Thales Aerospace's senior vice-president Jean-Georges Malcor thinks that the French company is better placed than most to weather the economic downturn
How badly has Thales been hit by the recession?
This Paris air show comes at a time when the aerospace business is experiencing a very serious crisis. We're starting to feel the pain from the statistics that we're getting from the civil manufacturers and airlines. Both Airbus and Boeing are reducing production rates and there is a pause in the large order intakes experienced in the last few years.
We are lucky in the short term because both manufacturers are still operating with large backlogs and this is acting as a damper. We are also operating very globally and so when one market is slowing down and another is picking up, we are able to balance between the markets. Nevertheless the drop we are experiencing in passenger and cargo traffic - particularly first and business class - is clearly affecting the business.
Is the military side of the business helping to offset the decline in civil?
We are benefiting from our duality in military and civil technology and it is clear that our military activities are going to help us to sail through the crisis better than companies that are only involved in the civil business. It is very important that we are able to manage the peaks and the troughs between the civil and the military side.
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What other measures are you taking to cut costs?
We are accelerating competitiveness plans that we have already launched, to work on the full range of the supply chain. We are also taking measures with our employees to avoid more severe measures such as layoffs as much as we can. So far we have not implemented such measures and I hope that we will be able to escape them. We have decided to close the [production] sites for two weeks in August, which will help us a bit to reduce inventory and work-in-progress.
Are you cutting back on research and development?
The temptation in times of crisis is to stop your investment in R&D and wait for better times. We are taking a very different approach, and are trying the best we can to maintain our R&D effort at the level necessary to anticipate the future. We want Thales engineers to stay at the forefront of new technology.
With many airlines drowning in a sea of red ink, how is your in-flight entertainment business holding up?
For the time being we are seeing very little slow down. This business seems to keep growing despite the crisis.
Is the defence sector helping you to weather the economic crisis?
Nations around the world have tried to give a big push on the military side in order to dampen the effect of the crisis. Make no mistake, in about two years from now, as we all hope, the crisis will be partially over, and all of the states will come back strongly on the debt issue and they will cut back on budget spending, including defence, so that is why keeping this balance between civil and military is extremely important for us. I hope that what makes us resilient at this moment is military and I hope that tomorrow what makes us resilient will be civil.
What will be the main focus for you at the show on the military side?
It is an opportunity to promote our presence on the [Dassault] Rafale, for which we are providing 25-30% of the value of the aircraft, in particular with the [active electronically scanned array (AESA)] radar. We have made good progress on the AESA and we are in the final phase of development and are beginning production. We are expecting final validation in the first quarter of 2010.
Maybe at Le Bourget we will be able to show some images and videos from the radar. We are also addressing a large part of the surveillance market and we are becoming increasingly present - with a lot of success in the Middle East - in ground surveillance with unmanned air vehicle systems. On the stand we will be displaying a full-scale model of the UK Watchkeeper which we believe to be the most ambitious existing and on-time UAV system. By the end of this year we will see the first flight in the UK and 2010 will be the technical acceptance trials and mid-2010 the initial operational capability. We are also working on strategic UAVs and we will be exhibiting the Heron-TP on the stand. This is the platform we are proposing with Dassault for an autonomous European mission system for the French armed forces.
Will a Thales UAV one day participate in the Paris flying display?
We hope so because those times are coming fast. There are still a lot of misconceptions about UAVs and it's an important matter for these new birds to be demonstrated to, and tested by, the operators. Unfortunately all our UAVs are in operation and not available to come to the air show. The Watchkeeper will more than likely be displayed in 2011, or maybe even Farnborough next year.
Aftermarket services are becoming an increasingly important part of your business, currently representing a fifth of turnover with ambitions to grow this to 30%. How will you promote this sector at the show?
The services business is of course extremely difficult to display at the Paris air show. During a crisis there is a natural tendency to compress the supply chain to make it more efficient, and we are more and more being requested to take responsibility for our systems for the next five, 10 or 25 years. We are extremely interested in that as we believe we are the best place to maintain our systems, but we cannot do it alone and we have had a number of initiatives such as the OEM service initiative and the similar initiative we have in defence. The idea behind it was to say: how can we federate the various OEMs providing equipment and systems on a platform and streamline the maintenance chain?
That is why we decided to team with a number of partners in order to provide a more solid package, addressing a part of the supply chain that is better defined. With the airframers we are improving our capability in terms of the service we are giving them. Our ranking with Airbus this year has shown a lot of progress - we are ranked fourth globally - and on IFE specifically we moved from rank 28 to eight. For me this is very encouraging because we are really pushing on quality of service. We are still investing right now even during the crisis, making sure that we are modernising all of our servicing capabilities.
