Sector Report: the Aviation Industry in France

1. Introduction The aerospace industry is a sovereign, high-tech, performing industry, which is essential for the French economy as it creates prosperity for the country and aggrandizes its international reputation. France’s export success is the evidence that its products own the necessary quality and competitiveness, as more than 75 percent of its consolidated incomes are realized through exportation. This industry profile is a useful tool to help investors understand the emergence of the French aerospace industry, as it aims to analyze the evolution of the sector and the influence of different factors and developments on its existence.

The French aerospace industry is divided in six different market segments: civil and military aircraft, helicopters, engines, missiles and UAVS, space and the equipment market for defense and aerospace. The report only focuses on the civil sector of the French aircraft industry since it is responsible for approximately 69% of total revenues. After this short introduction, the sector report is structured as follows: first the actual analysis of the sector, which is based on a SWOT-analysis, then the conclusions and recommendations, followed by the bibliography and appendices.

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The sources upon which the report is based include more general sources, such as the annual reports of Gifas (“Groupement des Industries Francaises Aeronautiques et Spatiales) and information from the Invest in France Agency but also more specific sources such as the Global Market Forcast developed by Airbus, news articles and publications from McKinsey Research. 2. SWOT- analysis 2. 1 Strengths 2. 1. 1 The aerospace industry is a driver for economic growth and employment Since 2002, total turnover of the industry has continued to increase.

According to the annual report (2007-2008) of Gifas (‘Groupement des Industries Francaises Aeronautiques et Spatiales’) unconsolidated (civil) revenues totaled €17,7 billion in 2002, whereas in 2007 revenues were up to €24,4 billion, which represents a growth of 38,4%. In 2007, 75% of consolidated revenues (civil and military) were derived from exports. Over the past few years the French industry has booked a record breaking number of orders and almost 80% is destined for export. In 2008 the French aerospace industry employed 134,000 people, almost 2,000 more compared with 2007. . 1. 2 The leading players EADS (Airbus) and Dassault aviation, both world leaders in their field, form the backbone of the French aircraft industry. The European Aeronautic Defense and Space company (EADS) is the largest aerospace company of Europe and is listed on the CAC 40, the French stock market index. The major and probably worldwide most known component of EADS is Airbus. The company is a leader in civil aircraft manufacturing. According to the Airbus annual review (2008) the company has accomplished a successive delivery increase since 2002.

Despite some cash-flow difficulties during 2006 and 2007, the year 2008 was an outstanding year for the company as it booked a record number of sales. In terms of new orders, Airbus had booked 777 aircraft, valued $100 billion, resulting in a market share of 54% ( aircraft above 100 seat). Other important subsidiaries of EADS are Eurocopter and ATR Regional Transport. Dassault Aviation is a world leader in the manufacturing of exclusive business jets. The Falcon range knows worldwide success with more than 2000 aircraft being sold in over 70 countries.

According to the annual report of Dassault Aviation (2007) the company booked a new record of orders (valued €5. 38 billion) and deliveries (valued €2. 35 billion). The company has been profitable ever since its creation in 1936. 2. 1. 3 The Airbus A380, giant of the sky The creation and launch of the world’s biggest plane gave France a major advantage over its most important rival, the American aircraft manufacturer Boeing. The giant can carry 35% more passengers than its closest competitor and its range is 10% greater. The super jumbo is very eco-efficient as it has a significantly reduced noise and emissions level.

The development of the aircraft required enormous investments to around €12 billion. Up to now, in its second life year, 200 orders have already been made and 13 A380’s have been delivered. Off course, this is insufficient to regain the huge development costs and everything depends on the success of the first A380 planes. Nonetheless, as the world passenger traffic and congestion of airports increases each year, it is almost certain that new orders on the A380 will soon be placed, especially by emerging countries such as China and India. 2. 1. 4 Investment in R&D

According to the Invest in France Agency, French aerospace companies invest more than 16% of their turnover in R&D activities in order to prepare for the future and to preserve their place in a highly competitive environment. This is more than their competitors in other countries. In order to keep developing competitive products, the French industry players have joined forces in 2 ambitious research programs: Clean sky (EU level) and an agreement with the ministry of ecology and sustainable development to establish a Civil Aeronautics Research Council.

Various new technologies and breakthrough inventions have been developed for the A380, making it the world’s most advanced and efficient airplane. 2. 2 Weaknesses 2. 2. 1 Governmental support The financial budget of the French government available for aerospace companies is quite small, in comparison with the government support in the United States. The received public support for Airbus for instance amounts only €60 million, whereas Boeing receives €800 million. 2. 2. 2 High wages and production costs

The 35-hour workweek, resulting in high wages and production costs, and the typical chauvinistic attitude to protect the domestic market and to keep most of the production to itself, limits the competitiveness of French aerospace companies. There is a tendency towards more flexibility, regarding the 35-hour workweek, but companies should consider expanding to low cost countries, where production cost are significantly less high. 2. 2. 3 Delivery delays The French aerospace industry has been confronted with a lot of delivery delays.

