ARIE EGOZI / TEL AVIV Long-serving chief executive predicts industry shake-up in Israel will leave his company with a bigger global profile

Israel's continuous war footing since its creation in the 1940s has left it with one of the most sophisticated defence and aerospace industries in the world for a country of its size. Now that industry is set for a shake-up, predicts Moshe Keret, long-serving chief executive of its biggest player, Israel Aircraft Industries (IAI). He believes it will see his company emerge with a bigger profile on the world market.

The company - ranked 29th in the world in aerospace sales in Flight International's Top 100 - took a 30% stake in fellow Israeli defence electronics group Elisra earlier this year. It plans to buy another 8%. Keret says the $99 million initial investment will boost IAI's position in the global electronic warfare (EW) market and could trigger further purchases. "I hope to be able to use this as a first step in the consolidation of the aerospace and defence industries in Israel," says Keret, who joined IAI as a mechanical engineering graduate 43 years ago and has been president and CEO for the past 17. "This process has not really been implemented so far in Israel as it has in the USA and Europe."

Electronic warfare

With the acquisition, Elisra and IAI's subsidiary Elta will jointly develop and market EW systems while continuing to compete internationally. It is a potentially awkward situation that will be closely monitored by the country's anti-trust commissioner, because the two companies will have a stranglehold on the Israeli EW market.

But IAI - whose portfolio ranges from aircraft conversions, through missiles and avionics to unmanned air vehicles (UAVs) - has been looking beyond Israel for strategic tie-ups. Gulfstream's purchase of IAI's Galaxy Aerospace joint venture with the Pritzker group in 2001 meant the US business jet manufacturer could fill gaps in its range in the medium segments of the market while IAI's two designs became part of one of the world's best known brands.

IAI still makes the Astra SP and Galaxy - now the G100 and G200 - for Gulfstream. For Keret it was the perfect marriage. "The co-operation with Gulfstream improved our capability to expand the market share of our products. We had the mid-size and super mid-size aircraft and they have the marketing strength and aftersales support. This was a logical joining of forces," he says. The venture has already spawned the G150, a widebody sibling of the G100, and may result in more derivatives.

IAI is likely to finish this year with sales of $2.1 billion, virtually the same as 2001, but with profits down almost a third to around $70 million. Nevertheless, with a backlog of $4 billion, Keret is pleased with the group's performance. "We hoped to increase our sales. But even the current level is an achievement considering the world crisis and the effects of regional tension on our business," he says.

The space market is also a potential growth area for IAI, despite the lack of demand for commercial launches. "We have to look at different angles on communication and imaging satellites," says Keret. While the communications market has slumped, the imaging business looks healthier.

Keret confirms that IAI is building the Amos 2, a communication satellite that will replace the Amos 1, which is now in orbit. Imagesat International, which operates the Eros A1 satellite and in which IAI has a 31% stake, is also working on its successor, the A2. "The company is functioning well and the second satellite will be launched in the next two years," says Keret.

One of IAI's biggest strengths is its expertise in UAVs, partly because the country's military has been a regular customer for many years. "While people may be impressed by the many UAV systems available today, the UAVs made by IAI belong to a very small group of operational, combat proven systems," he says. He cites the decision by EADS to market IAI's Heron medium-altitude, long-endurance (MALE) UAV as an example of industry's recognition of IAI's capabilities. The system is being evaluated by the French army and is competing in the UK's Watchkeeper programme. "We have a unique position in tactical and MALE UAVs," says Keret, but he will not comment on advanced UAV programmes under development.

Eastern exports

Asia, and particularly China, remains an important export market, despite the cancellation of the Phalcon airborne early warning (AEW) deal with China under US pressure. "Asia is less affected by the world economic crisis, and we have a forecast for sales worth hundreds of millions of dollars in the region," says Keret. Although he is vague on details, the company is negotiating contracts with China, India and South Korea, and Keret confirms that a contract to supply the Indian air force with three Phalcon-type AEW systems will be signed soon.

Chinese companies are also budding customers for IAI's Bedek aircraft conversions operation. The company held a sales conference there in October and Keret claims that demand for conversions could soar, with joint ventures with Chinese production companies a possibility.

IAI's export push is partly being driven by cuts in the Israeli defence budget, which are shrinking its domestic market despite the increase in terrorist attacks. However, the changing nature of threats to the West following 11 September mean IAI and several other Israeli companies are being looked to for innovative solutions. IAI is, for example, working with rival Rafael on a directional infrared countermeasures device to protect civil aircraft from attack by shoulder-launched missiles.

But Keret believes consolidation is the key to strengthening IAI's hand in the global market, by giving the company access to new technologies and markets. With its recent acquisitions, IAI is already slowly moving towards the critical mass it needs. "We are now better equipped to compete," he says.

Source: Flight International