Airlines India, Indian Airlines

Lancashire workers could find themselves moving to the Middle East as the impact of a multi-billion pound aerospace deal kicks in.
Staff at BAE Systems are expected to be offered the chance to move to Saudi Arabia after the kingdom strengthened its relationship with the UK by agreeing to replace its ageing fleet of fighter jets with 72 Eurofighter Typhoons.

The deal, which was confirmed by the Ministry of Defence yesterday, is worth around £7 billion to the manufacturer’s bases in Warton and Samlesbury, both near Preston, which employ 9,000 people and are at the heart of the programme.

However, it is believed Saudi Arabia will want a percentage of the lucrative maintenance and upgrade work, estimated to be worth £10 billion, to take place in the Middle East.

South Ribble MP David Borrow, a member of the parliamentary defence committee, believes that could be BAE’s significant operation in the kingdom being extended.

He said: “I would think they would be looking for a long-term maintenance facility to be based in Saudi, in partnership with BAE, which already has a large base in the Middle East.

“That could be extended as part of this deal, which further solidifies the UK relationship with the Saudis, I am sure they will be looking to work in partnership with BAE on an maintenance and upgrade work.”

Hundreds of other companies – from high-tech engineers to local restaurants – in Lancashire are also expected to benefit as suppliers.

North West Aerospace Alliance executive director Martin Wright, which represents many of BAE’s suppliers, said: “Any major order has a positive impact on other companies, as well as bringing stability to the presence of a major economic engine like BAE in the region.

“Obviously there is the engineering impact it will have on the economy, but the presence of a major employer like BAE somewhere like Warton or Samlesbury has an impact on local shops, restaurants, all sorts.”

BAE has a long tradition of links with Saudi Arabia since it first sold its Lightning jets to the kingdom in the 1960s. That was followed in 1977 by a deal which led to billions of pounds of work coming to BAE over the years.

Around 5,500 people, many originally from Lancashire, currently work at BAE’s base in the Saudi capital Riyadh.

An ambitious attempt to revive South-South economic cooperation around India, Brazil and South Africa (IBSA) is expected to receive a major fillip when the heads of state of these developing country majors meet in Brazil during the second week of September.

While the IBSA countries compete with one another in world markets and logistical constraints hamper expansion of trade, analysts believe there exists considerable opportunity for these three developing countries to technically collaborate with one another in specific high-vallue areas such as aerospace and atomic energy.

On Sep.13, when India’s Prime Minister Manmohan Singh meets his counterparts from Brazil and South Africa, an attempt would be made to thrash out a trilateral free trade area (FTA) agreement. The proposed agreement would not just be among the three countries but involve regional groupings, that is, SACU or the South African Customs Union (comprising South Africa, Botswana, Lesotho, Swaziland and Namibia) and MERCOSUR or Mercado Común del Sur (comprising Brazil, Argentina, Uruguay, Paraguay and Venezuela — with Bolivia expected to join in).

It was in June 2003 that the foreign ministers of India, Brazil and South Africa first met in Brasilia to set up the IBSA dialogue forum. This forum became a formal initiative with meetings in New Delhi (March 2004), Cape Town (March 2005) and Rio de Janeiro (March 2006). There is widespread agreement that trade among India, SACU and MERCOSUR can go up considerably in the years ahead.

Intra-IBSA trade currently accounts for only two percent of the total volume of trade carried out by the IBSA countries. No single IBSA country is among the top ten trading partners of the other two countries. Yet, trade among the three countries and regional groupings has gone up considerably in recent years.

Two-way trade between India and MERCOSUR more than doubled between 2001 and 2005 from less than one billion US dollars to 2.3 billion dollars. Similarly, bilateral trade between India and South Africa has gone up by 133 percent in these four years from 1.3 billion dollars to 3.1 billion dollars. Trade among the IBSA nations could rise to 10 billion dollars by 2007.

