As Alessandro Profumo marks his fourth year as chief executive of Italy-based aerospace and defense group Leonardo, he talks to London Bureau Chief Tony Osborne about the future of European defense spending, the impact of initiatives supported by the European Union, some of the company’s key business areas including defense electronics and helicopters, and Leonardo’s significant presence in the UK. Highlights follow.
AW&ST: What is the outlook for defense spending in Europe post-pandemic? Are you concerned we could see a repeat of what happened after the 2008 financial crash? I do not believe we are witnessing a repeat of the decrease in defense spending that followed the aftermath of the financial crisis. Quite the contrary; today the international system, and the place of Europe within it, is substantially different from a decade ago. As European countries recover from the pandemic, I foresee technological innovation and geopolitical constraints driving new defense investments.
First, the impact of new technologies is already reshaping strategic thinking across the world. The growing digitalization of military applications underscores the importance of cybersecurity, and space development is increasing the number of countries jousting for “space dominance,” stimulating competition and investment on key dual-use technologies such as satellites and launchers. Changing demographics will also play an important role in the European security outlook for the near future and, inevitably, the relative demographic weight of Europe will decrease. Such trends are already forcing Western countries to rethink military personnel management, leading to the adoption of autonomous systems and artificial intelligence (AI) solutions, investing in quality over quantity.
- Leonardo has acquired a 25% stake in German defense electronics firm Hensoldt
- Italy has a budget line to support Tempest fighter program with UK
A major topic of Leonardo financials is the company’s Industrial Plan. How far are you down that path? Have you had to adapt it to deal with the pandemic? Looking back on 2020, we are very pleased with our strategy and the results we achieved, which demonstrate our resilience and adaptability to the constantly changing effects of the pandemic—particularly on the civil sector of the aerospace industry. Within our strategic plan “Be Tomorrow—Leonardo 2030,” we have a clear view of long-term goals and a clear strategic path focused on accelerating innovation [through] three pillars: strengthen our core, transform to grow and master the new. During 2020, we dealt with the unprecedented effects of the pandemic by using the strength and diversity of our portfolio of products and solutions, our global presence and securing new orders from domestic markets, especially in the government and military sectors. Even if the COVID-19 pandemic affected Leonardo’s financial position and performance in 2020, the business fundamentals and prospects in the medium-to-long-term remain unchanged.
How is the company preparing for the new era of industrial transformation, digital design, manufacturing, use of data, etc.? Where have these technologies been introduced? Digitalization is a great enabler of structural change in production and in society at large. The ability to collect data, process information and automate manufacturing are already key determinants of international business competitiveness in the aerospace, defense and security sector. The proof of Leonardo’s commitment to accelerate technological transformation toward the digitalization of industry was the building of the supercomputer “davinci-1” last year.
The state-of-the-art infrastructure is designed to combine the capabilities of the cloud with supercomputing. Our new artificial “brain” will support the development of particularly complex new AI models and allow us to run high-fidelity numerical models in virtual operating scenarios. However, modeling and digital twins are also fundamental for creating and testing systems [that are] cyber-resilient by design. It is precisely the integration of cybersecurity, computing, modeling and secure remote management of systems and platforms that represent a distinctive feature of Leonardo’s offer at a European level. In 2020, Leonardo set up Leonardo Labs, an international network of corporate technology incubators designed to direct Leonardo’s research and development over the long term with the aim of anticipating innovation cycles.
What does the newly acquired share in Hensoldt bring to Leonardo? The acquisition of a 25.1% stake in Hensoldt will establish a strategic long-term relationship with a major defense electronics player in the fast-growing German defense market and allow closer cooperation between complementary businesses across geographies. We have a long-held belief in the importance of building cooperation across the European aerospace and defense industry, and we’re determined to play a long-term role in the defense electronics sector in Europe. There is also scope for potential collaboration in the field of future combat air. While we expect there to be two European Future Combat Air Systems (FCAS), the nations creating them are close allies, so there will be requirements for the systems to interoperate with each other and perhaps a level of commonality in sensors and onboard avionics. I can see Leonardo and Hensoldt working together should opportunities arise in this area.
You delayed the float of the initial public offering (IPO) for DRS because of unfavorable market conditions. Will you try again? The market window for the pricing of Leonardo DRS was characterized by unfavorable conditions that would not have allowed an adequate valuation of the subsidiary in line with comparable companies in the American defense sector. Through the potential IPO for DRS, we will give visibility to the value of the company, offer broader opportunities for its development and, at the same time, maintain a very solid capital structure for the overall Leonardo Group. This all adds up to important strategic progress and an increasingly active approach to managing our portfolio. We intend to reconsider this move when market conditions are more favorable.
With Embraer planning to launch a new turboprop airliner, will ATR—part-owned by Leonardo—need to react to such competition in the market? ATR is currently the regional aircraft market leader with the most sustainable, modern and efficient aircraft, and we intend to remain so in the future. ATR is continuing to investigate solutions for a reduced carbon footprint and continues to constantly innovate through incremental developments that fill the gap from now to when any disruptive technology will be made available. Sustainability is in our DNA, and we intend to maintain this competitive advantage by integrating those new technologies when it makes sense and brings real benefits to our customers.
