Germany's aerospace industry has been growing, driven by civil air transport demand. But it is facing difficult changes as its defense-related business contracts.

When the ILA Berlin Air Show opens this month, the sector can look at strong order books and growth rates. “I see no other industry sector that has a similar backlog,” says Dietmar Schrick, managing director of BDLI, Germany's aerospace industry association. Capacity has increased by 40% in the past three years. And with aircraft production rate increases ahead and new programs like the Airbus A350 around the corner, Schrick speaks of “pleasant challenges” in the commercial field. But on the defense side, they are not so pleasant.

In spite of growth and relatively good financial performance, the commercial sector has seen significant consolidation, creating larger units focusing on two core competencies: cabin interiors and aerostructures. So what the industry is afraid of losing on the military side—the ability to build and integrate complex aircraft—it lost long ago on the commercial side.

The consolidation trend has seen the growth of Diehl's aerospace unit, which has taken over the Airbus plant in Laupheim, focusing on cabin interiors. Diehl has also acquired Muehlenberg, a Hamburg-based galley manufacturer. Diehl Aircabin, at the Laupheim site, is currently a joint venture with Thales. But the French aerospace firm has not been an active shareholder in the business and has publicly stated that it is looking at selling its stake. That presents an opportunity for Diehl to fully take over the Aircabin affiliate.

Diehl Aircabin also provides an example of the problems that the German commercial aerospace industry is facing. How can it ramp up quickly enough to keep pace with the planned production rate increases and new development programs such as the A350? Diehl's approach to manufacturing most of the A350 cabin for Airbus has proven to be a major challenge, particularly with the activity still in the early stages of its development and many corporate functions not yet fully crisis-proven. Industry sources told Aviation Week earlier this year that development of the A350 cabin has fallen significantly behind schedule, although Diehl has never confirmed that. However, the company conceded that A350 cabin work has become substantially more expensive and challenging than it had anticipated, as the number of changes needed have been underestimated.

The initial A350 schedule is not affected, as complete cabins are only due to be installed by the end of 2013 at the earliest. But one senior industry official says that development on several A350 versions will be a major strain for the industry in 2013. He concedes it is hard to see how the suppliers can assemble the resources necessary to deal with the initial A350-900 and the frequent design changes required, as well as the preliminary design work on the A350-1000, due in 2017.

A350 work is also becoming a dominant factor in other parts of the industry. Premium Aerotec, at the former EADS Augsburg site, has been spun off into a fully owned subsidiary and is ramping up production of its A350 workshare. That includes the entire forward fuselage section (13/14) and the floor structure and panels for Section 16/18 (the rear fuselage), among others. In this case, the challenge is not only about ramping up production for a new program; it is also about the transition from metal to composite technology.

While Airbus opted for a fully composite A350 fuselage, much as Boeing did for the 787, the technology is still very different. Airbus did not go for fuselage sections cured in one giant piece, but instead for composite panels that are later bolted together. That more traditional manufacturing technique was chosen to reduce risk and costs, and allow Airbus to make up some lost time since even with the much-publicized delays, the 787 is several years ahead in its development cycle.

So far, the transition process appears to have worked with the usual hiccups, and the first A350 fuselage destined for fatigue tests has already been completed in Toulouse. But the real challenge will hit in 2013 and 2014, when serial production will be ramped up further. The first A350-900 is to enter service in the second half of 2014, with first flight scheduled for the end of the first half of 2013.

With Diehl Aircabin and Premium Aerotec representing the core competencies and centers of the German aerospace sector, BDLI does not expect further consolidation to happen in a massive way. German companies are active either in fields that are hard to combine with others, given that they are very specialized, or are too big to be sensibly folded into another entity.

Recaro Aircraft Seating is in the latter category. One of a handful of companies building aircraft seats, Recaro has lately seen unprecedented growth as a result of large-scale aircraft orders and pent-up demand from airlines that have not replaced interiors for many years. While that has long been seen as a cabin quality factor, the sharp rise in fuel costs has added another dimension. The installation of lightweight and sleeker seats can easily reduce the weight of an Airbus or Boeing narrowbody by a ton. Lufthansa has added several extra rows in each of its narrowbody aircraft types (Boeing 737 and Airbus A319, A320 and A321), because slimmer seats use less space.

