DASA hopes that its stringent cutbacks will lead the way to "renewed economic success".

Andrzej Jeziorski/MUNICH

TWO YEARS AGO, THE FORMER Deutsche Aerospace, now Daimler-Benz Aerospace (DASA), caused a scandal by staying away from the 1994 Berlin International Aerospace Exhibition (ILA).

Amid debate in the industry about the excess of expensive air shows in Europe, DASA's reluctance in the face of political pressure encouraged many other major companies to stay away from Germany's aerospace showcase, and appeared to threaten the future of the ILA. If a company representing the bulk of Germany's aerospace capacity could not be bothered to turn up to the show, why should anybody else?

Now, however, DASA is back and ILA '96 is fully booked, with over 500 exhibitors. The group has thus kept a promise made to German economics minister Gunter Rexrodt in 1994 by Jurgen Schrempp, then heading DASA, but since elevated to chairman of the parent Daimler-Benz group.

Schrempp's reluctance to attend the 1994 event is understandable. DASA had just seen its losses double to nearly DM700 million ($460 million). The company had announced a restructuring plan involving 16,000 redundancies and six site closures, intending to restore profitability by 1995. Schrempp felt that he could not justify spending millions of German marks to attend the show. Yet DASA's presence at ILA this year is far from being a sign that better days have arrived.

The company goes into the show carrying the worst losses in its history, and with plans for further swingeing job cuts. On the company's own estimate, it is still at least three years away from making a profit. In January, DASA finally pulled its financial crutch away from Fokker, which is now bankrupt. It is also trying to sell control of troubled turboprop-subsidiary Dornier Luftfahrt. Talks over a sell-off of engine subsidiary MTU have faltered. Yet, taking heart from successes in the defence and satellite fields at DASA's annual press conference in February, Schrempp's successor, Manfred Bischoff, summed up, without irony, that it had been a "difficult, yet successful, year".

In April 1995, Bischoff was still clinging to the hope that DASA could return to profit that year. His biggest fear was the low dollar-exchange rate, then hovering close to DM1.4. Today, German civil-aircraft manufacturers generate more than 90% of their turnover in a dollar market, while most of their costs are in German marks.

Bischoff needed a year's average exchange rate of DM1.6 to achieve a profit - he did not get it, and predicted another year of losses of hundreds of millions of German marks. It was becoming clear that DASA would have to resort to a further round of cutbacks.

REVEALING "DOLORES"

In October, after setting up a study group with the help of consultant McKinsey, DASA revealed its so-called "Dolores" restructuring plan. It included 8,800 additional job cuts, and the sale of three more sites. Naturally, the unions were up in arms, although some industry observers found the measures surprisingly mild, saying that DASA was overdue for a radical shake-up of its capacity, regardless of the dollar rate.

The goal was (and remains) to return DASA to long-term profitability by 1998, even assuming a worst-case dollar rate of DM1.35. The unions consider this too harsh, pointing out that the dollar rate has now climbed to DM1.5, and that the recent spate of new orders at Airbus is forcing production rates up to record levels.

So far, DASA is standing firm, despite mid-April protests by 10,000 employees. The fluctuation of the dollar rate is unpredictable in the long term, the company insists, so the plan stays.

The Dolores plan and the dollar rate, combined with an enormous DM2.3 billion write-off following the withdrawal from Fokker, left DASA with a record 1995 deficit of close to DM4.2 billion. It is now threatening even tougher measures in its fight back to profit.

One persistent complaint from German industry has been the imbalance between the amount of Government support which it gets, compared to the amount that its US competitors receive. The 1992 bilateral agreement between the European Union and the USA, limiting state support for civil-aircraft programmes of 100 seats-plus, puts the USA at an advantage, it says, because of additional, less transparent, support which the industry receives through NASA and military programmes.

Dr Hans Birke, managing director of the German Aerospace Industries' Association (BDLI), says: "We expect the Government to take care to level conditions as far as support is concerned." This should be done either by revised international agreements limiting state support, or by increasing state support to a level equivalent to that of countries such as the USA.

Earlier calls for more indirect support for the industry led Germany to produce DM600 million in support of civil-aerospace research, divided over four years from 1995, among technology programmes for next-generation fixed-wing aircraft, helicopters and engines.

Dr Dietrich Russell, head of DASA's aircraft group since October, tackles the question with more restraint. "In recent years, the German Government has given a lot of support, for which we are very grateful. We need more political support in our sales activities around the world, however. To improve its international competitiveness, European aerospace companies need similar support to the manufacturers in the USA and Japan, which get strong backing from their Governments," he says.

Russell's comments on US Government support for sales activities seem to reflect a commonly expressed feeling in the industry that, no matter how good the package offered to a potential export customer, the deciding factor could often be a simple telephone call from president Bill Clinton.

