Saturday, March 1, 2008
Middle East Markets: Inroads in the Middle East
The balance of the Middle East helicopter market is gradually shifting, as Russian manufacturers and Sikorsky Aircraft make significant gains in the military arena while AgustaWestland and Eurocopter get most of their new business on the fast-expanding civil market.
Nowhere is this trend more apparent than in Saudi Arabia, which in mid-September signed a wide-ranging agreement to buy more than 150 Mi-35M and Mi-17 military helicopters worth more than $2.2 billion from Russia. First reported by defense-aerospace.com, the agreement effectively dashed French hopes of selling a mixed fleet of 142 helicopters, including 64 NHIndustries NH90s and an initial batch of 12 attack Eurocopter Tigers. These contracts had been agreed to and initialled in mid- and late 2006, but had not been formally signed.
French officials are now scrambling to salvage three remaining contracts, together worth about 1.8 billion euros ($2.62 billion), for 42 Eurocopter AS550C3 Fennecs to be used for training and liaison missions, 20 Cougars/EC725s Caracal for search and rescue (SAR) and combat utility missions, and 10 NFH90 naval variants for the Royal Saudi Navy. These deals are being negotiated by Paris and Riyadh on a government-to-government basis, "and as far as we know, they’re still talking," said a senior Eurocopter executive. He added that the Fennec and NFH contracts are ready to be signed, and the Cougar contract will be shortly, but the final decision and timing rest with the customer.
Few details are known about the Saudi agreement with Russia, which was signed by officials in the cabinet of King Abdullah bin Abd al-Aziz Al Saud after personal meetings between the king and Russian President Vladimir Putin. Saudi military teams made extended visits to Russia in February and March 2007 to appraise the capabilities of Russian helicopters and other weapons, sources said, and the individual contracts are expected to be signed shortly. Russian officials attending the Dubai Air Show here declined to comment. Saudi Arabia never comments its military purchases.
Several explanations have been mentioned for the swing from France to Russia as a helicopter supplier, including King Abdullah’s decision to wrest direct control of major arms purchases from Crown Prince Sultan Bin Abdul Aziz, the deputy prime minister and minister of aviation and defense, who is also Abdullah’s half-brother. Sultan, who is said to be out of favor at court, was more attuned to performance and capability criteria, while Abdullah’s cabinet gives greater weight to political and financial criteria, sources said.
If Saudi Arabia is the largest Eurocopter military customer to date to switch suppliers, the United Arab Emirates are the most recent. Apart from the July 2004 sale of 20 NH90s to Oman, the French-German manufacturer has not made a major military sale in the region for several years. One exception is Kuwait, which has just completed the modernization of its fleet of military Puma/Super Puma utility helicopters.
One of the main reasons, according to government and industry officials here, is that the United States and Russia are increasingly perceived as powerful allies worth cultivating in light of growing uncertainties and instability in the region. Meanwhile, France is losing its political clout, Italy never had any, and Britain has given up even trying. "Despite what they say, the only real factor when countries in the region choose a military supplier is political and military influence. Everything else is window dressing," said one European executive.
Even as the region booms on the back of record oil prices, the erosion in the dollar’s value makes U.S. and Russian equipment much cheaper compared to European prices, which are kept artificially high by the exchange value of the euro and pound.
This is undoubtedly one factor aiding Sikorsky’s drive to reinforce its position in the Saudi and Middle East markets.
"This is probably the fastest-growing market in the helicopter business, whether for fleet replacement in the offshore market or fleet additions and equipment upgrades in the military market," Stephen Estill, Sikorsky’s vice president and chief marketing officer, told Rotor & Wing. "We also forecast strong growth in civil defense and disaster relief for the next 5 to 10 years."
The U.S. company’s most significant deal, announced here Nov. 12, 2007, is for 40 helicopters to renew the fleet of Saudi interior ministry, which is responsible for civil and homeland defense. The contract includes 16 S-92s, 15 S-76s and nine Schweizer 434s for training. This "fast-track" program was launched in June 2006, and calls for initial deliveries in March 2008. It includes an annex for operations, maintenance, logistics, and training, which will allow for the fast introduction of the aircraft into service.
