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Fokker's future hangs in balance

Dutch aircraft manufacturer Fokker is fighting for survival as a split emerges between the two main partners in the proposed Asian Express 100-seat aircraft project. Richard Whitaker reports from the Asian Aerospace show in Singapore.The 30 companies considering bids for all or part of crisis-torn regional aircraft manufacturer Fokker face extremely tight time pressures and a complex array of issues, ranging from Fokker's debt burden to its potential viability as an aircraft manufacturer. They must weigh up the pros and cons of bidding for the entire company, or of waiting for the alternative - a fire sale in which attractive assets could sell cheaply. The clock is ticking as the bridge financing ebbs away; Fokker will be out of cash again by the end of the first week of March, at the latest. Of the parties which have shown interest, six or seven have discussed acquiring the whole of Fokker and five are 'very serious', says chairman Ben van Schaik. 'Our first procedure is to talk to those interested in the entire company or a majority. Later on we may talk about smaller parts.' The front-runners are likely to be Bombardier, Aérospatiale, British Aerospace and Samsung, though bids from Taiwan or Japan cannot be ruled out. Bombardier, which has a reputation for turning round aerospace manufacturers successfully, confirms it is holding talks with Fokker. If it acquired Fokker, the Canadian company would probably close the F50 line in favour of the de Havilland Dash 8 programme, but the F70/F100 series would prove a useful complement to the Dash 8 and Canadair Regional Jet. A purchase would protect work at Bombardier's Shorts subsidiary, which builds wings for the Fokker jets. However, it would cast doubts over the development of the 70-seat RJ-X, which Canadair hopes to launch later this year. Aérospatiale and British Aerospace could mount a joint bid and then place Fokker in the recently formed Aero International (Regional) consortium which markets and supports Fokker's rivals, the Avro RJ and ATR family, plus the Jetstream. In this case AI(R) would have to decide between closing the Fokker production lines or finding a way to market them alongside Avro and ATR. Such a solution would give AI(R) significant leverage in the 50 and 100-seat markets and would enable a single new European regional airliner to be developed, as well as keeping Bombardier out. 'Maybe it is an opportunity to do something else in Europe, maybe not,' says AI(R) chief executive Henri-Paul Puel enigmatically. But to complicate matters among potential European suitors, Daimler Benz Aerospace (Dasa) is now pushing for the development of a new 100-seat aircraft, in which the German manufacturer is seeking the lead role, within the Airbus consortium. Among Asian companies, Samsung Aerospace of Korea has expressed interest in Fokker, but its president Moo-Sung Yu says: 'We are interested in knowing the situation first - the real situation.' Buying Fokker, possibly through a Korean industry joint venture, would give Samsung technical and marketing know-how, and would be especially useful if Korea splits with China over the Asian Express 100-seat regional jet project (see box). But a Korean purchase of Fokker would almost certainly result in the transfer of production to Korea, leaving Samsung to absorb heavy redundancy costs in the Netherlands. There is a wide diversity of opinion among industry leaders about the possible outcome. 'One of their competitors should buy them and shut them down,' suggests one US source. 'The European aerospace community would be very unhappy to see a European manufacturer failing, and I wouldn't discount the possibility of the major players mounting a rescue bid,' says a European source. But Van Schaik warns: 'There is a realistic chance - but no more than that' of completing a deal in the time available.If a bid for the entire company was not completed by early March liquidation looked inevitable, unless talks with a potential buyer were at an advanced stage and further bridge finance had been procured. Dasa has taken an after-tax provision of DM2.3 billion ($1.6 billion) in its 1995 accounts to cover its exposure. Liquidation would result in a fire sale of assets, many of which would be attractive. For example, Fokker Aerostructures has several lucrative aerospace subcontracts. The Fokker Aircraft Services maintenance operation turns a profit on annual revenues of $125 million and could interest a maintenance firm. Both Fokker and Dasa stress that even in the worst-case scenario they will make proper provision for supporting the 1,200 Fokker aircraft currently in service. This could involve combining the product support operation with Fokker Aircraft Services and part of Fokker Aerostructures and either retaining it as part of Dasa or selling it off. And Fokker will have no trouble finding a buyer for the product support operation should a fire sale take place. 