New Safran CEO Faces Short- And Long-Term Challenges
Olivier Andries took over from Philippe Petitcolin as Safran CEO on Jan. 1, after the latter took drastic measures in 2020 to keep the company afloat. The Paris-based equipment manufacturer, a “super-Tier 1” in the aerospace industry, is starting the new year in a relatively good financial position, given the weakened environment.
- Moneymaking engine services have been hit hard
- His agenda includes choosing the right option for future propulsion
Andries, 58, will nevertheless have to navigate the company through a still-turbulent climate, particularly in propulsion, which accounts for half of Safran’s revenues. His decisions will critically affect the situation of many suppliers. In the longer term, Andries holds some of the keys to the future of propulsion, as Safran will need to offer new concepts to decarbonize commercial aviation.
The most pressing issues center on production. The new CEO may have to adjust the production rate of the Leap turbofan more than once while the company suffers from the dual crises of COVID-19 and the Boeing 737 MAX grounding. Although the MAX has begun to return to the skies, Boeing has yet to ramp up production from its current “low rate.”
Meanwhile, Airbus is planning to gradually ramp up A320 production beginning in the summer, after downgrading its guidance in January.
CFM, the GE Aviation-Safran joint venture for the CFM56 and Leap engines, was planning on 2,000 Leap deliveries in 2020. It reduced that to 1,400 when the MAX crisis hit and ended the year at about 800.
Whether Andries will have to reconsider the propulsion branch’s business model is yet to be seen. Some analysts have suggested the engine OEM’s business model is fundamentally at risk, given its dependence on revenue services and aftermarket work. The 2020 loss in those revenues, of about 30%, was serious, a company executive says. “When the aircraft do not fly, we cannot perform as much repair activity as we should,” he says.
Petitcolin has a different view, contending that those aircraft and engines being retired from service are older ones. They are, therefore, not those for which Safran sells most of its new spare parts, he asserts.
Moreover, there is the prospect of a swifter recovery for revenue services. They account for a large share of Safran’s revenues, 57% of its propulsion activity. Global aircraft traffic is expected to rebound within months, but it will likely take years for new aircraft orders to recover.
For a production plan to be executed, suppliers must deliver on their commitments. This is another matter of concern for OEMs in general and Safran in particular. A number of suppliers have suffered from the severity of the industry changes.
To support its supply chain, Safran has made a major contribution to ACE Aero Partenaires, an investment fund formed last summer. ACE’s role is to take equity in French small businesses that are ailing but seen as key for OEMs. Safran is also one of the manufacturers that has created “watchtowers”—organizations monitoring the financial health of suppliers—which Andries will certainly continue to use to detect economic problems in the supply chain.
At least he inherits a fairly decent financial situation, in light of the downturn. Safran’s market capitalization has held up rather well, especially compared with that of Airbus. At the end of the third quarter of 2020, its financial results were in line with the revised objectives Petitcolin had set in late July. The effort to drive the break-even point down seemed to be paying off. Revenues in 2020 were targeted at –35% versus 2019. The profit margin was expected to be about 10%, and cash flow in the positive territory.
Massive job cuts, shorter hours (subsidized by the state), slashed investments and reduced purchasing have been the main cost-cutting measures.
Another of Andries’ top priorities—albeit less urgent for the company’s survival—is to make commercial aviation environmentally sustainable. “The sheer acceptability of air transport is at stake,” he said on a New Year’s greeting video. “We are going to intensify the work on a new generation of breakthrough engines. They will be ultraefficient and able to run 100% on new sustainable fuels. Our demonstrator will be ready in 2025 to support entry into service in 2035.”
Safran is focusing on a counter-rotating open rotor (CROR) engine. Engineers will build on a previous demonstration program that culminated with ground runs in 2017.
At the time, Safran’s management team was frustrated that Airbus abandoned plans for inflight testing. But Airbus is now under pressure to develop an environmentally friendly aircraft by 2035, so the airframer may revise its position. GE is aligned with Safran on the relevance of a CROR architecture.
Andries also alluded, during that video, to an electrically powered small regional aircraft.
Petitcolin had expressed skepticism about hydrogen, and Andries fell short of mentioning that option for the future of propulsion. Which new form of propulsion will enter into service in 2035 is still unclear.
In any case, future aircraft programs will require greater integration between airframers and engine-makers. And Andries will be at the forefront of inventing a new relationship.