Uncategorized

Products/Airframes: The Will to Survive

By Giovanni de Briganti | March 1, 2007

FIFTEEN YEARS AGO, ITALY’S AGUSTA WAS HOVERING on the brink of insolvency, its corporate parent pushed into bankruptcy by the Italian government and its immediate prospects dimmed by the lack of a competitive product line and a lack of profitable contracts.

Today, AgustaWestland’s British and Italian operating companies are flush with orders. It is the most profitable unit of corporate parent Finmeccanica, and its biggest problem is producing enough helicopters to keep customers happy. How did this turnaround happen?

Measuring the full extent of AgustaWestland’s recovery requires a short detour through the company’s books, and specifically its financial results for the first nine months of 2006. Wholly owned by the Finmeccanica group, in which the Italian state retains a 33-percent share, AgustaWestland employs 8,800 people, or barely 15 percent of the group’s total workforce. It accounted for only 22 percent of group turnover, but generated 36 percent of its operating profits — 183 million euros ($237 million) on turnover of 1.97 billion euros ($2.6 billion). Moreover, through September 2006 it took 31 percent of the group’s new orders, and its order backlog of 8.6 billion euros accounts for 26 percent of Finmeccanica’s total backlog.

Advertisement

Agusta’s transformation into today’s AgustaWestland is also illustrated by the expansion of its product line, which now comprises both new variations on older designs, like the A109 Power, A109 Grand, A109LUH and A119 Koala, and brand-new products, like the AW139, its AW149 military derivative, and the BA609 civil tilt-rotor, in which it has kept a 25-percent share. AgustaWestland also makes military transport helicopters, like its EH101 and the NH90, in which it has a one-third share, as well as military designs derived from the original Westland Lynx. This is now moving into its third generation, with the Future Lynx being developed for the British Army and Royal Navy. Perhaps most significant of Agusta’s evolution is the fact that the next U.S. presidential helicopter, the US101, is based on the company’s EH101.

A third view of Agusta’s transformation is provided by its corporate makeover. Once limited to its Italian home market, AgustaWestland’s production facilities now include a fully owned British unit, Westland Helicopters, as well as an assembly facility in Philadelphia, while international partnerships include links with Japan’s Kawasaki and China’s AVIC 2.

Its acquisition of Westland gave AgustaWestland a near-monopoly on the British military market just as the British government began to outsource maintenance and support of military helicopters, to launch development of the Future Lynx family, and to prepare for the replacement of its fleet of Puma battlefield utility helicopters. Agusta also gained total ownership of the EH101 design — the only large military helicopter produced outside the United States.

Not everything was a success, however. Agusta dismally failed to export the A129 attack helicopter, a failure which former CEO Amedeo Caporaletti — known within the company as "l’Ingeniere" in reference to his engineering degrees and background — ascribes to the Italian government’s refusal of export licences for two customers that he said were ready to sign on the dotted line. (Others, however, say the A129 is too small, with insufficient weapon and fuel payload to meet military requirements).

The company also got involved in messy scandals, notably in Belgium, where disputes about money it allegedly paid to local politicians resulted in the murder of several local politicians, including a former minister. It was never proven that Agusta played a role, and the murders were never conclusively solved, but the "Agusta affair" became a byword in Belgium for financial/political scandals.

If, in retrospect, Agusta’s transformation looks straightforward, its implementation was anything but, as Caporaletti pointed out. When he was appointed Agusta CEO in mid-1991, Agusta had debts of about $1.2 billion-over three times its annual sales — and was leaking money from every pore.

Caporaletti first requested, and obtained, carte blanche from the government, making sure he had full authority to implement the changes he wanted to make. In early 1992, after convincing trade unions and management that there was no alternative, he pushed through a tough restructuring plan that transformed the company by focusing on its core helicopter business and cutting both factories and manpower.

This involved selling off the group’s electronics, space engineering, and fixed-wing aircraft businesses, and closing six out of 12 factories. "They had become impossible to manage, as local potentates ran their operations with no rationality," Caporaletti explained. His decision to set up company-wide centers of excellence makes better sense, he said, because concentrating production increases the knowledge and know-how of each unit, and thus its industrial effectiveness.

Improbably, this plan was implemented even as the Italian government first liquidated EFIM, the state-owned holding company that owned Agusta, and then waffled before working out the financial details, which eventually led to the transfer of Agusta’s ownership to the Finmeccanica group.

After he took over, Caporaletti was obsessed with delivering at least one A129 to the Italian army each month. The delivery payment was the only thing that allowed the company to pay its bills.

The plan’s results were impressive, if not immediate, and by 1996 Agusta posted a profit of 141 billion lira on sales of 903 billion lira, compared to a 1991 loss of over 170 billion lira on sales of 640 billion lira. Over the same period, the workforce was reduced from 9,350 employees to about 5,000.

