Tag Archives: Aerospace & Defence

September 16, 2012 · 10:00 am

EADS and BAE Systems merger talks

I first learnt about the merger talks between EADS and BAE Systems via a tweet from my brother:

I then suggested that the possible kind of “last supper” might have been the “Defence and Security Co-operation Treaty” signed almost 2 years ago between France and United Kingdom.

Last supper. First, what is that “last supper” my brother was referring to? It refers to a meeting that was called in 1993 by William Perry, then US Deputy Secretary of Defense, in which he explained defence contractors the post-Cold War defense strategy which called for defense industrial base consolidation. In the chart below, you can see the spree of mergers and acquisitions that took place in the following years:

US defence contractors consolidation after “last supper” in 1993.

In Europe at the time there was a similar consolidation trend, which ended in mainly 3 big European aerospace and defence groups: EADS, BAE Systems and Finmeccanica.

Setting the record straight. Prior to the definition of those 3 groups, several discussions took place at the end of the 90s between different companies. Some articles that I have read about the EADS and BAE talks mention that after conversations between German DASA and British Aerospace failed in 1998 (when BA opted for acquiring GEC Marconi), DASA underwent the acquisition of the Spanish Construcciones Aeronáuticas SA (CASA). Well, this is not true. It never happened. DASA merged with French Aerospatiale. Some months later CASA joined the merged when EADS was created. This is well reflected in many other articles. Just as a side note: Tom Enders, current EADS CEO took a role personally in those conversations between DASA and BA already in 1998.

Balance between Defence and Civil business. Most of the articles that we can read today mention the strategic goal of EADS in balancing its defence portfolio with the civil one. Two years ago I wrote a post which included some graphics comparing the then largest world defence companies. I compared the relative size of each company and how defence-oriented their businesses are. Today, I will make use of one of those graphics to show the profile of the two companies, EADS and BAE Systems to weigh that strategic fit:

EADS vs BAE. Size and defence profile.

Stock Market response. The merger talks were announced last Wednesday 12th. The closing prices of each company the previous day were:

  • EADS: 29.67€. This is, a market value of 24.3bn€.
  • BAE Systems: 328pc. This is, a market value of 13.3bn€ (taking that day exchange rate of 1.25).

That is, the combined merger would be 37.6bn€; 64.6% coming from EADS, 35.4% from BAE. However, the announcement mentioned a 60/40 split of the parent company. That is, the announcement pointed investors that either EADS was overvalued (up to +17.7% to get a 60/40 split keeping BAE’s value constant), BAE undervalued (up to -21.5% to get a 60/40 split keeping EADS’ value constant) or somewhere in between.

In the following days, EADS price fell down and then stabilised, BAE went upwards. On Friday they closed at:

  • EADS: 25.31€. This is, a market value of 20.7bn€.
  • BAE Systems: 347pc. This is, a market value of 14.1bn€.

That is a split of 59.5%/40.5%… thus, the market understood EADS was overvalued around -15% while BAE was undervalued around 6%.

Self praise. Taking that price in which now EADS sells, 25.3€ (undoubtedly guided by the 60/40 split), I wanted to bring back another post I wrote about a year ago. In that post, I mentioned that I valued EADS at a price of 24€… Not bad :-).

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December 18, 2010 · 11:00 am

Commercial aircraft market size after discounts (update)

In an older post I already made an analysis of the aircraft discounts related to the published list prices (by the way, Boeing just raised its list prices 5.2% a couple of days ago). In that case, I used the revenues and deliveries of Boeing in the previous 3 years (38% discount was the result!).

Using that information, now that the latest market forecasts both from Airbus (Global Market Forecast) and Boeing (Current Market Outlook) are available, we can say that the real market size in the next 20 years will be in the order of 2,100bn$ (average of both forecasts in 2010 dollars).

