Hard times push Fairchild into arms of a new partner

 - May 15, 2008, 4:50 AM

A virtually stagnant market for new commercial airplanes and a rapidly eroding capital base have convinced German airframe builder Fairchild Dornier to pursue a new “strategic” partnership with another large aerospace concern. “We are cash negative,” said company chairman Charles Pieper during a press briefing on the morning of Fairchild’s March 21 rollout of the 70- to 85-seat 728. “A strategic partner could help reduce costs, provide an addition to the capital structure, provide additional customer contacts and a human-resources complement. In short, it would make us more competitive in all aspects [of our business.]”

Pieper said Fairchild Dornier continues to hemorrhage roughly $50 million per month, and concluded that “we cannot predict the ultimate future of Fairchild Dornier.” He added that the money shortage has forced the company to redirect funds from its other programs–namely the Envoy 7 business jet and 95- to 110-seat 928–to the first flight of the 728.

Top company executives declined an interview with AIN last month, but a company spokesman acknowledged that progress toward new order fulfillments has come to a virtual stop since September 11, precipitating this latest appeal for a fresh capital injection. He would not identify any potential partners, however, adding only that talks remain in a “very preliminary” stage and that reports of an imminent Fairchild-Boeing alliance amount to “pure speculation.” During the rollout, Pieper too declined to identify anyone by name, adding only that he has talked with “more than four” potential partners. Boeing also declined to comment on the reports.

The announcement came just 10 days before the March 21 rollout, held at Fairchild Dornier’s production facilities in Oberpfaffenhofen, Germany. Introduced in 1998, the 728 has endured a number of design changes as customer demands evolve with the fast developing regional airline industry. Now slated for first flight in July after problems with subassembly installations delayed completion of the first prototype, the airplane now appears likely to gain certification during next year’s third quarter, at least two months after the previous May target and a full year later than original estimates.

Severely undercapitalized during the early phases of the aircraft’s development, the company finally secured the funding it needed to proceed with its ambitious project in April 2000, when New York investment firm Clayton, Dubilier & Rice teamed with Germany’s Allianz Capital to buy Fairchild from former CEO Carl Albert. Now, as it prepares to start flight testing the $30 million jet, ever more exacting demands from potential mainline customers have forced the company to offer longer-range, higher-performance variants of both the 728 and 928, requiring another $870 million in development funding.

Long-range Commitment

Known as the 728-200, the 70- to 85-seat jet now offers a range of 1,800 nm–400 nm longer than the original 728–and a maximum takeoff weight of 83,754 lb, compared with the 728-100’s 79,343-lb mtow. The company attributes the need for the new variants to the trend toward more nonstop flights in the U.S. and Europe and a demand for low-density, long-range capability among airlines in Asia, South America and Australia. Unfortunately for Fairchild Dornier, the offering drew no sales commitments during Singapore’s discouragingly slow Asian Aerospace airshow in late February.

Nevertheless, the program’s existing customers have decided to convert the bulk of their firm orders to the new model. As a result, Fairchild Dornier plans to accelerate development of the -200 to accommodate certification by the start of 2004, some nine months earlier than originally planned. Although it plans to cease marketing the lighter -100, it will offer a 728-200 certified at a lower mtow if a customer requests it.

Earlier this year the company said it had secured some $345 million for the project from bank loans guaranteed by the German federal and Bavarian state governments, supplementing another estimated $525 million from present shareholders and lending institutions. Although the company spokesman would neither confirm nor deny that the funding plan has fallen apart, it appears now that the structure or even the existence of such support may hinge on the company’s ability to secure a risk-sharing partner.

“The question of the $870 million is not relevant right now,” said the spokesman. “It’s so dependent on what kind of partnership you arrange; [the money] could be there or it doesn’t necessarily have to be there. Right now it’s hard to say what the partnership will be like and what the funding requirement would be until we get into the details of the discussions. If the partner brings a lot of cash, then you don’t need the financing you needed before, so your interest costs are lower and everything changes in the model. We’re just embarking on these discussions. Once we find a partner, then we get into the details of the partnership configuration.”

Hours before the rollout ceremony, however, Pieper explained that German laws require that only “fully funded” programs qualify for government-backed bank loans. He added that the restrictions apply to both the federal and Bavarian state governments.

Although Fairchild Dornier claims to hold more than $11 billion in order commitments, the entire 728/928 program has drawn no firm sales since CSA Czech Airlines ordered four 728s from the company at last June’s Paris Air Show. CSA, which also said it would lease another four of the airplanes from GE Capital Aviation Services, has since scrapped its plans to increase capacity by 10 percent this year, raising questions about next year’s scheduled deliveries of four 728s. Fairchild, however, maintains it will deliver to CSA four 728-100s next year, all of which would come from an order for 50 placed by GECAS. Fairchild also plans to deliver seven 728-100s to launch customer Lufthansa CityLine next year, after which time it plans to devote its entire 728 production output to -200s.

Bureaucratic Delays

Meanwhile, an expected order for twenty-one 328JETs by China’s Hainan Airlines has yet to materialize, as Fairchild awaits the import license from the Chinese government it needs to complete the sale. Based on firm orders and offset agreements, Fairchild Dornier has begun building the Hainan airplanes, six of which it has completed. The company has since sold “three or four” of them to other customers, said Pieper.

“Because orders just came to a stop we didn’t have the use of deposit money for operating capital,” said a Fairchild spokesman in Germany. “We had a plan based on certain assumptions and come February it was clear that those assumptions were no longer valid. So we determined that the best way to proceed at this point was to pursue a relationship with a strategic partner.”

Despite the gloomy picture this latest announcement by Fairchild appears to paint, the company by no means stands alone in its predicament. In November BAE Systems scrapped its RJX program after pricing pressures from its three main competitors essentially squeezed the British manufacturer out of the market. Brazil’s Embraer, until last year the fastest growing jet builder in the world, has cut this year’s planned production rate by 35 percent after logging net sales of only 30 regional jets last year. Most recently, Milwaukee-based Midwest Express served notice that it would defer delivery of its Skyway Airlines subsidiary’s first 44-seat ERJ-140 from next January to January 2004. Another Embraer customer, Varig subsidiary Rio Sul, last month said it would swap its 11 ERJ-145s and five Brasilia turboprops leased from Brazil’s National Economic and Social Development Bank for an unspecified number of Boeing 737s by the end of the year.

Although Canada’s Bombardier managed to log sales of 230 regional airplanes last year–roughly the same number it sold in 2000–it too has issued calls for “a more conservative approach” for the coming two years. Shortly after September 11, the company cut this year’s delivery target for 44- and 50-seat CRJs from 165 to 149, and its de Havilland Dash 8 production from 48 last year to 36 this year.