Francois Gayet, AeroSpace and Defence Industries Association of Europe (ASD)
Release Date: 2009-01-23
The heads of various large European national aerospace associations expressed amazing optimism for the growth of their local aeronautics industries. As the representative voice of the pan-European aerospace association which includes twenty different national associations, do you share the same optimism?Yes, for the most part, because aviation has grown in cycles. For the first time in some time, business has been growing for the last eight years. Today, the big manufacturers, Boeing and Airbus, have a backlog of five years. If you want to buy an A380 now, Airbus can only deliver by 2013 or 2014. It's clear that the market has been growing very fast, thanks in part to countries like China and India. Today, it's also clear that there's a crisis, but it's not the first time. We had a crisis in 1991 after the first Gulf War, which caused a decrease in the air traffic for 2 years. We faced another crisis following the 9/11 attacks in the US, and traffic dropped again, but started to grow again after 2 years. We believe that countries, especially China, will have a continuous request for more airplanes. China is a big country and needs a lot of airlines to transport people across the country, and they will continue to need airplanes, even if there's a slowdown. There has been some cancellation of orders, but it is very marginal compared to the total order book.
Now of course there are three main issues which could temper this optimism a little bit. First, in the last few years we faced the oil crisis, which affected airlines more than the manufacturers. It's clear that when you have a big increase in oil prices, and at the same time, you need to replace your fleet because of strong environmental constraint, this does not go well together. The result is that most airlines struggle to have enough money to buy new planes. The second issue, which is more for the manufacturers, has been the exchange rate between the Euro and the USD. Although it's less of a problem today, more important than the real absolute value of the exchange rate is its extreme fluctuation. Manufacturers started to have great difficulty in Europe, because the whole market is priced in USD. For instance, even if almost 50% of an Airbus plane is manufactured in a non-Euro zone country, including China, Brazil, Canada, Mexico, or the US, the other half is still made in Europe and is still completely linked to the Euro. Therefore, exchange rate volatility is a big issue for manufacturers, and it affects the whole supply chain. The third issue is the relatively low increase in air traffic. Over the last twenty or thirty years, the increase in traffic was roughly 5% per year. Even if this drops a bit, it will pick up gain, so I would say that we could be reasonably optimistic about the commercial aircraft market.
While it's true that the major aircraft manufacturers have a massive backlog, with or without order cancellations, the consolidation of their supply chain as well as the credit crunch and delays in new aircraft programs are posing major challenges for the sustainable success of SMEs. Positive cash flow is a challenge. What needs to be done to ensure that a large portion of the supplier base is not forced to shut its doors?
On a national basis, each of the main associations has done a lot to obtain special credit lines and special support from national governments. On a European level, we have asked for a special funding mechanism to help SMEs. Right now, we are writing to the European Commission to get their support. This includes a request for EC financing of airplanes. Otherwise, would be buyers may have no way to fill their requirements. Together with the European Commission, it's clear that it's part of our mandate to find solutions.
The business model is changing, especially for Airbus. While Embraer was the first to introduce the concept of risk sharing with its supplier base many years ago, and Boeing followed suite, Airbus only in recent years has followed suite. Airbus is now selecting big First Tier subcontractors and giving them the technical and financial risk, making those companies more like partners. Certainly, this also means that suppliers will have to reorganize to ensure that they can accommodate this new business model.
Looking at the technologies that will help create the next generation of more efficient aircraft, we see a few areas where Europe does not have a first mover advantage. I'm talking about composites. What is being done to catch up, or alternatively, what are some other areas where Europe does have the first move advantage?
