Europe's aerospace industry is preparing for Paris in better shape than most would have predicted two years ago
Two years ago at the Paris air show, as Noel Forgeard and Alan Mulally - then the bosses of Airbus and Boeing Commercial Airplanes respectively - toured a Boeing 777-200LR with their senior executives, few realised the extent of the reversal of fortunes that was about to take place between the two manufacturers.
Although Boeing was inching ahead of its rival in orders for the first time in years - due to the success of the 787 and delays launching the A350 - Airbus was still basking in the halo effect of the A380. Boeing had just emerged from its own annus horribilis after Harry Stonecipher, the chief executive drafted in to clean up the manufacturer's tarnished image in the wake of the Mike Sears/Darleen Druyun Pentagon scandal, was forced to step down because of an extramarital affair with a colleague.
But worse was to come for Airbus. Within months, a series of schedule slips in the A380 programme - brought on by problems in Airbus's production set-up - prompted a domino effect of boardroom feuds, industrial disputes and financial crises. Forgeard, his successor and yet another chief executive resigned, a severe cost-cutting programme was introduced and the mess cast a shadow over the whole Airbus supply chain.
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Production problems with the A380 affected Airbus's entire supply chain |
Ironically, this mood of despondency within the European aerospace industry comes at a time when both civil and business aircraft orders are booming and capacity squeezes rather than idle production lines are the biggest problem facing some manufacturers. The scale of the recovery that was just beginning to gather pace two years ago is unprecedented.
"For the industry, the recovery has been confirmed. We wouldn't have bet on a 100% recovery within two years in 2005," says Thales senior vice-president aerospace, François Quentin. But even in this context individual companies as well as the industry have faced dramatic and often unforeseen challenges, and are preparing for the 2007 Paris air show that will take place in a significantly different aerospace industry.
High-profile deals
Big news at the last Paris air show was the possibility of a tie-up between Thales and either EADS or Finmeccanica. Neither of these has come to pass, but Thales has not been idle, involved in high-profile deals with Alcatel-Lucent as well as French shipyard DCN. The company has seen its fair share of internal growth too.
"We've steadily increased our footprint. Our service activity has increased and we now have a very high level of coverage worldwide. The A380 has triggered a drastic change in how we manage our global network. We are moving up the food chain in terms of the service we provide to airlines," says Quentin.
In common with other tier 1 suppliers, Thales is continuing to address the efficiency of its supply chain through a far-reaching initiative that will see it drastically reduce the number of suppliers it deals with. It will also increase transparency.
"We believe that by the end of 2008 we will have achieved a supply chain structure quite close to what we wanted," says Quentin.
Measures like these are vital to players in Europe facing the twin threats of the ongoing weakness of the US dollar (see graph on P102) and the rise of low-cost economies as potential alternative locations for manufacturing.
Sticking with its existing multi-domestic strategy, Thales is keen to expand its global footprint. Russia - a market that looks very different two years on, having taken concrete steps to consolidation - could be next on the list, subject to the removal of regulatory obstacles to foreign investments.
"We believe that one day Russia could become one of our multi-domestic homes - within 10 years for sure, five years probably," says Quentin.
Thales is already well established in Russia, with extensive involvement in the Superjet programme, which has emerged as a serious future alternative to existing regional aircraft and is being prepared for its first flight in September.
Western companies that took the plunge and invested in the Superjet are likely to be well placed for future programmes in the massive market as Russia's integrated aerospace company OAK takes shape.
Safran too, has a heavy presence on the Superjet. "When we decided to invest company money in this programme it was based on the confidence that Russian industry will consolidate and still be a player in aerospace," says Jean-Paul Béchat, outgoing chief executive of Safran.
"If, in a few years from now, they launch another aircraft there will be a competition. We are ready to compete."
With China emerging as the big target for many European aerospace businesses, EADS is leading the charge with the decision to establish an A320 final assembly line there. Its Eurocopter subsidiary also plans to jointly develop a new helicopter with China.
Analysts believe engaging with Chinese industry is the right way to proceed. "It's not about low cost - it's about staking a place in a new market," says Gareth Evans, head of consultancy at AT Kearney's European aerospace and defence practice.
Industry consolidation
Meanwhile, in Europe the much-talked-about industry consolidation has progressed. Developments have not been as dramatic as many were predicting two years ago, but the industry's landscape has certainly changed, with private equity investors increasingly playing an important role. This is particularly true in the aerostructures sector, which analysts say has long been due for consolidation.
Some analysts believe the high value of deals that have taken place in the last two years means the industry change may slow down, prompting some players to pursue different routes to growth - diversifying, or moving out of the sector altogether. "If they can't expand organically or regionally, they will have to diversify," says Evans.
Alenia Aeronautica is enjoying success in its aerostructures division with both Airbus and Boeing, and is especially well positioned as a risk- and revenue-sharing partner for the Boeing 787. Alenia has a 14% stake in the airframe, which makes for heavy levels of investment now, but which should give a big boost to profits in the longer term.
And not only will 787 business shape Finmeccanica's future balance sheet, the shift towards composites will change the aerostructures business as a whole.
