Success of Vega rocket flight boosts Avio profile

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Of all the people with cause to be relieved at the resoundingly successful maiden flight two weeks ago of Europe's new rocket, Vega, few will be as relieved as Francesco Caio.

Caio is chief executive of Turin-headquartered Avio, which has been perhaps the leading industrial player in Vega's development and built key components of the rocket at its Colleferro facility near Rome. Had the flight failed, a real possibility given that 60% of maiden launches end in tears, Caio's pre-launch boast that Vega puts Italy in the elite club of countries "that can access space using their own technologies" would have proven to be premature.

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 © ESA

But even if a second - or third - attempt had shown the statement to be true, an initial failure would have left this London-based Italian having to face three sets of unhappy stakeholders. Avio's customer, the European Space Agency, desperately wanted the success in a year in which cash-strapped member state governments are due to be asked for big, multi-year budget commitments. In addition, Italy's scientific establishment - itself facing the fallout of a particularly galling financial crisis - clearly needed a reward for championing a technically innovative project that was not enthusiastically backed by some partners in its early years.

WATCH THE EXITS

Caio would also have had to deal with London private equity house Cinven, which owns 81% of Avio and brought in the former Cable & Wireless chief to manage the business in March 2011.

Cinven has owned Avio since 2007, when it bought out another private equity owner, Carlyle Group, which had bought Avio in 2003. Italy's state-dominated industrial holding group Finmeccanica is the other major shareholder, with 14%. As is typical in private equity investment, Cinven's plan is to build value and then find an exit. Avio filed for an initial public offering (IPO) on the Milan exchange in the first half of 2011 but, says Caio, decided later in the year that the market was not ready and abandoned the plan.

With the fundamentals on Cinven's side - 2011 revenue grew 14% to €2 billion ($2.65 billion), EBITDA came in at a healthy €380 million and capital and R&D investment grew 26% to €170 million while net debt declined 4% to €1.4 billion - there is "no rush" to sell, says Caio, who praises Cinven as "very attentive owners [who] make sure our growth options are open".

But, he readily admits, an IPO may yet turn out to be Cinven's exit route in 2012. A launch failure might not have deterred an IPO attempt in a strong market, but success must have been a far, far better outcome.

As things stand, however, Vega is just one of Avio's long suits: space accounts for 14% of turnover, with an another 2% coming from civil maintenance, repair and overhaul. The rest comes from civil and military aero engines, and in that department 2012 is a big year for Avio.

Caio flags up Avio's position as supplier of the gearbox and part of the low-pressure turbine for the General Electric GEnx engine that will soon be certificated for Boeing's 787, a programme that represents 10% of Avio's turnover. Avio is also a major supplier to the Powerjet SAM146 engine that powers the newly-certificated Superjet 100 regional jet.

And, Caio stresses, positions on these new programmes are balanced by Avio's contributions to mature engines such as the GE-90. It also supplies CFM International, Pratt & Whitney in Canada and the USA and Rolls-Royce.

GROWTH CHALLENGE

The fact that there are no big new programmes on the horizon is no bad thing, he adds, given the development costs associated with all-new engines. The huge strength of airliner demand, he says, means Avio - ranked 39th in the Flightglobal-PwC Top 100 aerospace industry league table - can now look forward to 10 or 12 years of revenue growth from spare parts and new deliveries.

To frame his challenges, though, Caio likes to look at the medium-term future as a period that will demand "marginal innovation rather than fundamental innovation" for a supplier like Avio, which must keep up with rising volume demands. Avio - and other suppliers - must therefore focus first of all on maintaining quality. Improving efficiency, and hence profitability, can only be a secondary concern.

"We are," says Caio, "particularly sensitive to the role we play in the value chain."