Defence and Aerospace special report: Questions and Answers

Date: 18/10/01

By Laurence Frost

• Rainer Hertrich is President of the European Association of Aerospace Industries (AECMA) and co-chief executive officer of the European Aeronautic Defence and Space Company (EADS)

QUESTION: You recently said it's too early to assess the full impact of the 11 September attacks on EADS revenues. How can you be confident that the longer-term targets are still realistic? When do you expect the situation to become clearer?

ANSWER: The terror of 11 September has hit the aviation industry probably more than any other sector. Although it is too early to know all the future implications, we at EADS have taken all appropriate measures to stay on track, including freezing certain investments and extensions to capacity.

We hope to have a clearer picture in about three weeks' time regarding our Airbus deliveries in 2002. And we know the long-term future prospects of aerospace remain highly positive. Once the crisis is over, the commercial aircraft business can expect an annual 5 per cent growth in passengers and freight.

QUESTION: Are we likely to see a repetition of the 50 per cent decline in aircraft deliveries seen during the Gulf War?

ANSWER: No, I don't expect such a sharp decline. The recent levels of aircraft orders have been much more solid than a decade ago. Each year airlines have only ordered a number of aircraft equivalent to about 8 per cent of the fleet in service.

In the years leading up to the Gulf War orders peaked at a speculative 20 per cent of the world fleet. This was caused in part by over-ambitious leasing companies that are no longer around.

But the difference is not only a larger stability of the aviation industry. I also see a better political environment with governments taking steps to improve security, rebuild traveller confidence and providing financial assistance to the airlines.

QUESTION: If the 'war on terror' is a new kind of war, will it lead to the formation of a new kind of industry? Who are the potential winners and losers?

ANSWER: Any crisis also offers opportunities, of course. Whoever can meet the new challenges in the fastest and most effective manner will emerge from the current crisis even stronger than before. That applies to airlines, but it also holds true for the aerospace industry.

EADS certainly sees the new defence requirements as an opportunity. I am convinced that with our technologically advanced and innovative defence products we can meet the demand in the marketplace.

In recent years, we have concentrated our defence business on surveillance, reconnaissance, command and control, stand-off weapons, transport and fighter aircraft and helicopters. This change now seems to have received even greater confirmation.

QUESTION: Prior to last month's tragedy, Boeing appeared to be losing market-share to Airbus. Could a major US-led military campaign halt or even reverse that trend?

ANSWER: No, it couldn't. For the airlines it is the products that are decisive. And Airbus has the latest products, offering the most up-to-date technologies and the best commercial efficiency. This is exactly why in recent years we have succeeded in improving our market share from 25 per cent to 50 per cent.

QUESTION: As airlines cut jobs and slash new plane orders, can investors be absolutely certain that the Airbus A380 superjumbo will get off the ground in 2006 as planned?

ANSWER: The A380 development will continue exactly as planned. The market gives us the clear signal to continue our investment and stick to our plan of making the first deliveries early in 2006. More than ever before, cost reduction is on the airlines' agenda. The A380 will contribute to this effort and at the same time it will be possible to integrate the latest security standards into the aircraft.

QUESTION: What's the critical mass of orders that would guarantee a smooth take-off on schedule?

ANSWER: Last year we needed 50 firm orders to launch the A380 programme. We have achieved that aim. We now have 67 orders. Our next target is 100 firm orders to be reached at the end of the first quarter of 2002.

QUESTION: How many A380 orders have been cancelled or postponed since the attacks?

ANSWER: None. No A380 customer has cancelled or requested any postponement or rescheduling.

QUESTION: Airbus accounts for more than 60 per cent of EADS revenues; can increased military production really make up for a prolonged slump in civil aviation?

ANSWER: We are firmly convinced that only a healthy mix of civil and military business can guarantee the stability of an aerospace company. With total annual defence sales of 5 billion we are already the No. 2 in European defence.

But as we expand our Airbus commercial aircraft business, we also want to expand our defence business. For operational and technological but also for market reasons we want to increase defence up to 30 per cent of our total revenues.

QUESTION: Besides the fallout from the terrorist attacks, what are the main challenges facing the industry as a whole?

