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Sunday, January 1, 2006


Giovanni de Briganti

The New Landscape

Paris--Whatever its eventual outcome, the U.S. Army's Light Utility Helicopter competition will go down in rotorcraft history as the catalyst for some of the most surprising and unexpected industry teamings of recent years.

Scrambling to win the competition's $2-billion-plus prize, European and U.S. manufacturers have all embarked on partnerships that would have been unthinkable only a couple of years ago.

Flexibility is one thing, and is to be admired in management, but up-ending decades-old strategies for the sake of winning a single program, even if it does cover 320 helicopters, makes one wonder just how committed these captains of industry are to the long term.

Without a doubt, the most unexpected link-up is between Eurocopter and Sikorsky, who have been slugging it out for decades on the world market, demonstrating extreme enmity and using tactics--Turkey is a good example--that would have made even Ali Baba and the 40 Thieves squirm in embarrassment had they become public.

An Obvious Logic

Eurocopter, thanks to its majority share in the international NH90 program, has been increasingly elbowing Sikorsky aside and racking up export orders. Yet, for the Light Utility Helicopter program, the two entered a joint bid, with Sikorsky being responsible for logistics support and Eurocopter supplying the helicopter. There is an obvious logic in this arrangement, as Eurocopter has never sold a helicopter to the Pentagon, while Sikorsky has no suitable design of its own.

Nonetheless, teaming Cain with Abel is fraught with risk. Sikorsky helps Eurocopter gain a foothold in the hitherto highly protected U.S. military market, while Eurocopter opens a new, and potentially highly lucrative, revenue stream for Sikorsky, a major competitor. And will future export buyers feel confident that they are getting their money's worth, or will they fear that the two helicopter manufacturers might have rigged the outcome of their "competing" bids?

True, Eurocopter is not officially a member of the Light Utility Helicopter team, which is headed by EADS North America (the U.S. unit of Eurocopter's corporate parent). It is not even mentioned in the team's Light Utility Helicopter press release, which also makes no link between the UH145 offered to the U.S. Army and Eurocopter's EC145. It is doubtful, however, whether this will be enough to disguise its role.

A second surprise--the decision by AgustaWestland and Bell Helicopter to enter separate, competing bids--was finally explained in late November, when AgustaWestland took sole control of the AB139 program, buying out Bell's share. But this also raises new questions about Bell's strategy, as the appeal of endless updates of 1960s designs will eventually pale.

Is Bell's unspoken goal to achieve a monopoly in the U.S. military market for light helicopters, thereby maximizing future profits by selling support and MRO services for a nearly 700-helicopter (320 Light Utility Helicopters and 368 Armed Reconnaissance Helicopters) fleet without the bother and cost of having to invest in new military products? If yes, this is a high-risk gamble, and means that Bell's long-term prospects in the international military market are now pretty dismal.

For AgustaWestland, the gamble is less risky but also offers smaller potential returns. The real prize for the company lies outside of the United States, where hundreds of old UH-1s need replacing by a modern helicopter that is not too expensive to buy and to operate.

A victory would give the re-designated A139 the ideal credentials to corner this market, but if Bell wins it will be so tied up producing 407s and 412s for the U.S. Army that it won't be able to cope with foreign orders, leaving this particular market to AgustaWestland, which has a license for the 412.

A final surprise was MD Helicopters' Oct. 6 decision to team with DynCorp and GENCO, rather than with Lockheed Martin as it had said only two months earlier. The official explanation is that Lockheed Martin's participation would have made the bid too costly, but this doesn't sound too convincing.

A Brutal Change

More likely is the fact that Patriarch Partners, MD's new owner, sees a go-it-alone bid as its best--and maybe only--chance of making a large profit from its investment, even though the strength of the competition means its chances of winning are, realistically, marginal. But that, after all, is what venture capitalists do for a living.

It is a no-brainer that, by completely revising its light and utility helicopter acquisition plans, and by giving its domestic industry only a few months to respond with new offers, the U.S. Army has brutally re-drawn the industry's competitive environment.

It has also, for the first time, allowed two new foreign competitors to gain a foothold in its home market, while not giving its domestic industry enough time to come up with new, competitive designs. Whatever the outcome of the Light Utility Helicopter competition, these two decisions will influence the future of the U.S. helicopter industry to a far greater degree than anyone could have anticipated a year ago.

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