Year of living dangerously

Transcription

1 Year of living dangerously 30 Flight International September 2010

2 Boeing has bounced back to the summit of our Top 100 ranking of aerospace manufacturers after a year of boosted fortunes for its commercial aircraft division, but the wider experience for the industry was one of dramatically reduced profitability and minimal sales growth NIALL O KEEFFE london Last year Boeing leapfrogged EADS to regain the title of world s largest aerospace manufacturer, as rising sales of its commercial and military aircraft coincided with declines in both areas for its European rival. In dollar terms, the overall picture for the Top 100 manufacturers was one of stable revenues but sharply declining profits, as the fallout from global economic and financial chaos filtered through. That is according to the latest Flight International Top 100 survey, compiled in association with PricewaterhouseCoopers and which is based on company returns for the previous financial year. The 17.3% drop in collective profits compares with growth of 7.8% in 2008 and 26% in Where sales edged up only 0.6% last year, they had grown by 7.1% in 2008 and by 13% in schedule will cause the airframer to incur penalty charges. The last programme delay caused the first delivery of the Dreamliner to launch customer All Nippon Airways to slip from the last quarter of this year to the middle of 2011 s first quarter. In 2009 Airbus delivered a record 483 commercial aircraft, 15 more than in The two major airframers combined delivery total similarly scaled new heights, exceeding by 7% the previous record of 914 shipments, set in Boeing s defence, space and security division meanwhile pulled in some $10 billion more than EADS s equivalent businesses could muster while coping with delays to the Airbus A400M military transport and the attendant contractual wrangle. Boeing delivered 481 aircraft last year, a big rise on 2008 s strike-hit figure of 375 In association with Gareth Burgess/Flightglobal SALES BY SECTOR The rivals fortunes in commercial aircraft manufacture were a major factor in Boeing s eclipse of EADS. In 2008, Boeing s haul from this sector was $10.5 billion less than that of its EADS-owned rival Airbus, but 2009 brought a narrowing of the gap to $2.6 billion (see table). Boeing delivered 481 aircraft, a steep increase on 2008 s figure of 375, which was heavily affected by the 52-day machinists strike of that year. It s not so much that EADS won last time; Boeing lost, comments Anna Sargeant, assistant director, strategy at PricewaterhouseCoopers. This time round, we re seeing a rebalancing. While EADS hasn t been doing particularly well in defence, I wouldn t say this has been the fundamental driver for that change in position, she says. Sargeant makes the case that the machinists strike in some ways helped Boeing. We were all expecting to see a massive fall-off in production last year and it never really came, which was impressive. However, delays to Boeing s 787 delivery There were tough times for regional jet manufacturers. Bombardier Aerospace s revenues shrank 6.1%, while Embraer s were down a whopping 20.5%. The performance of business jet manufacturers contrasted sharply and unflatteringly with that of Sales at Dassault s Falcon executive jet division grew just 0.2%, compared with 31.4% the previous year. Gulfstream swung from 14.2% growth to a 6.2% decline. Cessna s reversal in fortunes was even more dramatic, as it followed 13.2% growth with a 41.4% decline. Hawker Beechcraft also slipped into decline, with revenues falling 10%. The scale of declines among business jet manufacturers means that major restructuring is inevitable in that sector, in Sargeant s view. The defence aerospace sector fared better. Its growth was well above that of the Top 100 as a whole. This represents a change from 2008, when defence aerospace growth was slightly below that of the Top 100. This points to declines hitting civil aerospace more strongly, says Pricewaterhouse- Coopers, which also notes lower volatility September 2010 Flight International 31

3 PROFILE CHEMRING ALAN DRON FLARES BUSINESS BURNS BRIGHTLY CHEMRING Group has continued its steady progress up the Top 100 table this year through a mixture of organic growth and acquisitions. The Fareham, UK-based group s countermeasures division manufactures airborne infrared and chaff decoys for fixed- and rotary-wing platforms. Its pyrotechnics division includes distress flare and smoke marker production. In spite of the recession, the group passed three financial milestones in 2009: group revenue exceeded 500 million ($750 million) for the first time, underlying pre-tax profit rose above 100 million and the group s market capitalisation breached the 1 billion mark. The yearend orderbook was up 37%, at 559 million. Chemring claims to hold slightly more than 50% of the global market for countermeasure flares, its share having risen sharply as a result of last decade s Iraqi campaign. Its UK countermeasures business continued to operate at very high levels of production, says the group, with demand for flares for the Eurofighter Typhoon continuing to grow as the number of aircraft in service with customers steadily increases. In the USA, its Kilgore Chemring chief David Price AT A GLANCE Top 100 rank 68 HQ Fareham, UK Aero revenues $786m Sales growth 42.3% Operating margin 20.4% ROCE 21.2% Employees 3,349 CEO David Price Flares division won a five-year indefinite delivery, indefinite quantity contract to produce decoys for the protection of transport aircraft, while Chemring Australia was awarded a long-term contract to provide countermeasures and pyrotechnics for the Australian armed forces. A state-of-the-art manufacturing plant is being built near Melbourne, while a research Chemring s countermeasures division manufactures airborne infrared and chaff decoys 32 Flight International September 2010 Chemring and development centre will also be established. Similarly, the countermeasures division is constructing a manufacturing facility in Salisbury, UK. The group s expansion over the past five years has been off the back of