After a series of discussions among representatives of four academic institutions and non-government organizations — the South African Institute of International Affairs (SAIIA), Business Unity South Africa (BUSA), the Consumer Unity & Trust Society (CUTS) from India and the Institute for International Trade Negotiations (ICONE) from Brazil — the conclusion that emerged is that the IBSA countries would benefit considerably if they cooperated with one another in developing their respective aerospace industries.

“The concept of IBSA originated in the desire of all the three countries to reform the United Nations Security Council but it then went way beyond this political idea to become an initiative for economic cooperation,” Peter Draper, head of the “development-through-trade” programme at the Johannesburg-based SAIIA told IPS recently in Pretoria.

“All three IBSA countries have vibrant democracies, are at comparable levels of development and have similar problems in dealing with poverty,” said Mbulelo Rakwena, diplomat and chief director for Latin America and the Carribean in South Africa’s foreign affairs department. Given the “chequered history of South-South cooperation”, he hoped the IBSA initiative would not ‘’degenerate into a talk shop reiterating platitudes” or become an exercise in “empty political dialogue”.

Jerry Vilakazi, chief executive officer, BUSA, says that despite the fact that many pronouncements are made about South-South economic cooperation, “developing countries have a higher comfort level in trading with countries in the North, including their erstwhile colonial masters”.

One constraint hampering trade among the IBSA countries is the high cost of transportation. Consignments from India and Brazil to South Africa first travel to Europe before reaching their destination because of low trade volumes, thereby increasing freight costs. Because of similar considerations, that is, low traffic, it is less expensive to fly from India to the U.S. than to Brazil, although Brazil is closer.

Despite the fact that the three countries have been acting closely with one another during negotiations at the World Trade Organization, the IBSA nations compete in international markets to export leather, garments and agricultural commodities like cotton and sugar to developed countries. At the same time, there is considerable potential for the three countries to cooperate in industries and sectors such as biotechnology, pharmaceuticals, ethanol and mining operations, besides aerospace.

Investment relations among the three countries have been ad hoc and erratic: Indian pharmaceuticals producer Ranbaxy has a presence in both South Africa and Brazil and vehicle manufacturers Tata Motors and the Mahindra group have invested in South Africa. India, in turn, has received investments from South Africa’s diamonds major De Beers and SAB Miller in alcoholic beverages. However, there have not been any major investments by Brazilian firms in either India or South Africa. While Brazil is the second largest recipient of foreign direct investment after China, India and South Africa are both conspicuous by their absence in that country.

Although language barriers have hampered economic relations among the IBSA countries — in India, it is difficult to find Portuguese translators though not Spanish ones — what has acted as a real dampener is lack of awareness about one another’s countries. A survey conducted by SAIIA, CUTS and ICONE found that most businesspersons interviewed in the three countries were not even aware of the IBSA initiative.

Nevertheless, there is consensus that just as South Africa can act as a hub for trade with the entire continent of Africa, and Brazil for Latin America, India too could act as a gateway for trade and economic relations with the entire SAARC region — the seven countries of the South Asian Association for Regional Cooperation (SAARC) comprise India, Pakistan, Sri Lanka, Bangladesh, Nepal, Bhutan and Maldives.

Pranav Kumar, policy analyst with CUTS, told IPS that the one important industry in which the three IBSA countries could come together despite logistical constraints is aerospace. “India is strong in military aircraft and space technology, Brazil has a lot of expertise in building passenger aircraft, while South Africa is ahead of the two others in the area of aviation electronics,” said Kumar, adding that there was “mutual complementarity” in this sector that could be built upon.

Mario Marconini of ICONE says that since Brazil’s aircraft manufacturers were among the country’s most important exporters accounting for exports worth two billion dollars a year, “there is a need for aviation experts in the three countries to sit together to work out how best technical cooperation arrangements can be worked out”. He adds that all three countries would stand to gain a lot from such cooperation as the international aerospace industry was growing at an impressive, sustainable pace of 25 percent a year.