"We believe the use of composites as the primary structure on the 787 marks a dramatic and fundamental change in the aerospace industry, as significant as the transition from wood to aluminium for airframe structures," says Merrill Lynch analyst Charles Armitage.
Outside Airbus, EADS has seen notable progress. MBDA has been a key driver in the consolidation of the European missile business and EADS' 50% joint venture ATR is benefiting from the turboprop resurgence, which has been triggered by high fuel prices.
Finmeccanica, the other 50% partner in booming ATR, has also shifted up a gear in the last two years. Its high-profile successes include winning the US presidential helicopter competition through its AgustaWestland helicopter division, and cementing its global presence with its selection as a preferred supplier in the UK under 2005's Defence Industrial Strategy.
The company's growth has been "extremely ambitious", Evans says.
UK presence in the USA
UK engine maker Rolls-Royce is enjoying a record orderbook of £26.1 billion ($51.1 billion) across the group as a whole, with success in particular on the 787. But although the company is adamant it will not move large chunks of its business to low-cost environments, it is having to face up to the problem of rising raw material prices as well as the need to increase its natural US dollar hedging. The company has a significant presence in the USA, but is now evaluating more sites for production there.
Smiths Aerospace is now part of General Electric, while Meggitt has been more successful than some of its UK counterparts in boosting its presence in the US defence market, with its $1.8 billion takeover of K&F Industries proceeded. However, Meggitt insists that the deal is more about completing gaps in its product portfolio than conquering the US market.
Cobham has increased its US business so that it now accounts for nearly 50% of total revenues, with the latest deal, to buy Patriot Antenna Systems, agreed last month.
BAE Systems' US strategy is on a different scale, but is aimed at the same goal. The company has made great leaps forward in its strategy to boost its presence in the USA, with the large-scale acquisition of United Defense Industries as well as smaller deals.
Elsewhere, Eurofighter and Hawk deals have given a big boost to BAE's orderbook, although there has been a cloud on the horizon in the form of rumblings over procurement deals in Saudi Arabia.
But if BAE's Airbus stake sale grabbed the headlines, analysts have been reassured by the strong set of results it posted in February, in particular the recovery from Nimrod and Astute programme problems that had beset its UK platforms and weapons systems business. Thanks to the sale of its Airbus stake BAE now has cash for more acquisitions and although it may have missed out on potential value from its sale, it avoided having to shoulder the exposure - and lost earnings - Airbus's parent EADS now faces alone (see graph).
As for the future - what will the industry look like at the Paris air show in 2009? Two interlinking themes that have taken on a much higher profile in the last two years are likely to be dominating industry debate by then, as the quest for cleaner, greener aircraft intensifies, and the launch of the next generation of single-aisle aircraft draws ever closer.
Quentin hopes Thales will be well placed for involvement in Airbus's and Boeing's next single-aisle programmes.
"We are opening up every question, including existing sacred cows. We have no preset target - that would be very arrogant. But we are open to sharing projects with both so they can integrate them into their designs at a system level," he says.
Thales and Safran have been involved in the European Clean Sky Joint Technology Initiative since it was launched last year.
"We're now very close to a final 'go' decision," says Quentin. "It used to be visionary thinking today it is mainstream."
Research into both these areas is already occupying significant chunks of time and money for tier 1 companies.
Béchat says: "We have a definite goal to stay as successful in the future as we are today with the current generation of engines. We will make use of all the resources of Safran and GE together to understand what the requirements [for the single-aisle replacement] are."
He adds: "We are working with Airbus, Boeing and very significant airlines to understand what the expectations are - less fuel, noise, maintenance costs. This work is ongoing - our main goal is to succeed with the best engine."
In the shorter term, small and medium-sized enterprises (SME) have expressed serious concerns about the impact of the Airbus Power8 restructuring plan to reduce the number of suppliers it deals with. Such suppliers are likely to rely ever more heavily on regional and national associations to help them deliver what their customers want.
"SMEs will have to invest now for new programmes," says Evans. "If they miss the boat, they're not going to sea. It is in the interests of the bigger companies to help the smaller ones that have particular capabilities they need to nurture and protect."
Powering ahead
The Power8 plan is opening up rare opportunities for those manufacturers able to use their composite expertise and investment firepower to boost their ranking within the European aerostructures industry as it evolves.
In two years' time Power8 will need to have made significant strides if it is to achieve its ambitious cost-saving targets, so by then several Airbus plants may have changed hands. For example, GKN could have taken over its Filton facility in the UK. Middle East cash in the form of Dubai Aerospace Enterprise could have solidified its presence in European aerospace. Latécoère could have cemented its position as a composites specialist. Diehl could have taken steps to keep Airbus's German sites in German hands.
Whatever the outcome of Airbus's decision to pursue an "extended enterprise" model, it is certain that key European aerospace sites will be looking to the future with different owners.
While it may be impossible to predict what will happen to the industry over the next two years just as European aerospace is a very different industry from the one preparing for the 2005 air show, there will be far-reaching developments in store.
Source: Flight International