I'm not the best expert but the Clean Sky Joint Technology Initiative (JTI) is certainly a very good and timely common approach at a European level. There are a lot of things which can be done with new technologies - futuristic engines, composites, and reducing airplane weight. There's a lot of systematic work to be done, not only by focusing on technologies, but across all the functions of the airplane, including the generation of water within planes. Today, planes have to carry tons of water for the passengers. In the future, people will think about recycling the water within the plane. This is a small thing, but if you save one ton, you can save nearly half of that in fuel. Passengers pay for luggage, and if you have two or three pieces, you pay more, so people reduce the amount they carry, which also reduces weight. This may sound like a joke, but it is another way to save weight. The best approach that we've found in Europe has been to launch the Clean Sky JTI, which will cover all technological areas and all kinds of platforms, including not only big planes, but business planes, rotorcraft, et cetera. Everybody will have the chance to get a piece of R & T (Research & Technology) funds to develop the future technologies that will bring us closer to reduction of fuel consumption by another 20% to 40%.
It is clear that foreign exchange considerations have been a major cause of the outsourcing trend which continues to unfold. Doesn't this trend pose a major threat to the European aerospace industry?
I would think so, because this industry is a long-term industry, which means that you need to invest in different technologies, processes, and capabilities, and you have to invest in people, like engineers and technicians. When you decide to put a plant somewhere, it involves a very complex system that involves investments in technologies and the people inside, so when a company decides to move production somewhere for competitive reasons, the decision is not to be taken lightly. They make a lot of analyses and then when they make a decision, it's not for immediate results, but for long term results, which means it's not 100% irreversible, but it could be. You need a combination of factors. Very good transportation systems are completely requires since, when you build parts of a plane, you have to send them to the main assembly line. You need a good local mini supply chain, because you have to subcontract things locally. You need to have a good engineering, production, and training system, because you need good engineers. A combination of many factors is in play. Mexico has been a good place where you can find all of these factors ?It's becoming a sort of Mini Toulouse.
In Europe, some companies have invested in Poland, the Czech Republic, and Romania. Maybe the next frontier will be Ukraine, because they have a lot of engineering capabilities, but for the time being, they don't have a good business model. I've been visiting Polish plants, and it's very interesting to see how they switched from the previous Soviet system, where they were manufacturing 'build to print' engines for fighters by the thousands. They cut their staff by maybe five or six times, rebuilt their plants, and now they are very good suppliers. The Americans were the first to enter Poland and are still the most active, but Poland is also starting to get back into the European system at a very competitive cost.
Have these developments in Eastern Europe been driven by local entrepreneurs or rather by Western European investments?
Well, it has been mainly by transferring technologies and skills to them, to bring them to the level of Western European companies. It's not easy, but they've accepted to become a pure supplier, rather than being final assembly or a private contractor as in the past. They switched from being the big guy who can do a lot of things to being a much smaller guy who has to learn again, who has to train his young engineers. Now they are coming back very strongly. Now, our companies must decide if they want to go to Tunisia, Mexico, Poland, or to China. Each has its own advantages and disadvantages. It's always a compromise, but when the decision is made, it's not just for a couple of months or years; it's long term. I believe this is the correct way to globalize this industry step by step. At the same time, I'm optimistic that this will continue to be a growing business and that there will be more engineering and research to do in the future, and that we Europeans will continue to do that very well.
You mean the fusion of the Eastern and Western European capabilities will create a sustainable winning combination?
Yes; when I talk to the unions in Europe, I tell them to not be so afraid, because this will bring increased traffic and purchases of airplanes. For instance, partnerships with China will create more jobs in Europe. It will not kill jobs, because we need much more than we ourselves can afford to provide. If we organize these partnerships well, this is a win-win situation.
As you have mentioned, planning in the aerospace industry is a very long term process. This being said, what would you expect to be the face of the European aviation industry ten years from now? What major evolutions are likely to transpire?
We will see more subcontracting done outside of Europe. We will also see the creation of more partnerships for research and development activities. The main question is if there is room in the world for a third big player in the production of large aircraft. Today, the duopoly of Airbus and Boeing involves two complete families of airplanes. If you want to be in that market, you cannot just have one plane - you need a complete family of aircraft and economies of scale. Both Russia and China are trying to create a third or fourth pole. Is there room for all to participate and fulfil their goals? I'm not sure, but there are two possible scenarios. Scenario A involves fierce competition between the newcomers and the Airbus/Boeing duopoly, which would certainly kill some of the cooperation which has begun. As soon as you see your partner become your competitor, you either stop talking with him or you start to decrease your level of investment in joint activities. Scenario B involves respectful cooperation which takes plenty of care not to create situations of direct competition with partners. So it's either cooperation through a common long-term vision or competition.