Airbus has delayed its deliveries of the A380 already four times and the company faced enormous penalty payments as compensation. According to Lionel Laurent from Forbes, the A400 transport plane as well, faced delivery delays that cost the company approximately $1 billion. The greatest loss of all has been that of credibility and confidence. 2. 3 Opportunities 2. 3. 1 Emerging nations: Asia, India, Africa As the economy in these nations is booming, the need for people to fly develops as well.

According to the Global Market Forecast (GMF 2007-2026) of Airbus, air travel is becoming more accessible and affordable to people with different incomes, which results in a wave of new international consumers and with it, the development of new airline industries. The demand for new aircraft in these new international markets will grow significantly within the next years, creating profitable benefits for the French aerospace industry. McKinsey research (2008) also indicates the importance for Western companies to capture major short-term cost-reduction opportunities that emerging players like China, India and Russia will offer. . 3. 2 World passenger traffic +4,9% per year According to the GMF (2007-2026), world passenger traffic will experience an annual growth of nearly 5% and traffic demand is expected to triple. Growing demand and increasing congestion at airports will not only force airlines to acquire more aircraft but it will also create a trend towards larger aircraft such as the A380. 2. 3. 3 Greater environmental sensibility Because of rising fuel prices, growing air traffic and a greater environmental concern, aerospace industries are driven by the need for more fuel and eco-efficient airplanes.

According to Airbus, the A380 is the world’s first plane that uses less than 3 liters per 100 seat km, which makes the giant some 20 years ahead of the world fleet. The A380 is also said to be the most quiet plane in the world as its noise levels has been reduced with 50%. 2. 4 Threats 2. 4. 1 Severe competition The aerospace industry is characterized by its high level of competition. The most threatening rival for the French and European aerospace industry is the American company Boeing. Boeing is, in terms of turnover, the largest aircraft manufacturer in the world.

Airbus and Boeing are racing neck and neck to lead the world market. Three years in a row (2003-2005), Airbus managed to outrival Boeing in terms of orders and deliveries, but since 2006 Boeing regained its position and left Airbus behind. Boeing’s new 787 forms a huge threat, as it will compete with the two most profitable aircraft families of Airbus: the A321 and the A330. According to Tinseth (Aerospace America, 2008) Boeing is now more than half a cycle ahead. Instead of developing a competitor for the 787, Airbus is only focusing on the A380. . 4. 2 The weak dollar The weak dollar is a huge threat to the French and European aerospace industry. Companies buy in euro and sell in dollar, which results in a significant loss in competitiveness. In order to reduce the exchange rate risks, European companies price contracts in dollar. The Aerospace and Defence Industries Association of Europe (Trend Capital, 2008) states that “the continuing weakness of the dollar will lead to massive relocation to dollar priced locations, where labor costs are much lower than in the eurozone”.

This forced step of relocation could threaten more than 640,000 jobs in Europe. 2. 4. 3 The financial & economic crisis The results of the French aerospace industry reflect strong economic growth in the beginning of 2008, but according to Edelstenne, president of Gifas, the financial and economic crisis have changed the situation dramatically. Traditional airline companies, such as Air France KLM, are hammered by the financial crisis and are therefore forced to cancel some of their aircraft orders.

The French government has mobilized an amount of €5 billion to avoid further cancellations. EADS statistics show that its share price has decreased significantly during 2008 and the first months of 2009. In 2007 the share price finished at €21,83, whereas it finished at €12,03 in 2008 and €9,45 on 2 April 2009. 2. 4. 4 Rising fuel price The high fuel price in 2008 damaged many airline companies. Air France-KLM booked losses valued at more than €542 million. In periods where the price of fuel is high, Airlines often have to cancel aircraft orders in order to survive. 3. Conclusion

The French aerospace industry is a driver for economic growth and employment. The figures of Gifas show that total turnover has increased 38% in five years. The biggest part of this turnover is produced by two world leading companies: EADS (Airbus) and Dassault Aviation. The French aerospace industry is known for its new technologies and breakthrough inventions. This is mainly due to the effort that French companies make by reinvesting more than 16% of their turnover in R&D. These investments and governmental support made it possible to create the A380, the giant of the sky.