Another area of technical cooperation could be civilian nuclear energy that is expected to get a boost once the recent agreement between the governments of India and the U.S. is finalized. Brazil and South Africa are both members of the Nuclear Suppliers Group and both have backed India’s position on relaxation of rules for supplying nuclear fuel.

Union officials are holding talks with a Wrexham aerospace company to try to avert more than 50 redundancies.
Magellan Aerospace Structures based at Llay, has told staff the jobs are at risk following the loss of a major contract with the Airbus plant at Broughton in Flintshire.

It is understood the specialist engineering company will axe 55 posts.

Amicus spokesman John Hamilton said they were trying to save the jobs, adding: “This is a big blow.”

He added: “We’re trying to establish this north east corner of Wales as a centre of excellence for the aerospace industry and this is a setback to those objectives.”

Mr Hamilton, a regional officer with the engineering union, said they had been told 40 jobs were under threat in the factory’s fabrications department and 15 in the treatment plant.

Magellen specialises in precision engineering, metal surface treatments and assembly of aerospace components.

Amicus said the lost Airbus contract was in connection with the Hawk 800 business jet, which is built by the American aerospace giant, Raytheon.

The Broughton plant supplies wings and other components for the aircraft.

Mr Hamilton said: “Unless the company can bring in another large order, it looks certain that jobs will go.”

Nobody from Magellan Aerospace Structures was available for comment on Monday.

Smiths Aerospace announces the appointment of Vic Bonneau to President of the company’s Electrical Power business serving aircraft primes and individual government customers on a global basis. Electrical Power business locations are in New York, Ohio, Florida, New Jersey and Cheltenham, England. Vic is based in Dayton, Ohio and reports to Dr. John Ferrie, President of Smiths Aerospace headquartered in London.

Smiths’ electrical power businesses are engaged in all phases of aircraft electrical power including primary, secondary, conversion and management/control. As demands for enhanced electrical power for civil and military aircraft have increased, the need for an integrated systems approach to design, manufacture and support will enable Smiths to deliver greater value to its customers.

Prior to this position, Vic was Vice President & General Manager of the Dayton facility for Smiths. Before joining Smiths, Vic was President of Leland Electrosystems, which had roots in the General Electric Company electrical power business. During his years with both GE and Leland, he held a number of positions of increasing responsibility in Engineering, Operations and Program Management.

Vic earned a Bachelor of Science degree in Electrical Engineering from Rochester Institute of Technology and a Master of Science degree from Rensselaer Polytechnic Institute in Troy, N.Y. Vic participates in a number of local business and charitable organizations. He is past President of the Vandalia-Butler Chamber of Commerce and a current trustee of the Vandalia-Butler Foundation.

Smiths Aerospace, a part of Smiths Group, is a leading transatlantic aerospace equipment and systems company, with more than $2 billion sales and 11,000 employees globally. Smiths holds key positions in the supply chains on all major military and civil aircraft and engine manufacturers. Strategically organized businesses focus on digital, electrical power, mechanical systems, engine components and customer services.

Aerospace’s big hitters are prospering as revenues and profits maintain their upward trend. But while the top 20 all display sustained growth, performance at some smaller suppliers is more volatile.

Five years ago, the aerospace industry was at the peak of its latest cycle. A downturn was just around the corner, but no-one could predict the deep trough into which aviation would plunge after 9/11. Five years on, the industry is a picture of health and stability, according to Flight International’s annual Aerospace Top 100.

Barring unforeseen events, the industry should stay on this upward trend - until at least 2008-9 if this is one of the industry’s normal cycles. Revenues are continuing to grow and overall industry profit margins are heading back towards their peak of 2000. But while the prime contractors and their Tier 1 partners are solidly profitable, there are signs that not all of the Tier 2 and 3 suppliers are so successfully turning increased sales into higher earnings.

The volatility in profitability among the base of smaller suppliers on which aerospace is built is a continuing concern that underlies the industry’s otherwise impressive performance. Based on publicly available data for 2005, including company reports, this year’s survey shows that sales increased by 8% and operating profits by around 17% for the Top 100 aerospace companies - largely driven by the growth in commercial aircraft deliveries by Airbus and Boeing.