Is fear of Scenario B as the expected outcome or the belief that there is only room for the two incumbents in this global game the reason that Airbus' decision to locate final assembly of the A320 has drawn some criticism?
I believe it's a very smart move, because this is the way you create cooperation. Maybe it's the first step toward the next generation of a single-aisle airplane and a building block of cooperation, rather than competition. Instead of having two main products available worldwide, some people dream of having up to four or five, but can they survive? The creation of any additional player would certainly not only require serious funding, but also a huge amount of expertise and skills, so if you start to kill this cooperation by creating competition, then you kill any possibility of having a good supply chain available to you.
Maybe in the next generation of airplanes, you could see the Japanese working with Boeing and the Chinese getting a share of both Boeing and Airbus programs. This is certainly a good model. The Europeans are supplying the undercarriage of the B787 while the Americans are providing for the A380. We live in a very strange world. This is now a global industry. When I visit some companies in France and ask them about their top customer, some will say Boeing and some will say Airbus, because they are competing for work from both. Messier-Dowty is one of many suppliers that might even sell more to Boeing than to Airbus.
The Frenchman and the Brit are becoming Europeans, and Europeans are becoming citizens of the world. For example, Rolls Royce isn't British ?the company is the number one engine supplier globally. So nationalism has now been taken out of the commercial aviation industry?
Most equipment suppliers both in the US and Europe have been competing, step by step, for both Boeing and Airbus business, and there is a significant share going in either direction. If you go around Toulouse, you will see a lot of US companies who have not only local offices, but entire plants, because they are big suppliers of Airbus. You could replicate this model with Embraer, Bombardier, and even business jet producers like Dassault, which all buy a lot from the US. This is a global industry, and I'm talking about more functions than just assembly lines. The European companies that are establishing some local operations in China are the ones that are serious about being global players. The trend will only become more intense in the future based on global growth patterns.
China and India want to develop their own industry and the opportunity to do it. It's better to do this in partnership, rather than competition, because they will be part of the global game. If they choose to move forward through competition, much more time and energy will be required to become part of this game. To penetrate the global market, you need a lot of investment, not only in money, but also in people and skills. You have to be fully qualified. You have to be recognized as a strong, reliable supplier by the main contractors. There are a lot of steps to go to become a really good supplier, and to do that, it is better to be linked to somebody that is already there and to grow with them through a step-by-step approach.
Today, you speak on behalf of all the European member associations of ASD. In 2009, you will be speaking on behalf of the world. Will your message change?
I will 'wear two hats', that of ASD, and that of the International Coordinating Council of Aerospace Industries Association (ICCAIA), once I begin my fixed two-year term as Chairman in January 2009. The ICCAIA represents the global aerospace manufacturing industry at the International Civil Aviation Organization (ICAO) and acts as the forum where associations from all countries that have prime contractor capabilities debate big issues in aeronautics on a global scale. The ICCAIA has focused committees (with membership of engineers and representatives from companies like Boeing and Airbus) that address issues like environmental protection, ATM, and airport security. Their work includes the preparation of reports for presentation to ICAO. Right now, for example, these teams are covering all of the issues revolving around CO2 emissions.
From my point of view, we should be joined by Russia and China at some point in time. The problem with Russia and maybe China is that they don't have national associations. They have a big conglomerate, which is government owned, but they don't have a real association like we have in Europe or in the US, where you have big companies, but also the small ones, participating in the game. Part of my mandate for the next two years is to see how China could be on board, but in order for that to happen, they need to develop an association, which would include not only the big conglomerates, but also their small subsidiaries and suppliers. GIFAS in France represents two hundred fifty companies, not only one. The Society of British Aerospace Companies (SBAC) represents several hundred companies, not only one. This is something that will come in 2009.
