MT Aerospace: boldly ambitious

The weak dollar may be creating trouble for German suppliers, but the strength of MT Aerospace's future aspirations is undimmed.

The failure of its attempt to take over Airbus's German plants has not dampened MT Aerospace's ambitions.

Despite not being able to pull off its bold bid to buy Airbus's German aerostructures factories, the Augsburg-based aerospace components producer has succeeded in raising its industry profile since winning selection as preferred bidder for the sites. The company's appeitite for acquisitions remains strong, but the persistent weakness of the US dollar means that German takeovers are unlikely to stay on the menu.

MT Aerospace chief executive Hans Steininger does not underestimate the threat posed by the weak dollar, which is beginning to wreak havoc behind the scenes despite the European aircraft industry's enormous order backlogs and apparently healthy growth rates.

"As of today I'm not sure how the German or European industry can cope with that," he says. "The cost pressure is steadily increasing and if the exchange rate remains on that level it might cause problems for some smaller, second or third-tier suppliers."

Steininger adds: "There are certain expectations from the original equipment manufacturers, from the first-tier suppliers, as they get attractive offers from southern and eastern European countries, from the emerging markets in Asia, probably from North America. Not only us, but all German suppliers have problems to cope with that."

©MT Aerospace Steininger: wary of weak dollar

A stark illustration of difficulties faced by German suppliers is the fact that in the middle of 2007, when MT Aerospace began to negotiate for work packages for the new Airbus A350 widebody twinjet, the euro was trading at around the $1.35 mark, but by early 2008 it had strengthened further, to reach nearly $1.60.

"As the industry has to sell its parts in US dollars we lost around 15%, and that's probably the majority of the margins calculated into the offers," says Steininger.

As it turned out, the free-falling US dollar was not the only reason that Steininger failed to strike a deal with Airbus parent EADS over the German plant sales, but it was a major factor in the decision.

"The key reason was that we could not match with our offer the financial expectations that Airbus had in general. There were different reasons, but the key reason was that with the exchange rate development over the last months the risk was, at least for us, too high to proceed," says Steiniger.

He adds that, perhaps understandably, "the other side was not willing to give in, in terms of economic conditions to adjust to the dollar price. They were looking to relieve some of their financial burden for the A350. As time went on and the risks were increasing, our financial offer was to a certain degree not matching their internal requirements. Their expectation of what they would get from the buyer of the plants was different to what we were willing to pay."

PREFERRED BIDDER

MT Aerospace was selected as preferred bidder for the Airbus plants in mid-December, underlining the fact that both sides felt a deal was close. However, by the beginning of March, faced with the continuing dollar slide and the ever-increasing urgency of the A350 development schedule, both parties could sense that hopes for an agreement on the value of the Airbus plants were fading away.

"In the middle of March there were some meetings where we said the difference is too big to be overcome over the next weeks or months, and then both sides decided not to continue as there was a tremendous time pressure on the A350," says Steininger.

"It looked like reaching agreement on the plants would have taken until the summer and that was not compatible with the A350 process.

"In the end it was a combination of the dollar risk, the tremendous price pressure, which is associated to the dollar risk, the extreme time pressure on the A350, plus the lengthy due-diligence process for the plant sales, which led to the failure the divestment. [Airbus] can focus now on the A350. From an outside perspective that is probably the right thing to do at the moment."

If there were any lingering doubts in the minds of Airbus executives over whether to end the divestment process and concentrate on bringing the A350 to market, these were dispelled by the descent of the rival Boeing 787 programme into the industrial mire.

"They learned that the steps Boeing was taking were probably too aggressive, to reduce the value chain significantly and change technology," says Steininger. "What everybody learns is that if the process is too complicated, then it's a high risk of failure. If they would have just reduced the workshare on existing programmes and left the 787 untouched, that would be probably the better concept.

"Boeing sold their structural plants to Onex, and created Spirit, at a very relaxed phase. From my perspective this was a successful divestiture. It was not overloaded with a parallel development phase."

INTERIM STEP

Whether or not Airbus will attempt to resurrect the German plant sales in two or three years' time - after completing the reorganisation of its internal and external supply chains and the bulk of development work on the A350 - remains to be seen. EADS announced in April that it was establishing a holding company for the plants at Varel, Nordenham and Augsburg as an "interim step".

©PA Photos The failure of MT Aerospace's efforts to land Airbus plants has not dampened its ambitions

MT Aerospace will meanwhile compete for supply contracts for "smaller" A350 parts that "fit into our infrastucture", says Steininger. It is already providing items such as waste water tanks, struts, and small carbon composite parts for the A400M military airlifter.

POTENTIAL ACQUISITIONS

At the strategic level the company is on the prowl for potential acquisitions, but will not consider businesses with a turnover of less than €100 million.

"If we do an acquisition it has to be a sizeable one," says Steininger. "You must have some kind of minimum size to be an accepted player. This minimum size is growing permanently as the big OEMs expect some kind of consolidation."

He believes there are "several" second-tier European suppliers up for sale, with annual revenues ranging from €100 to €300 million. Despite enjoying annual revenue growth of more than 10% thanks to rising aircraft production rates, some of these companies are struggling financially after investing heavily in delayed programmes such as the A350 and A400M, as well as the 787.

"The next logical step is really some kind of consolidation around these relatively fast-growing companies that have probably invested a little bit too much in the past years," says Steininger. "The biggest burden these companies have is delayed cash flow from the investments they have made."

MT Aerospace currently generates 80% of its annual revenue of around €110 million from European space contracts, which - although expected to deliver only moderate organic growth in the coming years - are largely immune to the weak dollar. Acquisition of a €100 million-plus aerostructures manufacturer would shift the centre of gravity of the business away from space.

Steininger says that MT Aerospace, owned by stock market-listed OHB, a €250 million company, is eyeing takeover targets in both Europe and "dollar countries" in North America, eastern Europe and Asia. The Far East is of particular interest, he says, because Airbus and Boeing are keen to expand their industrial footprints in the fast-growing region, although there are few "bargains" to be found.

Perhaps predictably, Steininger sees more and more aerospace manufacturing work moving away from countries such as France, Germany and UK.

"Maybe you can do the management here, engineering partly here, partly offshore and the majority of the manufacturing somewhere else," he says.

"That's not rocket science - that's what many others are doing. It's what Airbus is requesting from its suppliers, it's what the automotive industry does.

"They are all just following the tremendous price pressure the OEMs are handing over to their suppliers."

Source: Flight International