Flow of airplanes

Another very interesting feature that Airbus published in last year’s GMF (it is not yet in this year’s publication) and Boeing used for this year’s CMO is a graphic showing the dynamics of aircraft. In it you may understand how from today’s fleet, adding new deliveries, retiring old aircraft, converting some from passenger to freight transport they arrive to the forecasted fleet in 2029.

I include below both graphics.

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December 17, 2010 · 11:00 am

Airbus vs. Boeing, comparison of market forecasts

Airbus announced on Monday its latest Global Market Forecast (PDF, 4.6MB) for the 20-year period 2010-2029. Media has already highlighted the main points: ~26,000 new aircraft will be delivered with a market value of ~3,200bn$.

Some months ago, Boeing published its equivalent study, the Current Market Outlook (PDF, 8.2MB) for the same period.

It is interesting to compare the two of them. In that way we can see how each other treat competitors’ products (mainly A380) and how they try to shape the market and send messages to it (point-to-point & hub-spoke).

However, it is not easy to compare the studies as they use slightly different segmentations, disclose in different ways the value of aircraft for the segments (list prices) and is not always clear how to discount freighter aircraft from global figures. I dig for some time into those numbers and arrived to the following table:

Comparison of Airbus GMF and Boeing CMO 2010-2029.

Some comments on the comparison:

  • Boeing sees demand for 13% more aircraft with a 10% more value.
  • However, this higher demand is not applicable to all segments: Boeing sees ~60% less A380s or equivalent being delivered over the next 20 years, while 18% more single aisle (A320s) and 12% more twin aisle (A330/A350s).
  • Boeing plays down A380 potential, but sees a very similar number of RPKs (“revenue passenger kilometer”), that is, the number of paying passenger by the distance they are transported. Airbus forecasts for 2029 12.03 RPKs while Boeing forecasts 12.60 (in trillion).
  • The difference of less than 5% in RPKs means that out of the 13% difference in aircraft deliveries over 8% comes from the different business model each company is trying to push.
  • Finally, we can see that Boeing uses again higher average prices for smaller aircraft and a lower reference price for A380s.

Enjoy the two documents, differences apart, they gave a very good piece of information and insight about the market.

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December 5, 2010 · 12:00 pm

Home

By now, most of you are aware that I moved recently to Toulouse. Some of you may have read about the process of finding my new flat.

I live in the Rue du Cimetière Saint-Cyprien, close to the city centre. Going back and for to work takes about 20 minutes, there is traffic as they say here, but nothing compared to larger cities.

My street.

The flat is what they call a T3; this is a living room plus 2 bedrooms. The kitchen is way larger than my cooking skills will ever ask for. It has an open-air private parking lot…

… but really, what makes me call it home is this view:

Sweet home.

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July 21, 2010 · 12:00 pm

Boeing forecast for A380

The last two issues of Boeing’s Current Market Outlook, included a slide in which Boeing wanted to prove that their forecasts have been more accurate in the last 10 years. They compare actual aircraft demand versus both Airbus and Boeing forecasts in the year 2000.

Boeing Current Market Outlook, different views.

I find it interesting that all segments are described as such, segments: “Single-aisle”, “Twin-aisle”, “Large”… except for Airbus forecast in which Boeing introduces the model “A380”. As if wanting to point that Airbus was wrong in its A380 forecast… as if wanting to steer demand.

Let’s see the numbers:

  • Actual demand (2000-09): ~300 aircraft.
  • Boeing forecast (2000-19): ~700 aircraft, assuming equal split (among the 2 decades): ~350 a/c in 2000-09.
  • Airbus forecast (2000-19): ~1,300 aircraft, assuming equal split: ~650 a/c in 2000-09 (although A380 first flight took place only in April 2005).

As of today, Airbus has sold 234 A380s, including the latest 32 from Emirates. The prospects for the aircraft seem brighter as operators started operating it, on the other hand Boeing 747-8 orders have stalled since 2007.

A bit of history.