Have you selected your teaming partners for the Advanced European Jet Pilot Training (AEJPT) programme?
It is being formed right now because we have not received the RFI. If we are ready we will announce the partnership at the show.
What steps are you taking to rationalise your supply chain?
In difficult times everything starts with the airframers and they say: 'Okay, we ask you tier one suppliers to share the burden, we want you to be more competitive and to squeeze your price.' You have to be careful in doing so because you do not want to destroy your supply chain. We are not lacking activity today because of Airbus and Boeing's huge backlogs, but for very small companies sometimes it is cash and the inability to pay an invoice at the end of the month, so we have to be very careful with that.
The issue for us is to not be squeezed between the primes and the SMEs. For us the answer is in competitiveness. In order to satisfy at least partially the request from our primes we need to find additional competitiveness margin to reduce our price, to reduce the cost for the airframers without affecting too much what's happening below. We are also working on our supply chain in order to find new ways of manufacturing, to be a kind of virtual company, working with suppliers at their premises to work on quality and turnaround time, so there are a number of industrial measures that we are taking on a daily basis.
Would you like to see more supply chain consolidation, having reduced your suppliers from over 4,000 to around 800 now?
We probably need to go a little bit below that and we would like to see some consolidation. To enter into a real partnership you realise you cannot do that with a supplier base that is totally scattered. It is impossible because it requires so many resources and time. Even if we were not in a crisis situation we would probably go along those lines because the time where we were in a kind of pure buyer-supplier type of relationship is gone.
You cannot simply send a purchase order to somebody and forget about it. It's really a matter for us of entering more of a partnership with suppliers. This has a price because you're putting yourself in a kind of mutual dependence, so it has a risk. In the medium term we want to have a supplier base that is manageable.
It is being suggested in some quarters that Airbus and Boeing will fail to deliver all of the aircraft they have on backlog due to lack of financing. Do you see this as a risk?
It is very difficult to forecast properly. The only option we have today is to align our forecasting with Airbus and Boeing, for two reasons. If we are more optimistic we run a big risk of over-producing. If we are more conservative we run the risk that if the crisis stops and deliveries start again we will not be ready in time and delay aircraft deliveries. So it is a risk we are not prepared to take. We are carefully monitoring what's happening with Airbus and Boeing, and we are in a permanent dialogue. When I say 'carefully monitoring' it is on a weekly basis. We are adjusting our production in line with what they are telling us.
What are your expectations for this year's show given the economic downturn?
In terms of attendance what I'm hearing from GIFAS and others is that they are not expecting a major impact on the show. We may be announcing some teaming agreements for AEJPT but there will not be any major announcements. In terms of our fixed costs the chalet and booth were committed well in advance, but where we are cutting back if we can is the variable costs. We have reduced the attendance of our people at the show and variable costs have been reduced by probably a good 20%.
Do you think that you get sufficient value from attending air shows?
That is an intriguing question that is difficult to answer, because you are damned if you do and damned if you don't. Could a company like Thales afford not to be present at a show? Probably not. Are we getting the best value out of the shows? Probably no. Are we getting some value out of the shows? Probably yes. How is it quantifiable? Very difficult.
Joking aside, I think the big shows will not disappear for a lot of reasons. It is a good opportunity for the "profession with a big P" to meet in one week, for exchanges, discussions and partnership. All of that is a tick in the box for me. For the smaller ones it really depends on the business environment and the political situation.
I am not saying that they will disappear because they can be very pertinent where there is something going on in the area or a particular [procurement] programme has been launched. I think that there will probably be fewer and fewer big announcements because the shows will be more for professionals to meet to discuss the issues.
Thales supplies the avionics for the Sukhoi Superjet 100, being displayed at this year's Paris air show for the first time. How optimistic are you that the programme will be a success?
We hope that the Superjet will be a success because we clearly went in with Sukhoi with the perspective of a lot of sales. The programme is running fine for the time being, but obviously like all other airframers they are experiencing probably some pressure in terms of sales.
Can you give an example of how Thales is helping to make aviation more environmentally friendly?
We are probably one of the few companies in the world mastering the full chain, from airport systems and security, to air traffic management, flight management, optimisation of the route and descent, and so on and so forth. The R&D we are doing is looking at how we can optimise the full chain.
For example, today, during the descent of an aircraft, we are still running the engines to provide energy. Does it make sense if we are looking for a green aircraft, with less noise close to the airport? It is also slowing down the descent, so we are working with an engine manufacturer to see whether we can work together in order to generate power differently elsewhere on the plane. Can we optimise this extremely critical part of a flight?
Source: Flight Daily News
