Weak demand, strong euro and increased investment in R&D prompt streamlining

MTU Aero Engines is eliminating 7% of its German workforce as it gears up for an expected stock market flotation in 2006. The Munich-based manufacturer and maintenance, repair and overhaul provider - recently acquired by US private equity firm Kohlberg Kravis Roberts (KKR) from DaimlerChrysler - is trying to slash annual costs by €100 million ($122 million) over the next three years.

The company blames the cuts on weak civil aerospace demand, the strength of the euro against the US dollar and its decision to double research and development expenditure to €189 million in 2003 from €90 million in 2001, while turnover fell €600 million to €1.9 billion.

MTU chief executive Dr Klaus Steffens says that under KKR ownership the company will continue its "successful" strategy of focusing on military engine production and servicing in Germany, supplying civil powerplant compressors and turbines for partner Pratt & Whitney and its global network of MRO shops.

"What has changed is our financial structure," he says. "MTU has to finance itself out of free cash. It is not operating profit, but cashflow from operations that is most important. DaimlerChrysler wanted a dividend, but KKR is not asking for one."

Steffens is concerned about the low level of defence spending in Germany. "The technology of the aerospace business is to a large extent - especially in our case - derived from military programmes," he says. "My worry is while we keep the company afloat with the programmes we have, such as Eurofighter and [Airbus Military] A400M, where is the future technology coming from in Germany?"

Looking ahead, Steffens does not expect full-scale mergers between European engine manufacturers, but rather minority equity investments structured around transatlantic co-operative programmes.

Snecma's forthcoming privatisation is widely expected to lead to General Electric- the French company's partner in CFM International - taking a stake of around 10%. Avio in Italy has meanwhile been sold to Carlyle Group. MTU's major partner is P&W, although the German company also participates in GE and Rolls-Royce programmes.

"There is an opportunity for [GE, P&W and R-R] to engage financially - to take equity in these companies - and they will probably take it to make sure that their interests are secured," says Steffens.

MTU managed to break into the potentially lucrative US military market via its acquisition in 2001 of US-based turbine disk producer Caval from Chromalloy Gas Turbine. Caval manufactures engine parts for the Lockheed Martin F-35 Joint Strike Fighter and Lockheed Martin/Boeing F/A-22 Raptor under subcontract to P&W.

Steffens says he believes the PW6000 engine for the A318, which has been hit by a three-year delay to its service entry due to technical problems, and which will be assembled by MTU in Hanover, "will be a very successful engine as soon as we demonstrate it".

Meanwhile, there are "clear indications that the MRO market will come back to where it was in 2001", he says.



Source: Flight International