The company was careful to maintain its R&D spending even as it cut expenses and payroll. "The number of workers involved in R&D remained stable even while total manning was cut in half," noted Caporaletti, and this became the foundation on which Agusta’s recovery was built.

The biggest challenge Caporaletti faced when he took over was simply to keep Agusta alive. Banks weren’t helpful. At the time, his constant obsession was to make sure that at least one A129 was delivered to the Italian army each month. The delivery payment was the only thing that allowed the company to pay its bills.

But it wasn’t enough. Each A129 delivery generated a cash payment of 25 billion lira, but as monthly running costs amounted to 20 billion lira, the balance wasn’t enough to pay for investment, R&D, and other expenses. Caporaletti found extra cash by pledging the company’s notable art collection as security for a bank loan. The art works were eventually recovered once the loan was paid off and one — a large bronze statue — now graces the entrance to the company’s Vergiate, Italy plant.

Things got so bad at one point that, instead of cash, Agusta accepted a shipment of tropical wood from a Brazilian customer who couldn’t pay in cash for his helicopter. That wood is now the floor of the executive dining room at Agusta’s headquarters in Cascina Costa, near Milan.

While sometimes reverting to these age-old practices, Agusta also remained in the forefront of managerial innovation. "We were the first aerospace company to introduce SAP software in 1993, even if we couldn’t really afford it," Caporaletti said, adding that he negotiated a deal that limited immediate cash outlays on the program at about $1,000. It proved a good investment, he said, as the SAP program contributed to the high profit margins that eventually made Agusta’s financial recovery possible.

Another issue that continues to generate friction is the recurring enmity between AgustaWestland and Eurocopter, its partner in the NH90 program. Much of this can be traced to the personal antipathy between Caporaletti and Jean-François Bigay, the first CEO of Eurocopter. But a lot is also due to the fact that both companies still try to push their own proprietary helicopter (EH101 or Cougar) to the same customers they are nominally courting with their jointly-owned NH90.

Relations appeared to improve when Fabrice Brégier began his 30-month tenure as Eurocopter CEO. "A very capable man," said Caporaletti. "I would have liked to hire him myself." But this proved short-lived, and AgustaWestland recently began a legal challenge to Eurocopter’s 2006 contract to supply EC145s to the French Gendarmerie Nationale, claiming the specification was skewed in Eurocopter’s favor. This is unlikely to improve relations, especially as the contract was signed on the watch of Lutz Bertling, who has since become Eurocopter CEO.

AgustaWestland is making better progress in the United States. In addition to its long-standing ties with Bell Helicopter, AgustaWestland is also teamed with Lockheed Martin to market the EH101 to the Pentagon. To date, the EH101 has competed for the "Marine One" presidential helicopter, which it won, and for the U.S. Air Force CSAR-X combat search-and-rescue helicopter, which it lost. The partners have challenged that.

In early February, AgustaWestland also signed an MOU with Boeing to cooperate on the next-generation Chinook helicopter and other future rotorcraft opportunities, leaving Sikorsky as the only Western helicopter manufacturer with which it has no direct relations. AgustaWestland and Boeing said they will initially work together to jointly market the CH-47F to the Italian army, but will also cooperate on future opportunities for new helicopter sales in Italy and the United Kingdom, where AgustaWestland will be the prime contractor.

All in all, there is no doubt that AgustaWestland has more wide-ranging trans-Atlantic agreements than any other helicopter maker, and that these are likely to generate substantial future business. AgustaWestland, like Eurocopter, can only benefit from the Pentagon’s reluctance — or inability — to finance new rotorcraft development programs, and recent wins by both companies on the U.S. military market (US101 and LUH, which Eurocopter’s EC145 won) will undoubtedly be followed by others.

Agusta’s purchase of Westland, its erstwhile partner on the EH101, has also been a financial success. Just in the past two years, it has already generated new business worth £2.3 billion ($4.5 billion) in Britain.

It won the first five years of a 25-year contract to provide support for the EH101 Merlin Mk.1 and Mk.3 fleets, operated by the Royal Navy and the Royal Air Force, respectively. That is valued at £450 million.

It will develop and produce 70 Future Lynx, work valued at £1 billion.

It will upgrade 30 EH101 HM Mk.1s, with an option for a further eight. That’s worth about £400 million.

It will upgrade the Apache AH Mk.1 sighting and targeting system, a job worth £194 million.

It has a five-year contract for future support of the U.K. Defence Ministry’s fleet of Sea Kings, worth £300 million.

That’s not a bad return on the £1.06 billion Agusta paid when it took over Westland in 2004. Further U.K. military business is likely as the Defence Ministry looks at ways to make up its large shortfall in helicopter capabilities and replace its aging Puma fleet.

