Kevin O'Toole/LONDON
NOBODY CAN have failed to notice the growing mood of optimism within the aerospace industry. The scent of recovery, it seems, is in the air.
The optimism is not so much based on a significant upturn in business, although there have been the first hints of better times ahead, but rather on welcome signs that things are no longer getting any worse.
That is in itself worth celebrating. Even for an industry reared on a constant cycle of peaks and troughs, this latest recession has been punishing.
Airline customers are well on the way to recovery, and aircraft orders, albeit still scarce, are trickling back. Perhaps more important, the worst of the cancellations and deferrals which ate so badly into corporate backlogs, appears to have finally petered out. After more than two years of fire fighting, the talk is of raising production rates.
The industry also appears to have weathered the worst of the defence cuts, which followed the end of the Cold War. Again, the talk is more of stability than a dramatic recovery, but positive nevertheless.
A budding upturn in the spares and components business, too, has moved from an initial shaky start to look like something more substantial.
The current standings are clearly reflected in the Flight International Aerospace Top 100, the annual ranking of the world's leading aerospace companies, this year compiled in conjunction with management consultancy Booz Allen & Hamilton.
The ranking suggests that aerospace sales again fell in 1994, but only by a percentage point or so. Having achieved something close to stability is in stark contrast with the hefty falls of the past two years. If trends continue, 1994 may now be the last year of decline for a while as the industry rebounds from the bottom of the down-cycle.
HEALTHY TREND
Looking at the figures for the leading US aerospace groups for the first half of 1995, the trend appears to hold good. Sales growth is still a little erratic, partly because of the acquisitions and disposals, which have been reshaping the sector, but few groups are left showing an overall decline.
The evidence from previous cycles, and other industries, is that the recovery is indeed beginning to roll. "Optimism is beginning to re-emerge. As with all capital industries, when budgets return, they tend to grow at rates, which outstrip the general economy. People are beginning to sense that in the air," says Ian Godden, who leads Booz Allen & Hamilton's European and Defence interests.
When the industry gathered en masse in Paris in June for the air show, it felt almost like the air shows of old: orders being signed, new products on show, and the promise of more to come. That is the good news, but there is still plenty of room for caution. Godden warns that the new-found optimism should not be allowed to deflect from tackling the old, underlying problem of over-capacity and over-crowding, which were so graphically highlighted during the recession, and are unlikely to disappear with the impending recovery.
While markets may go some way to refill factories, there is scant hope of a return to the boom times of the late 1980s. Jet-airliner deliveries, for example, are now on their way back from the low point of 450 a year, but it could be another decade before the industry again tops 800 a year, recorded at its peak.
The defence sector, too, has a long haul back from the depths of the depression, and with the immediate prospect of military budgets stabilising, rather than rising.
The smart money predicts that there must be another cyclical upturn in the USA a few years hence, as at least some of the aircraft from the last boom come up for retirement. At best, it is likely to be a mini-boom, however, and few have illusions about a return to the heady days experienced during the arms build-up of the 1980s.
TOO MANY CONGLOMERATES?
Despite move towards consolidation, which has taken place to date mainly in the USA, there are as many as 20 large defence/aerospace conglomerates in North America and Europe fighting in the market. Godden argues that the number remains overweight.
"For example, there is no real logic for having five companies in the USA capable of building military aircraft. Perhaps the number should be three, or even two," he says, adding that at least one key driver for such consolidation will be the need to pass on cost reductions to customers, military and civil alike.
It is an interesting exercise to look back over the past five years, comparing the top 20 world aerospace companies of 1990, with how they sand to-day - admittedly using some guesswork, to factor in the likely effect of mergers and acquisitions, which have yet to show up in the 1994 year-end figures.
INCREASED SALES
One of the most striking features is how few companies have managed to increase their sales. Where sales have gone up, it is largely a result of the mergers and acquisitions, which have already taken place.
Some, such as General Dynamics, have simply made a decision to quit the business, while further down the league table, those such as Ferranti and LTV have had the decision made for them.
Other such, as General Electric have consciously slimmed down their exposure to aerospace. A similar strategy has been to shield the group from the vagaries of the aerospace cycle by building up businesses elsewhere. United Technologies, for example, has now got half its business in elevators and air-conditioning units.
Those determined to maintain their positions in the shifting league table had to invest in ever more adventurous mergers and acquisitions. Lockheed Martin followed Northrop Grumman's example, with GM Hughes now following suit by adding E-Systems to its defence-electronics business.
As yet, the cost advantages of these mergers have not fully filtered through to the financial performance of the enlarged groups. Looking across the Top 100 ranking shows a gradual rise in profit margins, but that appears to have had as much to do with falling investment and decline in research and development expenditure as anything more fundamental.
SLOW EUROPE
As the lead groups take advantage of the cost-cutting and personnel reductions afforded by mergers and rationalisation programmes, those who have failed to act stand at risk of falling dangerously behind.
Europe, with the exception of the UK, has been painfully slow to move, given the political sensitivities involved in cutting jobs, especially in largely state-owned industries. "Large-scale cost reductions have simply not taken place," says Godden.
Certainly in France there has been a strategy to delay shedding skilled workers, in the hope of making market-share gains when the recovery comes through. How far the strategy works and how long it continues to receive state backing, remains to be seen, but Godden believes that some form of down-sizing has become inevitable, however long it may be postponed. "The next phase is a very slow consolidation in Europe at national and trans-national level," he predicts.
Even if markets do show signs of sustained recovery, there is no guarantee that all the work will flow to the traditional aerospace centres of Europe and North America. The centre of gravity for new growth markets in civil and military alike is shifting towards Asia, and Godden argues that some of the aerospace jobs may follow it into the region.
Western manufacturers have begun to generate increasing volumes of subcontracting and assembly work into the region, and discussions over joint civil-aircraft projects grind on, but Godden believes that in the longer term, they will have to address the issue of making more substantial investments in the Pacific Rim.
"No-one has yet taken bold action in building a substantial business base in the region. That could change the whole world structure," he says, adding that it may also hamper efforts to fill up factories in the West.
The big Japanese corporations are already well ensconced in the Top 100 ranking, led by Mitsubishi Heavy Industries, the aerospace division of which has climbed into seventeenth position. Samsung is not too far behind.
The implication for the leading Western groups remains disappointingly familiar to continue the painful work on producing cost benefits from further rationalisation and consolidation. The message may not be new, but with a recovery in prospect, it is worth keeping in clear focus.
Source: Flight International
