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:: October 2000 Newsletter ::

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Dear Fellow Number Crunchers,

The GE/Honeywell merger is dominating news. Will it go ahead? What will the impact be on aircraft markets and financing? How will this affect the balance of power between primes and subcontractors? For answers to these questions, look elsewhere. I’ve decided instead to write about Fun And Games With Privatization. Permit me to let you in on a depressing trend I’ve recently noticed. Governments throughout the world are entering the last stages of aerospace industry privatization, seeking to sell off their holdings in private companies, or to sell wholly owned industry assets. And to do this, they have discovered an effective tool: lying like drunken consultants.

To put it succinctly, governments are making promises that they are unlikely to keep. They are announcing unrealistic procurement efforts designed to pump up future revenue streams of companies in which they have a financial interest. They either promise new domestic production efforts, or announce new acquisition competitions, with the prize going to whoever buys a stake in the local aerospace firm.

Example? Once upon a time, Brazil decided it was going to privatize Embraer. Not very coincidentally, they also announced a large and dubious fighter procurement effort—something like 80 planes. Why not? People will link the two, believing that control of the national aerospace industry will lead to victory in the national fighter competition. We don’t think Brazil is going to buy any fighters until 2004, at the earliest, and all this talk about a Mirage 2000 production line at Embraer (yeah, the French fell for it) is tripe.

And back East, Korean Aerospace Industries is not exactly the most attractive property on the market; sort of the Baltic Avenue in the giant aerospace Monopoly game. Yet Boeing has been forced to make some kind of bid, as part of its efforts to sell F-15s to the RoKAF. To Boeing’s great and lasting credit, its bid was feeble and half-hearted. Yet if Boeing winds up with a stake in KAI and no F-15 contract, well, joke’s on them—unlike Embraer, KAI does not have a strong civil side. To quote Johnny Rotten, “Ever get the feeling you’ve been cheated?”

This process is also being repeated in Greece, with Dassault suddenly interested in Hellenic Aerospace as a way of displacing Eurofighter for the next Greek fighter buy. There’s no other good reason to own Hellenic Aerospace (unless you really, really like ouzo), but the French seem to think it will give the Rafale an inside track.

This trend isn’t confined to the marginal guys. In Europe, I have a strong feeling that many of the most enthusiastic statements about Airbus’s A400M are designed to prop up asset values of state holdings. Look at France, which should be a strong supporter of any European transport programs, and whose defense minister has made several “commitments” to buy the A400M. They say they will sign a multinational contract early next year, but France’s 2001 defense budget is devoid of A400M funding (they claim it will come out of a “general funds” account). The French Government, however, does have a share in EADS. The Government may sell that share, and talking about the A400M and its associated future revenue helps prop up the value of their asset.

Okay, this all sounds a bit duplicitous. But the defense industry can’t be about sunshine and lollipops all the time. Besides, consider the alternative. Taiwan has been trying to privatize AIDC for years now, with almost no success. Why? Because they began the process after the country placed orders for 210 new jet fighters. If they had linked this procurement effort to selling off AIDC, the company would have attracted numerous suitors. But because its privatization is going ahead without promises of government spending, AIDC’s charms revolve around a limited base of subcontracts and some product support efforts. Belatedly, the government has announced a new upgraded version of the Ching Kuo (see the report in the September supplement).

The upshot of all of the above? You guessed it. I needed something new to whine about. My problem is that thanks to the immense (but not illegal, of course) conflicts of interest that result from privatization efforts, it’s difficult to tell which program is real. How many fighters does Brazil really want? Will Europe really fund the A400M? It makes forecasting difficult.

About this supplement: We continue to be true believers in the F-22. The C-5 re-engining looks healthy, but numbers depend on C-17 production line issues. The Citation series looks incredibly robust. Premier One continues to suffer delays and setbacks (along with efforts to sell Raytheon’s bizjet unit). We still think the 717 is on borrowed time.

As for next month, we will update the NH-90, EH-101, F-15, Lynx, MD-11, F-2, King Air, and others. I apologize for not having a spare moment to update the business jet overview—just send me an e-mail if you want the latest numbers. Call with requests, and enjoy the fall foliage.

Yours, Until Teal Group Privatizes,

Richard Aboulafia
 

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