From Piaggio in the north to Vulcanair in the south, there is more to Italy's aerospace industry than Finmeccanica, even if you have to look hard to find it
Italy's aerospace industry is so dominated by Finmeccanica it is easy to forget there is a sizeable number of small and medium enterprises (SME) as well as a handful of larger independent players. These include Piaggio, Genoa-based manufacturer of the distinctive Avanti twin-pusher turboprop; and engine-maker Avio, now majority-owned by the US-based Carlyle Group.
Finmeccanica accounts for 80% of Italy's aerospace industry revenues and a similar proportion of the country's 50,000 aerospace workforce - a share which has increased following recent takeovers such as that of Aermacchi. This means most SMEs are highly dependent on Finmeccanica companies, says Carlo Festucci, secretary general of Italian aerospace trade association AIAD, which represents around 100 companies, 60 of which have fewer than 200 employees.
"The link to SMEs from Finmeccanica is very strong," Festucci says, but not all independents feed off Finmeccanica's table. Companies such as defence equipment manufacturer Aerea have built substantial US sales bases, he says. Some 80% of the Milan-based company's revenues are from direct exports.
Being an SME in Italy is "no better or worse than elsewhere in Europe", says Bruno Cussigh, president and chief executive of fuel-gauging systems supplier Logic Sistemi Avionici. There are opportunities for small companies to develop their own niches, he says, as the larger companies move away from manufacturing to concentrate on system integration. "We believe that as consolidation continues there will be more and more areas where the big players are unwilling or unable to participate."
Lottery winner
Senior management at Logic have something of a lottery winner's glee about them. They are using proceeds from the sale of Aermacchi to Finmeccanica in 2002 to invest heavily in new technology. The Foresio family established Logic in 1962 and sold 75% of the company to Aermacchi in 1987 before selling the remainder in 1992. But when Aermacchi was sold to Finmeccanica, the conglomerate decided not to take the Logic subsidiary, creating an independent company once again.
Logic, with around 160 employees based in Cernusco sul Naviglio near Milan, is not tiny, but is still wary of getting in the way of original equipment manufacturers and their tiered supply chains. The company aims to "complement, not compete with" major systems suppliers, says Cussigh. There is little overlap, for instance, with Finmeccanica's avionics house Galileo Avionica.
Like many small firms, Logic's key attribute is flexibility, which translates into short lead times. For example, it received a contract at the beginning of September to develop a fuel-gauging system for the extended-range AvCraft Dornier 328Jet, which has to be delivered, fully qualified, in September next year. This kind of short turnaround would be impossible in large, bureaucratic companies, says Cussigh.
Another example is the control system for the folding blades and tail on the NH Industries NH90 helicopter. "The risk of this system is too great for the majors, especially as the numbers are small. It's time critical; they need it urgently and can't do it themselves," Cussigh says. Logic, on the other hand, can dedicate its entire resources to just one or two subsystems.
Growing to survive
Following the split from Aermacchi, Logic decided it was too small to survive as an independent company in an industry intent on consolidating supply chains. It has embarked on a twofold growth strategy of new product lines and acquisition of similar companies, all paid for by proceeds of the sale to Finmeccanica. Contronic in Germany was the first company to be bought, in July, but Cussigh says more will follow.
Logic exports heavily, with 61% of its products heading out of Italy. This is due chiefly to a history of participation in international programmes, even under Aermacchi financial control. The company supplies systems for the Pilatus PC-9, a direct Aermacchi competitor, for example, and Cussigh says Aermacchi is now only one of many customers and is not treated any differently, except for the fact that its M346 trainer "has our most technologically advanced products on board".
Cussigh admits that without the help of a "big brother" it will be more difficult to meet new clients. But on the positive side, it will easier to invest in new projects with the money from the sale, which has been ploughed into tools, personnel and greater risk-sharing in new programmes as a tier-two supplier.
Finmeccanica companies still account for 35% of all contracts, something Cussigh would like to change, along with Logic's reliance on military contracts, which account for 65% of revenues. It is stepping up marketing, exhibiting at this year's National Business Aviation Association convention, for example. "We need to be known in the market," he says.
Hungrier Avio
The new leaner, hungrier Avio is largely the result of its new-found independence - a rarity in Finmeccanica-dominated Italy. Although the Italian aerospace giant has a minority stake in Avio, US investor Carlyle Group holds 70% of the former FiatAvio, acquired from the Fiat automotive group last year. The Turin-based company has been confirmed as a 12% workshare partner in General Electric's GEnx engine for the Boeing 7E7, and is servicing its debts ahead of schedule.
Carlyle has a plan to strengthen Avio before floating it through an initial public offering. There is a strong focus on growth, of which GEnx participation is just one element, says Giorgio Abrate, head of business development at Avio. "I think we now have a new financial approach and we care a lot about cashflow," he says.
While Abrate does not think the company was constrained in the Fiat era, he concedes that the car manufacturer was "clearly less focused on aerospace", and that managers feel better off with Carlyle, which plays a hands-off management role. Day-to-day operational control resides in Turin, but the Carlyle team is available to offer financial advice and exploit contacts in capital markets, Abrate says.
