Newcomers look to trump Russian bid for Fairchild

 - May 8, 2008, 5:08 AM

As receivers of bankrupt regional jet manufacturer Fairchild Dornier awaited a takeover bid from a partnership led by Russian conglomerate Basic Element last month, another group of investors that hopes to prove more palatable to aircraft program stakeholders and the German  government suddenly surfaced. Swiss-registered Aviation Finance Consulting (AFC) wants to inject E200 million ($195 million) in capital into the company and maintain operations in Oberpfaffenhofen, Germany, with E800 million ($780 million) in loans backed by the Bavarian and German federal governments. AFC has proposed installing former Augsburg Airways boss Olaf Dlugi as CEO and former Dornier chief executive Heider Heydrich as COO.

The AFC overture stood as the first expression of interest in Fairchild Dornier’s 728 program by a Western investor since the German company began negotiations with Basic Element more than three months ago. Meanwhile, negotiations between the Russian investors and Fairchild Dornier have progressed to “the highest political levels,” placing the Swiss latecomer at a disadvantage in terms of timing. Still, the inherent political and logistical impediments of doing business with a Russian enterprise remain an issue of contention, a fact that could potentially bode well for AFC.          

Nevertheless, the Basic Element bid, tendered on October 18, has gathered increasing support in both Germany and Russia, where a pair of new allies in the form of Siberian airframe builder Irkutsk Aircraft Production Association (IAPO) and Moscow-based investment group Kaskol have surfaced. IAPO professes to be “very interested in broadening the base of cooperation” with European companies such as Fairchild Dornier and EADS. “Our goal is to become a diversified aerospace company participating in global programs,” said an IAPO spokesman. “We see Basic Element’s plan as promising, and an opportunity for us to share in a large international aviation project.”

Although Kaskol confirmed its interest in the project to AIN, it had not participated in direct negotiations with Fairchild Dornier. “Let Basic Element go forward, and if their plans become reality, we will be happy to participate in the 728 as subcontractors and risk-sharing partners,” said a company spokesman.

EADS Central to Deal

Despite its repeated denials of any interest in the project, EADS’ cooperation appears central to any deal between Fairchild Dornier and Basic Element. Spain’s CASA, a member of EADS and a Fairchild Dornier risk-sharing partner, stands to lose a significant investment if the German company dissolves. CASA’s predicament appears to have sparked a renewed interest in saving Fairchild Dornier by none other than GIFAS president and EADS co-CEO Philippe Camus. During a Russo-French economic conference in Moscow in mid-September, Camus met with Russian prime minister Mikhail Kasyanov to discuss cooperation on a number of projects, including Russian participation in Fairchild Dornier.

“Apart from financial and management issues, there are also those of intellectual property rights and high politics,” an informed source in Russia told AIN. “Major 728 parts have been designed by EADS member companies, so EADS must approve the transfer of design documents to the Russian side.”

A private investment company that controls several large aluminum plants in Siberia, Basic Element just recently took a controlling stake in Aviacor, which already builds the Tupolev Tu-154M and has begun building an assembly line for the Antonov An-140 turboprop. Basic Element chairman Oleg Deripaska sent a team of engineers from Aviacor to the Fairchild Dornier plant to examine the technical merits of the program. Although they reportedly returned convinced of the feasibility of Russian participation in the project, the plan has drawn a firestorm of controversy in Russia, where the press has drawn parallels between Deripaska’s endeavor and an overture by former Yakovlev boss Alexandr Dondukov to buy the bankrupt Fokker and build Fokker 50s and 100s with Russian parts.

At issue, of course, remains the Russian government’s interest in many other indigenous regional aircraft programs. Although a link-up with Fairchild Dornier would reinvigorate the Aviacor factory in the Volgan city of Samara, it would also position Basic Element at the center of the most advanced and only Western-licensed regional jet program in the country, placing programs led by Sukhoi, Tupolev and Antonov at a distinct disadvantage.

Contrary to early reports, Basic Element does not plan to move assembly of the Fairchild Dornier 728 to Russia. Under the latest version of Basic Element’s plan, a Russo-German joint venture would manage the project, while assembly continues at Fairchild Dornier’s Oberpfaffenhofen plant and Russian enterprises gradually master components manufacturing. The Russians’ ability to make parts for the airplane stands as the central consideration, given the cost reductions needed to render the project economically feasible. More than 80 percent of the parts used in the 728 come from subcontractors. The Russians’ primary goal centers on assuming a large portion of that subcontracting work and, in the process, gaining knowledge in the processes used by Western manufacturers.

Cooperation is Key

During an informal meeting at the Fairchild Dornier plant last month, 728 program manager Michael Rehmet and 728 chief engineer Jens Henkner said the Russian plan hinges on the cooperation of between five and eight key suppliers holding intellectual property rights to their components. Both agree to the need for minor modifications to the 728 airframe to make better use of Russian manufacturing capabilities, but they insist that major alterations to the onboard systems would not prove feasible.

If the receivers accept Basic Element’s bid, Russian engineers would help complete development of the airplane, assist in certification and prepare for production. Although nearly complete, the 728 still requires some 200 to 300 white-collar workers, notably stress engineers and systems integrators, to reach certification. According to Rehmet and Henkner, the first prototype needs some six months of ground testing, meaning first flight could occur within nine months at the earliest. Meanwhile, the second prototype, although structurally assembled, still lacks systems. Suppliers have built some parts, including the wings, for the third prototype. Under current circumstances, if a buyer surfaces by the end of the year, the 728 could gain certification in 2005.

Last month a group of creditor banks agreed to help the German and Bavarian governments create a so-called “transfer company” that will allow Fairchild Dornier to continue operations for another six months and keep at least 1,200 workers employed in maintenance, support and Airbus components building activities. The company ceased production of the 32-seat 328JET last month, sending another 200 employees into a training program established to help inactive workers find new jobs.

While they remain hopeful of selling the company as a single entity to a large aerospace concern, Fairchild Dornier has prepared contingencies for selling the various assets separately. On October 18, Alliance Aircraft CEO Earl Robinson was in Munich attempting to close a deal for the 328JET program. Claiming to hold between $15- and $16 million worth of direct funding, Robinson said he now views the 328JET as a potential “bridge” to the development of his proposed StarLiner line of 35- to 50-seat regional jets. As part of the Fairchild deal, Robinson has offered to continue production of the 328JET in Oberpfaffenhofen, while development of the StarLiner project proceeds in Martinsburg, W.Va. However, Robinson said he plans at some point to use the Oberpfaffenhofen facilities to build StarLiners as well.