Yesterday, I was digging into back materials and I found two interesting pieces. Both from Boeing’s website in the year 1996 (using the way back machine). The first one is from a webpage about delivering value it could be read:

“In an industry defined by continual change, customers expect Boeing to help them prepare for the challenges ahead. That’s why we work closely with customers to understand their long-term requirements.

Customers have expressed interest in many potential airplanes, including:

  • An airplane smaller than the 737-600, seating 80 to 100 passengers.
  • An airplane larger than today’s 747-400.
  • A capable and cost-effective supersonic jetliner.
  • Derivatives of current models.”

Of those potential airplanes: we have seen the Embraer 190, the Airbus A380, derivatives and the only one that never came true was the supersonic jetliner…

Artist image of Boeing Sonic Cruiser.

The other piece is from a news release on the occasion of the Farnborough air show of 1996 (2010 edition is taking place right now). There, Boeing stated:

“Most major aerospace companies agree that airlines will require 500 to 700 airplanes capable of carrying more than 500 passengers. Boeing forecasts 500 airplanes will be needed by the year 2015.

Much of the demand for these very large airplanes will be generated by steady growth in air travel to and from Asia, and by capacity constraints at some of the world’s largest airports.

The 747-600X, with its ability to carry 548 passengers on routes up to 7,750 nautical miles (8,900 statute miles or 14,350 km), is designed to fill this market need. It will allow airlines to accommodate traffic growth without increasing the number of departures scheduled for busy airports.

During the next 20 years, airlines also will need approximately 600 airplanes capable of carrying between 400 and 500 passengers.

The Boeing 747-400 and 747-500X are designed to fill this market need.”

At this point it is useful to remember that in 1993 Boeing together with Airbus consortium companies started the feasibility study for the Very Large Commercial Transport (VLCT). Boeing left the joint study two years later. Nevertheless, still in 1996 it stated in its website that demand of aircraft carrying above 400 seats (747 and A380 of today) in the following 20 years would be between 1,100-1,300 planes, very close to Airbus forecast of the year 2000. The reasons behind that demand were the same Airbus argues nowadays: growth in Asia, constrains in largest hubs…

Later on, Boeing changed its forecast down to 700 aircraft.

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July 20, 2010 · 12:00 pm

Aircraft discounts and new entrants

Boeing has recently unveiled its latest Current Market Outlook (CMO): a commercial aviation market forecast for the next 20 years. It calls for 30,900 new aircraft deliveries worth 3.6 trillion dollars. Today, I wanted to write about aircraft discounts and the possibility of having new entrants.

Boeing Current Market Outlook.

Both Boeing and Airbus give their market forecast and backlog figures in what they call as list prices. If you take figures from CMO, you will reach average list prices for regional jets (31M$), single-aisle (79M$), twin-aisle (230M$) and large aircraft (306M$). These figures are in accordance to the prices published in their website (dating from 2008).

However, if you take their published numbers of deliveries each year and use the same prices, you would come to much higher revenues figures than the ones they publish in the year-end results: this is because aircraft makers actually sell the planes at a much lower price. How much lower?

Discounts

I took the figures of revenues, orders and deliveries of the last three years and tried to reach what would be the corresponding discount Boeing’s customers manage to get on average.

I assumed that new orders come with a 3% down payment in the year of the booking, while the remaining cost I assumed that was paid on the year of delivery (for simplicity I didn’t consider more intermediate payments, the 3% figure was taken from the AIAA paper “A Hierarchical Aircraft Life Cycle Cost Analysis Model” by William J. Marx et al.). I also used estimated figures for Boeing Commercial Aviation Services ranging from 2.2bn$ to 3.3bn$.

With these assumptions, I concluded that the average discount that would best replicate revenues figures for Boeing Commercial Airplanes with a minimum error was: 38%! (being the errors in revenues of: 0.05% for 2009, 3.2% for 2008 and 0.5% for 2007).

Thus, when figuring out the value of those 30,900 aircraft we could rather estimate it at 2.2 trillion dollars (instead of 3.6 trn$).

New entrants?

