French SMEs in the aerospace sector are likely to see further consolidation as they struggle with eroding operating margins, says a report by credit insurer Euler Hermes.

Operating margins among the 120 French SMEs which Euler Hermes surveyed for the report have almost halved – from an average 9.3% in 2000 to 5.3% in 2004. And margins are forecast to drop further to an average of 4.5% for 2006, the report says. Philippe Brossard, head of research at Euler Hermes, says the longer payment times negotiated by customers further up the supply chain, as well as costs incurred through the weakness of the dollar that are passed down the supply chain, have contributed to the decline. But compared with other industries, such as automotive, margins are still fairly healthy. Aircraft manufacturers and equipment makers are the best off, the report says, with the latter having “good prospects, since they specialise in niche markets and are bolstered by a profitable maintenance business that cushions them from the shock of downturns in the general economy.”

But SMEs may have to team up in joint ventures or consolidate to share the cost of research and development as customers demand more sophisticated, complete products in a bid to cut costs, Brossard says. “The risk for SMEs is that margins are gradually taken off by contractors,” he says. Some subcontractors also want to become original equipment makers themselves “to service markets directly and participate in new development programmes”. Despite these measures, subcontractors are likely to feel continued pressure: the report forecasts a 15% rise in insolvencies in 2005.

Source: Flight International