AIN Blog: Failure Is Not an Option as Pragmatists Take Charge of Finmeccanica and Italy

 - December 9, 2011, 6:30 AM
Restoring Alenia's aerostructures business to profitability is a priority
Alenia makes aerostructures for Boeing's 777, but has struggled with the 787

At face value, the December 1 departure of Pier Francesco Guarguaglini as chairman of Finmeccanica should herald a new dawn for the Italian aerospace and defense group. But his successor Giuseppe Orsi, who continues to serve as chief executive too, faces a monumental task to rebuild the company’s business plan in the face of third quarter losses of €324 million ($422 million).

Guarguaglini, who incidentally is under investigation in connection with allegations of false accounting, had flat-out refused to sanction the case Orsi had built for a fundamental restructuring of Finmeccanica. The 74-year-old former chairman, who was appointed by deposed Italian prime minister Silvio Berlusconi, was at the head of the generation of Finmeccanica management that had felt frustrated by the steadfast refusal of Airbus to let the Italian group join the European airframing consortium.

Instead Finmeccanica sought a strategic partnership with Airbus’s U.S. rival Boeing, for which it has been making aerostructures. And yet, when Finmeccanica’s big opportunity came in the shape of its selection by Boeing to make the 787 Dreamliner’s sections 44 and 46 fuselage barrels, as well as the horizontal stabilizer, its Alenia Aeronautica division basically blew it. Penalties that Finmeccanica has had to pay Boeing to compensate for lengthy delivery delays and quality problems have resulted in a €753 million ($1 billion) charge against its third quarter earnings. The program failings also badly dented Alenia’s credibility and resulted in its now having a much smaller role in this key airliner program. Airbus probably heaved a sigh of relief that it never brought its Italian neighbor into the fold.

Orsi, who comes to the top job at Finmeccanica with a good reputation for his previous role of running one of its most successful divisions (the helicopter maker AgustaWestland), now has an historic opportunity to reverse the group’s fortunes. The strongest card he can play, in what previously might have been a hard task to get all the various Finmeccanica stakeholders to agree to, is that, to put it bluntly, failure is not an option.

Guarguaglini’s leadership of Finmeccanica was starting to look about as credible as Berlusconi’s delusional stewardship of Italy’s ruinous public debt crisis. Italy’s wholly pragmatic prime minister Mario Monti was behind the latest boardroom changes at Finmeccanica (in which the Italian state has a one-third stake). Monti knows that Orsi must overhaul Finmeccanica along the same lines that he now must overhaul the Italian economy—slashing costs and sweeping away the legacy of uncompetitive cronyism.

Turning around Finmeccanica’s aerostructures business won’t be Orsi’s only challenge. Aggressive cuts to Italy’s defense budget (as well as to those of some of its main export clients, such as the U.S. and UK) will likely dent previously assured income from this side of the business. It is not inconceivable that he will feel compelled to rebalance the group’s bottom line by selling more profitable lines of business, such as its stake in the ATR regional airliner manufacturer.

In any case, at least now Orsi should not face steadfast internal obstructionism from on high. New programs such as Alenia’s alliance with Russia’s Sukhoi to develop the new Superjet 100 airliner also present an opportunity for the group to redeem itself.