GRAHAM WARWICK / WASHINGTON DC
Can the Canadian aerospace industry climb out of a downturn and rediscover its growth path? Our seven-page report looks at its options
Where to go for growth: that is the issue facing the Canadian aerospace industry. After more than a decade of rapid expansion, and at the bottom of a civil downturn, the world's fourth largest aerospace player faces challenges in resuming and sustaining its previous growth path.
Canada ascended to fourth place in the world aerospace rankings in 1999, and achieved record sales of C$23.2 billion ($16.7 billion) in 2001. Sales for the overwhelmingly commercial, export-driven industry declined 7% last year, to C$21.5 billion, and are expected to slip another 2.3% this year, to C$21 billion. Revenues are projected to begin recovering next year, but whether Canada can return to the spectacular growth rates seen in the 1990s is in question.
Bombardier, the engine of Canadian aerospace industry growth, has entered a consolidation phase after years of rapid expansion propelled by an aggressive product-development strategy. The Global 5000 super-large business jet, now in flight test, is the company's 15th aircraft in 14 years, but it is not clear when the next new model will be launched. For now, chief executive Paul Tellier is content with Bombardier's line-up of business and regional aircraft.
Conservative approach
"We have a good line of products that should meet the needs of our customers," says Tellier, a former railroad executive with a reputation for turning companies around, who took over as chief executive in January tasked with restoring investor confidence in a company that had put growth ahead of profit.
"I have come in as chief executive with a very conservative approach. The company has been through extremely rapid growth. Now the emphasis is on increasing profits, reducing leverage and strengthening the balance sheet," he says.
Recapitalisation of the company has required some tough decisions. In addition to completing a C$1.2 billion equity offering, Bombardier has agreed to sell its Recreational Products division - the foundation of the company - for another C$1.2 billion.
A substantial part of the business-aircraft financing portfolio of Bombardier Capital has been sold, and a strict cap placed on the interim financing of regional aircraft. The company's modest defence businesses are being sold. The "new" Bombardier will have two equally sized sectors: Aerospace and Transportation.
Although the recapitalisation has been more successful than envisaged, raising more than C$2.5 billion, there is no sign that Bombardier is ready to restart product development. Although analysts are concerned the company risks losing ground to Embraer's all-new 170/190 family as the market moves to larger regional jets, Bombardier believes its CRJ700/900 derivatives will meet the near-term needs of customers. "We will not re-open the file on going beyond 86 seats - but we never say never," Tellier said at the Paris air show (Flight International, 24-30 June).
Design halt
Bombardier halted design work on the 90- to 110-seat BRJ-X in 2000. "In 18-24 months we may revisit the decision [on the BRJ-X], but today we are satisfied with our line of products," Tellier said in June. The Montreal-based company's decision-making is being monitored closely by its network of suppliers, whose fortunes to a greater or lesser extent are tied to those of the Canadian giant.
Heading the list is Pratt & Whitney Canada, also headquartered in Montreal. The Canadian engine manufacturer has a prominent position in the regional turboprop market, supplying PW100-series engines for all Bombardier Dash 8s, but has missed out almost completely on the regional jet boom. Instead, the company has focused on the business aircraft sector, taking a lion's share of the market with a series of turbofans ranging from 1,000- 8,000lb thrust (4-36kN).
"Our big challenge is the regional market," says chief executive Alain Bellemare. "We used to have a significant part with the PT6 and PW100, but then along came the regional jets." While P&WC sees continuing demand for turboprops, it is low volume, and the company is focusing research and development investment on the PW800 turbofan for next-generation regional jets and large business jets. "We keep investing in technology to get ready for the next generation of regional jets that will emerge in the next 10 years. In the long run we will take a significant portion of the regional jet market," he says.
P&WC invests more in R&D than any other Canadian aerospace company, Bellemare says, spending an average of C$400 million annually, and has continued to invest heavily through the downturn. The company has certificated more than 40 engines in the last 10 years and has more than 20 in development.
Fundamental investment
"In good times or bad, we keep investing. It is fundamental to our future growth," he says. "In the last two years we have had to make some very tough decisions from an overall business viewpoint to maintain our high level of R&D. To sustain our spending we have had to take cuts elsewhere."