Recaro is doubling its production capacity within the next three years. It is opening facilities in Poland, the U.S. and China to serve markets locally and keep up with demand. At the same time, new products particularly for business class, are under development.

Financing has, with some exceptions, not been a major issue for most suppliers. Some parts of the supply chain were hit hard by delays in the A350 and Boeing 787 programs, but given the low-interest policies of key central banks, particularly in Europe, “financing is currently available at favorable terms,” says Recaro's chief sales officer, Andreas Lindemann. He notes that while banks take a close look at company metrics and financial performance, they are generally open to working with aerospace suppliers.

One requirement that suppliers are still struggling with is Airbus's drive to reduce the number of companies it works with directly. BDLI has already set up a roundtable for Tier 1 Airbus suppliers like Diehl or Liebherr Aerospace to tackle joint issues and find new processes where needed. But the association is also convening another roundtable for Tier 2 and 3 suppliers that have lost direct contact with Airbus and are now working on programs through the entire chain. Schrick also sees a need to harmonize reporting systems for production milestones and change-management so that visibility throughout the supply chain is maintained.

Airbus and parent EADS more generally have been pushing for more global sourcing in key markets, but that has not led to contract losses for German suppliers. According to a recent study, the German aerospace supply chain grew by 9% annually in the 2005-10 timeframe. “We did not suffer as a result of globalization,” Schrick says, although he concedes that there may have been some reduction in growth, which could have been higher without the new competitors.

On the defense side, this fall BDLI and the German defense ministry are to enter talks about what a national defense strategy could look like and what it would mean for the industry. Germany has put a strategy in place in the space segment and is taking an increasingly active role on the commercial side with the country's aerospace coordinator, Peter Hintze, watching workshare allocation closely within Airbus, particularly between French and German sites.

However, “the dialogue is missing where it would be most important,” Schrick warns. The problem is, Germany's exact defense requirements are not clear yet. The reform of its armed forces is a work in progress and while the defense budget has been essentially flat for a number of years, there are still no future programs in sight that would be big enough for the industry to continue in its current form.

“We are faced with a slow death of competencies that we have built up over decades,” Schrick says. He points out that it took the German defense industry around 30 years to develop the full range of capabilities needed, based on an initial phase of license production. “But it is now that the future path is decided,” he believes. “We need a military aviation strategy. Without one, even future technology upgrades for existing programs could be endangered if capabilities are disappearing.”

In 2011, 25% of the aerospace industry's revenues came from military sales, but for the first time defense-related revenues declined in absolute terms.

Though the media focus is on the success in the commercial and problems in the defense fields, the space sector has seen less drama. That segment recorded 3.7% revenue growth in 2011. Of the industry's total revenues in Germany, 8.4% are from its space component. BDLI says key programs like ATV or Ariane 5 are “on track” and it showcases the start of Galileo, albeit following multiple delays. BDLI says the German space strategy is paying dividends strategically, but needs to be implemented on the program level. BDLI defines key programs as including further development of Ariane 5, successful use of the International Space Station and a robotic mission to the Moon under German leadership, among others.

While ILA will likely never be able to compete with biggest air shows—such as Farnborough—the show has had noticeably more backing in recent years, particularly from then-Airbus CEO Thomas Enders. Increasingly, Airbus has used ILA as a stage to announce orders, such as the record Emirates deal for 55 A380s in 2010. The company is likely to do the same this year, albeit at a lower level since the market has cooled, with Boeing's 737 MAX catching up with the A320NEO's earlier sales successes.

But companies are also using ILA more as a stage for recruitment. Many of them are having difficulty finding aerospace engineers. “If the company is based in an attractive city like Munich, it is no problem,” says Schrick. “But in other regions it is much more difficult to get the right people. Even attractive pay does not make the difference.”

ILA has been moved to September this year—for the first time—to avoid coming too close to what was originally planned to be the June opening of Berlin's new airport (see p. 52.). BDLI has not made a decision yet on whether ILA will be kept in September or will move back to a date in early summer ahead of Farnborough. Schrick says the association still wants to get more feedback from the industry before making a commitment.