British Aerospace's return from the wilderness has taken time, but the strategy appears to be falling into place.
British Aerospace is back in profit and sharply focused around its core defence and civil-aircraft operations. More important, it appears to know where it is going, with a series of key alliances on line in Europe.
The picture is in sharp contrast to the diversified conglomerate of 1991, which was floundering towards heavy losses and stacking up alarming liabilities in its regional-aircraft business.
The scope of the restructuring in the intervening three years has been savage by any measure. Virtually half of turnover has been divested with the sale, among others, of corporate jets, space activities, Ballast Nedam and last, but not least, the Rover automotive group.
If the group is smaller, it is also fitter and, thanks in part to the lessons in efficiency learned from the automotive business, wiser. What remains is an aerospace operation, which is among the slickest and most productive in the world, BAe believes.
Chief Executive Dick Evans quotes a string of examples from across the group. Production cycle times on the Hawk military trainer, assembly on the Airbus A320 wing lines or man-hours for final assembly of the Avro regional jet have all been cut in half since restructuring began.
The improvements have not come without their casualties. The core aerospace workforce has been cut by around 30,000 over the past five years. Plants too have gone, including the once famous sites at Kingston in Surrey and Hatfield Hertfordshire.
Armed with its newfound efficiency and a firmer sense of purpose, BAe has been turning its attention, to sealing a series of alliances within a consolidating, European industry. Having failed to secure much by way of partnerships, the group had begun to look dangerously marginalised, as France and Germany forged ever-closer ties.
Now BAe is winning back some of the initiative. The regional-aircraft alliance with ATR is one major coup, which has temporarily left Daimler-Benz Aerospace nursing its hurt pride. Further deals on missiles and ammunition are waiting to be signed and others could eventually follow.
Any previous UK squeamishness over losing control over its national industry appears to have been swept aside. The success of the Airbus consortium, an opportunity, on which the UK came within an ace of missing out, has become a central theme in BAe's strategic planning.
Evans admits that issues of national pride are still alive in dividing up work-share on European programmes, but believes that harsh economic realities will eventually dictate that decisions are made on grounds of efficiency rather than politics. "Cost is going to become increasingly important," he says.
For the UK, that may mean capturing a major share of combat aircraft production but, for example, ceding final assembly of civil aircraft as BAe concentrates on its expertise in wing work.
There are signs that the world is moving in BAe's direction. The drive to cut costs and refocus operations is taking place across Europe, making BAe look more like a role model, where once it was viewed as a cautionary tale.
BAe's actions on turning around its regional-jet and turboprop operations are a case in point. The business was running out of control and came uncomfortably close to bringing down the whole group as the extent of its losses and liabilities became apparent.
Radical surgery has ensued. Turboprop and regional-jet lines operations have been heavily pared down and split out into separate Jetstream and Avro final assemblies. These operations directly employ no more than 4,000 on two production lines.
Regional-jet output has been brought down from around 40 to a more realistic 18 aircraft a year, while the 30-seat J41 is effectively the only Jetstream aircraft in series production.
The remaining commercial-aircraft manufacturing operations are held in a new aero-structures division which formally emerged at the start of this year.
Still more important, BAe has re-organised its chaotic lease book. The fleets, of around 100 regional jets and 400 turbo-props on which the group holds financial liabilities, are now managed by the largely independent AMO and JSX leasing operations.
The regional-aircraft operations are still losing more than £150 million a year, but are no longer on a terminal downward spiral. With aircraft orders beginning to flow again, Avro should be breaking even in 1997, with Jetstream to follow, BAe says.
In a stark reversal of roles, it is now BAe's main regional-jet rival Fokker, which is attempting to grapple with an almost identical downsizing programme.
BAe stole a further march earlier this year, as it saw the latest piece of its strategy fall neatly into place by announcing a partnership deal with the Aerospatiale/Alenia ATR consortium.
The game is far from over. The ATR deal as yet only involves the merging of marketing and customer support. The issue of production is not due to come up until a new-aircraft programme is defined, in a year or so.
Meanwhile, Fokker and its German parent Daimler-Benz Aerospace (DASA) have not relinquished any of their ambitions to lead a future European regional-jet consortium. BAe and ATR themselves have gone out of their way to stress that talks will be resumed with other possible partners once their own partnership is up and running.
There is little argument from any of the European manufacturers that the ideal is for a single regional-aircraft programme sitting beneath Airbus. The difficult question is the perennial one of leadership.
Although Evans acknowledges that Germany and France have been in competition to take the lead on final assembly, it is not a pre-occupation, which BAe necessarily shares.
"Final assembly is a particularly unattractive piece of business, requiring huge investment," says Evans, adding that there is a "distinct possibility" that regional-aircraft manufacturing could eventually leave the UK.