Agusta also displayed considerable flair in the way it managed its relationship with Bell, specifically in making what increasingly looked like a financial coup when it bought out Bell’s share in the jointly designed AB139 (now the AW139), which promises to be its most profitable product. The market for both the AW139 and its AW149 military variant is estimated to exceed 1,000 units over their program lifetimes.

Yet, AgustaWestland paid Bell a paltry $95 million for all the rights to the AW139, while at the same time keeping its 25-percent share in the BA609 tilt-rotor — with the option to boost its share up to 40 percent of the program if it so decides. And it probably will so decide, as Caporaletti is also a firm believer in the potential of the civil tilt-rotor, despite the problems that have dogged the development life of its military counterpart, the V-22 Osprey. Bell and Agusta have now each flown one prototype, and Caporaletti is convinced the BA609 has considerable potential both as a VIP transport and for special-mission roles like maritime patrol, search and rescue and coastal surveillance. It also could find a market as a training aircraft for V-22 aircrew.

The BA609 has the same footprint as a Bell 412, and its combination of high speed and 12-passenger capacity makes it suitable for a wide variety of missions. "But it will find its market once it really appears on the market," said Caporaletti. In the meantime, the partners are working to improve safety, notably by ensuring that the three computers that manage transition into and out of the hover are as reliable as possible. Not only are two of the computers mounted in parallel, with a third as back-up, but each computer even has different processors, so that a design fault in one won’t affect the others.

Looking to the future, Caporaletti sees a series of incremental improvements that will keep the company competitive while future technologies are shaken out. One guiding principle is to "give our customers the productivity improvements that we will achieve," and another is to do things that others aren’t doing. This would include, for example, developing "smart" auto-adaptive rotor blades, new transmission designs, and user-friendly initiatives lumped together under a "Friendcopter" label, like all-weather capabilities and innovative ways to avoid reference loss when flying in fog or in no-visibility conditions. In a word, the goal is to make the helicopter user-friendly.

Caporaletti guided Agusta’s transformation from loss-making industry laggard to financially successful industry leader without any recourse to outside financing. Today’s AgustaWestland is financially secure, with a wide product range and large customer base, and a strategy that is opening up new markets without diluting its technological expertise.

The challenge for the company’s future managers is to grow the company across the breadth of the business, without stumbling on any of the self-made obstacles that are inevitably bred by success. In this respect, their task is probably harder than the one faced by Caporaletti, who — despite all the difficulties — benefited from a clear and immediate danger of failure that kept him, and the rest of the company with him, on their toes.

April 2007:

After-Market Round-Up: We corral the latest hot products and development trends from equipment and component makers.

Covering Your Fanny: We take a close-up look at what goes into safety certification of civil and military helicopter seats and the latest efforts by manufacturers to keep your keester covered.

X-Hawk: We take a close-up look at Bell Helicopter’s partnership with Israeli developer Urban Aeronautics on this innovative "fancraft" technology.

Leaning Schweizer: The efforts of this small-helicopter maker (and "skunk works" for Sikorsky) offers a case study in what Lean Manufacturing can-and can’t-do.

Survive: We look at the latest in helicopter underwater emergency training and other offshore safety issues.

40th Anniversary Issue

May 2007:

A Look Back: Rotor & Wing’s former editors and contributors look back at 40 years of covering the rotorcraft industry, and some of the characters we encountered along the way.

A Look Ahead: Our current editorial team explores what the next 40 years may bring for the industry in:

Airframes: Including the latest of Bell’s 429, Sikorsky’s X-2, and aircraft on the drawing boards at other manufacturers.

Engines: Including new turbine developments and the drive to put a diesel on a rotorcraft.

Transmissions: The heart of the matter: What can be done to better match engine performance and airframe demands?

Helicopter Training: We answer the question, what is the next generation of flight training for rotorcraft pilots?

From the Field: The latest news from flight schools and training-device makers.

From the Factories: The latest training news from helicopter manufacturers.

advertising sales reps

Eastern U.S./Canada

David Bowling

4444 Westgrove, Suite 315

Addison, TX 75001

Tel: 972-735-9077

Fax: 972-713-0621

dbowling@accessintel.com

Central U.S./Canada

Randy Jones, Publisher

4444 Westgrove, Suite 315

Addison, TX 75001

Tel: 972-713-9612

Fax: 972-713-0621

rjones@accessintel.com

Western U.S./Canada

Norman S. Schindler

5236 Colodny Road, Suite 108

Agoura Hills, CA 91301

Tel: 818-707-1133

Fax: 818-707-2313

norman.schindler@aopa.org

International

James McAuley

Cortijo LoCota, 42, Casa Las Flores

Santa Rosalia, 29551 Campanillas Malaga, Spain

Tel/Fax: +34 952 118018

jimediaservices@aol.com

Receive the latest rotorcraft news right to your inbox