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Tuesday, July 1, 2008

Market Round-Up: Europe: Shifting From Hardware To Operator Services

Giovanni de Briganti

With operators seeking lower operating costs and more efficient support, OEMs are moving toward managing life-cycle costs.

PARIS — Europe’s helicopter industry is preparing for major changes in the way it does business.

These are not all yet clearly visible, and depend to a large extent on how European economies manage to cope with the wide-ranging consequences of the sub-prime credit crisis. A few things, however, are already relatively clear.

Defense spending throughout Europe will continue to drop as countries cut back on the size and capabilities of their armed forces. R&D funding for military programs will be reduced severely as life-extension programs will often take precedence over new development or procurements.

This may not be particularly worrying for European militaries in the short term, as they are well on the way to being comprehensively re-equipped with new-production aircraft. But it does mean that no money will be available for a very long time to prepare for next-generation helicopters.

On the civil side, the graying of Europe’s population will provide ever-greater impetus for the growth of emergency medical service (EMS) helicopters, for both primary and secondary EMS missions.

The increasing need for domestic security throughout Europe likely will push for the wider use of helicopters by police, border control and coast guard agencies. The dramatic increases in the price of oil virtually guarantee that the offshore segment will absorb considerably more helicopters to support exploration and production.

In terms of the European civil market, Honeywell’s 2008 Turbine-Powered Civil Helicopter Purchase Outlook found that Europe would account for about 20 percent of the world’s new turbine-powered helicopter sales during the next five years. "Some of these gains are attributable to emerging markets in Eastern Europe and Russia," Honeywell said, "but European operators cite regulatory requirements and avionics capabilities as the top reason for acquiring a new helicopter, after age.

"Other important factors are new-technology engines, cabin size, performance, reliability and operating-cost reductions," stated the company. Its survey also noted "the general utility and corporate-use categories were most frequently mentioned by European respondents followed by EMS and law enforcement."

The European Union’s Green Rotorcraft project also forecasts that "rotorcraft operations are expected to grow sharply in the future to face the European citizen’s demand for medical service for safe and quick transport of patients and living organs needed for transplantation."

The Green Rotorcraft project sees another driver in the form of "passenger transport from city heliports to airports, and also between cities or areas where an efficient surface transport network cannot be developed for geographical or economical reasons."

Production of new helicopter models is increasingly accompanied by the search for new profit centers, such as improved customer service for civil operations, and for new markets, notably in Central and Eastern Europe. One of Eurocopter’s growth objectives is to participate in the push for homeland security in the countries that have Schengen-area borders and joined the European Union in 2004 (Poland, Hungary, Slovakia, Slovenia, Lithuania, Latvia and Estonia) and in 2007 (Bulgaria and Romania).

AgustaWestland has recently taken a major step into the Russian market by signing a contract with Russian helicopter company Oboronprom. It will initially buy AW helicopters, to a value of about €450 million ($698 million), for resale in Russia and the Commonwealth of Independent States. In a second phase, the two partners plan to set up maintenance centers for AW helicopters in Russia and, ultimately, to jointly produce AW helicopters in Russia for both domestic and international markets. AW CEO Giuseppe Orsi said the Russian and Commonwealth of Independent States markets are "very important, with the potential to generate significant future business opportunities."

Russia appears determined to develop its helicopter sector and return it to its Soviet-era position.

"I very much hope that Russian helicopter manufacturers, primarily Oboronprom, in cooperation with our foreign partners, will be able to boost the output of helicopters and associated equipment," Sergei Ivanov said, addressing the opening of the HeliRussia show in mid-May. He added that there are only 14 helicopters per million people in Russia, compared with 56 in Canada. About 130 Russian and foreign exhibitors took part in the show. Although Russian helicopters are unlikely to have much of an impact in Western or Central Europe, they may well take sales in the Russia and the Commonwealth of Independent States away from AW or Eurocopter.

In terms of improving customer service, a recent example is the new AW product-support center at Lonate Pozzolo, Italy, where work has started on the second phase. That will double the size of the current 10,000-sq-m (107,000-sq-ft) facility.