Randy Tinseth, BCA’s VP Marketing, was quoted in Flight Global saying that he expected at least one more competitor in the single-aisle segment. If there are more competitors, competition is going to be tight.

Today Boeing Commercial Airplanes and Airbus Commercial yearly revenues together approximately account for 70bn$. If their revenues are to grow with Boeing’s forecasted world airplane fleet growth of 3.3%, along the next 20 years the revenues of both companies combined would amount to 1.94 trillion dollars.

Considering that the whole market, factoring in discounted prices, was going to be 2.2 trn$, this leaves the rest of competitors a share of the pie of about 250bn$ for the next 20 years (excluding regional jets), this is just 11.4% of the market.

If we look at it on a per year basis: 12.5bn$ a year for all new entrants (CSeries, Embraer, MS-21, SSJ, C919, Koreans, Japanese…) would mean about 250 aircraft a year (compared to the ~380-400 single-aisle that each Boeing and Airbus are delivering per year).

There is room for one commercial success comparable to the 737 or A320 family, but there is not room for two… maybe this is why Randy says “one or two of those guys into the mix” (despite of the many more new possible players).

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July 15, 2010 · 10:00 am

Project managers and Pencils

Today I was attending a project management course at Airbus. After some introductions, the teacher came to the always controversial (within such a technological company) comment that “the project leader needs to have experience in project management not in the technical issues related to the project”… she then cited aircraft as an example: “nobody within Airbus may know every technical detail of an aircraft which counts with hundreds of thousands parts, yet there is someone managing its development…”

That example seems very clear. Tonight, while listening to a TED Talk on the exchange of ideas, by Matt Ridley, I got the thread to a way better example: that is the essay “I, Pencil: My Family Tree as told to Leonard E. Read” by Leonard E. Read, which can be found at the Library of Economics and Liberty.

I believe this a much better example because of exactly the same reasons Mr. Pencil gives:

“[…] I have a profound lesson to teach. And I can teach this lesson better than can an automobile or an airplane or a mechanical dishwasher because—well, because I am seemingly so simple.

[…] Simple? Yet, not a single person on the face of this earth knows how to make me.”

Then, the pencil goes explaining where all its components are coming from…

“[…] My family tree begins with what in fact is a tree, a cedar of straight grain that grows in Northern California and Oregon. Now contemplate all the saws and trucks and rope and the countless other gear used in harvesting and carting the cedar logs to the railroad siding. Think of all the persons and the numberless skills that went into their fabrication: the mining of ore, the making of steel and its refinement into saws, axes, motors…”

If it’s clear that nobody knows how to make simple pencil, clearer will be for any other case of a more complex product.

There is indeed a Mr. President of the pencil company, there may even be a Pencil Programme Manager, but as Pencil says: “There is a fact still more astounding: the absence of a master mind, of anyone dictating or forcibly directing these countless actions which bring me into being.”

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April 2, 2010 · 8:00 am

Aerospace, a high-tech sector in Spain

Two years ago, there was a televised debate prior to the general elections in Spain. I remember I was watching it with friends and the incumbent president said “Spain is the leader country in the technology of air refuelling aircraft”. Since those friends watching the debate with me and I work in the aerospace sector we appreciated the comment.

Many things have happened since them, but one has not changed: aerospace sector is one of the most technologically intense in Spain.

For this post I am using mainly two sources: 2008 annual report from ATECMA (Asociación Española de Constructores de Material Aeroespacial, now replaced by TEDAE – Asociación Española de Tecnologías de Defensa, Aeronáutica y Espacio; 2009 report is being cooked) and 2009 report from COTEC (a foundation for technological innovation, “Informe Cotec 2009“).

I already mentioned in a previous post the size of aerospace sector in Spain: 5,577M€ revenues in 2008. In the last 10 years aerospace revenues in Spain have trebled. In 2008 Spanish GDP was about 1,088 bn€, so aerospace sector weighed 0.51% of Spanish economy.

