Despite banner ’05, jury still out on Safran

Farnborough Air Show » 2006
November 14, 2006, 11:10 AM

Safran (Hall 4 Stand B12), the offspring of last year’s somewhat surprising merger of French engine giant Snecma and communications group Sagem, claims to have found its feet quickly and to be having a boom year. Sales in 2005 showed increases for all business areas of the new group, except communications. But the financial markets appear to be reserving judgment on whether the merger will have a deep-seated industrial logic, and there have been suggestions that the uncompetitive communications firm is dragging down the successful aerospace business.

Both at the announcement of the French government-inspired merger in October 2004 and its completion the following May, many industrialists, bankers and aerospace industry analysts raised questions as to the real sense of a tie-up between an engine maker and a firm that produces mobile telephones. Was it no more than a marriage of convenience? Safran chairman Jean-Paul Béchat, from the outset, agreed that the merger is “atypical,” but he doggedly insists that real synergies exist between the two companies.

The group’s 58,000-strong workforce in more than 30 countries, including some 41,000 in France, is employed in four branches: aerospace propulsion, aircraft equipment, defense security and communications. The Snecma and Sagem subsidiaries have retained their names and identities under the Safran umbrella.

With 2005 results driven upward largely by last year’s big increases in Airbus and Boeing narrowbody airliner orders and deliveries, Safran reported a 9-percent increase in earnings to €762 million ($953 million) from revenues that were 4.7 percent up at €10.58 billion ($13.23 billion).

The aerospace propulsion branch last year posted a 4.1-percent increase in sales, which included a record 1,640 orders for the CFM56 engines it produces with General Electric of the U.S., and orders for 1,250 helicopter powerplants from its Turbomeca subsidiary.

The aircraft equipment sector recorded a 13.1-percent rise and defense security activity showed a 6.3-percent improvement. But communications sales decreased by 2.6 percent. First-quarter 2006 results mirrored this trend with an overall 13.7-percent sales hike. Propulsion, equipment and defense security rose 17.2 percent, 16.5 percent and 31.2 percent, respectively, but communications fell by 4 percent.

Béchat, who became Snecma’s boss 10 years ago, does not accept suggestions that the merger honeymoon is over. Despite the officially reported dip in overall sector sales, he argued that Safran’s communications sales are actually very good, with records broken for modems and mobile phones. “The problem is not one of sales volume but of a sustained downward pressure on prices because of the huge competition in all these markets,” he told Aviation International News.

He pointed out the branch’s sales no longer consolidate the loss-making cable business that Safran shed last December. At constant size and exchange rates, communications sales would have increased 4 percent, he said. “Despite these difficulties, most of our activity was up compared to 2004. Our prospects and the forecasts are good to reach our main goal in 2006, which is to prove to the market that Safran will thrive.”

But the results continue to beg questions about the sense of the merger. According to Béchat, when two companies merge, their activity is not always completely in the same business. “When two aluminum producers get together, they do the same thing and there is no question of merger synergies. But when two companies are complementary, you have to identify the link between them,” he explained. “Snecma and Sagem’s activities are in aerospace, defense and defense-linked security. We never believed in synergies between mobile telephones and engines. Of course, some of the two companies’ products are disparate. But the same could be said of Smiths Industries, which mixes aerospace equipment and medical products– and it works.”

Béchat’s main argument in defense of the merger is that electronics are playing an increasing role in aircraft manufacturing and there is a growing link between Snecma’s mechanical expertise and Sagem’s electronic prowess with complementary technologies that are evident in fields such as aircraft equipment control systems. “For example, Snecma developed the electrical braking system for the B787 and Sagem is involved with Safran subsidiary Messier-Bugatti on the electronics for these systems,” he pointed out.

With aircraft engines increasingly dependent on electronics, before the merger Snecma had to seek an outside partner for each new electronics suite. But now, Béchat said, Sagem will produce electronic control cards for Snecma’s engines. Similarly, Sagem is now becoming a supplier for Boeing, a major Snecma client with which it had not done business.

Last year, Safran made six acquisitions and sold a similar number of companies. Béchat confirmed that the group remains open to further amending its portfolio but said he is not yet ready to discuss any such plans. Closure of Aircelle’s Meudon plant, just outside Paris, is being finalized and Safran last month opened a new 17-acre, 116,640-sq-ft production site for the assembly and marketing of electrical connection systems for the aviation industry in Morocco, where costs are low.

Béchat declined to comment on press reports that Safran is considering changes to the group’s present dual leadership arrangements. They are common in large French firms, but members of the financial community increasingly view them as inefficient and lacking in transparency.

The CFM alliance with GE continues to enjoy dominance in the powerplant requirements for Boeing’s narrowbodied airliners and, since January, the CFM56 is claimed to command 75 percent of the Airbus A320 family market. GE, Béchat said, has made no negative comment about failing to become a Safran shareholder after it had expressed just such an interest when the French government first announced its intention to restructure Snecma’s equity.

Béchat confirmed that he still has no intentions to pursue a merger with Thales, although the French electronics and defense group does work with Safran as a partner, for example, in a 50:50 program to modernize the Dassault Mirage F1 combat aircraft for the Moroccan air force. “We are together on some activities but compete in the bulk of our sales,” said the Safran chairman. “This is the name of the game. Thales wants to be a big defense systems player and we supply equipment and make engines. We are not in the same field and do not want to team up with them.”

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