Paris Air Show

CAE makeover has touched up all areas

 - December 12, 2006, 12:54 PM

Like a country doctor on a series of house calls, CAE president and CEO Bob Brown has seen his share of ill health in the Canadian aerospace industry over the past few years. Last year at Bombardier, he took the fall as CEO for the financial troubles that continue to this day. At Air Canada, as chairman of the board, he helped guide the airline out of bankruptcy. Brown now finds himself at the helm of simulator and training giant CAE, which finds itself in dire need of a financial and spiritual lift after three years of progressively declining earnings.

As soon as Brown took the helm last August, he embarked on a broad six-month review of CAE’s markets, customers and other external stakeholders as well as its internal resources and processes. Setting out first to repair the company’s standing among the financial community, he cut the company’s debt nearly in half by selling its Marine Controls division to L-3 Communications. Then he went about consolidating civil and military manufacturing, including engineering, program management and global procurement, from two units into one, a move that resulted in the loss of more than 450 jobs. The restructuring took effect on April 1 and, according to Brown, has already paid dividends.

“I think that you’d find that our debt-to-equity now is much more in line with financial norms, I think that the financial community is pleased with what we’ve done there,” Brown told Aviation International News. “But we’ve also reduced the dividends significantly, so I’d say that’s one thing. The other thing is to look at our cash flow for the fourth quarter we just completed. I think it’s stronger than we’ve had before. You can see that we’re still bidding and winning contracts; the backlogs we ended up with, particularly in the military part of the business, was very strong at the end of March.”

Challenges on the Civil Side

Of course, the civil side continues to present “challenges,” as a weak airline market, a strong Canadian dollar and shrinking profit margins have forced CAE to concentrate on internal efficiency to produce simulators more cheaply. A top priority involves cutting the time it takes to build a simulator. By the end of the year, said Brown, he expects to shave off about five of the some 19 months it now takes to assemble one of the machines.

“I don’t think there’s been any, or very few in any event, simulators that have been purchased by the legacy carriers in the United States since 9/11,” he lamented. “It’s how you’re organized and how you build flexibility into the system to deal with these kinds of circumstances that allows you to be competitive over the longer term.

“So we have changed the overall approach that we have in terms of the way we are building simulators. It’s not just changing the organization, it’s looking at how we build them, it’s looking at how we design them, and it’s making sure that we sell what we build.”

Currency Conundrum

Brown can do nothing about one of the biggest problems not only CAE but most companies doing business in U.S. dollars must face. Over an 18- to 24-month period the Canadian dollar rose in value from 63 cents to around 83 cents relative to its neighboring currency. Brown estimates that each cent the Canadian dollar gains on the U.S. dollar slashes about C$750,000 from CAE’s bottom line.

Nonetheless, CAE’s military business continues to yield double-digit margins on a 34 percent year-over-year gain in order intake, so that side of the business will essentially remain intact. Brown also expressed optimism about the civil training part of the business. “We’re seeing growth all around, probably the regional jet sector being the weakest, but I think the large civil and business aircraft training will be quite good,” he commented.

Nevertheless, CAE plans to close the Dallas-based Schreiner Aviation facility it bought in 2001, get rid of its inactive Dornier 328 simulator and move some Dassault Falcon business jet simulators to a new training center it plans to open in Morristown, New Jersey, next summer. By then CAE will operate four major global business aviation training centers, including Burgess Hill, in the UK, Dubai in the United Arab Emirates and the SimuFlite center in Dallas, which it bought in January 2002.

“Asia is very strong; the Middle East is doing well. I think Europe is stable,” said Brown. “We’re really looking to see if the legacy carriers can get things straightened away over the next year or so in the United States. Overall I think the training we’re seeing actually is up as it relates to the utilization of the simulators that we have in our training system.”

Over the past year the company cut its debt from C$529.6 million to C$285.8 million and saw its free cash flow rise from C$9.8 million to C$87.8 million. For fiscal year 2004 it suffered a net loss of C$304.7 million, due to a third quarter loss of C$347 million attributable mainly to goodwill impairments related to the sale of the company’s Schreiner division and restructuring costs. Excluding nonrecurring items the company reported earnings of 19 cents a share, compared with 21 cents a share a year earlier.

“We’re making money now,” said Brown. “[The goal is] getting an acceptable rate of return for our shareholders on what they have invested, and it’s also having a generated free cash flow, which I think is a real indication of quality earnings and capability to sustain ourselves going forward.”