Interestingly, it is the first Saudi contract to have been awarded after a competition of sorts, instead of by direct negotiations with a single supplier as is usually the case. Requests for proposals went to six major helicopter manufacturers in early 2006. Bids were filed in June 2006. Sikorsky was selected during the second half of that year and a letter of intent was signed Dec. 4, 2006, prompting Sikorsky President Jeffrey Pino to congratulate the Saudis for "a very precise approach to inviting proposals, and following their procurement process to the letter."
These helicopters will carry out civil search and rescue (SAR), firefighting, medical evacuation (medevac) and secondary emergency medical service (EMS) missions, in addition to security and traffic surveillance, from an enlarged network of operational bases planned by the interior ministry.
Sikorsky is also negotiating the sale to the Saudi defense ministry of 24 UH-60L Black Hawks. Congress was notified of this Foreign Military Sales contract, worth about $300 million, in June 2006. It would will nearly double the Saudi Land Forces’ fleet of Black Hawks, which currently consists of 18 VH/UH-60s and 12 S-70As.
At the Dubai Air Show, Sikorsky also revealed that it had completed delivery of eight UH-60Ls to the Jordanian Special Operations Aviation Brigade, which is also responsible for border security. The first three were delivered in June 2007, but had not been publicly announced. When Congress was notified in September 2003, this sale was valued at $220 million. It includes M130 chaff dispensers, warning receivers, and gun pods. The Royal Jordanian Air Force already operates five UH-60/S-70As in its Royal Squadron.
The Black Hawks will supplement and eventually replace Jordan’s Super Pumas, leaving Eurocopter to provide only the EC635 light twin, for which it received a follow-on order for four aircraft in January 2006, and which have now been delivered.
Sikorsky made a more significant inroad into Eurocopter territory with the sale of 10 S-70As to the United Arab Emirates, whose air force currently operates Pumas (including Romanian-manufactured ones), while the UAE navy operates Super Pumas. This direct commercial sale was announced here Nov. 12, and no value was provided.
Bahrain is another recent Sikorsky customer. In June, it signed a letter of offer and acceptance to buy nine UH-60Ms for $204 million through the Foreign Military Sales process, becoming the international launch customer for this latest version of the Black Hawk. At the Dubai Air Show, Sikorsky also announced the sale to Bahrain of a single S-92 for head-of-state/VVIP transport. Other customers in the region, including Qatar and Kuwait, have also ordered S-92 VVIP/head-of-state aircraft.
Bell is the main loser here, as Bahrain finally preferred the UH-60M to the six Bell 412s it had planned to buy for SAR missions. Notice of the planned $160 million deal was sent to Congress in August 2007. Bell said it is still negotiating with Bahrain.
AgustaWestland continues to chalk up mostly civil orders in the Middle East, where its AW139 is having a very successful run. The Middle East orders account for nearly 80 of a total of about 300 orders signed to date. The AW139 and its military variant, the AW149, are ideally placed to dominate the Bell 205/212/412 replacement market, said Roberto Garavaglia, AgustaWestland’s marketing director. He noted that their high installed power gives them the same payload as larger helicopters. "The AW139 maintains its ISA performance all the way to ISA+30 and even ISA+35 conditions, with temperatures of 50 degrees Celsius, which is something that most older helicopters cannot do," he noted.
AgustaWestland has high hopes for its military helicopters in the Middle East, including for the latest version of the three-engine EH101, which has been fitted with 2,500-shp turboshafts, and various versions of the Future Lynx. "We are a long way from having attained our potential in the Middle East, and we anticipate a strong growth in our order book," Garavaglia said
The potential of these helicopters is illustrated by the recent sale to Algeria of six EH101s and four Super Lynxes, where they will be used for SAR, border patrol, and utility missions. This is the company’s first sale to Algeria, which is a Russian client of long standing. The contract is reportedly worth 400 million euros, according to reports in the Italian press, but AgustaWestland would neither confirm nor deny it.
At the Dubai show, AgustaWestland announced two new sales: one, for $140 million, covers the supply of 10 AW139s to Gulf Helicopters of Qatar, which will use them largely for the offshore oil market. The second sale, of two AW139s in VVIP configuration, was to the Dubai Air Wing, which also ordered its third Eurocopter helicopter, a AS365N3 Dauphin in VIP configuration. Other recent Eurocopter sales in this area include a top-end VVIP EC225 to Algeria, and the EC130B4, EC135, and EC155B1 to the UAE.