'Product support for Fokker is a cash rich operation for a single investor. I don't see any problem in disposing of that or the maintenance operation,' says Chris Partridge, senior analyst at Avmark. He also plays down concerns that the crisis at Fokker will push down the resale value of its aircraft. 'The regional market is in expansion mode and as such I don't foresee any collapse in Fokker values over the long term.' He points to the rising secondhand values of older B737s and B727s as supply tightens in the regional jet sector. Nevertheless, some Fokker operators 'have already taken write-downs on their Fokker products', he adds. But Clive Medland, vice president for asset management and valuation at SH&E in New York, foresees at least some softening of the resale price. If the Dutch manufacturer is taken over as a going concern 'the values will stabilise over the next six to 12 months,' he says. But if adequate product support is maintained in isolation, he believes 'values will diminish and far quicker than those of the L.1011, resulting in a 45 per cent reduction over the next five years.' The closure of Lockheed's commercial aircraft business in the early 1980s had less effect on L.1011 resale values than the closure of Fokker would have today, because there is 'more focus on values now, and also when the L.1011 values started to plummet in the mid-1980s the boom in the market started,' says Medland. But both agree that it is highly unlikely that the whole Fokker operation will close down, because 'other organisations have too much to lose as well,' concludes Partridge. The crisis at Fokker came to a head on 22 January, when Dasa withdrew financial support following the failure of Dasa and the Dutch government to agree on a proposed DFl 2.3 billion ($1.4 billion) recapitalisation. A majority 51 per cent of Fokker is owned by Fokker Holding, in which Dasa has a 78 per cent stake and the Dutch government a 22 per cent interest, while the rest of the firm's stock is publicly traded. Dr Dietrich Russell, president of Dasa's Aircraft Group, says Dasa will help Fokker to find buyers and product support solutions, but rules out any future financial support. The German company insists that it had 'put DFl 1 billion on the table' as its part of the proposed rescue package, but the Dutch government failed to come up with its own offer. Fokker has been labouring under a rapidly increasing debt burden, which reached DFl 3 billion by the end of last year. Two-thirds of this is owed to Dasa, which in 1994 advanced a DFl 600 million loan repayable through future share issues, and last year provided DFl 1.4 billion in working capital to keep the company afloat. Dasa paid DFl 680 million for its Fokker stake in 1993. After Dasa pulled the plug, Fokker obtained temporary protection from its creditors. The company then secured a DFl 255 million bridging loan for five weeks, and the government made a DFl 110 million prepayment against Fokker 60 turboprops currently in production for the Dutch air force. Fokker is paying suppliers in cash, and six or seven aircraft should be delivered during the five-week holding period. Van Schaik says Fokker has a firm-order backlog of 75 aircraft - 50 of them jets - and that there have been no cancellations since the crisis erupted. Fokker's chairman blames the company's troubles on a 50 per cent drop in demand during the last few years, along with a 30 per cent drop in prices and a 25 per cent fall in the value of the US dollar against the Dutch guilder. He insists that Fokker is now a 'lean and efficient company'. Its leasing portfolio has been taken off the balance sheet by transferring 69 aircraft to Dasa's debis leasing subsidiary. Had the recapitalisation gone ahead, Fokker would have broken even this year and moved into profit in 1997, says van Schaik. However, a representative of another manufacturer questions this claim: 'They are still selling aircraft for less than the cost of producing them.' Herein lies the dilemma. Fokker's core business of manufacturing aircraft in a high-cost country will remain under pressure as long as prices are depressed by tough competition. Yet the company has valuable assets, including a wide customer base, technical and marketing know-how, and a number of profitable subsidiaries.
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