David Calhoun has been president and chief executive of GE Aircraft Engines for three years and has a long track record of management throughout GE. He talks to Karen Walker about company issues and opportunities despite the downturn, and shares his views on the value of major air shows.
Q: What is the biggest issue facing GEAE and the aerospace industry today?
A: It's not that we are in a cycle - we are used to that. But the downturn is deeper and longer than anyone probably imagined. SARS is hitting us to a greater extent than Iraq. As airlines scale back seats and schedules because of the SARS impact, they are doing it with new aircraft as opposed to old and that's hurting us on the service side.
However, two things are very different from last time. First, military business has been very strong in this period. This is very different compared with the downturn of the '90s, when military was going down just as fast as commercial.
Secondly, we went into the early '90s with a not too significant installed base compared with our competitors. But we have entered into this cycle with a much larger installed based and the service business has held up much better.
Q: What's the financial outlook for GEAE in 2003?
A: For the rest of this year the revenue picture will be down at least 5% for GEAE. Depending on SARS, that could get as high as 8%. Profit will be down slightly.
Q: How long can you keep maintaining profit margin despite declining revenue?
A: You can't do it forever. If SARS had not been here and with it the unforeseen toll on our services business, we would have grown earnings confidently this year. I hate the fact that we have to reduce our workforce, but if you were holding the hand I am holding, you would still feel pretty good with my customer base.
The industry restructuring had to happen, frankly. Airlines had to get a handle on their labour costs and had to deal with competition and fleet issues. That's good for me. If you look at the airlines that are winning, it's the high-frequency narrowbodies and that works to my advantage. I also like my position on the Airbus A380 and on the long-range Boeing 777. It's short-term pain for long-term gain.
Q: What sort of financial support has GE provided airlines during this downturn?
A: Our leasing arm is one of the significant players out there. The company has made a very substantial bet that this industry will survive and survive in a healthy way. We have provided more than $7 billion in loans to the industry since 11 September [2001]. We don't do that willy-nilly. We believe we will get a healthy return on that. People and cargo will always fly.
Q: What about GEAE's research and development budget - how that has been affected?
A: This is getting tougher. We have been spending more than $1 billion a year and it will be the same in 2003. That's about 15% higher that any period prior. We have some big commitments to Boeing and to Airbus. But it's all holding up nicely. All programmes are intact. It's a technical business and I see the R&D budget being maintained at least through 2004, after which things will ease up.
Q: What about the outlook for the F136, the alternative engine that GE is proposing for the Joint Strike Fighter? How serious a blow is it for GEAE and partner Rolls-Royce that the US JFS programme office has cut $440 million of F136 funding?
A: It's serious, but I am confident there will be two competing engines and by the 250th aeroplane there will be two viable alternatives. We will continue to point to the F-16 experience as good for everybody.
We got into the game a lot later; there is advantage to being first and to being second. The F136 can be pushed back a couple of years and that's a real possibility.
We are working well with Rolls-Royce. Both recognised how advantageous it is to have the US and the UK working together on this. That's a big ticket.
Q: What are your thoughts on the proposed Boeing 7E7? Do you believe Boeing will go ahead with this aircraft and how important is it to GEAE?
A: I will be shocked if it does not go. Boeing has the right set of objectives in my opinion - the middle market is in need of a solution.
The cost goals are pretty noble. The numbers could be big. I would love to be the sole-source engine on that aeroplane, but I am not making that call.
Q: Do you believe airshows are still relevant or a waste of time and money?
A: I believe in airshows. I don't like all the regional shows around the world. But I do like Paris and Farnborough because it's a statement about what the industry is.
Everyone is taking steps to lower their costs and maybe reduce participation, but nobodyis making statements about the US not participating.
Our job is to bring us together. My biggest partner is a French company. The sort of demonstrations that Airbus does at a show poses a challenge to Boeing and makes for a more competitive industry.
Source: Flight Daily News