this booming countermeasures business. Group chairman Ken Scobie ascribes its development to a clearly defined policy of organic growth, a focused programme of acquisitions... and subsequent investment in product and facilities to cover future expansion. Chemring s latest orders include a four-year contract to supply IR flares for the US Air Force s Lockheed Martin F-22 Raptor fleet plus a similar twoyear deal to cover the service s Boeing B-52 Stratofortresses. Among the group s newer divisions is Chemring Energetics, whose products chief executive David Price describes as anything that goes bang, whizz or whoosh. Essentially, it offers controlled explosions, such as charges to blow off aircraft canopies in an ejection sequence. Last year Chemring took over California-based Hi-Shear Technology, which produces squibs, cartridges and gas generators for the military aviation and space sectors. US Air Force/Senior Airman Julianne Showalter in defence air systems procurement. In 2009, the top 14 defence aerospace divisions or companies grew 4%, compared with 0.6% of growth for the Top 100. In 2008, the top 15 defence players achieved growth of 6%, while the Top 100 was up 7%. Growth at the major US defence companies Boeing, Lockheed Martin and Northrop Grumman was around 5%. However, European defence behemoth EADS suffered a 13.1% decline as growth slowed at the Eurocopter rotorcraft division while both Airbus Military and the Defence and Security Systems division suffered declines. In 2008, EADS s defence aerospace business had grown by an extraordinary 47%. STRANGE CURRENCIES As usual, the figures in the Top 100 analysis have been dollarised on a fixed exchange rate for the entire 12 months, to reflect the reality that the US dollar is the prime currency of aerospace sales globally, notwithstanding some substantial defence business that is transacted in local currency. EADS s defence aerospace business was down 13.1% as growth slowed at Eurocopter Sterling s weakening against the dollar, from 0.54 per dollar to 0.64, was such that Rolls-Royce s sales could rise by 10.5% in local currency but fall by 7.1% in dollar terms, while the various effects of the euro s fall in value, from 0.68 per dollar to 0.72, included an amplified decline at EADS and constrained growth at Finmeccanica. Depreciation of the Swedish kroner and Indian rupee turned local currency sales growth of 3.6% at Saab and 10% at Hindustan Aeronautics into dollar declines of 10.8% and 1.3% respectively. However, foreign exchange effects brought some good news for Japanese manufacturers. Aerospace sales fell in yen terms, but increased in dollar terms at Ishikawajima-Harima, Kawasaki Heavy Industries and Mitsubishi Heavy Industries. The strong yen also helped to boost Fuji Heavy Industries rise up the rankings (see profile). However, in considering currency effects one must bear in mind that, across different companies, there is a varying correlation between the currency of a company s main domicile, in which a high proportion of costs will be measured, and the currency in which the bulk of its sales contracts is denominated. Even within companies, there are variations. In its military business, Rolls-Royce has as a major customer the UK Ministry of Defence; its civil contracts tend to be in dollars.

4 View at the top: Boeing leapfrogged EADS as rising commercial and military sales coincided with declines in both areas for its European rival Boeing Airbus, with its euro cost base, also tends to yield dollars. For all of these players, it really depends who their customers are, says Sargeant. It is also worth noting that exchange rates will have fluctuated across the year, with the result that a contract s particular timing within the year is significant. As ever the Pareto rule applies to this year s Top 100, with the top 20 companies racking up about 80% of sales and profits to be more precise, 79% of the former and 78% of the latter. Average margin was lower for the top 20 than the Top 100, but variability in margin was higher among tier two and three suppliers than among tier ones. MOVERS AND SHAKERS Collectively, the Top 100 pulled down revenues of $558 billion. The 49 North American companies in the ranking accounted for 63% of this, or $352 billion. Their average operating margin, meanwhile, was 10.4%, similar to the comparable figure for The Top 100 s European contingent, numbering 38 companies, accounted for $177 billion of revenues, or 32% of the Top 100 total, compared with $206 billion (35%) in Notably, its average operating margin slumped, from 8.1% in 2008 to 4.7% last year. Given that most European companies will have largely euro cost bases and dollar sales, movements in the exchange rate are likely to have played a significant role in this result. However, the composition of the top five companies by profit margin precisely mirrored that of 2008, with TransDigm in the top spot, ahead of FLIR Systems, Precision Castparts, Garmin and Hindustan Aeronautics. The only change was that Precision Castparts moved ahead of Garmin. DEFENCE AEROSPACE Sector rank Company division sales ($m) Sales ($m) Boeing Includes 85% of Boeing Defense, Space & Security 28,612 27, Lockheed Martin Includes Aeronautics and Electronics 24,405 23, Northrop Grumman Excludes shipbuilding and 40% of aerospace (space estimate) 23,374 22, BAE Systems Excludes Land and Armament Systems 21,348 19, Raytheon Excluding Intelligence and Info Systems and estimated Space revenues ($1,000m) 20,677 19, Finmeccanica Excludes 34% Aeronautics; 15% Helicopters, Space 17,540 14, EADS Excludes Airbus Commercial, Space and 50% Eurocopter 15,305 17, United Technologies 80% Flight Systems (Sikorsky, Hamilton Standard) 9,534 9, L-3 Includes 71% sales to DoD, of which 75% estimated to be aerospace related 8,315 7, Thales Includes Defence 8,014 8, Honeywell Estimated 35% of revenues 3,767 4, Textron Bell Military (50% of Bell) plus Textron Systems 3,320 3, Israel Aerospace Industries 2,881 3, Dassault Aviation 1,364 2,100 SOURCE: PricewaterhouseCoopers September 2010 Flight International 33