The BDLI says that the estimated total turnover of all its member companies in 1996 is expected to be more than 40% lower than in 1991, depending on the dollar rate. Airbus Industrie's 1997 delivery schedule of 185 aircraft compared with this year's 135, however, seems to show that the civil-airliner market is recovering. It may not be soaring to the levels experienced at the turn of the decade, but things are looking better now than for some time.

With the passing of Schrempp's avowed "love baby", Fokker, DASA's ambitions in the civil-aircraft sector have been toned down and refocused. Gone are its aims of a leading role in the regional-jet field. Going - probably - is DASA's lead role in the Dornier 228 and 328 turboprops, as Fairchild Aircraft and 11 others negotiate to buy most of loss-making Dornier Luftfahrt. All remaining aircraft programmes are in partnerships, and the central aircraft activity for DASA is now its role in Airbus.

PRODUCT-LINE EXPANSION

"Together with the [Airbus] partners, DASA will work on the expansion of the current product line with new versions, such as the A330-200, A321 growth and A340-8000. The Airbus programme also has to be expanded with a completely new very-large aircraft, seating more than 400 passengers, and a new 100-seat regional jet right below the A319," says Russell.

Russell sees DASA's role developing as that of "an equal partner in co-operation with other European companies". It is one of DASA's major strategic goals, he adds, "...to improve its competitiveness by establishing joint ventures and strategic alliances".

This can be seen in DASA's unveiling of six new joint ventures in 1995: Collins DASA Avionics, together with Rockwell; Davia, a satellite-navigation company formed together with Russia's Aviapribor; Eurockot Launch Services, with Krunischev of Russia; GEC-Thomson-DASA Airborne Radar; Nortel DASA Network Systems, together with Northern Telecom in the field of satellite-communications/network systems; and Zeiss-Eltro Optronik, bringing together DASA and Carl Zeiss optronics activities.

Two major joint ventures which have yet to be established are in the propulsion-systems and military-aircraft field. Until recently, DASA was in long and tortuous negotiations with BMW to bring its loss-making engine subsidiary MTU M_nchen into a merger with BMW Rolls-Royce (BMW R-R). These negotiations have now ground to a halt, with the two companies saying that, not only is there no chance of a merger, there is no immediate prospect of MTU getting any subcontracting work from BMW R-R - there had been speculation MTU could produce the low-pressure turbine for BMW R-R's BR715 engine.

Instead, MTU says that it is concentrating ever more on its strategic partnership with Pratt & Whitney, although there is no question of reviving the short-lived plans, dropped in 1994, for an equity exchange between the two companies. It seems unlikely that this will be the end of the story, however.

It seems inevitable, in the long term, that DASA's military-aircraft group will also be placed in a joint venture. Rumours come and go, with British Aerospace and Dassault being bandied around as potential partners. So far, DASA has denied any such plans - saying that it will take "years yet" before a European military-aircraft alliance could be formed - while conceding that it would make sense.

PARALLEL PROGRAMMES

"I think it's starting now with the Future Large Aircraft [FLA]," says Birke. If the programme goes ahead, the FLA is to be developed within the Airbus framework under the Airbus Military Company subsidiary, formed specially to manage this programme. It seems logical that future combat aircraft should also be developed within a European joint venture, says Birke, to prevent a recurrence of today's "absurd" situation where Europe is engaged in three parallel fighter programmes: the Eurofighter EF2000, the Saab JAS39 Gripen and the Dassault Rafale.

The military sector overall is still suffering from shrinking procurement budgets. The German defence budget withered from DM54 billion in 1991 to DM47 billion in 1994. The 1996 budget of DM47.9 billion - already under strain from the unexpectedly high cost of operations in the former Yugoslavia - is now facing the prospect of a further cut, which could be as much as DM2 billion.

It is still uncertain which procurement programmes could be affected by the cut, but sources in Bonn confirm that Germany's participation in the Helios 2 spy-satellite programme, together with France, is now being discussed, with a cheaper US programme considered as a possible alternative.

If Germany does withdraw from the Helios 2, the consequences for DASA could be dire. One of the company's main consolations during the past year has been the agreement with Aerospatiale to go ahead with joint ventures in the satellite and missiles field. The two evenly split companies to be formed are the German-led European Satellite Industries (ESI), and the French-led European Missile Systems (EMS).

The French go-ahead for the formation of ESI was given only on condition that Germany participated in the Helios 2. What will happen with ESI if Germany backs out is unclear. With satellite sales up by 36%, to DM1.8 billion, in 1995, DASA has placed emphasis on the sector, and the loss of ESI would be a disaster which could in turn affect the formation of EMS, as both ventures come under the same agreement.

In DASA's latest annual report, Bischoff writes: "I am convinced that the decisions taken last year have cleared the way towards renewed economic success and new business prospects." Tens of thousands of nervous employees hope that he is right.

Source: Flight International