Creating a Virtual Buy-In
For about the past quarter-century, since the self-inflicted demise of the once-dominant Singer-Link in the late 1980s, the commercial aviation Level D full-flight simulator business has been a story of CAE and the dwarfs.
March 4, 2014 By Rick Adams
For about the past quarter-century, since the self-inflicted demise of the once-dominant Singer-Link in the late 1980s, the commercial aviation Level D full-flight simulator business has been a story of CAE and the dwarfs. It still is, for the time being; however, the dwarfs have now almost all joined forces with well-heeled new friends, seeking to cash in on the perceived profit mine of airline expansion.
|Link Simulation & Training, based in Crawley, U.K., has won a number of recent SIM contracts. Photo: L-3
Unwilling to concede any of the roughly 75 per cent market share they have enjoyed for the past several years, Montreal-based CAE has been aggressively signing new deals with customers – a record-shattering 43 full-flight simulators (FFSs) announced through late January (the previous high mark was 38) with two full months remaining in the company’s fiscal year.
Among the former dwarfs who intend to challenge CAE’s near-monopoly in the coming years is Montreal neighbour Mechtronix, acquired by Bell Helicopter owner Textron in November, along with another small but equally persistent entrepreneurial simulation firm, Opinicus, based in the Tampa, Fla. area.
A year earlier, traditional CAE nemesis Thales sold its civil simulation and training business to L-3 Communications. U.S. defence giant Lockheed Martin acquired Netherlands-based simulator manufacturer Sim-Industries in 2011. Aircraft avionics specialist Rockwell Collins amalgamated NLX, Evans & Sutherland, and SEOS Displays into an integrated FFS operation in 2003-08. And FlightSafety International, founded six decades ago by industry legend A.L. Ueltschi, became part of Warren Buffett’s Berkshire Hathaway holdings in 1996.
Buffett’s Berkshire is No. 5 on the Fortune 500 list with more than US$160 billion in annual sales. Lockheed Martin (No. 59) is approaching $50 billion in annual sales. L-3 (No. 197) and Textron (No. 225) are both above $12 billion. Rockwell Collins is just outside the elite list with about $5 billion. By comparison, CAE’s yearly revenue is slightly under $2 billion (over $2 billion in Canadian dollars).
Other than the family-run Frasca International, CAE is the only “pure play” remaining in the niche industry of flight simulation; their only focus is on training. Their competitors, though now with different brand names on the business cards, are many of the same leaders and engineers they have successfully competed with over the years. And historically, training business units, which are part of large, bureaucratic conglomerates risk being neglected in terms of investment and overburdened with corporate overhead cost and paperwork. This appeared to be the case with Thales’ training unit (elements of the former Rediffusion Simulation and Singer Link-Miles in the U.K.), which had been in steady decline, at least in commercial simulator sales, before being rescued by L-3. In 2006, for example, Thales sold 16 FFSs to CAE’s 28, but in recent years Thales’ sales had dropped to the mid-single digits.
But the X factor in the full-flight simulator mix is the potentially deep pockets of CAE’s new challengers. The capability to sustain investment in new technology concepts – or to buy market share with loss-leader bids.
With the Fortune 500 businesses, it is sometimes difficult to know the true revenues and profitability of their simulation units; the numbers are buried among layers of other groups and divisions. In 2011, the year before it was sold to L-3, Thales pegged its fixed-wing civil simulation revenues at €97million (US$132 million, Canadian $152 million). Textron reportedly paid about US$125 million for both Mechtronix and Opinicus. L-3 bought the Thales business, which included some training centre assets, for about $132 million. CAE’s revenues for the segment they label “Simulation Products/Civil,” were Cdn $402.4 million (US$361.2 million) for its FY2013.
Despite the buyer’s-market pricing pressures, CAE margins have held up remarkably well. In the most recent quarter reported (in November), Q2 of FY 2014, civil simulator sales represented about 30 per cent of the company’s operating income and a 19 per cent profit margin, compared with 13.4 per cent operating profit overall.
CAE also has a strong base of long-time customers, including joint venture training centres with traditional carriers such as Emirates, China Southern, LAM-TAN, Iberia, and ambitious low-fare airlines such as AirAsia and Cebu Pacific.