While the PW800 remains in the R&D stage, awaiting a launch customer, P&WC has begun full-scale development of the PW600 small turbofan, selected to power the Cessna Citation Mustang and Eclipse 500 entry-level business jets. These engines complete the company's turbofan range, but the future shape of its turboprop and turboshaft ranges remains to be determined. P&WC hopes to penetrate the US military helicopter market through the small military engines division formed with parent company Pratt & Whitney.
In common with many Canadian companies, lacking a domestic defence market of any size, P&WC's business base is almost totally commercial. "We have a strong foothold in the civil market, but not in the military - except trainers - so there isa huge opportunity out there," says Bellemare. This would help offset the inevitable civil cycles. "Because there is very limited military work in Canada, all business is on the same cycle at P&WC."
The domestic military market, although modest, and the opportunity to work more closely with Bombardier has encouraged some overseas companies to establish operations in Canada.
Thales ambition
France's Thales has grown from supplier to risk-sharing partner on Bombardier's business and regional aircraft, and has ambitions for a larger role on future products. Earlier this year the electronics giant regrouped its activities under Thales Canada, and created centres of excellence serving not just Canada, but also US and other customers.
"Thales Avionics [in Montreal] is a centre not just for Canada and Bombardier, but for other customers around the world, such as Dassault Falcon," says Thales Canada chairman Pierre Jeanniot. Montreal is the company's international centre of excellence for business and regional aircraft avionics, and Thales Canada has established other centres specialising in optronics (also in Montreal) and military communications (in Ottawa). "Our purpose is to grow in Canada by serving not just the domestic and US markets, but also worldwide," he says.
Thales Avionics Canada is developing enhanced vision systems (EVS), flight management systems (FMS) and fly-by-wire flight control systems for business and regional jets. The company has teamed with Canada's CMC Electronics to develop the EVS for Bombardier's Global Express long-range business jet, and Thales will be a key bidder to supply the integrated cockpit and fly-by-wire system for any future Bombardier aircraft. The Montreal site is also leading development of an integrated cabin environment system for business jets. "This is a potential growth area," says Jeanniot.
Defence concerns
Canada will get a new prime minister, if not a change of government, later this year and there are indications the new leadership could boost the country's modest defence budget. The biggest military aircraft project on the books is the much-delayed Maritime Helicopter Programme. Jeanniot sees this as a "big opportunity" for Thales Canada, which is part of the Lockheed Martin/Eurocopter team.
Jeanniot echoes the concern voiced by other Canadian industry leaders over "Buy American" legislation being considered by US Congress in retaliation for opposition to the invasion of Iraq. With defence making up only 10% of Canadian aerospace sales - and half that being to US customers - anything that would precipitate a further decline is of major concern to the industry.
The first scare came in 1999, when Canada's exemption under US international trade in arms regulations was rescinded. The exemption was partially reinstated, "but a lot of damage was done with respect to attitudes towards Canadian firms", says Peter Boag, Aerospace Industries Association of Canada (AIAC) vice-president strategic planning. "US customers are gunshy of the issue because of conflicting interpretations of the rules."
Of more immediate concern is a proposal now before Congress to rescind Canada's status as part of the US national technology industrial base. Since much of Canadian industry's already-modest defence business results from its ability to act as adjunct to the US industrial base, this proposal particularly concerns the AIAC. Boag is hopeful that whoever is chosen as Canada's new premier will be able to ease the cross-border tensions caused by outgoing prime minister Jean Chretien's vocal opposition to the Iraq war.
One way to penetrate the US market is to buy into it through acquisitions. Canadian simulator manufacturer CAE has done just that through its purchases of the Florida-based military simulation business of BAE Systems (formerly Reflectone) as well as business aviation training specialist SimuFlite in Dallas/Fort Worth. Expanding into civil aviation training and increasing sales to the US military are both part of the Montreal-based company's strategy to diversify away from its core commercial flight simulator business.
"In the last two to three years we have become more balanced, expanding from the supply of equipment into the provision of training services in all three of our segments: commercial, military and marine," says chief executive Derek Burney. For the fiscal year ending in March, 40% of CAE's revenues came from training services. "That is a significant change over the last three years," he says. Over the same period, the company has seen commercial flight simulator sales fall from 35 to 22 to 11 last year. "We would be a much smaller company without training," Burney says.