The rapid developments in emerging markets, the expansion of world passenger traffic and a greater environmental concern create a trend towards large, eco-efficient aircraft such as the A380 and profitable opportunities for France to enlarge her world market share. Although the French aircraft industry has its weaknesses and threats, the impact of some of them is decreasing or being decreased by the government and companies. Nicolas Sarkozy stated in 2007 that he wishes to put an end to the 35- hour workweek, as he finds it catastrophic for the French economy. This will enable companies to lower wages and reduce production costs.

Airbus has announced its Power8 restructuring plan in 2007, which is developed to cope with the US dollar weakness, increased competition pressure and the financial burden of the A380 delays. The financial crisis represents the biggest threat for the French aerospace industry. The longer it lasts, the bigger the risk of order cancellations. 4. Recommendations The latest results of the French aerospace industry reflect strong economic growth with a record breaking number of orders. Unfortunately, the financial and economic crisis have dramatically changed this situation.

How long this crisis will last is uncertain. It is therefore recommended for investors to postpone their investment and to contact investment companies, such as the French investment Agency, in order to gain more detailed information regarding the French aerospace industry and its prospects. Besides that, it is also recommended to contact stock market analysts who can provide personalized advice and determine the best timing for companies to invest. 5. Bibliography GIFAS, (2008, 9th of July). Industrie Francaise Aeronautique & Spatiale, rapport annuel 2007-2008.

Consulted the 30th of March 2009 at: http://www. gifas. asso. fr/reaxia/files/cyyydsjgw/RA-GIFAS2007-08. pdf GIFAS, (2008, 2nd of April). Press release, 2008 results for the French aerospace industry. Consulted the 30th of March 2009 at: http://www. gifas. asso. fr/reaxia/files/bdgrjsodjkd/2009AVRIL02Communiqueanglais. pdf GIFAS, (2008). French Aerospace industry 2008-2009. Consulted the 30th of march 2009 at: http://www. gifas. asso. fr/reaxia/files/ersvtgsv/Gifas-Digest-2008-UK-web. pdf Airbus, (2008). Global Market Forecast (2007-2026). Consulted the 15th of March 2009 at: http://www. irbus. com/store/mm_repository/pdf/att00011423/media_object_file_GMF_2007. pdf Airbus, (2008). Airbus annual review (2008). Consulted the 30th of March 2009 at: http://www. airbus. com/store/mm_repository/pdf/att00013220/media_object_file_Airbus-AnnualReview2008. pdf Chambost, G. C. , Renard, J. D. R (2005), La grande aventure de l’airbus A380, s. l. , Editions Sud Ouest. Dassault Aviation (2008), Rapport annuel 2007. Consulted the 17th of March 2009 at: http://www. dassaultaviation. com/fileadmin/user_upload/redacteur/finance/publications2008/RAinteractif/Dassault_ra_2007_fra/index. tm Invest in France Agency. Aerospace. Consulted the 18th of March 2009 at: http://www. invest-in-france. org/benelux/en/Why-choose-France. html# Laurent, L. L, (2007, 11th of March), Billion-dollar delay bombs Airbus. Consulted the 3rd of April 2009 at: http://www. forbes. com/2007/11/05/eads-airbus-boeing-markets-equity-cx_ll_1102markets05. html De Tijd, (2008, the 1st of January), Sarkozy wil einde 35-uren werkweek. Consulted the 3rd of April 2009 at: http://www. detijd. be/artikel/Sarkozy_wil_einde_35-uren_werkweek. 6048218 Bedier, B. C. , Vancauwenberghe, M. V. , Van Sintern, W. . S. , (2008, April), The growing role of emerging markets in aerospace. Consulted the 8th of April 2009 at: http://www. mckinseyquarterly. com/PDFDownload. aspx? ar=2117 Wilson, J. R. W. , (2008, May), Chasing a dreamliner. Consulted the 10th of April 2009 at: http://www. aiaa. org/Aerospace/images/articleimages/pdf/Aerospace-Dreamliner_MAY2008. pdf Trend Capital (2008, 21st of April), Weak US dollar threatens Europe aerospace industry jobs: ASD. Consulted the 10th of April 2009 at: http://capital. trend. az/? show=news&newsid=1181586&catid=513&subcatid=471&lang=EN 6.

Appendices 6. 1 Total turnover of the civil sector of the French aircraft industry (in €million) [pic] Source: Gifas, annual report (2007-2008) 6. 2 Evolution of the US/Euro Foreign Exchange Rate [pic] Source: Economic research, federal reserve bank of St-Louis (2007) Live rates at 2009. 04. 26 10:56:38 UTC 1. 00 EUR = 1,32790 USD 6. 3 EADS N. V- Share price [pic] Source : EADS N. V http://eads. net/1024/en/investor/Stock_information/Share_price/Share_price_chart. html 6. 4 Evolution of oil prices (1994-2008) [pic] Source: www. greatdreams. com/oil/peak_oil_consequences. htm

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