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:: September 2007 Letter ::

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Dear Fellow Aviation Folly Watchers,

Remember Indonesia’s IPTN? It was a repulsive cash-devouring horror, stupidly wrapped in a national flag. It represented a value-obliterating idea—creating indigenous aircraft as part of a nation’s development roadmap. Also, its brochures were seriously cheesy. It’s easy to hurl insults when the target is mortally wounded. On September 3 Indonesia’s courts declared it bankrupt.

PTDI, as IPTN is now known, went to its grave doing what it did best: providing misleading and false guidance. They claimed a sufficient backlog to allow recovery and restructuring. An Indonesian court ruled otherwise. The judge, Heru Pramono, ruled “The document simply shows estimates that are not supported by adequate infrastructure and capital,” adding that there was no reason to keep the company alive. PTDI can appeal to Indonesia’s Supreme Court, but the ruling speaks volumes. The only hope is that some of the company’s maintenance and components business might be salvaged.

Let’s review its inglorious history. IPTN, d.b.a. PTDI, a.k.a. Indonesian Aerospace, was founded in 1976 by BJ Habibie, a President Suharto crony who went on to run the country before going into semi-exile. IPTN blew through over $2 billion and sold 300 license produced turboprops and helicopters at a loss. It designed and flew its own N-250, a 70-seat turboprop that went nowhere. When the plug was pulled by the IMF and Indonesia’s own reformers in the late 1990s, IPTN had plans for the N-2130, a 130-seat jetliner in the same class, and just as viable, as Bombardier’s CSeries. Habibie was succeeded as Indonesia’s leader by Abdurrahman Wahid, who stated, “We know that the airplane industry that we had nowadays has only ended up fit for a museum.”

But like all good museums, we can learn a lot from this experience. Here are some useful lessons from IPTN for anyone wishing to build a national plane.

First Thing To Do: Seal The Borders (and Cripple The Airlines). Habibie forced Merpati and other Indonesian carriers to fly IPTN CN-235s at exorbitant rates (one airline executive said lease costs for this 44-seat prop were the same as for a 737; he was fired). But serving domestic needs is a key rationale for building a national plane. So, countries need to choose: they can have a healthy airline sector, or they can hobble those airlines with “buy national” purchase rules. The future health and competitiveness of Russian and Chinese airlines depends on being able to pick the best plane for their needs. If the Russian and Chinese governments force their airlines to purchase SuperJets and ARJ21s, they will likely damage those carriers. Of course, those are not fully open economies. The biggest problem for the CSeries is that Canada’s economy is modern and open. The government won’t force its airlines to buy national planes.

Second Thing To Do: Kill The Messengers. Transparency is a dirty word for any government or company (especially a government-owned company) with something to hide. The Suharto government took a heavy hand with IPTN critics, banning one magazine that reported the misdirection of $185 million in reforestation funds to IPTN. This pattern is repeating itself in Russia. The Economist August 23 article The Making of a Neo-KGB State says Russia’s FSB has been empowered to act against independent analysts and journalists that threaten Kremlin interests. Since the SuperJet is built by a Kremlin-owned company, this move definitely boosts its prospects. They don’t want reporters or industry analysts questioning the SuperJet business case or manufacturing plans or certification issues (whistleblowers: don’t eat glowing sushi). The plane’s Western customers and industrial partners are taking a faith-based approach to due diligence.

Three: Have Cash To Burn. Aircraft manufacturing means integrating other people’s components. More than the systems outsourced; much of the airframe comes from outside suppliers too. That’s how you build a competitive plane and leverage other people’s money. But it also means the manufacturer has a small margin to absorb top end risk. If they can’t sell the aircraft for the cost of its components, they lose money. Habibie’s view was that aircraft were a good business just because they were high value. He told the BBC, “I have some figures which compare the cost of one kilo of airplane compared to one kilo of rice. One kilo of airplane costs thirty thousand US dollars and one kilo of rice is seven cents.” Yet if an aircraft sells for $30,000/kilo but it costs $40,000/kilo to build, the company and national economy take a heavy blow.

These three lessons represent The Aircraft Industry Business Advice Book From Hell. But the real lesson is simple: Be Careful Choosing Role Models. There are basically two models for any emerging civil aerospace player. One looks to build national aircraft. The other seeks to build a broad portfolio of work, partnering with international players like Airbus and Boeing. In many ways national aircraft are enemies of globalization.

The problem is Embraer. It’s a superb success, with a bright future. But as a model for others to copy, it’s a disaster. It’s the only successful example in the world of an emerging producer entering this business at the top end, starting with complete aircraft. Embraer wannabes don’t remember that for 30 years Embraer was also a cash-devouring horror. They also don’t remember that the other countries and companies that wanted to be like Embraer burned through piles of cash and then failed anyway.

IPTN, of course, is the saddest example of a failed Embraer wannabe. Indonesia’s aviation market has lots of potential, and the country has a good combination of skilled labor and relatively low costs. It should be producing a healthy range of aerospace components and subcontract parts, working with a variety of international partners. But thanks to bankrupt dreams of a national aircraft, Indonesia now has no aviation manufacturing industry of any note. China, Russia, Canada, and anyone else with dreams of a national plane should study IPTN’s wretched enterprise closely.

We have no IPTN reports to update this month. Or ever again. But there are updates of the Rafale, C-17, Tiger, F-2, Super Puma, Avanti, and the Military Transport overview. A new report covers the HondaJet. Enjoy.

Yours, Until Lesotho Aerospace Makes Me CEO,

Richard Aboulafia

 

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  ~  Last updated on January 08, 2006