5 PROFILE MARTIN-BAKER ALAN DRON FAMILY BUSINESS JUMPS UP THE RANKINGS EJECTION seat specialist Martin-Baker enters the Top 100 at 99 by virtue of a solid 23.3% jump in sales in Overall growth and the commencement of a variety of new projects is how head of business development Andrew Martin describes last year s progress. Retrofit programmes got under way on the Franco- German Alpha Jet advanced trainer and on Boeing F/A-18 Hornets for several nations. Martin-Baker s biggest and most significant win of 2009 was a 48 million follow-on contract to refit Northrop T-38 Talon trainers for the US Air Force. Its Mk16 seats are replacing an older Northrop system on 450 T-38s. Martin-Baker also won a contract worth 23 million ($35.4 million) to provide seats to multiple customers for the Beechcraft T-6 trainer, plus Eurofighter Typhoon Tranche 3A and Super Hornet deals worth 12 million each. A major milestone for the company this year was the completion of the Joint Strike Fighter ejection seat qualification programme. Martin-Baker won a contract for this seat, the Mk16E, in It is also delivering thousands of crashworthy troop and gunner seats to Sikorsky for the US Army and international UH-60 helicopters. The company is looking at developing seats for ground vehicles that will give protection from mine blasts. It has developed prototypes, but producing these commercially will await a clear technical specification from customers. Martin says the company is expanding its interests into other safety-related technologies that he declines to detail, other than saying that a lot of new products are under consideration. However, one area he is willing to talk about is a plan Twin bosses: John (left) and James Martin AT A GLANCE Top 100 rank 99 HQ Denham, UK Aero revenues $235m Sales growth 23.3% Operating margin 22.6% ROCE 80.1% Employees 800 CEO James & John Martin (joint) to establish a global chain of ejection seat maintenance, repair and overhaul establishments to support the 90-plus nations who use the company s equipment. The first of these, Marcos Bernasconi Associates (MBA) of Buenos Aires, Argentina, received its certificate of excellence in July. Just as important as high technical standards and a track record is attitude, says Martin. It s not just a seat, it s a piece of lifesaving equipment and needs to be treated accordingly. Companies such as MBA have to show their commitment to Martin-Baker s standards by sending personnel to the latter s Denham headquarters for training. Martin-Baker is led by John and James Martin, twin sons of the company s founder, Sir James Martin. Mk16 seats are replacing a Northrop system on 450 T-38s Martin-Baker Martin-Baker Engines (Civil and Military) Sector rank Company COMMERCIAL AIRCRAFT Top 100 listed by company division 1 General Electric Aircraft Engines (excl Sm 2 United Technologies Engines (Pratt & Whitney) 3 Rolls-Royce Civil Aerospace and Defe 4 Safran Propulsion (Air & Space) 5 Honeywell International Aerospace (estimates) 6 MTU 7 IHI Aero-Engines & Space Op 8 Avio Aeroengines and Avioserv 9 Volvo Aero 10 ITP SOURCE: PricewaterhouseCoopers Sector rank 2009 Sector rank 2008 Company 1 1 Airbus Commercial (excl AT 2 2 Boeing 3 3 Bombardier 4 5 Gulfstream 5 8 Dassault Aviation 6 6 Embraer 7 4 Cessna 8 7 Hawker Beechcraft 9 9 ATR SOURCE: PricewaterhouseCoopers analysis from company reports Company ranking Company Aeroflex Alcoa Alliant Techsystems Amphenol Asco Avio B/E Aerospace BAE Systems 8 5 Ball BBA Group Boeing 1 2 Bombardier CAE Chemring Cobham Crane Curtiss-Wright Dassault Aviation Denel 95 new Diehl Aerospace Doncasters Ducommun EADS 2 1 Eaton Elbit Systems Flight International September 2010

6 sales 2009 Sales 2008 ($m) ($m) iths estimate) 15,919 16,353 12,577 14,041 nce 10,124 11,480 7,888 8,507 5,065 5,655 3,630 3,986 erations 2,957 2,890 ice 1,963 1,974 1,020 1, sales 2009 Sales 2008 ($m) ($m) R) 36,668 38,811 34,051 28,263 9,357 9,965 5,171 5,512 3,393 3,384 3,368 4,238 3,320 5,662 3,199 3,547 1,400 1,300 Company ranking Company Embraer Esterline Finmeccanica 9 9 Firth Rixson FLIR Systems Fuji Heavy Industries Garmin GenCorp General Dynamics 4 6 General Electric GKN Goodrich Hampson Industries 96 new Harris Hawker Beechcraft Heico Heroux Devtek 97 new Hexcel Hindustan Aeronautics Honeywell International Indra Ishikawajima-Harima Israel Aerospace Industries ITP ITT PROFILE KONGSBERG ALAN DRON JSF LINKS PROPEL FAST-RISING KONGSBERG Kongsberg chief Walter Qvam AT A GLANCE Top 100 rank 54 HQ Kongsberg, Norway Aero revenues $1,089m Sales growth 25% Operating margin 9.1% ROCE 22.4% Employees 5,423 CEO Walter Qvam IN JUST two years, Kongsberg Group has climbed 23 places in the Top 100, with a rise of 12 positions in the past 12 months. Led by Walter Qvam since 2007, the Norwegian technology group s aerospace-related divisions, Defence Systems Kongsberg and Aerostructures, won three major contracts in 2009, gaining income streams that will continue for several years. Defence Systems won the group s largest-ever single contract when it was chosen, along with Raytheon, to provide Finland with an NKr3 billion ($480 million) NASAMS II air defence missile system. Defence Systems was also awarded an NKr166 million contract by the Norwegian Defence Logistics Organisation in April 2009 to begin development of the joint strike missile, which is an airlaunched multi-role development of the company s naval strike missile. Although initially modest, the latter contract may have major significance for Kongsberg as the company says the joint strike missile will be the only anti-ship missile designed to fit inside the weapons bay of the Lockheed Martin F-35 Lightning II. This may be significant when the Joint Strike Fighter starts to be rolled out to air forces in the next few years, as it will provide an anti-ship capability without compromising the F-35 s stealth qualities. Kongsberg and Lockheed have signed an agreement to integrate the missile on the aircraft. Production is due to start in Another agreement signed with Lockheed will see Aerostructures fabricate advanced composite components from carbonfibre and titanium for the F-35. Initially worth NKr460 million, the value of this work could rise as high as NKr2.5 billion in coming years, says the company. Its initial deliveries will support Lot 3 low rate initial production aircraft, which will begin the programme s transition to full rate production. This is an important milestone for Kongsberg, says Harald Ånnestad, president of Kongsberg Defence & Aerospace. The agreement is the result of hard work from both teams, and paves the way for years of close co-operation between our companies in this exciting programme. The parts will be produced at a new 30,000m² (323,000ft²) plant built in Kongsberg. Production is under way and will last until Kongsberg is designing an anti-ship missile that will fit inside the Lightning II s weapons bay Lockheed Martin September 2010 Flight International 35

