Fairchild fights for financing

 - May 15, 2008, 10:56 AM

Time is ticking, and Fairchild Dornier has only two months to find a strategic investor. In the hands of a court-appointed administrator since filing for insolvency on April 2, the company’s prospects may have grown even bleaker when one of its biggest customers–GE Capital Aviation Services–withdrew an order for fifty 728 regional jets last month.

In a statement, the company said it had been unable to close with a strategic partner in the time available “as defined by German law.” The move came less than two weeks after chairman Charles Pieper acknowledged that Fairchild Dornier was in dire need of money. Insolvency money (the money that pays salaries) is now guaranteed until July 2. The company expects court insolvency proceedings to begin on June 17.

“Fairchild continues business,” Eberhard Braun, the insolvency administrator, said in a statement released April 4. However, the company has since laid off some 500 U.S. workers and effectively closed its support offices in Herndon, Va. At press time a skeleton staff led by Dean Rush continued U.S. corporate sales functions while vice president Jim Burks and three individuals staffed the asset-management division.

A company spokesman told AIN that insolvency is similar to the U.S. Chapter 11 process. The latter provides some protection from creditors. The bank consortium, consisting of the Bayerische Landesbank, the HypoVereinsbank and the KFW, has provided the temporary insolvency administrator with the liquidity immediately needed.

On April 3 the insolvency administrator had in hand $20 million, the spokesman said. This was the first part of a total $90 million loan partially guaranteed by the State of Bavaria and the Federal Republic of Germany and subsequently approved by the European Commission.

The administrator said the search for a strategic investor is ongoing. Today’s majority shareholders are New York investment firm Clayton, Dubilier & Rice and Germany’s Allianz Capital.

On March 21 Pieper declined to name potential partners, though company executives suggested Airbus would have been the preferred choice. Several times they alluded to alleged similarities that exist between Fairchild Dornier and Airbus product lines. “We say to our prospects that operating 728 family aircraft along with A320 family jets provides consistent service standards on all routes,” Fairchild Dornier COO John Wolf said in his presentation on March 21.

However, Airbus remains an unlikely strategic investor. EADS (Airbus’ parent company), Snecma, Thales and Dassault jointly hold a 20-percent stake in rival regional jet maker Embraer.

Wings Clipped at San Antonio

Insolvency administrator Braun also decided to stop 328JET wing production in San Antonio. “As the U.S. company is financed from Germany and there are no U.S. laws similar to the German ones for the payment of insolvency money, it was necessary for nonessential activities to be shut down immediately,” he noted.

The administrator closed down wing production in the U.S. since “there are enough wings in stock in Germany for the continuation of the company, and wing production can be resumed if necessary at any time.”

The 3,600 German workers “will receive their salary on time for the next three months” since the Munich Employment Exchange has approved the insolvency financing and gave an independent bank its financial approval. In other words, the federal government will guarantee these salaries.

Hours before the rollout of the 728 on March 21, Pieper had painted a clear picture of what he sees as the reasons behind the company’s predicament: “There are four significant challenges [the shareholders] did not anticipate.” The first one was “the nine-month delay of the 728 in 2000, which pushed out our product margins about a year.” According to the spokesman, technical snags caused the delay.

The chairman sees the second one, the 428JET cancellation, as “a cash savings versus continuing the program.” But this decision left the 328JET “as a standalone product,” which resulted in less cash flow.

The third big issue was the Chinese government’s refusal to issue an import license for Fairchild Dornier’s 328JETs. Hainan, a Chinese airline that operates nineteen 328JETs, had ordered 21 more. “Based on firm orders and agreements on the required offset programs, we started to build them,” Pieper explained. When the government changed its import policy, “we had built six of them already,” he added. Since then “three or four” have been sold.

The fourth issue was September 11 and its effect on the airline industry. For Fairchild Dornier, this first translated into delivery postponements. Pieper said, “We had 328JET customers ready to take airplanes, but after September 11 these carriers could not obtain the financing, leaving us with significant inventory and a need to cut capacity.” Most recently the 328JET production rate has been two aircraft per month.

Another consequence of September 11 was Airbus’ cutting production by more than 20 percent, Pieper recalled. Airbus components manufacturing accounts for 12.5 percent of Fairchild Dornier’s revenues. Further diminishing Fairchild Dornier’s prospects, 728/928 customer campaigns were all put on hold.

According to Pieper, the combination of these problems has left the company with costs on plan and “somewhat higher R&D,” but with significant revenues and
margins pushed out. “The economy is coming back... but a year later,” he said.

Pieper sees the need for liquidity as being “greater than ever before.” This is why the company has taken “a proactive approach to find a strategic partner.”

Financial sources have suggested that potential buyers such as Boeing and Bombardier would prefer to negotiate with a company that is already under insolvency. Under the German laws, insolvency means that the buyer does not have to assume debt interest.

728 Program Hangs On

The “power on” milestone for the first 728 was scheduled to occur at press time. After four months of ground testing, first flight is officially pegged for “July or August.” The flight-test program should last “11 to 14 months” for the 728-100 to enter service during the fourth quarter of next year. The longer-range -200 will follow during the first quarter of 2004, some nine months earlier than originally planned. Starting in early 2004, all deliveries should be 728-200s since the company has chosen to focus on this variant. Although Fairchild Dornier plans to cease marketing the 728-100, it will offer a lower mtow by customer request.

Flight-test aircraft number two, which was still under assembly when the first 728 rolled out in late March, should fly about two months after number 1. Aircraft S/N 3 and 4 should follow at one-month intervals. The structural test aircraft was scheduled to be shipped to IEBG, the German company in charge of these tests, in late March.

Fairchild Dornier recently invested $100 million in its Oberpfaffenhofen, Germany plant. It is theoretically able to build sixty 728/928s a year and can double that rate if a second riveter is added.

Prospects for the 728 family are believed to be mainly in Europe and in the U.S. “These two regions will account for 70 percent of demand for aircraft in the 25- to 110-seat market, said Barry Eccleston, who is in charge of business development at Fairchild Dornier. According to his forecast, the global market for this category is 9,000 aircraft over the next 25 years. “Asia is about 7 percent of the market, but could be higher if China develops,” he added.

Fairchild Dornier also hopes to cash in on the major U.S. carriers’ “new strategy.” These carriers’ response to low-cost carriers is to pick up the high-yield traffic with smaller aircraft, Eccleston said.

With the GECAS cancellation, the company holds firm orders for 73 aircraft in the 728/928 family, from Lufthansa Cityline, CSA Czech Airlines, Bavaria International Leasing, Safadi (a Lebanese operator) and an undisclosed customer. A letter of intent for two 728s was signed with Sol Air of Italy. However, “the Flight Options commitment for 25 Envoy 7s [an executive version of the 728] is not a firm order,” Pieper pointed out.