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FARNBOROUGH: Why CAE's shift to services proved smart

CAE's move into the training services market has proved one of its smartest strategies since the company began, repairing aircraft radios, in 1947. The rapid growth of the airline industry – much of it in markets such as Asia where there was little pilot training infrastructure – has led to a surge in demand for newly qualified pilots and for type and recurrent training for existing flightcrews.

At the same time, military operators – faced with tighter budgets to support their own instructors and training centres – have increasingly looked to outsource the training of their pilots. The trends have seen the Montreal-based business become the largest independent provider of training services across both the commercial and defence markets.

CAE was one of the first companies to begin manufacturing aircraft simulators in the 1950s, when it was known as Canadian Aviation Electronics. By the turn of the century, it had become the world's biggest manufacturer of full-flight – a status it retains today with a claimed 70% share of the market, dwarfing its three major competitors.

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However, around that time it began looking seriously at the training supply market. A flurry of investment in its own centres and acquisitions, including Schreiner Aviation Training in Amsterdam in 2001, business aviation specialist SimuFlite a year later, and, most notably, Oxford Aviation in 2012, saw it expand its footprint across the world.

Today, the provision of training services, as opposed to the manufacture and sale of training devices, makes up around three-fifths of CAE's $2.16 billion annual revenues, although the company does not break the two activities out in its results.

"It has been a very deliberate approach to broaden our business into services, as a natural extension of our heritage," says chief executive Marc Parent. "Some 60% of our revenues are now related to training. That's a very big shift, because in the 2000s, services made up around 20%, and that was largely aftermarket."

GROWTH AREAS

The company has almost become a victim of its success in manufacturing; with such a dominant share, and demand largely governed by aircraft delivery cycles, it is a "slow growth market", admits Parent. However, there is "double-digit" annual growth potential in training provision. "All things being equal, yes, you will see us move more into services," he says.

Last year, CAE published its first pilot demand outlook, which predicted a need for 255,000 airline pilots over the next decade – the equivalent of 70 pilots a day – and 180,000 captains. In addition, the business aviation sector will require more than 50,000 pilots. "The world is going to need a lot of airline pilots," says Parent. "We are seeing a very hot market for flightcrews in the next decade."

CAE has signed more than 40 long-term training agreements with airlines in the past 12 months. In some instances, it provides instruction at its own centres, or hours on its simulators. At the same time, it has set up a series of joint ventures with airlines, setting up dedicated training departments using CAE equipment and jointly funding them with carriers.

HEADING UPSTREAM

Since its acquisition of Oxford, a largely ab initio flight school, so-called pilot creation programmes have become increasingly important, with the company launching around 10 of these in the past two years as airlines have looked to become much more involved upstream in the supply of new pilots. Every year, CAE graduates more than 1,000 cadets, with around four-fifths of them sponsored by airline customers who guarantee them a job.

Customers include Air Asia, China Eastern, China Southern and Japan Airlines, with AeroMexico, American Airlines, JetBlue and Jetstar Airways coming on board in recent months. In some cases, CAE offers multi-crew pilot licence (MPL) training, designed to train candidates as first officers in a more realistic airline environment. Some 85 AirAsia cadets, for instance, have been through the MPL programme since 2010.

While CAE has been in the defence sector since being given the contract to design a simulator for an Avro Canada CF-100 in 1952, its penetration in the market increased significantly in 2001 when it acquired BAE Systems' Florida-based training division, which had contracts with the US military. It has since won major deals for the likes of the US Navy’s Sikorsky MH-60 and US Air Force's Lockheed Martin C-130J.

During the same decade it began an outsourcing contract to train UK helicopter pilots, and in Germany it won the deal to train pilots for the Eurofighter Typhoon and NH Industries NH90. By 2010, the military business had grown to around half of CAE's revenues. However, the ongoing growth of the commercial side, and falling military budgets has seen the proportion represented by defence fall back in recent years.

Recent deals have included, in 2015, the prime contract to supply NATO's Flying Training in Canada programme, and, the same year, a deal to train US Army fixed-wing pilots at a new centre in Alabama. In both instances, CAE owns the aircraft and the facilities.

Parent says in the defence market there is an "increasing propensity for governments to outsource training", adding: "Militaries are rising to their own personnel challenges by having more conversations with us about what we can do." The aim of many modern defence services, he says, is to "focus on readying the warfighter for the mission and less on support roles".

Despite the push into services, CAE has continued to innovate on the equipment side, launching its latest-generation commercial product, the 7000XR Series full-flight simulator in 2015, and following it earlier this year with the 600XR flight-training device (FTD). At this year's show, the company will launch the 700MR FTD, designed for military helicopter flight and mission training.

The past few years have seen Airbus and Boeing announce their intention to capture more of what they see as a lucrative market in services. Their strategy is to make further inroads into the parts aftermarket – an area they had previously been content to leave largely to their suppliers – and also training, if not in the manufacture of flight simulators, then the provision of training to their airline customers.

Parent, however, insists competition with the OEMs "is not really new". He adds: "The OEMs have always been interested in the aftermarket, but we are the only pure play in the business. We focus on the end-customer and being the best at what we do. [The airframers] will play their game and we will play ours, and, where appropriate, we will partner with them and get win-wins."

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