Could Fokker have performed better if it had followed Avro's lead in cutting quicker and deeper?

Kevin O'Toole/LONDON

FOKKER MAY NOT appreciate the irony, but its latest crisis has come just as the regional-jet market is showing few signs of life.

If a recovery in aircraft orders alone had been enough to secure the company's future, then its prospects should have been getting brighter. After a reasonably prosperous 1995, in which there was a healthy rise in orders and deliveries, Fokker ended the year with a relatively healthy backlog of 60 regional jets and 14 turboprops. The problem was not the number of aircraft sold, but their selling price.

Fokker had also at last been coming close to completing its protracted restructuring plans. If Daimler-Benz (DASA) and the Dutch Government had gone ahead with their recapitalisation as planned, Fokker's aim would have been to break even this year and be back in profit by 1997. The problem is, that neither the market recovery nor the restructuring have come quickly or decisively enough.

The inevitable comparison is with the fate of British Aerospace's regional-aircraft operation, which itself came close to extinction back in 1992 and was perilously close to taking the rest of the group with it.

The unholy mess, which BAe found itself in, is now infamous. In a blind effort to fill up production slots, the sales team had been booking orders at almost any cost. The order book was awash with short-term leases, buy-back guarantees and head-lease commitments. In all, BAe held gross liabilities and commitments of around $2.5 billion on all of its regional-aircraft operations. The business, inevitably, was also racking up huge losses.

Action was swift and decisive. Almost overnight, BAe decided to shut one of the two production lines, virtually halve the workforce and cut the output of new aircraft. At its lowest ebb, BAe turned out little more than a dozen new aircraft a year.

Meanwhile, the BAe lease book of around 100 aircraft was put in the hands of the Asset Management Organisation (AMO), essentially functioning as an operating lessor with the sole task of keep the 146 in the air.

The cost of the restructuring, including the turboprop operation, totaled more than $1.5 billion but it was effective. The Avro manufacturing operation, which has emerged from the restructuring is essentially a low-cost assembly unit. It employs fewer than 1,800 people, against as many as 5,000 five years ago. Assembly times are down, from 29 weeks to only 15. The first Sabena RJs, ordered at the start of 1995, were delivered by the end of the year, completed in fewer than 20 weeks.

Most important, BAe has been determined to cap production of new aircraft to below 20 a year. The reasoning is straightforward - the fewer aircraft which are produced, the more selective the company can be over which deals it makes, above all avoiding the build-up of fresh liabilities.

In Avro's case, the aim has been to concentrate on cash sales to blue-chip airlines. Recent deals with carriers such as Sabena and Swissair are a case in point. Even if more such deals are struck, BAe will remain cautious about raising production rates until Avro has achieved its target of a return to profitability in 1997. The simple reasoning is that Avro should not sell more aircraft until it can make a profit on them.

Fokker, too, had moved to rationalise, but its efforts had more of the appearance of a series of fire-fighting measures than a single decisive step.

In 1992, the process went on hold for the best part of a year while DASA carried out tortuous negotiations with the Dutch Government over acquiring the group. DASA finally signed in 1993. Although Fokker had been cutting jobs, the new owners then launched a fresh study to create a more comprehensive action plan.

Boardroom disagreements over the plan's ferocity were hard to disguise. Its announcement at the start of 1994 was accompanied with the news that Fokker chairman Jan Nederkorn had been "...released from his duties".

Losses continued to mount, until Fokker finally appeared to bite the bullet, at the start of 1995 with a more wide scale rationalisation and another tranche of job losses. DASA and the Daimler-Benz finance arm debis helped repair some of the damage done to balance sheets by taking 69 leased aircraft off Fokker's books, but more was needed.

By mid-year, Fokker had run out of cash, needing an injection of at least Dfl2.3 billion ($1.4 billion) from its shareholders to refill its coffers and write down growing debts. Agreement between DASA, which had kept Fokker going with a Dfl1.4 billion credit line and the Netherlands Government did not materialise.

Direct comparisons with Avro are a little unfair, given Fokker's size and mix of business, but the fundamentals apply. While Avro had moved quickly to cut its costs and limit future losses by restricting aircraft production, Fokker kept its capacity largely intact.

With the added burden of high Guilder and Deutschemark production costs against a low dollar selling price, Fokker's need for cost cutting was, if anything, greater. The company more or less admits that it had been losing cash on every aircraft sold, although under the latest production plan it finally hoped to turn that situation around this year. The damage appears already to have been done.


Source: Flight International