Aerospace sector revenues and R&D evolution.

Regarding the employment, there were 36.160 employees of which over 15,000 were graduates, engineers and managers; 41% of the workforce consists of highly qualified employees. The employment of the sector has been doubled in the last 10 years.

Aerospace sector has presence in 16 regions, with the highest contribution from Madrid (63% of revenues and 57% of employment).

Aerospace sector revenues and employment per region.

There were 335 companies: 6 employing over 1,000 workers and 318 SMEs.

The sector had a positive trade balance of 3.6bn€ (while Spain has a large negative trade balance, of about 100bn$ prior to the crisis, now around 70bn$, 4.5% of GDP).

Aerospace industry is a dual industry: companies involved in it develop both civil and military products. The weight of each depends on the different years, but on average Spanish aerospace industry is 60% civil and 40% military.

After this brief description of some facts (see ATECMA report for a more detailed view of the sector), I want to remark the technological intensity of the sector.

Aerospace sector invests about 10-15% of its revenues in R&D. This is by itself an impressive, figure: Spanish economy as a whole invested in 2007 1.27% in R&D, thus aerospace invests 10 times as much as the economy average. If we said that the weight of the sector was 0.51% of Spanish economy, the aerospace R&D represents 5% of national R&D investments. Even more, if we only count R&D executed by companies, aerospace R&D contributed with 8.5% of total private R&D.

I included in this post the report from COTEC because it makes a distinction among the different sectors dedicated to technology in Spain: manufacturing vs. services, and high technology vs. medium-high. It uses categories derived from INE (Instituto Nacional de Estadística), and there we see 6 sectors classified as “High Technology Manufacturing Sectors”:

  • Pharma
  • Office material and computers equipment
  • Electronics components
  • Radio, TV and communication devices
  • Medical, precision, optics devices and watches
  • Aerospace

R&D investments of high-technology sectors.

Combining the data from this report with data from ATECMA (using 2007 figures for comparison with COTEC), we reach the following findings:

  • Aerospace sector revenues represented 15% of high-tech manufacturing sectors.
  • High-tech manufacturing sectors invested 1.3bn€ in R&D in 2007, this is 4.5% of their revenues, or 10% of total R&D in Spain.
  • Aerospace sector R&D represented 49% of high-tech manufacturing sectors R&D (!).

Indeed, it seems a high-tech sector.

If you wish to compare Spanish A&D with other European countries, please see the ASD reports (AeroSpace and Defence Industries Association of Europe).

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February 27, 2010 · 4:56 am

Go and get married…

Tomorrow I will be attending the birthday party of a friend who is getting married this year. In that party there will be another friends who will be getting married as well this year. I have yet other friends getting married this year as well. First thought: “Javier, you are in the age where most of those around you get marry…”.

Second thought: weddings cost money, lots of money. And they do not only cost money but produce many exchanges of cash from one side to another: Buying dresses, rental of suits, nuptial cakes, rental of luxury cars, hotel rooms and saloon, expensive menus, free drinks, buses back and forth for the invitees, professional photographers, flowers, hundreds of haircuts, long lists of gifts from El Corte Ingles, honey moon trip to Bali, musicians (with the corresponding cannon to SGAE, it couldn’t be otherwise…), a voluntary donation to the church…

The Federación de Usuarios-Consumidores Independientes (FUCI) releases every year a study of the cost of a wedding per region and how much each item is costing. The latest study dates back from 2009.

From the study we learn that in 2009 a wedding cost around 18,380 euros on average. They were most expensive in Madrid, and the average cost had decreased 11% from 2008.

The study takes into account the expenses incurred by the ones organising the wedding. Can we assume that those attending it will incur in as many costs in gifts, haircuts, cleaning of suits, hotel rooms, transport, etc…? (This hypothesis comes from the not written rule which states that presents should aim to account at least for the same value of the menu which is ~50% of the cost incurred by spouses-to-be, the main assumption is in the other costs incurred by invitees -transport, hotel…). If so, let’s settle the turnover of a wedding in 35,000 euros.