That growth took total 2005 sales and profits for the Top 100 to $443.5 billion and $34.1 billion respectively. “The trend since 2003-4 has been significant revenue increases and even more significant profit increases - as you would expect from a capital goods industry returning to growth,” says Neil Hampson, a partner at PricewaterhouseCoopers. “But it is still pretty healthy growth.”

Overall growth in 2005 was slower than in 2004, when Top 100 revenues and profits increased 13% and 22% respectively, but that is to be expected, Hampson says. “Last year [2004] there was more growth through acquisition. This year [2005] there is more organic growth,” he says, adding: “The rate of revenue and profitability growth will inevitably decline as the industry gets larger.”

With no major foreign exchange shifts and few major corporate changes in 2005 there is little movement in the Top 100 ranking by revenue this year, with the positions of nine out of the 10 highest placed players unchanged from last year’s survey. As in previous years, the Top 20 companies account for around 80% of the total revenues and profits. Top 20 revenues have increased 54% over the five years 2000 to 2005, but the sales of this year’s Top 20 have outpaced that growth, increasing by 59% over the same period, showing the effect of consolidation at the top of the table.

Boeing in pole position

In the revenue ranking, Boeing maintained its pole position and slightly extended its lead over European rival EADS in 2005, and the two companies continue to pull ahead of the pack as commercial aircraft sales accelerate while defence revenues stall. Boeing’s revenues were up 5%, commercial aircraft returning to form with an 8% increase in sales after the 6% decrease suffered in 2004. At the same time, Boeing’s defence growth slowed dramatically, from 11% in 2004 to just 1% last year, the company again showing the strength of its balanced business case.

Airbus doubled its sales growth to 12% in 2005, propelling EADS to 8% higher revenues. With delays to deliveries of the A380, the European giant is now projecting a 4.5% increase in revenues this year, to around $44.5 billion. This will see EADS lose ground against its US rival in next year’s Top 100, with Boeing forecasting sales growth of 9.5-10.5% for this year, to $60-60.5 billion, on higher airliner deliveries. Whatever the final figures, for the foreseeable future increased commercial aircraft revenues at Airbus and Boeing will be the engine driving Top 100 growth.

For the next five players in the Top 10, the expected slowing of US defence spending will be the main concern. Third-ranked Lockheed Martin saw revenues increase 5% in 2005, and is projecting 3.5-6.2% growth for this year, but fourth-placed Northrop Grumman expects sales to slip slightly this year after managing a 3% increase in 2005. After an 8% increase last year, sixth-ranked Raytheon is also forecasting flat revenues this year as the US defence budget comes under pressure.

The UK’s BAE Systems saw sales increase 17% last year on its acquisition of US armoured vehicle manufacturer United Defense Industries (UDI), but it stayed firmly in fifth place. BAE’s ranking next year will depend on whether it succeeds in divesting its 20% stake in Airbus to EADS, at what price, and what it does with the money. The UDI acquisition boosted BAE’s US defence business, but acquisitions packing a similar punch are becoming harder to find.

General Dynamics is in a similar position, stabilised in seventh place after a rapid climb up the Top 100 propelled by acquisitions, its just-completed $2.2 billion purchase of US information-technology services company Anteon unlikely to move the company up the aerospace rankings and few other large deals in prospect. That said, GD’s healthy 11% revenue rise in 2005 was driven largely by strong organic growth in its aerospace business.

United Technologies outpaced rival General Electric in 2005, 12% sales growth across its Pratt & Whitney engines, Hamilton Sundstrand systems and Sikorsky helicopters businesses keeping the company firmly in eighth place and ahead of GE Aircraft Engines with its 7% revenue increase.