7 PROFILE KAMAN NIALL O KEEFFE BELL PEALS FOR Kaman KAMAN HAS risen five places to number 83 in our Top 100 after a year in which it won a five-year contract to build composite blade skins and core assemblies for Bell Helicopter. By the terms of a deal it values at $53 million, Kaman was enlisted to manufacture 18 different assemblies for Bell s H1, 406, 407, 412, 427, 429, 430 and BA609 rotorcraft. The work was assigned to Kaman s HeliworX plant in Bloomfield, Connecticut, which also serves Boeing, Northrop Grumman and Sikorsky. In 2008, Boeing awarded Kaman a contract to make wing components and assemblies for the US Air Force s Fairchild A-10 attack jets. The inboard and outboard flaps, slats and deceleron assemblies are manufactured at Kaman s Jacksonville, Florida facility, while bonding work is carried out at HeliworX and tooling fixtures produced by Brookhouse, a UK company Kaman acquired in Founded in 1945, Kaman AT A GLANCE Top 100 rank 83 HQ Bloomfield, Connecticut, USA Aero revenues $501m Sales growth 5% Operating margin 4.7% ROCE 8.7% Employees 4,032 CEO Neal Keating has two arms to its business: industrial distribution and aerospace, which accounts for 43.7% of the total. In 2009 Kaman s aerospace revenues grew 5% to $501 million. In addition to manufacturing metallic and composite aerostructures, the aerospace division markets and supports the SH-2G naval and K-Max commercial helicopters. It also produces military safeand-arm devices. While Kaman admits economic conditions necessitated painful but necessary expense and staff reductions, its military business as a Kaman s unmanned K-Max was demonstrated this year US Marine Corps Kaman chief Neal Keating whole grew 11.8% last year to represent nearly 70% of the aerospace division s sales. This overwhelmed a decline of roughly 8% in commercial aerospace sales, although Kaman cites the Boeing 787, Airbus A350 and Airbus A380 commercial types alongside the Joint Strike Fighter as ramping-up programmes in which it is a participant. Production of Black Hawk cockpits for Sikorsky dramatically ramped up in 2009, says Kaman, which also began deliveries of 10 SH-2G(E) helicopters it is upgrading for the Egyptian air force. But it had to deal with fall-out from Australia s Kaman SH-2G(A) Super Seasprite naval helicopter programme, which was terminated in In 2009 Kaman took title to the 11 Super Seasprites Australia ordered in Deliveries of these upgraded ex-us Navy SH-2Fs had been due to begin in 2001, but problems with the avionics delayed full functionality until by the time the programme was cancelled in As it strives to sustain last year s growth, Kaman is pursuing the unmanned sector. In January, a project team comprising Kaman and Lockheed Martin demonstrated the unmanned K-Max helicopter to the US Marine Corps. The demonstration was to show the K-Max s ability to resupply troops at forward operating bases in Afghanistan. Kaman Generally, the highest margins were to be had in aftermarket-rich businesses, evidenced not just by the performances of TransDigm and Precision Castparts but by those of Chemring and Meggitt. Electronics was another sector offering profit potential, with Rockwell Collins and Harris joining FLIR and Garmin among the GKN increased aerospace sales by almost 50% after acquiring Filton Aerostructures from Airbus in January 2009 prospering elite. As ever, specialising in a niche could shield a player from competition and boost profit potential. However, general profitability was back to 2005 levels after five years of steady growth (see graph). In 2009 the Top 100 s average margin was 8.5%, down from 9.1% in That 2008 figure in turn matched the figure for Subsequently, average margin dropped as low as 6.9% in 2003 before its five consecutive increases. Aside from energy control systems specialist Woodward Governor which, having acquired MPC Products and HR Textron, grew revenues by two-thirds the Top 100 s fastest- Top 100 listed by company (continued) Company ranking Company JAMCO Kaman Kawasaki Heavy Industries Kongsberg Korea Aerospace Industries L-3 Communications Ladish Latécoère Liebherr LISI Lockheed Martin 3 3 Loral Space & Comms Magellan Aerospace Martin Baker 99 new Meggitt Mitsubishi Heavy Industries Moog MTU Aero Engines Northrop Grumman 5 4 Orbital Sciences PAIG Panasonic Parker Hannifin Pilatus Precision Castparts Flight International September 2010

8 growing company, based on aerospace sales in local currency terms, was Norway s Kongsberg (see profile). GKN was not far behind, increasing aerospace sales by almost a half after acquiring Filton Aerostructures from Airbus in January After boosting its ranking by seven places in 2008, Chemring (see profile) repeated the trick last year, with aerospace growth exceeding 40%. BAE Systems sales grew by one-third as it continued its acquisitions drive. After purchasing MTC Technologies, Tenix Defence and Detica in 2008, it added unmanned air vehicle specialist Advanced Ceramics Research last year. Its ranking slipped three places only because of a reclassification of its land and armaments division. In addition to being among the fastest growers, BAE Systems was also in the top five when it came to absolute growth, as measured by added revenues in dollar terms. Boeing topped this table too, ahead of Finmeccanica, which grew aerospace sales by one-fifth, and the defence giants that