Fairchild Dornier teeters on the brink

 - April 21, 2008, 10:10 AM

As a district court in Weilheim, Germany, opened insolvency proceedings against Fairchild Dornier on July 1, the fate of the Bavarian regional jet builder hung on the fading hope that a large established aerospace company might come to its rescue. But by the middle of last month, after company receivers fired 80 employees and placed another 1,800 “on hold” at 79 percent of their salaries, Italy’s Alenia and Earl Robinson’s Alliance Aircraft had replaced heavy hitters EADS, Boeing and Bombardier as the remaining “serious” suitors for the beleaguered manufacturer.

Existing in a state of virtual limbo at press time, Fairchild Dornier was broken into four pieces by insolvency administrator Eberhard Braun in an attempt to render it more easily digestible by smaller companies. The largest piece–the 728 and 928 manufacturing division–remained Braun’s biggest challenge, given its need for another $400 million to complete 728 certification and $1 billion to finish development of the 928. Alenia, the half-owner of Franco-Italian turboprop builder ATR, expressed the most interest after its partner in the joint venture, EADS, ruled out taking a stake in the German company.

In fact, EADS’s influence over the outcome of the Fairchild sale extended beyond the effect of its own disinterest when the European consortium threatened to block any attempt by Alenia to introduce the 728 program into ATR. But if Alenia were to pursue the 728 on its own, any deal would have to survive European Commission antitrust scrutiny given the Italian company’s 50-percent share in the turboprop builder. Further complicating matters, Alenia would have to negotiate the terms of the acquisition with its parent company, Finmeccanica, and the Italian government. Meanwhile, EADS has asked permission from Fairchild to recruit as many as 400 employees from Oberpfaffenhofen to satisfy a need for qualified labor within its military and defense electronics businesses, as well as among its Airbus and Eurocopter divisions.

Early last month a team of 150 engineers from Alenia returned to Rome from Oberpfaffenhofen, where they had evaluated not only 728/928 manufacturing, but also its product support and Airbus subassembly fabrication businesses. Roughly two weeks later, an Alenia spokeswoman told AIN that the company “decided not to consider any formal negotiations to purchase one or more businesses of Fairchild Dornier.” Although she declined to offer details, she said the company concluded that “submitting offers would not be feasible because of significant factors of uncertainty over the profitability of the businesses under review.”

She added, however, that Finmeccanica reserved the right to “monitor any future developments that may affect the subjects of the preliminary assessment.” Alenia became the primary suitor for the 728 and 928 after Canada’s Bombardier announced in June that its own five-week analysis convinced it that the program “would not produce returns in line with [its] requirements.”

Bombardier’s decision to end its commercial study prompted the program’s last major customer–Germany’s Lufthansa–to follow GE Capital Aviation Services in canceling a firm order for sixty 728s. GECAS canceled its order for 50 of the airplanes soon after Fairchild Dornier announced its plans to file for insolvency in early April. Lufthansa’s regional subsidiary, Lufthansa CityLine, already flies 50-seat Bombardier CRJs and 70-seat CRJ700s, a fact that contributed to the parent airline’s clear preference for a Bombardier takeover. In fact, Lufthansa joined the German and Bavarian governments in formally beseeching Bombardier to consider the 728 program in early May. Meanwhile, the Czech Republic’s CSA Czech Airlines has begun searching for alternatives to the 728. The Czech national airline held firm orders with Fairchild Dornier for four of the 70-seat jets and planned to lease another four from GECAS.

With virtually no firm orders remaining on the books, the program’s value to potential stakeholders appears to have lessened considerably. Paradoxically, as the number of interested companies suitably funded to undertake such an ambitious project dwindles, its value falls yet further and government incentives become even more essential to any potential sale. Aside from Alenia, Earl Robinson’s Alliance Aircraft stood as the only other company still publicly interested in the 728 program. According to the Fairchild receivers, Robinson has submitted a proposal, giving him access to company financial information for a due-diligence review. But, Braun has expressed reservations about Robinson’s claimed ability to raise the $500 million he proposes to invest in the project.

Soon after Alenia announced its decision not to invest in the 728, Bavaria’s Christian Social Union party economics minister, Otto Wiesheu, said he had asked EADS to reconsider its position on Fairchild. Talks centered on opening a so-called development center at the company’s headquarters in Oberpfaffenhofen–an effort geared toward placing more employees within EADS’s existing structure as well as within a revamped Fairchild Dornier. Although EADS has repeatedly said it harbored no interest in the 728, it has not ruled out taking over the components business on which it depends for Airbus bulkheads, sideboxes, floor structures, rear sections and tailcones.

Last month holding roughly $130 million in government-backed financing approved by the European Commission, Fairchild Dornier retained roughly half of its 3,600-strong workforce on its active roster, and placed 1,836 employees in a three-month “training” program during which they receive 79 percent of their normal salaries. Even if receivers manage to find buyers for all the divisions, German estimates place the number of eventual job losses at some 1,000. 

Approaching the point of a nationwide crisis, German unemployment stands as a central issue during this parliamentary election season. Although the economic climate in Germany has added to the weight of Fairchild Dornier’s plight, the desire to keep jobs in Oberpfaffenhofen may have proven counterproductive to attracting new international investors. As a condition of any financial support, the government must demand certain guarantees related to the level of work and number of employees that remain employed in Oberpfaffenhofen. But the high cost of German labor has long represented a disincentive to foreign investors and led to Fairchild’s decision in the late 1990s to outsource much of Dornier’s work overseas to cheaper labor markets.

While prospects for the sale of the 728 project appeared to grow dimmer as last month wore on, Braun expressed confidence in the marketability of the remainder of the business, particularly the support and components divisions. Foremost among the potential buyers of the subassembly manufacturing segment stood Germany truck builder MAN Technologie. Already a supplier of water tank systems to EADS subsidiary Airbus, MAN recently cut 300 jobs from its own workforce due to the weakness in the European aerospace sector. 

Meanwhile, U.S. investment firm Dimeling, Schreiber & Park expects to decide by next month whether to fund the 32-seat 328JET, production of which will continue under Braun’s auspices until then. A 60-percent owner in Piper Aircraft, DS&P acknowledged strong interest in the program, despite the recent cancellation of a 30-unit order by Atlantic Coast Airlines, the program’s largest customer. Another company interested in the 323JET, Italy’s Piaggio Aero Industries, expects to decide on whether to bid for the project by early this month, according to a letter sent to Fairchild Dornier employees from the interim management. Run by Piero Ferrari, son of Ferrari car maker founder Enzo Ferrari, Piaggio builds the P.180 Avanti light business turboprop and P.166 reconnaissance airplane.

With reporting from Jeff Apter and Thomas Stocker.