Finmeccanica Slide Could Impact New AgustaWestland Programs

 - January 3, 2012, 9:10 AM

The tumultuous reign of former Italian Prime Minister Silvio Berlusconi may be over, but the damage it has inflicted on Italy’s economy and the ongoing euro crisis will likely linger well past his latest criminal trial.

Among other problems, the business climate in Italy remains clouded by allegations that several companies felt obliged to provide favors and payments or one sort of another for Berlusconi and other politicians. Pier Francesco Guargualini, the former chairman of industrial and defense giant Finmeccanica, is one executive allegedly caught up in this practice. The Berlusconi appointee resigned on December 1, under pressure from Italy’s new Prime Minister Mario Monti, and is still being investigated for alleged bribery–charges he denies.

Giuseppe Orsi, the dynamic former CEO of AW, was appointed to replace Guargualini. He faces significant challenges in rebuilding Finmeccanica.

Finmeccanica is 32.5 percent owned by the Italian government and the parent company of helicopter maker AgustaWestland (AW). Over the past few months, the group’s share value plummeted by two-thirds, its market capitalization fell to €1.6 billion, debt ballooned by 50 percent in one year to €4.7 billion, cash reserves were depleted, and rating agency Standard & Poor’s downgraded its debt to BBB-, the last investment grade available on the way to junk status.

Finmeccanica must shed under-performing assets to pay down debt and right its financial house. AnsladoBreda, the company’s money-losing train and tram maker, is a prime target for divestiture. Historically, the Italian Government and the Italian public have fought hard against this, and Finmeccanica has even been pressured to buy local companies or stakes in local companies considered cash drains, but Finmeccanica’s board has green-lighted Orsi to dispose of up to €1 billion in assets and restructure the company.

The restructuring also means that Finmeccanica will slow investment through 2012 by €200 million and slash another €140 million from overhead and administration.

It may not be enough, as the company’s order book is in free-fall, dropping 30 percent for the first nine months of 2011 compared with 2010. A substantial share of Finmeccanica’s business comes from the defense sector, which is likely to post further contractions in 2012.

And the specter remains that the EU or the World Bank could force the Italian Government to quickly divest its share of Finmeccanica, as a condition for refinancing sovereign debt, driving further and even more drastic consolidations.

AgustaWestland in Limbo

Exactly how this plays out for AgustaWestland’s new product development programs remains unclear. If recent aerospace business history is any indicator, when a parent company is in financial difficulty, new development programs of its subsidiaries are scrapped or delayed. When AIN put the question to an AW spokesman last month, he would say only that all the development programs currently are on track. That includes the AW609 civil tiltrotor program.

The long-troubled partnership between AW and Bell to develop the 609 officially ended in November with AW assuming the assets of the Bell Agusta Aerospace Co., the joint venture formed to develop the aircraft. While details of the deal remain undisclosed, it is widely believed that it involved little or no cash trading hands, with AW getting it for its past program investment and the promise that Bell would provide drive train and rotor components going forward.

AW announced that it would form a new U.S.-based entity to complete certification in 2015 or 2016. Development work will be based at AW in Cascina Costa, Italy, where a third and fourth prototype will be constructed.

The 609 was announced in 1996 and the first prototype flew in 2003. Two test aircraft, one based in Texas and the other in Italy, have flown a total of 600 hours at altitudes to FL250 and speeds to 275 knots. AW maintains that 85 percent of the flight envelope tests are complete and that 70 orders remain for the aircraft. However, many of those orders are price conditional and the estimated price of a 609 has climbed from $10 million to close to $30 million since the program began. AW declined to provide an updated unit price or categorize the status of existing orders.

AW also has three new conventional twin-engine helicopters under development, all with ambitious flight test, certification and delivery schedules over the next three years. The AW149 and 18-passenger AW189 build on the technology of the popular AW139 and are seen as having low technical risk while the clean-sheet, 9,000-pound AW169 appears aimed squarely at competing with Sikorsky’s new S-76D.

The AW189 made its first flight on December 21, while the AW169 is slated for first flight this year. Certification for the 189 is planned for 2013; 169 certifcation is planned for 2014. AW also expects certification for the AW149 in 2013.