took third and fourth place in the rankings Lockheed Martin and General Dynamics. Lockheed s sales rose $2.5 billion. General Dynamics grew its revenues by $2.7 billion, in the process jumping two places in the rankings. After achieving the highest growth of any Top 100 company in 2008, French aerostruc- Company ranking Company Raytheon 6 8 Rockwell Collins Rolls-Royce Ruag Saab Safran Senior Sequa Singapore Technologies Eng SKF Spirit AeroSystems Holdings Stork Teledyne Technologies Terma 100 new Textron Thales TransDigm Group Triumph Group Ultra Electronics Umeco United Technologies 7 7 Volvo Vought Aircraft Industries Woodward Governor Zodiac PROFILE ITT STEPHEN TRIMBLE ITT SHOWS GEOSPATIAL AWARENESS US ENGINEERING company ITT was not a mover in the Top 100, remaining at number 19, but 2010 has brought big changes inside its $6.3 billion defence electronics arm, which caters to military and government markets. By executive decree on 5 January, seven business units divided mainly along standalone product lines were absorbed into three new value centres : electronic systems, geospatial systems and information systems. The internal consolidation came about one year after David Melcher became president of ITT Defense & Information Solutions, which was bolstered three years ago by the $1.7 billion acquisition of EDO. Perhaps the most dramatic change came in the new geospatial systems unit, which combined the seemingly unlikely pairing of the space business in Rochester, New York, and the night vision goggles unit in Roanoke, Virginia, into the same division. Both units, however, are fundamentally based on imaging systems, and the move coincides with the company s strategic push to chase the rapidly growing market for airborne intelligence, surveillance and reconnaissance. ITT chief Steve Loranger AT A GLANCE Top 100 rank 19 HQ White Plains, New York, USA Aero revenues $6,585m Sales growth -2.6% Operating margin 8.3% ROCE 10.7% Employees 40,200 CEO Steven Loranger ITT has deep roots in space-based observation systems, which require a high degree of on-board processing to manage massive loads of data collected by sensors tracking objects the size of planets. Meanwhile, US military officials have developed a need for wide area airborne surveillance systems and hyperspectral sensors. Both are cameras that generate vast amounts of data. Transmitting all of that data to the ground requires lots of bandwidth. Ideally, most of the data could be processed on board the aircraft, with only a tiny fraction needing to be sent to the ground or downloaded on to a larger network. ITT s newly formed geospatial systems division intends to apply its background on space networks to this emerging, adjacent market. The company is already supplying wide-area Gorgon Stare pods to prime contractor Sierra Nevada, which delivers the systems to the US Air Force for integration on the General Atomics MQ-9 Reaper. The division is also teamed with Lawrence Livermore National Laboratory on a mid-wave and long-wave hyperspectral sensor, says imaging scientist Bernard Brower. Meanwhile, the Electronics Systems value centre is being formed with pieces from the former communications systems unit in Fort Wayne, Indiana and elements of the previous intelligence and information warfare unit in Nashua, New Hampshire. The goal for each of the three new units is to combine technical expertise for new integrated products. The space business and the night vision goggles unit have made a seemingly unlikely pairing ITT ITT September 2010 Flight International 37

9 PROFILE FUJI HEAVY INDUSTRIES ARIF RAHMAN FUJI S HEAVYWEIGHT UAV AMBITIONS FUJI HEAVY Industries, a Japanese conglomerate that also manufactures automobiles, has jumped seven places to number 58 in the Top 100 after growing aerospace revenues 15.3% in Within its aerospace operations, Fuji specialises in advanced composites, from which it manufactures wings and other structural components. The company also offers expertise in flight-control and other technologies for unmanned aircraft. The forward field observation system Fuji began manufacturing in 2003 has found favour with Japan s ministry of defence. Three units of the unmanned helicopter type have been built for the army s artillery units. A civil version of the design, dubbed the RPH- 2, has also been developed. The RPH-2 carries a chemical pesticide tank and spray boom for agricultural use. In 2009 Fuji s civil revenues were boosted by rising sales of the Boeing 777 after resolution of the machinists strike that crippled the US airframer s production line. A Chief executive Ikuo Mori AT A GLANCE Top 100 rank 58 HQ Tokyo, Japan Aero revenues $996m Sales growth 15.3% Operating margin 5.2% ROCE 4% Employees 13,000 (est) Chief executive Ikuo Mori total of s were delivered in 2009, compared with 61 in Last year was, however, clouded by the delay to the Boeing 787 programme. Fuji manufactures 787 centre wing boxes, for which Boeing had to develop a modification, delaying the type s first flight. Fuji has been manufacturing components for Boeing since 1973, serving the 767 and 777 programmes before it joined the 787 team. For the 777, as for the 787, its role is to manufacture the centre-wing section that joins the main wings and fuselage. Smaller than other Japanese aerospace conglomerates such as Mitsubishi, which holds the lion s share of fighter manufacturing, and Kawasaki Heavy Industries, dominant in military products, Fuji prioritised the unmanned sector as one in which it can carve a lucrative niche. For Japan s air force, it has been developing a fixed-wing unmanned air vehicle that can be deployed from under the wing of a fighter aircraft. It has also developed and tested a Fuji aerial robot system that uses a global positioning system for navigation and autonomously handles take-offs and landings by small fixed-wing aircraft. tures and cabling specialist Latécoère suffered the sharpest contraction in 2009, with its sales dropping by more than one-third as it bore the impact of Boeing 787 delays, delivery slowdowns at Embraer and Dassault, and a dispute over a business jet contract. Indicative