European Contractors Worry About Slowdown

This article first appeared in Aviation Week & Space Technology.

Concerns are mounting at European defense companies that the global economic downturn will drive down military spending.

Although such cuts by major European nations have not yet emerged, there are signs among smaller states that budgets will be affected. Croatia has deferred its fighter competition, Romania may do the same, and Estonia already has slashed its allocations for defense.

Kongsberg CEO Walter Qwam says there is "a lot of fear that defense spending will be cut." Moreover, the current economic climate could drive protectionist procurement practices, he notes.

Estonia, with its economy in sharp decline, has already moved to trim annual military spending by around 14%. The defense ministry has to give back approximately $54 million and bring the top line down to roughly $345 million.

The budget action will mean Estonia will fall short of its target of raising defense spending to 2% of gross domestic product by 2010, says Defense Minister Jaak Aaviksoo. This is also undermining planners' efforts to bring more stability to the defense arena. Several procurement programs are being put on hold as a result of the budget adjustment.

In Sweden, financial uncertainty surrounds the budget and its potential impact on industry. Saab -- the country's largest defense and aerospace contractor -- is worried about the government's spending plans. Company officials also are pondering how Saab's bottom line may be affected as a result of its supplier role to Airbus and Boeing.

The Swedish government is expected to put forward a new spending bill next month, although discussions about long-term defense allocations could drag on for much of the year, says Saab CEO Ake Svensson. The government is trying to align funding priorities with the need to protect certain defense industrial capabilities, he adds.

In parallel with its budget review, Stockholm is looking at other reforms that could be implemented to support industry. Changes in the acquisition organization and procurement processes may result, as well as greater support for Swedish manufacturers in defense exports. Local industry often grumbles about receiving less backing from its government than some of its rivals.

Because of ambiguities in both its defense business and commercial activities, Saab management hesitates to give an outlook for the year, beyond noting that sales are likely to be flat. The civil aircraft business pummeled last year's earnings, with a fourth-quarter writedown of 953 million Swedish kronor ($108.6 million) related to delays Airbus and Boeing experienced on some of their programs. Saab also took a 232-million-kronor provision for further anticipated losses. That does not yet reflect the potential fallout from the cancellations and deferrals that Airbus and Boeing are experiencing.

Compounding the financial charges on the commercial front were ongoing problems in the defense sector. The combined effect was 1.8 billion kronor in nonrecurring financial items in 2008 that drove Saab's full year results to a 242-million-kronor loss. Saab is making adjustments as a result of repeated write­downs because of problems in development programs. The company intends to be more judicious in how it accounts for such projects, which will have the near-term effect of depressing the 2009 profit margin by four percentage points.

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-- Christian

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