ANSWER: One of our main challenges in Europe is the low budgets and the lack of coordination for research and development, especially in defence. This has led to a serious competitive disadvantage for our industry. With OCCAR [the Organisation for Joint Cooperation in Armaments] and projects like the A400M military transport aircraft and the Meteor missile, the European governments have shown promising efforts in the right direction.

I'm also grateful that the European Commission has now decided to address the subject of better coordination in research and technologies. This is not only an issue for the industry; it'salso an issue for the European taxpayer. We must make better use of the limited resources that are available.

QUESTION: Airlines have complained that massive aid to their US rivals will distort competition. Could this aid also tip the competitive balance in favour of US aerospace companies?

ANSWER: It is clear to me that the immediate effects of the crisis cannot be shouldered by the airlines alone. Here emergency aid from the government is justified. And, of course, we need a level playing field.

The EU should not allow European airlines to face a competitive disadvantage. I welcome the decision of the European Commission to allow for temporary government support, but it seems to me that more needs to be done to ensure fair competition.

QUESTION: The tragedies of 11 September have prompted increased economic uncertainties as well as stronger desire for US-EU security cooperation. Will long-running trade disputes over subsidies be put behind us, or could they be brought to the fore?

ANSWER: I was in Canada and the US at the beginning of October. My observation was that indeed we are now facing a small window of opportunity for more transatlantic cooperation. And we should use it.

Security, for example, is no longer a national issue or a continent-by-continent issue. And NATO forces' interoperability can only be strengthened in a joint effort. This is more and more recognised on both sides of the Atlantic. The trade disputes did not play a part in any of my discussions.

QUESTION: How will increased EU cooperation on defence and security policy benefit the European industry?

ANSWER: Such increased cooperation on a European level is absolutely critical to maintaining an industrial base for European defence. The industry has restructured and continues to restructure - with the aim of improving its competitiveness. But none of the efforts on the industrial side will bear fruit if corresponding action is not taken by the European governments.

That is why we are pressing for a harmonisation of European procurement structures and joint European programmes. Industrial restructuring is creating the potential for economies of scale, but we really need the cooperation of European governments to exploit this potential.

QUESTION: Does EADS stand to gain on balance from a gradual move away from EU dependence on NATO?

ANSWER: I would not see it this way. The set of capabilities that have to be improved for effective European participation in NATO operations does not differ substantially from what you need for successful conduct of EU-led missions. In either context we are talking about command, control, and communication; intelligence; and strategic lift - just to name the three most prominent areas.

Industry works on the assumption that the force goal processes in NATO and the EU are complementary. Certain difficulties that have surfaced in the negotiations between NATO and the EU have not led us to expect a duplication of investments. In any case, Europe has to make the necessary investments in the most efficient way.

QUESTION: Are there still barriers to industrial consolidation that could be tackled at EU level?

ANSWER: The recent approval of the European company statute is a good step forward in facilitating industrial consolidation at the European level. But it is not sufficient.

If we really want industry to change from a national to a European company statute and if we want to create greater mobility of people inside Europe, the EU needs to back up the company statute with appropriate tax and - probably even more important - social security regulation.

QUESTION: What kind of benefits can companies such as EADS derive from EU-funded research programmes? Could they be better targeted?

ANSWER: EU research programmes are an integral part of our R & D activities now. We are matching EU funds with industrial R & D money. We are determined that the European aerospace industry can and should play a leading role in creating European added value.

The European Commission's proposed sixth research programme has confirmed our approach: aerospace has been selected as a priority. Apart from funding, this is also a political acknowledgement of the importance of aerospace in Europe.

But we do not consider the funds proposed by the Commission as sufficient to reach the goals of the Vision 2020 Busquin report. Also, in the light of the tragic events of 11 September, I think we should consider a stronger focus on security issues.

QUESTION: How has the current industry crisis changed the prospects for EADS acquisitions or partnerships outside the EU? Is this a good time to seek US partners?

ANSWER: As the prime contractor for everything that flies in European defence, I see ourselves as a strong partner in transatlantic cooperation. There is a window of opportunity for more transatlantic cooperation. And we should use it for the sake of military interoperability, but also with an eye towards efficiency, effectiveness and wise allocation of our talents.

Interview with Rainer Hertrich, president of the European Association of Aerospace Industries (AECMA) and co-chief executive of the European Aeronautic Defence and Space Company (EADS). Article forms part of a special report on defence and aerospace.