Business Week International International Business: EUROPE
SMALL-PLANE MAKERS START TO FLY IN FORMATION (int'l. edition)
Builders of regional airliners--planes with 100 seats or fewer--lose money consistently. That's mostly because subsidies have kept too many builders alive: five in Europe plus others in Canada and Brazil. With new rivals looming in Asia, two of Europe's top producers have finally agreed to merge. The linkup between Franco-Italian ATR and the commuter plane unit of British Aerospace could pass Canada's Bombardier as the biggest builder of commuter planes.
A critical move to get consolidation rolling in this $5 billion-a-year industry, the merger is certain to promote a broad realignment. It will push rivals to seek partners and lead the new Franco-British-Italian company to sign up additional players. "This is just the first step in a much wider regional-aircraft venture," says Michael J. Turner, chairman of the British partner, BAe Commuter Aircraft. The new company, to be based at ATR's home in Toulouse, hasn't picked a name yet.
Asia is a key element of this industry reshaping. Small-plane orders there are expected to grow 7% to 8% a year, while Europe and the U.S. flatten. Governments from South Korea to Taiwan want homegrown companies to share in the bonanza--not just for jobs and income, but because regional planes offer the easiest way to build native aerospace industries.
The Europeans are coming courting. They want Asian partners to help win local orders and to defuse new competition globally. Already, Germany's ambitious Daimler Benz Aerospace is thought to have a secret deal with China to develop a 100-seat commuter jet. The new BAe/ATR alliance will also chase Asian partners. One likely target is Indonesia's state-owned IPTN, which aims to build a 70-seat plane. Low-wage Indonesia is "the major threat in Asia," says Tom Appleton, executive vice-president of Bombardier's Regional Aircraft Div., which builds de Havilland and Canadair turboprops and jets.
BUMPY PATHS. The new cross-Channel merger also reshuffles the deck in Europe. Daimler badly wanted to join the new venture. The Germans still hope for admission later. They may be disappointed. "We don't rule them out, but too much concentration is dangerous," says Fausto Cereti, chairman of Italy's Alenia, co-owner of ATR. Translation: ATR fears that the Germans are eager to dominate any merger. Also, Daimler's planes, built by its Fokker and Dornier units, compete directly with those of BAe/ATR. There's little overlap between BAe and ATR models.
As a fallback, Daimler and Sweden's Saab might forge a rival alliance. The Swedish company has a hot new turboprop, the Saab 2000, which offers jetlike speed with the greater fuel economy of a propeller plane. Martin J. Craigs, president of Saab Aircraft International Ltd., says his company doesn't need a partner but won't develop a model without an ally to share costs. Like nearly all commuter-plane builders, Saab is losing money. State-owned ATR, which doesn't publish results, says it's breaking even after years of losses.
ATR's fortunes are looking shakier, though, after three of its planes crashed in recent months. The latest was on Jan. 30, when four crew members died in Taiwan. Earlier, U.S. authorities banned ATRs from flying in frigid weather after wing icing apparently caused an October crash. That ban has been lifted, but it has decimated sales. ATR sold only four planes in 1994's fourth quarter vs. 36 in the year-ago period.
These problems may have helped push ATR into British arms. For now, the merged company will simply market the planes of both companies. BAe will take a $400 million write-off to kill one model, the 70-seat Jetstream 61, which competes with an ATR plane but has yet to win an order. Later, the partners will develop and probably build new models. BAe might specialize in wings, as it does now for Airbus Industrie. "Even if each of us just makes components, at least we'll be working," says Alenia's Cereti.
Europe has tried before to cut competition in commuter planes. ATR was to buy Canada's de Havilland in 1991, until Europe's trustbusters ruled that their joint 50% market share would be too high. The BAe/ATR merger, with a 35% share, seems sure to fly. Now, the Europeans must toil to prevent a whole new flock of Asian competitors from roaring into their markets.By Stewart Toy in Paris, with Heidi Dawley in London and Silvia Sansoni in Rome