Engine room

Despite reduced orderbooks, Rolls-Royce and Snecma are putting a brave face on the situation, gaining comfort from their relatively healthy condition going into the downturn

Europe's two leading engine manufacturers, Rolls-Royce (R-R) and Snecma have not escaped the crisis in the aviation sector, and have had to focus much of their attention over the last year on dealing with a reduced orderbook. Neither is predicting a recovery any time soon. The rule of thumb is for a lag of three years between airlines seeing their traffic drop off and aircraft orders hitting absolute rock bottom. However, despite this unpromising environment, both companies are putting a brave face on the situation.

The ability of the companies to speak confidently reflects in part the fact that they headed into the downturn in relatively healthy shape. The R-R Trent has closed on GE in the widebody market, and is on level pegging on the Airbus A380 against the GE-Pratt & Whitney engine alliance. Snecma, through its CFM International joint venture with GE Aircraft Engines, has a commanding position on narrowbody types, while both R-R and Snecma have a steady defence business to fall back on.

"If you have to be in the air transport industry, there are worse places than CFM," says company president Pierre Fabre. "Yes, it is a downturn, but we have seen worse," the chief executive says, alluding to market conditions during the first Gulf war.

However, CFM expects to deliver 717 engines this year, well down from the peak annual rate of more than 1,000 between 1999 and 2001. Yet this is still well above the trough of the mid-1990s, when CFM delivered only 389 engines. At R-R, deliveries of civil engines spiralled down from 1,362 in 2001 to 856 last year, with 2003 likely to produce a similar figure. R-R now expects 2004 to be the bottom of the current cycle.

Different approach

R-R has already cut 6,200 jobs since 2001, bringing the headcount to 37,000. In contrast, Snecma has not announced much by way of staff cuts. The cost of redundancies can be high under French labour laws, while there is an added political dimension for Snecma, which is 97% state owned. The French government had considered a partial sell-off before the September 11 attacks, but the downturn in both the aviation industry and the stock market has seen this put on the backburner.

Snecma chairman Jean-Paul Bechat has claimed he does not need to dismiss 3,000 workers to impress his shareholders. However, at this year's 2002 annual results presentation in January he noted that civil aviation had lost three years of growth, or around 1,400-1,500 aircraft. "Our production rate is going to have to absorb this difference," he admitted.

Both CFM and Snecma hint that they would welcome a sell-off, which would give greater commercial flexibility, not least in making acquisitions. Earlier this year, a joint bid by Snecma with Italy's Finmeccanica to take over Fiat Avio foundered partly due to the reluctance of the French government to fund the deal.

In the meantime, Snecma has been reorganising its corporate structure - a process that has been ongoing, particularly since its 2000 acquisition of Labinal, a French maker of nacelles and thrust reversers. Snecma has been grouping the Labinal activities together with its Messier-Bugatti brakes and hydraulics unit, while non-aircraft business is being placed together with its small engine maker Turbomeca.

Last year Snecma also took over the Airbus half of their Aircelle joint venture, forming a wholly owned nacelle and thrust reverser subsidiary. This has been placed with the Propulsion Solide military and space rocket fuel unit. Aircelle's air transport business was seen as a way of counterbalancing the effects of sudden changes in defence budgets.

Reorganisation is also under way at R-R, which is to create a group holding structure. The company has steadily been building up its civil aeroengine and broader power-plant businesses over the last decade through a mix of growth and acquisition. That leaves it now with four distinct business units: civil aerospace; defence; marine; and energy. Yet the company's basic structure has remained largely unchanged, and R-R believes that a holding company will now allow these divisions more freedom.

The group claims it achieved £250 million ($400 million) of cost-savings in 2002, with a further £50 million anticipated this year. In terms of sales, civil aerospace accounted for £2.7 billion in 2002, down over 20%, while divisional operating profits were more than halved to £150 million. On top of this, the group has been forced to deal with a £1 billion-plus hole in its pension scheme.

Snecma reported 2002 sales down 6% at €6.5 billion ($7.5 billion). But operating profits came in at €621 million, aided by customer support and helicopter engine segments, representing a healthy operating margin of 9.5%. Times may well be tough, but both companies are still achieving operating margins that most airlines can only dream of.

REPORT BY COLIN BAKER IN LONDON

Source: Airline Business