Evans is unambiguous about BAe's desire to concentrate on the kind of aero-structures work, which it has already made its own within the Airbus consortium. "Our aim is to be the world's best designer of commercial-aircraft wings. Our expertise and our skill base are in wing design and it is an area where we're looking for further investment," he says.
As he points out, BAe stands to earn more profit from this work than by any adventure into civil final assembly. The ultimate aim is to expand the budding aero-structures business, with work from other civil-aircraft manufacturers, provided there is no direct competition with Airbus. Evans suggests that areas such as corporate aircraft could be appropriate.
As part of the drive to build up volume in aero-structures, BAe has been bringing back in-house work previously contracted outside the group. The building of RJ wings has been transferred from Textron, in the USA, to the Jetstream plant at Prestwick, helping to fill the hole, which will be left by ending J61 production. Airbus wing contracts are also being repatriated, including those of major pieces from Gulfstream Aerospace. Others are due to follow, including contracts now with Bombardier in Canada.
Evans dismisses suggestions that, by ceding final assembly, BAe may ultimately risk losing work-share, especially with the German industry still competing hard for Airbus wing design. He believes that the issue of work-share is not a question of national ambition, but simple industrial and commercial logic.
"If the Germans could make better wings for Airbus then we would have to support them," he says, adding that with its expertise in aerodynamics and production efficiency he finds it difficult to contemplate BAe coming second. "It would raise some pretty fundamental questions if we did," he says.
Evans believes that such jockeying for position will have to subside as Airbus comes of age. "We're looking for a complete set of skills," he says, pointing out that competitors such as Boeing would hardly allow such internal struggles. Neither would they tolerate an inefficient or un-competitive supplier base.
Similar arguments are applied to the Future Large Aircraft (FLA) military-transport programme, where BAe will again compete against DASA for the wing work. Although the initial tussle over production work-share is likely to be based on traditional formulae based on partner-country purchases, Evans believes that here too cost arguments will increasingly come to the fore. "When the chips are down, cost is going to become increasingly important," he says.
He adds that, even on a strict requirement basis, the UK's public promise to buy 48 aircraft is "a much franker commitment than anything coming out of Germany". The fact that the commitment came at all is testament to the UK Government's renewed support for its industrial base, from which BAe stands to gain credibility in its European partnership talks.
BAe had backed the FLA programme, even when the UK Government bailed out, but as one senior manager ruefully comments, private money simply does not have the same value in Europe as public funding.
With other distractions largely removed, the strength of BAe's underlying defence business is again starting to show through in corporate profits.
With sales of £4.6 billion, the defence division now accounts for around 70% of the group's business, dwarfing the less-than-£800 million apiece for the Airbus and regional aircraft operations.
Years of cost cutting have left the business as one of the leanest in the world. While others have struggled, in 1994 BAe turned in its highest-ever profits and a record order book, running close to £10 billion. It could grow bigger still if BAe succeeds in expanding its naval-business platform with a renewed bid for UK submarine-builder VSEL.
The division has been through its share of excitement, not least from the threat of a German pull out from the Eurofighter project, but that programme's future is now reasonably secure.
Evans admits that the company is in for some tough negotiations over the next six months as Eurofighter EF2000 production share is thrashed out between the partners, but, with the UK off-take firm, they are discussions from which BAe can only gain.
The more intriguing question is where BAe and the rest of the European industry go from here. The most pressing UK requirement is for a replacement for the Panavia Tornado GR.4 strike aircraft, on which the French could be eligible partners.
BAe is in preliminary discussions with Dassault and hints that it would like to see a demonstrator flying within the next five years.
At the same time, BAe is teamed with McDonnell Douglas in bidding for the US Joint Advanced Strike Technology programme, which BAe would like see filling a UK requirement for a replacement for the Harrier GR.7/FA.2.
Whatever the next move proves to be, BAe is keen to avoid another division with the French over combat-aircraft programme leadership. As with the civil market, collaboration is simply being driven by cost, says Evans.
"I don't see anybody in Europe ever again designing and building a combat aircraft from national resources," he says, adding that, in the long term, it seems unlikely that any single European Government could afford to have an "all-through" design capability.
Evans suggests that the defence industry may in future have to move beyond traditional collaborative programmes, to "bring some of the assets into common ownership".
He cites the pending missiles deal, in which BAe Dynamics will pool its operations with those of Matra in France. The aim is to use the structure, as the basis for a broader European missile consortium, possibly bringing in GEC-Marconi, Saab and others. An initial agreement, has already been signed by Bae with Saab, on marketing and possibly, production of the JAS 39 Gripen.
Whether these deals eventually form a blueprint for tackling the bigger issue of a joint European venture on combat aircraft remains to be seen. That, says Evans, is as much a political as a commercial issue, but with funding scarce the two may eventually begin to converge.
Source: Flight International