Simulation is not a huge market, certainly not compared with aircraft and avionics. With Airbus, ATR, Boeing, Bombardier, Embraer, and others delivering about 1,500 new aircraft per year that translates to roughly 60 new full-flight simulators based on a rule-of-thumb of 25 aircraft per FFS. An airline’s training requirement varies, of course, according to how much a simulator is used for longer initial type-rating or transition courses and shorter recurrent training courses. Also, one significant training trend is shifting some training tasks away from the $10 to 20 million FFSs to considerably cheaper non-motion simulators or monitor-based procedures trainers.
So, with CAE snatching up nearly 50 sales worldwide, the rest of the industry is left with a handful of deals each. Deploying two or three simulators a year is not a viable business model, so we can expect some of the diversified conglomerates to abandon the civil simulator domain in due course. Or perhaps one of them, or another aerospace megacorp, will buy CAE itself.
In a sense, the new era in this domain is just ramping up. It will take Textron-Mechtronix-Opinicus some time to sort out their new organization and determine which technologies they will keep and expand. L-3 Link has only recently integrated Thales and is gaining traction. Rockwell was relatively dormant in this space for some years but has recently become very active, especially in China. Lockheed replaced the original Sim-Industries leadership last summer. And at CAE, there’s also a new team at the top; civil group president Jeff Roberts, who had directed that business for more than a decade, was replaced by supersalesman Nick Leontidis.
Here’s an overview of CAE’s well-funded foes and some of their technologies and recent market activities:
New York City-based FlightSafety is a strong No. 1 to CAE’s No. 2 in the business aviation training sector, a market for which both companies build their own simulators.
|Despite the buyer’s-market pricing pressures, CAE margins have held up remarkably well. Photo: CAE
The two rivals are about equal in the rapidly growing civil helicopter market. FlightSafety has S-92 FFSs in operation at its Farnborough, U.K., West Palm Beach, Florida, and Lafayette, La., centres. In March, Sikorsky and FSI announced orders for four more S92 FFSs – to be positioned in Lafayette, Brazil, Norway and Southeast Asia.
In commercial aviation, FlightSafety’s strength is with regional airlines, particularly in North America. It offers simulators for Bombardier’s CRJ and Dash 8 series at multiple locations in Canada and the U.S., as well as the U.K. They’ve also built an ATR 42/72 turboprop FFS for Azul Airlines in Brazil, as well as a couple of Embraer E-jet trainers. In 2013, FlightSafety delivered a Beechcraft 1900D SIM to Air New Zealand.
FlightSafety’s latest visual system, VITAL 1100, is now being fielded on both fixed-wing and helicopter simulators. The first were on a Sikorsky S-92 device in Stavanger, Norway, an S-92 and AgustaWestland AW-139 in Lafayette, a Eurocopter EC-135 (with night vision goggle capability in Dallas, Tex. and an Embraer 190 in St. Louis, Mo. The computational performance of VITAL 1100 is claimed to be up to five times greater than that of its predecessor. Since its 2009 acquisition of Glass Mountain Optics, FlightSafety has implemented glass mirror displays, said to be free of visible distortions and artifacts out to the mirror edge.
Link Simulation & Training, based in Crawley U.K., won a contract in December for a Boeing 787 FFS for KLM Royal Dutch Airlines. They also received Level D certification on a 787 Reality Seven device for a Middle Eastern customer. The former Thales operation has been Boeing Alteon’s designated Dreamliner simulator provider, but a majority of 787 FFSs openly competed by airlines had been won by CAE.
Link also won 777-300ER simulator contracts from China Airlines for installation in Taipei, and from EVA Airways, also in Taiwan. Both are scheduled for 2014 delivery. In January, Link received certification for an Airbus A320 FFS for EVA.
In June 2013, Link announced expansion of the Asian Aviation Training Centre (AATC) it inherited from Thales in Bangkok, Thailand, adding an A330 FFS.
Sim-Industries has been relatively quiet since the Lockheed takeover and the subsequent reorganization in 2012, when it became Lockheed Martin Mission Systems and Training. Last summer, Sim-Industries founder Frank Uit den Bogaard stepped down as CEO, succeeded by Jeffrey Wood, who was previously in charge of airlines and fleets for StandardAero.
