International Business

Caught in Aviation Downdraft, Deutsche Aerospace Slims Down

BONN

ISSUE: The dramatic tailspin in the worldwide aviation industry has struck hard in Germany, where the country’s comfortable social safety net has made labor expensive and increasingly non-competitive.

Deutsche Aerospace (DASA), which in just four years has grown to become Europe’s No. 1 aerospace company, is taking drastic action to scale back its operations with the aim of turning a profit by 1995.

BACKGROUND: Four years ago, Daimler-Benz, Germany’s leading industrial conglomerate, formed DASA as part of an ambitious effort to expand its core Mercedes-Benz automotive business into a global technological concern and launch Germany as a key player in the aerospace market.

DASA Chief Executive Juergen Schrempp quickly amassed a corporate giant, with interests in every branch of aviation.

Early this year, the company acquired the Dutch Fokker aircraft group, building on earlier mergers and acquisitions that include such aviation fixtures as defense contractor Messerschmidt-Boelkow-Blohm, engine maker MTU, aircraft producer Dornier Group and satellite specialist Telefunken Systemtechnik.

DASA has successfully challenged longstanding French dominance of the European Airbus Industrie consortium, evidenced by the rollout earlier this year in Hamburg of a new airliner, the first wide-body Airbus jet ever assembled in Germany.

But Deutsche Aerospace’s rapid empire building has bloated its payroll to more than 80,000, including many highly specialized--and highly paid--aircraft workers.

Analysts had long expected a consolidation, particularly since DASA has been operating in the red since last year and does not expect to turn a profit for two more years.

OUTLOOK: The worldwide aviation industry remains in dismal straits, with prospects of a turnaround still years away.

The worldwide recession in commercial airline business combined with a sharp post-Cold War dip in defense-related aviation orders has struck Deutsche Aerospace on all fronts.

Schrempp predicts that DASA’s volume in 1993 will fall about $700 million short of the $9.3 billion announced earlier this year, with new orders coming in 20% below anticipated levels.

Even orders that have not been canceled or postponed are in doubt, some industry observers say, because many customers are in trouble and will be unable to meet their bills.

The company plans to shed 20% of its work force by 1996 and close six job sites, moves that are expected to save $920 million a year.

The plans have met strong opposition from worker groups and local government officials at a time when spiraling unemployment across Germany is becoming an explosive social and political issue.

Labor leaders are pushing for a four-day workweek to avoid layoffs, and several state governments have suggested saving jobs through public subsidies.

But Deutsche Aerospace has expressed little interest, saying the company’s problems are structural and that the restructuring must go forward.

Industry analysts say DASA is taking the right approach, particularly since direct subsidies would upset world trade negotiations.

“If you want to be successful, you have to do what the market dictates, not what the politicians say,” said one London banker, an expert in European aerospace.

STRATEGY: Schrempp has built his company’s reputation partly by making deals and looking beyond the traditional bounds of German aviation.

He was the force behind a study with Boeing on a super-jumbo jet, has teamed up with the French on helicopter production and says the door is open to foreign cooperation on the next generation of Fokker jets.

Some analysts expect a leaner Deutsche Aerospace to maintain a similar broad perspective on the commercial side, while continuing to press Bonn on the defense side--which accounts for 27% of sales--to make a bigger commitment to the entire industry.

Deutsche Aerospace is lobbying hard for Bonn to buy the new generation of the Eurofighter and to provide indirect subsidies to Deutsche Aerospace by funding research and development on par with government efforts in Japan and the United States.