Under its civil training initiative, over the past three years CAE has built up a fleet of more than 90 simulators at 20 centres worldwide.
The pace is slowing, and the company plans to add only 10-13 simulators this fiscal year, but Burney still expects civil training revenues to grow by more than 20% for the full year. He also expects to see more training joint ventures with airlines, such as the centres established with China Southern and Emirates.
Military matters
Expanding the military business is also key to CAE. In Canada, a Boeing CF-18 simulator upgrade contract is scheduled to be awarded in January, while in Europe two training programmes for the NH Industries NH90 helicopter are expected to be decided later this year. But winning the US Army's Flight School XXI contract, scheduled for award this month, would signal a "fundamental change" in CAE's credibility among US defence customers, Burney says.
"Europe is a stronger military market for us. The USA is still catching up. Only 30% of revenues for all three businesses are from the USA."
CMC Electronics looked to the USA when it wanted to diversify following its purchase in April 2001 from BAE Systems by Canadian investment fund Oncap. This led to the acquiring of Chicago-based military cockpit specialist Flight Visions, and divesting of the company's long-established military radio group as CMC narrowed its focus on aviation. The Montreal-based company now has three business units - civil, military and custom electronics - and plans to grow in the commercial and defence markets by "moving up the food chain to systems integration", says Bruce Bailey, vice-president commercial aviation.
With the blessing of Oncap, CMC is actively looking for acquisitions, "but the company is on a growth path without acquisitions", says Bob Atac, vice-president military aviation. Unusually for a Canadian company, the business is split 60:40 military:civil, although Canada accounts for only 2% of military sales compared to the USA's 54%. "We are trying to keep a balance between military and civil, and within the businesses between original equipment and aftermarket," Bailey says.
CMC is also continuing to invest heavily in R&D, he says. Key new civil products include a fourth-generation GPS receiver, which it provides to Honeywell, and a second-generation EVS sensor, which will be supplied to Thales. CMC is also active in airliner cockpit retrofits, specialising in the "classic" market exemplified by the Airbus A300 and Boeing 747, and is expanding into military transport upgrades, beginning with the Lockheed Martin C-130.
Diverse growth
Growth on the military side is expected to be in several directions, says Atac: the new Cockpit 4000 integrated avionics; and new products including digital head-up display (HUD). CMC also has a thriving product line of control display units (CDU) for military helicopters and has re-entered the Doppler navigator business in response to demand for systems, he says.
Cockpit 4000 has been selected for the Korean Aerospace Industries KT-1C and Raytheon T-6B turboprop trainers, and is the basis for CMC's flightdeck upgrade for the Canadian Forces' Lockheed CP-140 maritime patrol aircraft. At the heart of the system is a new open-architecture mission computer that is also the basis for CMC's latest CDU and FMS products. The digital HUD replaces the cathode-ray tube with a high-brightness liquid-crystal display.
At around C$350 million in annual sales, CMC is fairly small by global aerospace industry standards, but relatively large when measured against the rest of Canadian industry. This illustrates the biggest problem the country's aerospace sector faces - the preponderance of small and medium enterprises (SMEs).
"We have a large number of businesses that by Canadian standards are relatively small, and by international standards are very small," says Boag. "They really need to grow their capabilities and achieve critical mass." Boag believes consolidation is necessary if Canada's many small, innovative companies are to survive and grow. "Canadian primes are streamlining their supplier bases and will no longer deal with small companies. The offload work is there, but the companies need to be larger," says Boag. In the USA, small businesses are able to grow with the help of R&D funding from the US Department of Defense, but this not an option available in Canada, he says.
Help for small firms
AIAC is talking to the government about a programme that would help small firms invest in upgrading their business processes. The Technology Partnerships Canada (TPC) programme, which provides repayable loans to industry, is focused towards product development and budget-limited, but its supplier development initiative with the AIAC has provided funds to help SMEs step up to electronic commerce and lean manufacturing, Boag says. AIAC wants to see TPC support for pre-commercial development programmes performed collaboratively by several companies.
There is no shortage of innovation in Canadian aerospace, but without consolidation among the many small firms making up most of the industry it is hard to see where the next Bombardier will come from. And barring the emergence of another major player to join the likes of P&WC it is difficult to envisage Canada's aerospace industry resuming the rapid growth that propelled it to fourth place in the world rankings.
Source: Flight International