The one new Top 10 entrant is Italy’s Finmeccanica, which saw revenues rise 24% with the full consolidation of AgustaWestland lifting helicopter sales 71% and the acquisition of BAE Systems’ assets boosting defence electronics revenues 53%. The company is forecasting sales growth of 10-13% for this year across its aerospace and non-aerospace businesses. Whether this will be enough to keep the Italian giant in the Top 10 remains to be seen.

L-3 Communications, sitting at number 13 and poised to enter the Top 10 after a meteoric rise up the ranking fuelled by a multitude of acquisitions, may be taking its foot off the growth pedal after completing last year’s $2.65 billion aquisition with US government information-systems specialist Titan.

This has taken L-3 to $12 billion-plus in sales, and could propel it into next year’s Top 10, but meanwhile the company is focusing more on organic growth and smaller acquisitions.

Revenue risers

Finmeccanica and L-3 are among the companies making the Top 10 growth ranking this year (see table P42), the US firm at number three with an almost 37% increase in sales and the Italian giant at eight with almost 30%. But top ranking for the fastest growing aerospace company goes to French aerostructures manufacturer Latécoère, which managed an almost 150% increase in revenues. As with composites supplier Hexcel (46%) and systems supplier Liebherr (34%), the growth was mainly driven by Airbus and Boeing work, says Hampson. US company Textron (35% growth), meanwhile, experienced substantial civil and military sales increases at its Bell Helicopter and Cessna Aircraft businesses.

Latécoère, which like Liebherr has been actively taking risk-sharing stakes in aircraft programmes, is one of the companies further down the Top 100 that made a significant move up the ranking this year, climbing from 87 to 82. Others include US firms DRS Technologies (41 to 37) and Esterline (65 to 53), both seeing 14% sales growth and Japan’s Fuji Heavy Industries (74 to 57 on 8% growth), another active risk-sharer.

However, for every up there is a down, and companies dropping down the Top 100 table this year include Thales, slipping from number 10 to number 12 on flat sales. Bombardier continued its slide down the table, dropping from 15 to 16 as it eked out a 1% increase in aerospace revenues - a 52% rise in business jet sales just barely managing to offset a 17% decline in regional aircraft revenues as the 50-seat jet market evaporated.

France’s Safran, created in May last year by the unlikely merger of communications company Sagem and engine manufacturer Snecma, makes its first appearance in the Top 100 at number 15, in part because the company’s consolidated financial statements for 2005 include only nine months of Snecma’s revenues. Using pro forma statements intended to reflect the group’s financial performance would rank Safran at number 12, with aerospace revenues of $10.2 billion, up 7% from 2004.

Others moving down include the UK’s GKN (28 to 45 following the sale of its AgustaWestland stake to Finmeccanica), South Africa’s Denel (57 to 70 on lower contract volume) and Loral Space & Communications (59 to 81 after emerging from bankruptcy as a smaller company focused on satellite manufacturing).

Other than these relatively small moves, the table is predominantly stable and likely to stay that way. Hampson does not expect any further major consolidations, because the easier-to-achieve domestic deals have all been done. “From now on they are going to be international, and that means they are going to be political,” he says. Instead, a lot of smaller deals are expected as the bigger companies sell non-core business and buy to fill niches. “We will see a lot of cleaning up of portfolios and a lot of investment in homeland security and information systems,” Hampson says.

Further down the table, the many smaller Tier 2 and 3 suppliers are ripe for consolidation - something the primes and Tier 1s want, Hampson says. This is also the sector of the industry where financial performance is much more variable, and where potential trouble lies when aerospace enters its next downturn. The greater variability in financial performance among the smaller suppliers is reflected not only in the wide range of rankings by revenue but, in particular, in the wider spread of their operating margins both between suppliers and from year to year.

Tier 1, 2 and 3 players performed well in the 2005 Top 100 survey as the trend towards risk- and revenue-sharing partnerships pushed value down the supply chain. This year’s survey shows that they have again achieved good results when it comes to operating margins as they continue to take on more responsibility for designing, developing and supporting their products and more complex roles in programmes. Their performance is anything but consistent, however.