of the continuing consolidation of aerospace manufacturing, Hampson Industries managed to re-enter the Top 100 despite its aerospace sales falling by almost 30%, a figure affected by its disposal of Hampson Aerospace Machining. Japanese companies are among the suppliers to, as well as customers for, Boeing s Flight International September 2010 Boeing CHART PLACINGS While Boeing moved past EADS, five other companies in the top 20 also improved their positions. General Dynamics and Raytheon each jumped two places, to fourth and sixth place respectively. GE and Rolls-Royce each rose one place, with the former in 10th position and the latter in 14th. These progressions were at the expense of Thales, Textron, Northrop Grumman and BAE. Thales dropped five places to fifteenth after a reclassification of revenues to exclude the security division, which is not involved in aerospace manufacturing. Northrop slipped one place to fifth and Textron by one place to seventeenth. As mentioned, a reclassification affected BAE s placing. Elsewhere in the Top 100, the rising stars were Woodward Governor (up to 70 from 91),

10 Finmeccanica which owns Alenia and its sky light simulator in Turin grew sales by 21% last year Kongsberg (54 from 66), FLIR (73 from 85), Chemring (68 from 75), Fuji Heavy Industries (58 from 65), Diehl (93 from 100), SKF (82 from 87), Loral Space & Communications (59 from 64), Amphenol (74 from 79) and Kaman (83 from 88; see profile). The unmanned air vehicle market was a focus of acquisitions pursued by prime contractors Latécoère s diving sales brought a slide in the rankings, to 76 (from 60 in 2008). There was an even harder landing for Firth Rixson, which limped in at 86 after being placed at 69 the previous year. Elsewhere, there were significant diminutions of status for Sequa (64 from 55), Hexcel (which completed Fuji s journey in reverse, moving to 65 from 58), PAIG (85 from 78) and BBA (46 from 40). MERGER RE-EMERGENCE There was limited merger and acquisition activity from financial investors in 2009, says PricewaterhouseCoopers, which notes Finmeccanica COMMENTARY PRICEWATERHOUSECOOPERS NEIL HAMPSON ACCELERATING GLOBAL GROWTH THE AEROSPACE and defence industry is the largest exporter in the USA. But exports are only one measure of globalisation. When we also consider the international supply chain and foreign direct investments, aerospace and defence ranks in the middle among other industries. The shift in wealth towards emerging economies is changing the competitive landscape, and as aerospace and defence companies expand their global footprints, a race to capitalise on rising opportunities has begun. The Asia-Pacific region is expected to account for 37% of the value of all new aircraft deliveries over the next 20 years nearly as much as North America and Europe combined. Who would have thought 20 years ago that we would be able to sell aerostructure products to China and other countries that were closed markets? This has changed the world tremendously, says Gilles Labbé, president and chief executive of Héroux-Devtek. Since the end of the Cold War, international threats have changed but not diminished. The world faces adversaries who are often unpredictable and difficult to identify. Regional tensions in the Middle East and Asia keep defence equipment in demand. US companies took $38 billion in new defence orders in the most recent fiscal year, and that could increase. Globalisation also offers companies greater access to talent and labour. According to some estimates, India produces about as many engineering graduates as the USA, and China produces significantly more engineering and technology PhDs than the USA or India. Aerospace and defence companies cannot remain competitive by relying solely on traditional sources of talent; companies must recruit the best people from around the world. I don t think there s a talent shortage, but I think there are particular societies and economies that focus on different areas of expertise, said Tim Mahoney, president and chief executive of Honeywell Aerospace. Our strategic plan is to hire the best engineers around the world. In 2008, foreign direct investment by the top 50 global aerospace and defence companies climbed to a record. While the search for low-cost manufacturing remains an important motivation, research and development investments have increased significantly, including the hiring of talent in engineering and other critical areas. The top five recipients of foreign direct investment in the aerospace and defence industry were India, China, the USA, Russia and Mexico. OPPORTUNITIES As globalisation creates opportunities, it introduces challenges that require new management tactics. Industry executives interviewed in the PricewaterhouseCoopers report A&D Insights: Accelerating Global Growth identified the following issues as their top challenges: protection of intellectual property; cost and complexity of export regulations; ethics and compliance across cultures; increasing financial risk, particularly currency exchange rate risk; and management of expanding offset requirements. Intellectual property protection poses perhaps the most significant barrier to globalisation many countries with the highest growth rates have the weakest intellectual property laws and enforcement. The complexity and limitations of export regulations offer another key challenge. US regulations restrict the export of certain technologies and place regulations on foreign governments such as end-use monitoring requirements. The complexity of regulations creates significant risks and increases compliance costs. Companies also face challenges in the area of ethics and compliance. They must not only understand local laws and cultures, but also educate their international employees and partners on their own country s regulations and ethical standards. International customers are demanding more in the way of technology transfer, direct offsets and foreign direct investment. Companies must weigh the competitive and performance risks inherent in these issues, as well as the value of their offset investments. Companies must also manage financial risk related to foreign currencies. This can be particularly challenging because revenue and costs may be in different currencies over a long period, combined with the inherent limitations of the currency hedging markets. With these issues in mind, companies must conduct thorough due diligence and understand long-term economic, political, cultural, and demographic trends before investing in global markets. Globalisation is driving growth in the aerospace and defence industry. However, the changing landscape creates new competitive threats and complex operational challenges. The race is on. Companies that can best manage these complex challenges will be tomorrow s leaders. Neil Hampson is global aerospace and defence leader at PricewaterhouseCoopers. The A&D Insights: Accelerating Global Growth report can be viewed at aerospace-defence September 2010 Flight International 39