Eurocopter Sales Director Olivier Lambert forecasts high demand for civil helicopters in the region, for VIP/corporate, tourist, and emergency medical services. This suits the French-German manufacturer’s product line. "The civil market is certainly expanding fast, and we are selling about 30 civil/para-public helicopters per year in the region, and will gradually increase to 50 a year," he said.
On the military market, "we’re putting our products in place where we foresee a need in the near future, but the final criteria for awarding a contract is essentially political," he acknowledged. Qatar, Kuwait, the UAE, and Jordan are where the next programs are expected, Lambert said, for Gazelle, Sea Kings and Puma/Super Puma replacements.
Eurocopter and AgustaWestland are also competing in Libya, which is just opening up to Western manufacturers after a decades-long embargo. AgustaWestland’s first sale, in January 2006, was an 80 million euro deal to supply 10 A109 Powers for border patrol, including equipment and services. It was followed in December 2006 by an order from the Libyan Red Crescent of five A119 Koalas for emergency medical service. The two contracts were signed after AgustaWestland, corporate parent Finmeccanica, and the Libyan Company for Aviation Industry set up a joint venture to provide know-how, training, technology, and equipment. The Libyan shareholder will mainly invest in infrastructure, plant, and local marketing activities.
Interestingly, the joint company, known as Libyan Italian Advanced Technology Co. (LIATEC) would at some point establish a production assembly line in Tripoli, and would have commercial rights to sell locally assembled helicopters in a number of African countries, making it the most advanced of several helicopter manufacturing joint ventures planned in the region.
AgustaWestland and Eurocopter have opened initial talks about Libya’s requirement for attack helicopters, but Russia is determined to keep its hold on the Libyan market. At the Lavex 2007 air show in late October, Rostvertol exhibited for the first time and touted its Mi-35M, which made three demonstration flights, including one with a Libyan pilot acting as navigator. An upgraded version of the Mi-24 Hind, the Mi-35M is fitted with a new rotor system with composite blades, and an improved, X-shaped tail rotor, according to Rostvertol. It is equipped with modern radios and avionics, an OPS-24N gyro-stabilized, electro-optical sensor pack, and can carry up to eight missiles.
Russia also continues to sell its cheap but reliable helicopters to several countries in the region. Its latest sale, announced in November, covers the delivery of five Mi-171s to the Iranian Red Crescent Society in 2009. The Ulan Ude company has already sold 35 Mi-171s and Mi-171Shs to Iran in a $210 million deal. Seven other Mi-171Shs were delivered through Rosboronexport, Itar-Tass reported.
While Russian manufacturers look to expand their market share, Eurocopter remains the region’s dominant supplier. The company claims 650 helicopters flying in the Middle East, about 90 percent of which are military, ranging from the old Gazelle and Puma to newer designs like the EC635. This market position compares favorably to its competitors.
Sikorsky has delivered 60 military helicopters to the region and has another 90 on order, while just over 100 AgustaWestland helicopters are operated by government agencies and military services in the Middle East (excluding Iran), with both Westland (Sea King, Commando and Lynx) and Agusta-Bell aircraft (AB-205/-212) designs. Boeing, although it has sold CH-47s and AH-64s to several Middle East and Gulf countries, has a much smaller fleet footprint.
While manufacturers salivate when talking of the Middle East market, its strong growth will, sooner than later, get bogged down by two structural problems: a major shortfall in flight and maintenance crews, and a production shortfall as manufacturers strain to keep deliveries up with new orders.
The personnel shortfall can be made up, albeit it at a high cost, by increasing salary levels to attract foreigners, especially as European forces continue to downsize and U.S. and British military pilots resign under the stress of continuing combat operations in Afghanistan and Iraq. Over the longer term, several flight academies being set up all over the region will eventually turn out required numbers of qualified air crews.
Solving the production problem will not be as straightforward, at least unless additional production lines are set up. Eurocopter’s Lambert, for example, said delivery times now exceed two years for the Super Puma, three years for the Fennec, and six years for the NH90, for which the first available delivery slots are in 2013. Such long delivery times are enough to discourage prospective customers.
Sikorsky has been able to reduce its Black Hawk delivery times by launching production of "green" aircraft in advance of anticipated orders and by setting up a new military completion center at its Schweizer Aircraft subsidiary for export aircraft. This allows it to offer delivery slots as early as 2010, said Estill, even before the company sets up a new production line for export Black Hawks at its Polish subsidiary, PZL Mielec.