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Thursday, March 1, 2007

Eurowatch: For Eurocopter, Deliver, Deliver, Deliver

Giovanni de Briganti

PARIS — THE INAUGURAL JAN. 24 press conference of Lutz Bertling, Eurocopter’s new CEO, was a welcome breath of fresh air in an industry better known for its obfuscating and highly selective approach to public relations than for its forthrightness.

Clearly, it helped that Bertling was able to announce a historically high revenue and order backlog; that Eurocopter’s products, across the board, are selling like proverbial hotcakes, and that profit margins are projected to grow.

It also helped that Bertling, in a company "first," conducted his presentation and subsequent Q&A session in faultless English, which affords fewer opportunities to elegantly sidestep unwelcome questions than does the French language.

Whatever the reasons, Bertling was refreshingly open in acknowledging the crucial problem confronting Eurocopter: the main challenge for 2007, he said, is to "deliver, deliver, deliver." The company delivered 381 new helicopters in 2006 (up from 334 in 2005), and took orders for 615. To avoid being swamped by its order backlog, which now stands at a historical high of 11 billion euros ($14.2 billion) — or nearly three years of production, Eurocopter plans to increase deliveries by 20 percent in 2007 and again in 2008. (In fact, both orders and backlog are actually higher, as a 1.2-billion-euro Spanish contract for 45 NH90s signed Dec. 29, 2006 will be booked in 2007.)

"You cannot deliver 500-plus helicopters with a structure that was originally designed to deliver 200 helicopters," and in this respect the "Vital" restructuring plan, launched in March 2006 by his predecessor, Fabrice Brégier, has given the company a valuable head-start.

This will require an expansion of both workforce and factories: 500 new hires are planned for 2007, on top of the 1,200 in 2006, and 250 million euros are being invested to modernize factories in France and Germany and to complete a new one in Spain. Work is also needed to improve the international supply chain, Bertling said, and to shift more production costs into the dollar zone to avoid being caught out by exchange rate fluctuations.

The situation is serious. Prospective commercial operators are increasingly bothered by the long delivery times for Eurocopter products and may eventually buy elsewhere if they have to wait too long. Military operators are miffed by the delays in the NH90 program and some, like Finland, are demanding penalty payments for late delivery.

The NH90 problem, said Bertling, is essentially bureaucratic, as NAHEMA, the program’s executive agency, took longer than expected to certify the production helicopter, while Germany’s defense ministry, the first operator, took even longer to issue the military type certificate that is a prerequisite for deliveries to begin. The problem was compounded by late delivery of some government-furnished equipment.

On the international scene, Eurocopter will increase its industrial footprint in the United States, China, and India, and will focus on its two international development programs: the EC175 with China and the KHP with South Korea. Bertling didn’t beat around the bush when he said, in this respect, the challenge is managing technology transfer "so we keep tight control of what [foreign partners] get and what they don’t get."

The one issue Bertling openly evaded was the company’s 2006 profit, which he declined to state since it is traditionally announced by corporate parent EADS. He did, however, say that it will "not be lower" than the 212-million-euro operating margin it posted in 2005.

In fact, the availability of large amounts of money is of paramount importance if Eurocopter is to implement the vision Bertling outlined. Down the road, he said, Eurocopter wants to sell complete mission capabilities rather than just helicopters, by providing all the support needed by customers in a "you fly, we manage" package.

This vision will require, in practice, public/private partnerships in which the manufacturer finances all support equipment, spares, and support and recoups it over time by billing the customer in installments. But it requires money up front, as does the sustained research-and-development effort to maintain the company’s technological lead, and the increased investment required to expand production facilities.

The question is from where will this money come. Eurocopter logged a profit margin of less than 6.6 percent in 2005 (down from 7.3 percent in 2004). While Bertling expressed confidence that "Eurocopter has the means to invest despite the problems at EADS," it remains to be seen whether EADS will, in fact, be so accommodating given the financial problems at its Airbus unit.

Bertling is engaging, seems frank, and — as a company insider — knows the issues and problems facing Eurocopter. And, as the first German to head the company, he will probably be cut more management slack than would a French CEO. It now remains to be seen if he is effective enough as a corporate infighter to keep EADS’ hands out of Eurocopter’s till.

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