An example of where this comes in useful is in exchange-rate hedging. When part of the Fiat group, Avio saw wide fluctuations in exchange rates against the dollar, since Fiat sold few cars in the USA and its only sizable dollar income was from New Holland agricultural vehicles. "Now we have the freedom to customise hedging to our needs, with help from Carlyle," says Abrate.
But Carlyle has laid down instructions to reduce the debt acquired at time of the sale, when the equity value of Avio fell €1 billion ($1.23 billion) short of the €1.5 billion asking price. Abrate points out that earnings before interest, taxes, depreciation, and amortisation are positive (€190 million last year), but it is the interest that drags the bottom line into the red. Avio has already made several voluntary payments ahead of schedule to reduce interest on the debt and Abrate wants to go further. "We have the goal of halving our debt by 2008."
This is where the growth strategy comes in. As well as its participation in the GEnx, Avio is "confident" of receiving work on the GE/Rolls-Royce F136 engine for the Lockheed Martin Joint Strike Fighter. With military budgets continuing to decline in Europe, Avio sees participation in the JSF as vital to its growth strategy. "We are negotiating our involvement. We've signed a preliminary agreement to complete 5% of the work, so now we're just trying to get the best parts," says Abrate.
Space ambition
Avio also has higher ambitions in the space field. The company is the largest producer of solid propellant motors in Europe and also provides the liquid propulsion system used on Ariane 5 cryogenic engines. Growth in space, however, is still highly political in Europe, with workshare distribution squabbled over for years for every new project. "We want to maintain our dominant position in solid propulsion and grow our liquid business, but in ways acceptable to others in Europe," Abrate says.
To grow, Avio has to look elsewhere, recently responding to a UK Ministry of Defence tender for solid propulsion for maritime countermeasures missiles. Although the value of such contracts is small, Abrate says they signal to the wider market that the company is competitive, which is useful for future large contracts.
Avio is also looking at ways of growing its domestic defence business. Its ISIS health monitoring system is used on Pratt & Whitney Canada PT6 engines in the Italian army's Agusta Bell AB412 helicopters and Avio has plans to roll the system out to other rotary- and fixed-wing types. "How we manage our captive market is to offer higher value, keep it happy, by reducing their overhaul costs," Abrate says.
While much of Avio's growth strategy depends on technologies and relationships built up under Fiat's ownership, Abrate's perception is that "autonomy is a more effective way of running a business than being part of a conglomerate".
Secondo steps up
For fuel systems specialist Secondo Mona, not getting to cozy with Finmeccanica is almost a strict policy. Despite developing the fuel system for Aermacchi's M346 trainer, Secondo Mona wants no single customer to represent more than one-tenth of its revenues. Combine individual Finmeccanica companies and the figure still only reaches "less than one third", says president Ricardo Mona.
This quasi-strategy - the company refuses to acknowledge it officially - has enabled it to remain independent for 101 years. Its customer list is impressive, with exotic airframers like Hindustan Aeronautics included in a list dominated by the major European collaborative ventures: Eurofighter, NH Industries and AgustaWestland.
The 190-strong company derives two-thirds of its revenues from products, with one-quarter coming from maintenance, repair and overhaul of the Italian defence forces' fleet, with the remaining sliver attributed to build-to-print work. Finmeccanica itself may not rank high in Secondo Mona's client list, but often work on international projects is invoiced through the local contractor, which leads to long payment cycles as the Italian government, either directly or through various Finmeccanica subsidies, is a notoriously bad payer, says Mona. This is balanced by contracts with prompter payers such as Goodrich, with which Secondo Mona is building the afterburner unit of the Eurofighter's EJ200 engine.
But for Secondo Mona, with a turnover of €20 million, cashflow is not as big an issue as programme failure. The 10% rule comes into sharp focus when considering two of the company's current projects, the M346 trainer and HAL Saras commuter, which critics say will never sell in large quantities. Secondo Mona designed and developed the fuel systems for both aircraft, a step up from producing components.
With Aermacchi it is a risk-sharing venture, whereas the HAL work is under contract, but both projects incurred a large chunk of non-recurring expense and the company, nestled in the countryside in Somma Lombardo, outside Milan, has had to continue investing €1 million a year in tooling to produce the prototypes. "Although I am confident that the M346 will sell, clearly an Italian order is not enough on its own," says Mona. "And even if the Saras does not succeed in being commercialised, it has opened up other potential for us."
Eurofighter hurt
The delay in signing Tranche 2 production contracts for the Eurofighter Typhoon has hurt the company's production flow, but head of product development Sergio Bogni says it has proved to the company the importance of not relying on any one programme, no matter how stable it looks. "The slowdown of Eurofighter work has been an incentive to look for other business, so it's positive in one sense," he says.
Future projects include the Lockheed Martin/Alenia C-27J tactical transport, but, like other contractors, Secondo Mona is trying to shift focus towards civilian programmes. Currently 90% of its contracts are military, a figure it wants to shrink to 70%, says Bogni. The company is hoping the fuel monitoring and distribution system developed for the Saras will find application on commuter aircraft produced elsewhere in the world. "We're talking to many companies, including other component suppliers, to jointly build a complete fuel system for a new type," he says.
MURDO MORRISON / ROME & JUSTIN WASTNAGE / MILAN, TURIN & SOMMA LOMBARDO
Source: Flight International