11 a prevalence of uncertainty, particularly in commercial aerospace. Nonetheless, there was a notable number of transactions by corporate players, with US companies dominating among both acquirers and targets, although European players seeking dollar-zone presences were also active as acquirers. In July 2009, Boeing acquired the assets and operations of Vought Aircraft Industries South Carolina facility, where aft fuselage sections for the 787 are fabricated and stuffed. The rest of Vought Aircraft Industries was acquired by Triumph in June, a transaction falling outside the timeframe relevant to this year s Top 100. In December, Boeing continued its efforts to regain control of the delay-hit 787 programme by purchasing from Alenia Aeronautica the outstanding 50% of Global Aeronautica, which integrates centre fuselage sections at a facility also in South Carolina. EADS, meanwhile, pursued transactions aimed at boosting its presence in the rotorcraft market. In April 2009 it took an 80% stake in Euroheli and in October it purchased 60% of All Nippon Airways helicopter maintenance business. There are a number of funds already raised but looking for the right investment Anna Sargeant PricewaterhouseCoopers assistant director, strategy The company placed third in the Top 100, Lockheed Martin, was not inactive when it came to takeovers. It acquired Universal Systems & Technology, which provides interactive training and simulation services, in January Gyrocam Services, a manufacturer of gyrostabilised optical surveillance systems, joined the Lockheed empire in August. The unmanned air vehicle market was a target for a number of prime contractors. Northrop Grumman acquired the design rights to Swift Engineering s KillerBee product line in May The following month, BAE moved to extend its UAV reach by buying Advanced Ceramics Research. Raytheon s move up the charts was aided by its acquisition, in October, of BBN Technologies, a provider of command, control, communications and intelligence (or C3I ) systems. GKN, another chart riser, acquired Filton Aerostructures from Airbus in January 2009, going on to win additional work packages on the Airbus A350 XWB and the Joint Strike Fighter. As M&A activity continues to pick up, some important questions arise, as identified 40 Flight International September 2010 AVERAGE OPERATING MARGIN OF AEROSPACE AND DEFENCE COMPANIES Operating margin (%) 10% 9.7% 9.1% 8% 6% 4% 2% 0% SOURCE: PricewaterhouseCoopers by Sargeant: At what point is there going to be a serious investment made into Asia? And what s going to be the game-changing development which makes that happen? It s something that s been on the horizon for a number of years now, but we haven t seen significant investments. The ramp-up of activity at Airbus China may serve as a catalyst to increased investment in the wider region. Generally, corporate investors will continue to pursue acquisitions as a means of accessing growth markets while financial investors will target niche companies with higher profit potential, predicts Sargeant. There are a number of funds which have already been raised but are looking for the right investment and some players who are able to make investments with almost 100% equity, she notes. And then there are players looking to exit. THE BIG PICTURE Overall, 2009 was a challenging year for the global aerospace industry, says PwC. Reduced passenger and air freight demand brought a dramatic decline in new aircraft orders as airlines looked to preserve cash. Military and commercial programmes including the Airbus Military A400M and Boeing 787 TOP PERFORMERS MEASURED BY MARGIN Rank by Rank by Rank by Company aerospace Operating Operating margin margin aerospace name sales margin margin sales (2009) $m (2009) (2008) TransDigm Group % 42% FLIR Systems % 26% Precision Castparts 2,991 27% 23% Garmin % 25% Hindustan Aeronautics 2,337 23% 23% Martin-Baker % 15% Chemring % 21% Meggitt 1,794 20% 15% Rockwell Collins 4,470 20% 20% Hampson Industries % -1% SOURCE: PricewaterhouseCoopers 7.4% 6.9% 7.2% 8.5% 8.9% 9.0% 9.1% 8.5% were afflicted by delays and cost overruns. Credit markets, meanwhile, remained tight. Compared with its civil counterpart, the defence sector remained relatively robust, an outcome PwC attributes to reliance on public sector funding. However, large military platforms garnered fewer orders, reflecting a shift in the defence strategy away from previous large-scale heavy programmes to more intelligence-based and intelligence-support programmes, says PwC. Companies were adapting to adjustments in defence procurement to focus even more on flexible, mobile and responsive force structures, with an increasing focus on logistics and life-cycle support, adds the consultancy. Amid uncertainty over the future outlook for civil aircraft demand, Airbus and Boeing managed their orders carefully, PwC suggests. The airframers avoided sharp declines in delivery numbers, but put production ramp-up plans on hold. Meanwhile, the airframers efforts to reorganise their supply chains around fewer suppliers continued. The increased prevalence of risk- and revenue-sharing partnerships meant that their supply chains were more exposed to changes in delivery profile than ever before, says PwC.

