How Dassault Is Fighting the Euro Surge
For Dassault Aviation (AVMD.PA), it's the best of times and the worst of times. The French aircraft maker racked up a record 212 orders worth more than $8 billion for its Dassault Falcon corporate jets last year. And the customers are still coming: Sales of private jets worldwide are forecast to double over the next decade, thanks to booming demand from newly minted Russian billionaires, Mideastern sheikhs, and other highfliers.
There's just one glitch: Dassault builds its planes in the euro zone, and it's getting hammered by the euro's relentless climb against the U.S. dollar. "For our industry to be operating normally, the rate should be around $1.10," says Dassault Chief Executive Charles Edelstenne, who also heads France's aerospace industry trade association. With the euro now above $1.55, "We're at a level which is very difficult to tolerate," he says.
Dassault isn't the only European manufacturer getting squeezed with the U.S. currency losing more than half its value against the euro over the past five years (BusinessWeek.com, 3/20/08). But it suffers more than most because traditionally the commercial aerospace business is dollar-based—that is, all planes are priced in greenbacks.
Pressing Suppliers to Move Offshore
That puts Dassault at a big disadvantage to U.S. competitors such as Gulfstream, a unit of General Dynamics (GD), and Cessna, a Textron (TXT) subsidiary, whose production costs are mainly dollar-denominated. Another key rival, Canada's Bombardier (BBDB.TO), has been partially cushioned from the dollar's slide because its Learjet business is based in Wichita, Kan. Dassault, by contrast, makes all its planes in France, though they're outfitted with avionics and custom interiors at a Dassault plant in Little Rock, Ark.
To fight back, Dassault says it has boosted productivity at its French factories by upgrading IT systems and adopting the latest in digital-design technology. Even as the company ramped up production to deliver 70 planes last year—15% more than in 2006—it hasn't added to its 8,000-strong French workforce. Still, Edelstenne says these efficiencies haven't been nearly enough to offset the dollar's fall. The only solution, he says, is to move as much spending as possible out of the euro zone. And the easiest way to do that is to lean on suppliers.
Indeed, the hundreds of smaller companies that supply Dassault and its better-known European counterpart, Airbus (EAD.PA), are likely to bear much of the brunt from the dollar's fall. For the aircraft makers themselves to move their factories offshore would be costly, time-consuming, and politically challenging (although Airbus already is planning to open assembly lines in China and the U.S.) To get quicker results, they're pressing suppliers of aircraft components, everything from air-conditioning systems to cabin doors, to set up operations in less costly locates.
Hedging Buys Breathing Room
Just this month, French aerospace group Latécoère (LAEP.PA), which makes fuselage sections and other components for both Airbus and Dassault, said it would open a plant employing about 1,000 in either Morocco or Tunisia. In January, British jet-engine maker Rolls-Royce (RR.L) announced it would invest $100 million to build a factory in Virginia to build engines for Dassault's latest plane, the midsize SMS business jet, scheduled to enter service in 2012.
Can such moves keep Dassault from getting squashed by the dollar's collapse? The company has some breathing room because it has used financial derivatives to hedge against currency risk. Profits last year more than doubled from 2006, to $593 million, on revenues up 24%, to $6.3 billion. "I haven't made any sale that risks putting me in the red," Edelstenne says.
Dassault also may catch a break because private-jet customers, unlike intensely cost-conscious airlines, "are not as price-sensitive," says Richard Aboulafia, an aerospace analyst with the Teal Group in Fairfax, Va. "Customers will buy a business jet because of [brand] loyalty, or because they like the way the interior looks." With commercial airlines, on the other hand, "it's all about fuel burn and numbers." Indeed, Dassault's new 7X model, which entered service just last year, is selling briskly, with a backlog of 170 orders.
But after clawing its way out of an industry downturn five years ago and investing to spiff up its product line, Dassault can't afford to take any chances. The Dassault Falcon of the future will still have a French-sounding name, but it's sure to be a multinational bird.