Bob Brown took over as CAE chief executive last year - and has quickly made his mark by instigating major changes
Many markets in aerospace have just two major players, because of the heavy upfront costs and long payback times. But while Airbus and Boeing compete fiercely in the airliner market, it is not often they face competition from new market entrants promising significantly lower costs.
This is true for the flight simulation business, where years of bruising competition between CAE and Thales have resulted in razor-thin margins, but that has not discouraged new players from seeking to enter the market by undercutting the two major suppliers.
One reason is that the components of a flight simulator – the computer, motion and visual systems – have become commodities, enabling any company with integration skills to join the market. They may sell only one or two simulators, but their presence is enough to keep intense pressure on prices.
Seeing its margins on equipment sales reduce as a result of competition, industry leader CAE decided in 2000 to diversify into the civil aviation training services market. The resulting rapid and costly investment in training centres has made CAE the largest independent provider of airline pilot training, and created a company that is uniquely split 50:50 between manufacturing and services, as well as 50:50 between civil and military.
But in 2004, at the bottom of the post-11 September industry downturn, the huge investment in aviation training began to drag down CAE’s balance sheet. When Bob Brown took over as chief executive in August last year, his first task was to conduct a six-month internal and external review of the company.
The strategic review culminated earlier this year in the decision to sell the company’s Marine Controls division to L-3 Communications for C$328 million ($264 million). “We needed to shore up the balance sheet quickly,” says Brown. The ship controls unit was profitable, but it was CAE’s only non-core business and its sale has given the company financial flexibility, he says.
Next, CAE conducted an impairment test on the assets in its civil aviation training business, and decided the revenue per simulator, exchange rate, growth rate and other assumptions behind its acquisitions of Schreiner Aviation Training and SimuFlite were no longer supportable. As a result, the company wrote down the value of its worldwide fleet of around 100 simulators by C$450 million.
“We had to get our asset base in line to make a return on our investment,” says Brown. “We are getting positive and growing results.” After growing rapidly through the acquisition and creation of training centres, the simulator network is being rationalised to make it more efficient. A Dallas, Texas centre acquired from Schreiner is being closed and “we are looking at Europe”, he says.
“We are looking at the simulator utilisation rates. Some of them are not pulling their weight and we will take one or two out of the system,” says Brown. But it is not all about retrenching. CAE is opening a new training centre in the north-east USA to serve the business aviation market, which it will equip with both new and relocated simulators.
Brown is no stranger to corporate reorganisation. Before joining CAE, he was chairman of Air Canada during its successful restructuring under bankruptcy protection. Brown also steered Bombardier through several highs and lows as president of the aerospace division and, from 1999 to 2002, as chief executive of the Canadian manufacturer.
CAE’s reorganisation has created distinct civil training, simulation products and military groups. Training has been separated from products to provide “clean lines of organisational responsibility and accountability”, says Brown, adding: “The markets did not understand if we were making or losing money on simulators versus training.”
Engineering, manufacturing, programme management and procurement for civil and military simulators have been brought back together under the products group. “The real key is producing a simulator at the right cost,” says Brown. “We have not been efficient from a manufacturing point of view. We have to reduce cycle time on simulators; we have to reduce cost; we have to share technology acquired on the military side with the civil side.”
The changes should be transparent to the customer, says Brown, because marketing and sales will be shared between the civil training and products groups so CAE can continue to offer airlines options ranging from acquiring simulators to buying training. “We have made it seamless for the customer.” Military customers should also see no change, he says, but internally CAE will be able to concentrate its research and development and take advantage of procurement efficiencies. “The result will be a better product.”
Brown sees CAE’s current April 2005-March 2006 fiscal year as a transition period, with the restructuring expected to begin paying off in the 2006-7 financial year. “We have business that was taken on in the past at lower margins that has to work its way through so we are in position by next fiscal year to be profitable.” But through the restructuring, the company is not compromising on the investment in technology that has kept CAE at the forefront of its industry. “We will keep our leadership position,” says Brown.
Graham Warwick/Washington DC
Source: Flight International