12 That regional and business jet manufacturers were not able to manage the volatility in their markets as easily is reflected in declines approaching 40% for those worst affected. For defence aerospace s prime contractors, meanwhile, diversification into unmanned technologies represents a means of mitigating risk on core air systems programmes. A BRIGHTER FUTURE? When looking to the likely outcome of this year, PwC sounds a note of optimism. As global economies recover, we are seeing a return to airline demand growth in 2010, says the consultancy, noting decisions made by Airbus and Boeing to ramp up production of narrowbody aircraft. In the widebody sector, meanwhile, a rethink is under way. Boeing and Airbus are being forced to reconsider the best way of delivering large programmes, says PwC. The strategy of outsourcing and joint ventures favoured for so much of the last decade is being questioned as they try to exert supply chain discipline and control. In the aftermarket business, prospects have been boosted by increased aircraft utilisation, even if the recession has expedited the exit of older types requiring heavier maintenance. Maintenance deferred during the downturn will finally be carried out. However, the maintenance industry s centre of gravity is likely to shift, since airline growth is focused in Asia, the Middle East and Africa. As the commercial market picks up, the outlook for defence aerospace grows cloudier amid intensifying pressure on the US and UK defence budgets, and indeed on public spending generally. The upshot, by PwC s reckoning, is that governments are using new methods to develop, acquire, finance and support defence equipment. For defence suppliers, there is a need to rethink supply chains and explore cross-na- Rank (08) Company (country) aero sales ($m) Total sales ($m) Operating result ($m) Operating margin division growth* (2) Boeing (USA) 68,281 60,909 68, % 2,096 3, % 6.5% Commercial Airplanes 34, % , % 4.2% Boeing Defense, Space & Security 33, % 3,299 3, % 10.1% Boeing Military Aircraft 14, % 1,513 1, % 9.6% Network and Space Systems 10, % 839 1, % 9.1% Global Services & Support 8, % % 12.5% Boeing Capital Corp/Other/Accounting differences % % -78.1% 2 (1) EADS (Netherlands) 59,544 63,308 59, % , % 6.4% Airbus Commercial 36, % 505 3, % 8.6% Airbus Military 3, % -2, % -17.9% Eurocopter 6, % % 6.5% Defence and Security Systems 7, % % 7.0% Space (Astrium) 6, % % 5.4% Other Business (and HQ) 1, % % 4.9% 3 (3) Lockheed Martin (USA) 45,189 42,731 45, % 4,466 5, % 12.0% Aeronautics 12, % 1,577 1, % 12.5% Electronic Systems 12, % 1,595 1, % 13.0% IS&GS (Information Systems & Global Services) 12, % 1,011 1, % 9.3% Space Systems 8, % % 11.9% 4 (6) General Dynamics (USA) 31,981 29,300 31, % 3,675 3, % 12.5% Aerospace 5, % 707 1, % 18.5% Combat Systems 9, % 1,262 1, % 13.6% Marine Systems 6, % % 9.4% Information Systems and Technology 10, % 1,151 1, % 10.7% Corporate (4) Northrop Grumman (USA) 27,542 26,170 33, % 2, % -0.8% Aerospace Systems 10, % 1, % 4.2% Electronic Systems 7, % % 13.4% Information Systems 8, % % 7.7% Shipbuilding 6, % 299-2, % -37.5% Technical Services 2, % % 5.7% Intersegment eliminations -1, % 8.9% 6 (8) Raytheon (USA) 24,881 23,174 24, % 3,042 2, % 11.3% Integrated Defence Systems 5, % % 16.9% Intelligence and Information Systems 3, % % 8.1% Missile Systems 5, % % 10.8% Network Centric Systems 4, % % 12.7% Space and Airborne Systems 4, % % 13.3% Technical Services 3, % % 6.7% Corporate and Eliminations -1, % 21.3% 7 (7) United Technologies (USA) 24,494 25,616 52, % 6,465 7, % 12.8% Engines (Pratt & Whitney) 12, % 1,835 2, % 15.1% 42 Flight International September 2010

13 tional synergies, according to the consultancy. The activity in the security, surveillance and homeland security sectors is likely to continue as suppliers invest in growth areas away from the traditional defence budgets, it says. Nevertheless, the US Quadrennial Defense Review, issued in February, and the US defence budget for fiscal year 2011 have eliminated some of the uncertainty regarding that nation s defence spending priorities, and this has enabled strategic decisions to be taken. UNMANNED SECTORS Increased interest in the support and unmanned sectors can be discerned among many defence players. In the UK, the industry anxiously awaits the outcome of the Strategic Defence and Security Review, which is due in October. Meanwhile, desire to limit exposure to home markets defence budgets is evident, for example, in the priority afforded by BAE Systems to the Indian market. While 2010 s overall results are likely to be stable with some growth, it s a really a question of what strategic moves companies make in order to deal with changes coming down the pipe in the defence market, says Sargeant. She sees profitability as likely to increase, but cautions that fluctuating exchange rates will continue to have an impact. Equally, the now well-established prevalence of risksharing partnerships means that any volatility at Airbus and Boeing will reverberate through their supply chains. That s a big change companies are having to deal with, she says. At the same time, companies are likely to be more savvy when it comes to negotiating future risk-sharing partnerships, says Sargeant. This applies not just to suppliers but the primes too. The prime contractors are recognising that if they pass too much risk to their supply chain, then it s actually the prime contractor that will feel the pain in the end. Capital ROCE (%) Personnel Sales per employee ($) Comments employed headcount growth 2009 growth 29, % 17.2% 157, % 434, % Acquired assets and operations of Vought Aircraft Industries South Carolina facility in July 2009 Acquired outstanding 50% stake of Global Aeronautica in December , % 7.0% 119, % 498, % EBIT affected by A400M provision and foreign exchange effects Acquired 80% stake in Euroheli and 60% of All Nipon Airways helicopter maintenance business (Asia) in October , % 22.4% 136, % 332, % Acquired Universal Systems & Technology (interactive training and simulation) and Gyrocam Services (gyrostabilised optical surveillance systems) 20, % 20.3% 91, % 348, % Acquired AxleTech International (supplier of axles for specialty trucks and military vehicles) into Combat Systems in December , % -1.2% 120, % 279, % Acquired Sonoma Photonics and assets from Swift Engineering s Killer Bee unmanned air systems product line in April 2009 included in the Aerospace segment 18, % 14.6% 75, % 331, % Acquired BBN Technologies (C3I systems) 37, % 20.6% 206, % 256, % September 2010 Flight International 43