How many people do get married in Spain in a year? From 2006 to 2008 the average was 204,000 weddings, with a slight decrease of 3.4% from 2007 to 2008.

Now the math is already there: this industry generated in 2008 around 7,000 million euros. Is this much? The same year aerospace industry in Spain had a consolidated turnover of 5,577 million euros. So the wedding sector weighs 25% more than the aerospace sector in Spain or around 0.7% of Spanish GDP (let me not enter in this post in the discussion of the value added of the sector… I still want to get invited to those weddings).

In line with the recent campaign “esto solo lo arreglamos entre todos”, my contribution: please encourage marriages and do get married!

I have a good friend who used to be quite against marriage. I hope this may help turning his opinion.

Aerospace and Weddings, value-adding and value-requiring sectors.

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February 12, 2010 · 1:54 am

Augustine’s Laws

Last summer I read a book, a classic: “Augustine’s Laws” by Norman Augustine. Norman served in many positions both in the Administration (Under Secretary of the Army) and in the Aerospace & Defence industry (CEO of Lockheed Martin). Lately he lead the Committee that was reviewing the US Human Space Flight Plans.

I first learnt about this book from a teacher in Seville in 2006. He used a couple of his graphics in the course. One was plotting the trend of fighter aircraft acquisition costs per unit. I remember that the extrapolation of the trend pointed that somewhere in 2054 the whole DoD budget would allow to procure one single aircraft, that would have to be shared by US Air Force and Navy, with the 29th February of the leap years availabe for the US Marines.

Since that moment I wanted to read it, and it was only 3 years later that I had the opportunity to do so. The book reviews A&D programs, especially their mismanagement and failures from the Wright brothers times till the early 80’s, when the book was written. The book is hilarious. Really. Let me show you this by concatenating some of its “findings”:

  • The first one was commented above: aircraft are more and more costly with time.
  • At the same time aircraft developments turn in aircraft always becoming heavier than initially designed, producing more capable and heavier aircraft.
  • Another trend points out that avionics and electronic components are of greater importance in the aircraft of today. Wright brothers didn’t make use of avionics or electronics, however in the 80’s the percentage of OEW dedicated to them was around 20%, and increasing.
  • We also find that electronic components themselves become smaller and cheaper with time (just think of room-size computers of decades ago compared to today’s smart phones).

Thus we find ourselves in front of a paradox: Aircraft that will be heavier and more expensive, but that a certain point will be entirely made of avionics and electronic components which are lighter and cheaper with time! How can this be? As Augustine points out: engineers came to the rescue, they came up with “something” that it’s very expensive, doesn’t add weight and helps to solve the paradox without violating 2nd law of Thermodynamics. They came up with software. Neverending of lines of software… which also contribute to delay developments.

Here you may read the different laws, I’ll just copy the ones I like the most:

  • Law Number V: One-tenth of the participants produce over one-third of the output. Increasing the number of participants merely reduces the average output.
  • Law Number VII: Decreased business base increases overhead. So does increased business base.
  • Law Number XIII: There are many highly successful businesses in the United States. There are also many highly paid executives. The policy is not to intermingle the two.
  • Law Number XXVI: If a sufficient number of management layers are superimposed on each other, it can be assured that disaster is not left to chance.
  • Law Number XXXII: Hiring consultants to conduct studies can be an excellent means of turning problems into gold, your problems into their gold.
  • Law Number XXXVII: Ninety percent of the time things will turn out worse than you expect. The other 10 percent of the time you had no right to expect so much.
  • Law Number XLIV: Aircraft flight in the 21st century will always be in a westerly direction, preferably supersonic, crossing time zones to provide the additional hours needed to fix the broken electronics.
  • Law Number LI: By the time of the United States Tricentennial, there will be more government workers than there are workers.

Clearly this is not something I learnt today, but then, last summer I didn’t have a blog to comment on this. Enjoy the book.

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