The search for new markets niches can be taken to extremes. Eurocopter now aims to achieve a leading position on the yacht market, where several of its models are proposed as flying tenders for yachts. For its fifth participation at the Monaco Yacht Show, Eurocopter has renewed its partnership with Edmiston, a well-known yacht broker, to jointly market helicopters to yacht owners.

In the military sector, while continuing intensive production of major programs such as Tiger, NH90 and AW101 (formerly known as EH101), Europe is shifting its sights to the provision of lucrative support services and, ultimately, to the provision of turnkey helicopter services.

A market study by Frost & Sullivan found that the European military helicopter market earned revenues of more than $4 billion (€2.6 billion) in 2006, but estimated that these will fall to $1.5 billion (€970 million) in 2015 — a drop of two-thirds.

Military services, on the other hand, are expected to grow strongly as other European militaries follow the example of the United Kingdom, and outsource to the private sector an increasingly large share of helicopter maintenance and support. This is potentially a very lucrative business. AW’s Sea King Integrated Operational Support (SKIOS) contract, finalized in November 2007, is worth €660 million (more than $1 billion) for the first five years alone.

France recently took a first step towards military outsourcing, when it awarded a 22-year contract to operate the Army helicopter flying school at Dax to a joint venture headed by Defense Conseil International. The private operator will buy, operate and support a fleet of 36 Eurocopter EC120Bs for the school. For that, the army will pay a flat annual fee. This could be followed by other outsourcing contracts as the armed forces are forced by funding and manning cuts to concentrate on their core military activities.

"It is my belief that Eurocopter must not only be a mission solution provider to its customers, but also a fully-fledged service provider," Eurocopter CEO Lutz Bertling has said. "During 2007, we set up a 24/7 hotline service center for our customers. We created a fleet safety directorate. We inaugurated an EC135 simulator center." The company also established a new maintenance center in Abu Dhabi and opened a joint project office with the U.K. Defence Ministry for the Royal Air Force Puma upgrade. "Continuing the ramp-up, extending our line of services and managing the global supply chain are major keys to market success", Bertling concluded.

Running parallel with outsourcing, looming budget cutbacks are also a new factor for AW and Eurocopter. France’s new defense "White Paper," due to be published in June, is widely expected to call for a major reduction in military manpower and equipment, which will necessarily mean a reduction in the number of Tiger and NH90 helicopters to be procured.

The situation appears more critical in Britain. Under pressure to cut spending, the Defence Ministry has already dropped plans to buy a new utility helicopter, and will instead upgrade part of its fleet of Pumas. Doubts are also being voiced about the £1 billion (roughly $2 billion) Future Lynx program, which could be terminated to free up funds for other, more urgent programs like the new aircraft carriers. Instead of buying these 70 new-development helicopters, Britain could opt to buy off the shelf, either from U.S. manufacturers or Eurocopter.

As their domestic military markets shrink, European industry is looking with renewed interest at the U.S. military market, on the back of its wins for the VH-71 presidential helicopter and light utility helicopter that have finally signaled an opening for European manufacturers.

Development work for domestic government customers is decreasing, and is being replaced by cooperative ventures with China (on the EC175), South Korea (on the Korean Helicopter Program) and others. In these projects, European technology is combined with the developing world’s low production costs with an eye toward less expensive, highly competitive new designs.

Research, on the other hand, will mostly concentrate on the civil sector, and singularly on "greening" helicopters under the aegis of the European Union’s Clean Sky initiative. Its Rotorcraft Integrated Technology Demonstrator, launched in February 2008, "will deliver innovative rotor blades and novel turbine engine installation for noise reduction," according to the Clean Sky project statement.

"The demonstration of diesel engine integration, airframe drag minimization features and advanced electrical systems," which is also planned, "will enable the reduction of fuel consumption and elimination of noxious hydraulic fluids."

Both European manufacturers support the initiative.

Eurocopter said it "is fully involved in developing solutions that reduce fuel consumption and external noise and include a greener life cycle for its products."

AW, "which is fully involved in developing solutions that improve rotorcraft efficiency and reduce the external noise impact," said "it is already investing its own money in programs to meet the greener environment challenges."

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