In September, Lockheed signed a contract with Lufthansa Flight Training, one of the industry’s most demanding customers, for a Boeing 777-300 FFS. Sim-Industries also won a contract with another industry benchmark,
FedEx, for a pair of 767 FFSs. Other Sim-Industries customers have included Sri Lankan Airlines, Jakarta Aviation in Indonesia, Japan’s Panda Flight Academy, and even CAE (indirectly) in an A320 for Oxford Aviation Academy, which CAE acquired in 2012.
Lockheed opened a flight training facility in Brazil last February, serving GOL and other South American airlines.
Banking on a 30-year history of doing business in China, Rockwell Collins formed a joint venture company – ACCEL (Tianjin) Flight Simulation – with Beijing Bluesky Aviation Technology, a subsidiary of the Aviation Industry Corporation in China (AVIC). Its training centre southeast of Beijing will focus on commercial flight training and is expected to open in May. ACCEL will be managed by Rockwell’s Andrew Morris, who spent 24 years with CAE, including a role as VP, marketing.
Colin Mahoney, Rockwell SVP, International, said the JV will develop Level D simulators for single-aisle aircraft, initially for Chinese airlines “and ultimately for the rest of the world.”
Rockwell and Beijing Bluesky have previously worked together on China’s C919, MA60, and MA600 programs. Mahoney regards their open systems architecture design as the strength of the strategy, applicable both to simulation and flight decks. The open architecture approach incorporated in Rockwell’s Pro Line Fusion avionics is featured in the Bombardier CSeries commercial aircraft, which is in flight test phase in Montreal, as well as in the Mitsubishi Regional Jet being developed in Japan.
Mechtronix was innovative and bold to the point of brash in challenging the simulation status quo when the Concordia University graduates launched the company in 2004. And though their sales were infrequent, Mechtronix represented the proverbial gnat on the elephant’s behind. Positioning its headquarters within walking distance from CAE down the Cote de Liesse near Pierre Trudeau airport, Mechtronix claimed it could reduce the cost of simulation by 50 per cent.
|In commercial aviation, FlightSafety Internatonal’s strength is with regional airlines, particularly in North America.
PHOTO: FlightSafety International
Mechtronix targeted second- and third-tier airlines such as Copa in Panama and schools like the Civil Aviation Flight University of China (CAFUC). Sales of high-end simulators hovered around three to five per year.
There were periodic rumblings that the upstart would go out of business, but then Mechtronix would receive an infusion of survival cash – $18.6 million in 2010 from the federal government’s Strategic Aerospace and Defence Initiative and $7 million from the Business Development Bank of Canada in 2009, as examples.
Around 2008, a representative of Richardson Capital called to solicit my thoughts on the flight simulation market as a potential investment. The rep didn’t mention which company they were interested in, but not long after, the Calgary-based private equity firm, part of James Richardson & Sons, Winnipeg (found in 1857), purchased a sizeable stake in Mechtronix for $39 million.
Textron’s new training business will be led by Opinicus co-founder Jim Takats, a BEEE electrical engineering graduate of McGill University in Montreal who in the early ’80s worked a stretch at CAE as an avionics engineer. Takats is regarded as one of the foremost experts in the science of motion cueing for flight simulators, and was team leader for the Royal Aeronautical Society’s international working group on the topic. Mechtronix, on the other hand, has been a vocal advocates for eliminating the motion requirement for fixed-wing flight simulation.
“We are already seeing the opportunities for customers that come with such deep compatibility between the established AAI, Mechtronix, and Opinicus offerings and capabilities,” Takats told Wings. Textron Simulation & Training Systems has the right team in place, the right capabilities and a proven history of high-performance products and industry-leading expertise.”
|MAJOR COMMERCIAL AIRCRAFT & CIVIL
HELICOPTER SIMULATOR MANUFACTURERS
CAE – Canada
FlightSafety International – U.S.
L-3 Link Simulation & Training – U.S., U.K.
Lockheed Martin – U.S., Netherlands
Rockwell Collins – U.S.
Textron – U.S., Canada
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