ASD has had a prominent role in the high-level EU-China Civil Aviation Project. What results has that long-term initiative yielded?
Our in-house China expert, Patrick de Prevaux, who is ASD Managing Director International Programmes, created the EU-China Civil Aviation Project soon after joining us in 1997. The initiative brought together the EU Directorate General of Air Transport and the CAAC, as well as EUROCONTROL, ASD and their counterparts to promote the overall framework required to make for greater closeness in aviation and aerospace industries. The program ended as scheduled in 2006 with two sets of concrete results: a facilitation for a better understanding and harmonization of Chinese and European air regulations. This was based on Joint Aviation Authorities (JAA) and the European Aviation Safety Agency (EASA) regulations. Safety is clearly the central theme both on the ground and in the air. The second achievement is the inclusion of China in aerospace industrial cooperation. Industrial programs sponsored by the EC ?involving companies like Airbus and Snecma ?have brought China closer to Europe. This includes the establishment of a new Masters in Aerospace Safety, a post-graduate diploma that is recognized by both the Chinese and French Ministers of Education and will soon be recognized by the EU. We are trying to extend this to other areas like aircraft maintenance.
Often, European Tier Two SMEs like Messier-Dowty and Messier-Bugatti have entered China through joint ventures 'under the shadow' of a much bigger Tier One suppliers or OEMs of engines or aircraft. China's ARJ21, an evolution of the old DC-9, perhaps its 'great grandson', has included participation of many European suppliers. The A320, the next step, is an enhancement in collaboration but the Chinese are perhaps still 20 years away from having the expertise in the design of engines and aircraft systems required to produce a large jet. While the Chinese are getting there with aerodynamics, they really don't have much experience to speak of in aero engines and systems.
These collaborative efforts are indirect effects of the kind of non-commercial cooperation that we have launched to harmonize standards thus making for better technical relationships between companies. Thus, we have facilitated cooperation between our industries. Phase Two of the EU-China Civil Aviation Project begins in 2009 and will focus on three areas. In offering vocational training of Chinese engineers and technicians, our aim is for there to be a clear understanding of how Western standards are defined, including less technical areas like project management. The necessity to train Chinese engineers is more related to the capacity to understand each other and how we are working together, something that is really lacking today. Also, in joint ventures, we are striving for a level playing field in which there will be no deficiencies in terms of knowledge, product development, and project management. Secondly, we are interested in taking our cooperation with the Chinese authorities (the CAACATM) to the next level in the promotion of a re-development and re-definition of air navigation systems in China. This is necessary in order to accommodate rapid growth in air traffic. The third aspect will be to promote the Masters in Aviation that we would like to launch. I'm talking about the creation of an aviation academy in China that will offer a post-graduate Masters in Aviation diploma. The thought is that the only way for China to be able to attempt systems development will be for them to have a steady supply ?generation after generation ?of specialized engineers who can communicate and understand their European counterparts and the way they work. In these three ways, we will continue to act as facilitators in bringing Europe closer to China. We feed the political issue to address operational needs ?we harmonize the perspective of the EC and our own industry.
Do you have a final message to offer to your counterparts at the CAAC?
The message is simple. The European aviation industry must project on the global scene the values and technological advantage created by the European Clean Sky Initiative. This crosses all technological areas and platforms of aircraft. Since the development of world-class aviation industries and services is a strategic decision for China, we are here to promote a safe and sustainable approach. This means taking into account all the environmental constraints and requirements that are necessary in building any long-term aviation plan. This is of absolutely paramount importance and we are here to help in this regard. We aim to work very closely on all levels ?government and industry ?to make China a long-term partner in this joint vision of sustainable aviation.
| Company: | AeroSpace and Defence Industries Association of Europe (ASD) |
| Position: | Secretary General |
| Country: | Belgium |