On helicopters, you were initially reluctant about the deal to take over Switzerland’s Kopter Group. Are you satisfied now that the buy will pay dividends? And more broadly, do you see the helicopters business product fulfilling market needs, or does there need to be investment in new products? Also, progress on the AW609 tiltrotor has been painfully slow: Are you optimistic about that platform when it enters the market? I’m firmly convinced of the investment made in acquiring Kopter Group and its program. Despite the challenging conditions faced by the global civil helicopter market, and the additional impact of COVID-19 over the next five years, the segments we have been investing in the most over recent years—4-9-metric-ton categories (AW Family) and a long, light single (AW09)—are still forecast to be the most solid. The market shows that in times of difficulty the most modern products are also the most resilient.
We are focused on new concepts and architectures—fast rotorcraft, rotary-wing unmanned air systems and advanced air mobility. Despite the long development [timeline] and challenges faced by the AW609 program, we must not forget that the introduction of a civil certified tiltrotor is a complex endeavor. But, it will represent a step change in aviation. Most of today’s discussions about modern air mobility in the industry are based on concepts, demonstrators and projects depicting a world to build, but they are not really around the corner. However, the AW609 will introduce new capabilities much earlier.
Is there any consideration to adapting Leonardo’s fixed- and rotary-wing products with hydrogen/hybrid-electric propulsion? Together with airframe and system integration and development, propulsion is one of the technology enablers that is part of our development road map. We’re therefore making our own assessment of opportunities for innovative propulsion solutions, including hybrid and electrical in the rotorcraft domain. Over the next 20 years, we see a diversified platform-and-system evolved scenario—not only consisting of fast rotorcraft, rotary-wing unmanned air systems and advanced air mobility [platforms], but also of smart helicopters. That means helicopters made smarter by featuring the main new technologies integrated into unconventional designs. An example is the acquisition of Kopter and the new AW09 single-engine helicopter, which strongly sustains this vision. Kopter is also set to become a center of competence for new light helicopters and new technologies, and the modern design of the AW09 is ideally suited for such an evolution.
The British government is flowing money into the Tempest FCAS, but are you seeing the same level of enthusiasm for the project from Rome? Absolutely! Rome is fully committed to the Tempest project. The most recent statement by the Italian defense ministry said Tempest is “crucial for the balance of military and industrial capabilities at the European and global level.” Italian Defense Minister Lorenzo Guerini told the Italian Parliament in November that “the Tempest program is among the defense priority programs.” Italy has already identified a budget line for our participation in Tempest within the Eurofighter program, which will allow for concrete activities to start as part of what we are calling the “Typhoon to Tempest” transition. The next phase will focus on the commencement of a trilateral concept and assessment phase underpinned by a joint statement of work, aimed at driving forward the development of next-generation capabilities.
Following the publication of the UK government’s Integrated Review of Security, Defense, Development and Foreign Policy and industrial strategy, what opportunities do see for Leonardo in the UK? Looking at the announcement of the Integrated Review and the UK’s new Defense and Security Industrial Strategy, I was pleased to see Leonardo presented as one of the “notable examples” of “overseas-based companies who have chosen to invest in or move parts of their businesses into the UK.” Since the last security and defense review in 2015, Leonardo has invested £1 billion ($1.4 billion) in UK-based research and development. The result of this is intellectual property that allows our UK-based business to compete for and win technology orders from around the world against tough competition. The UK’s approach to FCAS technologies was clearly a strong focus of the review. So we see plenty of opportunities here, both for our UK business as well as our Italian business, as a key part of Tempest.
The UK Defense Ministry’s intention to develop an Air Platform Protection strategy that will cover all air assets also appeared in the strategy paper. The importance of Leonardo to the UK’s rotary-wing capability also received special mention, with our Strategic Partnering Agreement highlighted. I believe this close relationship with our customer puts us in a good position to win the UK’s New Medium Helicopter replacing four in-service helicopters including the Puma. This requirement is an exciting prospect for our site in Yeovil, England. If we are selected to provide our AW149 for this requirement, we will establish a production line for the type in the UK for both the UK customer and future export orders.
Airbus has called on European industry to jointly develop a medium helicopter to meet NATO’s Next-Generation Rotorcraft Capability (NGRC) requirement in the 2030s. Is that something you are interested in? Is there a danger that European rotorcraft skills could be lost if a future European military platform is not developed? First, of course we must take into account government requirements. In the case of NATO’s NGRC, a preliminary set of requirements has more recently been published and we are studying them to satisfy these expectations. Considering Leonardo’s well-established industrial presence in Europe and North America, and being recognized as a credible partner, I believe we’re ideally positioned to play a crucial role in any requirements, either specific or converging. We’ll need to see what role Europe will play in these new initiatives and which are the best opportunities based on concrete requirements. There’s a lot that the European OEMs can do to guarantee a continued contribution to the future of defense. Also, to ensure that Europe’s contribution is preserved and valued, we must remember that the UK—already also a partnering nation in the NGRC initiative—is an essential part of the equation.
Are you optimistic about the potential new wave of pan-European defense development? The European defense programs and initiatives represent a unique opportunity to promote collaborations at the industrial level and a technological and skills specialization that could eventually lead to integration solutions. They also stimulate the consolidation of requirements and demand that remains a crucial issue, since the 27 countries [in the EU] have 27 defense ministries and an equal number of procurement structures.
EU initiatives allow us to conduct research on disruptive technologies and [pursue] capability developments that are in many cases beyond the grasp of any one member state and national industry. Also, don’t forget that EU money is an addition to, not a replacement for, national funding. Some may argue that the €8 billion ($9.7 billion) funding of the European Defense Fund is too low compared with the initial €13 billion sought by the commission, but it is indeed a major start. It is the first time that the European Commission is devoting part of the EU budget to cofinance research and development of military capabilities. It is an epochal opportunity to capture and we are sure that funding will improve in future budgets.
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