An interview with the management team of FACC AG, Robert Machtlinger (CEO), Andreas Ockel (COO), Aleš Stárek (CFO) and Yongsheng Wang (CCO), on upheavals within the aviation and aircraft industry as a result of COVID-19 and the nonetheless bright medium-term outlook for the future in a very challenging market
Mr. Machtlinger, let’s start right away with the topic of corona, which seems to be unavoidable this year: How did the pandemic affect FACC, and how did you deal with it?
We did not really feel the effects of COVID-19 until the second quarter of 2020; in fact, our business was still going very well until March. However, we became alerted to the issue of corona back in January, as we were confronted with the question of how to resume production under safe conditions at our strategic supplier’s plant in China after the Chinese New Year. This challenge along with our close ties to our majority shareholder, AVIC, gave us a head start, which we were then able to exploit in Austria. I also came into contact with this issue early on at an annual supplier meeting in February, which is attended by suppliers from all over the world. Here, the possibility of the infection spreading to Europe was already being discussed.
How did you react to this?
Back in February, we started developing and assessing various scenarios, the worst of which – a prolonged global pandemic – unfortunately materialized. We remained in close contact with our customers from the very beginning. Each week, we collected new data and fed them into our model calculations – and so the picture became clearer and clearer. This process dragged on until approximately May, by which time our customers had finally made significant downward adjustments to their requirements for 2020. Meanwhile, travel had come to a grinding halt, and a swift recovery seemed out of the question. As a result, we too understood reasonably well what was in store for us – namely, a drop in revenues in the order of approximately EUR 250 million.
Parallel to that, we of course immediately implemented comprehensive hygiene and protective measures throughout the company. A dedicated, multifunctional COVID task force, comprising management, occupational health, operative and customer service representatives as well as employee delegates, actually convened seven days a week during the initial phase. Our internal rules on contact tracing and home quarantine were much stricter than official regulations. On top of that, we immediately closed our cafeteria and provided our employees with free meals by other means. Overall, we were therefore able to keep infection rates within the company very low and avoid business interruptions.
And what about your supply chain? Many companies experienced difficulties in this area ...
This is where a further advantage, which we gained by obtaining information relatively early on, comes into play: We actively secured our supply at an early stage and, unlike many other companies, were never forced to shut down operations for want of the required material supply. We had previously replenished our stocks of critical materials in good time. In addition, we monitored our suppliers very closely, both in terms of delivery reliability and their overall financial situation. Shutting down operations was never an option as we are, after all, an important building block in the overall system. And we have succeeded. Our customers can attest to the fact that we provided the fastest and most comprehensive response of all suppliers. As a result, we encountered no supply problems in 2020.
Did financing or liquidity issues ever pose a problem in this context?
We naturally also took immediate action in the financial area and prepared relevant cash flow forecasts under the various scenarios that Robert Machtlinger previously mentioned. In addition to implementing massive cost savings, we promptly initiated talks with our financing banks. In June, we also secured a COVID-19 credit facility of Oesterreichische Kontrollbank in the amount of EUR 60 million, which further improved the liquidity of the company. Incidentally, we had already entered all value adjustments made necessary by COVID-19 into the accounts in the second quarter, and thus earlier than many other companies.
And how have your staff reacted to the partially drastic changes triggered by the corona pandemic?
They have been extremely cooperative. Our consciously proactive and clear communication probably played a key role in this regard. From the outset, we pursued a strategy of utmost transparency and honesty, because glossing over the situation would not have helped, on the contrary. At the same time, we tried to communicate to our colleagues that we were in control of the situation and thus to reassure them. All in all, our set of measures followed the course of action prescribed for emergency situations in aviation: aviate (i.e. maintain operations) – navigate (get your bearings and take the revised course) – communicate (create transparency for all parties concerned).
But you also had to lay off part of your workforce…
I’m afraid so. It had already become clear in May that we would most likely not be able to maintain our headcount in view of our lower revenues. Short-time working schemes helped us for a while to bridge this phase of uncertainty, but in the fall we were forced to part with 650 members of staff with a heavy heart, accompanied, of course, by an extensive social package. This is naturally a heavy blow for both sides as we have lost valuable know-how and experience as a result of these layoffs, not to mention the negative implications at a more personal level. This makes it all the more important to emphasize that a strong, competent, motivated and passionate team remains one of the most important factors for the success of our company.
What other steps have you taken to cut costs? For instance, where do you currently stand with your F.A.C.T restructuring program, and have any additional measures been taken here as a result of corona?
The F.A.C.T program, which we launched back in 2019, was implemented at full steam in 2020. However, since this program was planned for a normal environment, it was of course insufficient, which is why we have stepped it up again. The main areas of focus are streamlining our administration, consolidating our supply chain, increased vertical integration and expanding our production footprint in low-cost countries. In addition, we brought inbound logistics back in-house in 2020, creating around 60 new jobs. Conversely, we merged the initially two separate departments for research and component development, combined our two quality departments into one unit, and turned six technical departments into three.
The consolidation of our supply chain offers particularly strong leverage, as it represents the lion’s share of our costs at around 60 percent. We have defined a separate strategy for each individual product category in order to develop the performance and potential of our suppliers. To this end, we have divided them into four groups: Maintain, Develop, Grow and Exit. We had originally planned to reduce the number of our suppliers by 10 percent, but in the end it was even more than that. In February 2021, we launched another initiative, the FACC Compete Partner program, which is designed to help suppliers grow in a stagnant market. This is to be achieved by reallocating a purchasing volume totaling EUR 75 million from exit suppliers to other suppliers over the next two years. Thereby we aim to further consolidate our supplier base from currently 440 to less than 400 and further cut costs. The name Compete is derived from the program’s core concepts and objectives: cost effectiveness, operational excellence, materials of the future, partnership and passion, efficiency in all processes, transparency in quotations, environmental and social responsibility.
You previously mentioned vertical integration ...
With this, we aim to deepen our value chain in the medium term. One example from the previous year is the metal machining area, for which we have made specific investments at the Reichersberg site and which is noticeably gaining in volume. This means that we can now manufacture complex aluminum fittings ourselves, for instance. Another focus is on business jet furnishings, which we have so far bought in their entirety, and which we will also be manufacturing ourselves in the future. Moreover, we have moved various work steps along the composite value chain out of the supply chain and back into the company, thereby increasing the utilization of our own capacities.
And what about your presence in low-cost countries, specifically your greenfield investment in Croatia?
In light of the corona pandemic, we have of course reevaluated and also redimensioned this project, which involves a new high-tech composite plant near Zagreb, but we will nevertheless start construction in 2021. Lightweight components for passenger cabins of commercial aircraft and business jets will be manufactured here on a production area of approximately 10,000 square meters from 2022. The plant was designed from the outset to be scalable at all times to accommodate a future increase in call-offs. It therefore remains an important element of our organic growth strategy.
At the same time, we will continue to build on our existing international sites in the USA, Canada, Slovakia, India and China. This is because a global presence in all growth markets and proximity to our customers are essential for us. The plant in Wichita, for instance, is increasingly gaining in significance due to our MRO business. The EN 9110 certification for maintenance work represents another major step forward for us in this regard. Previously, FACC was only authorized to repair, maintain and overhaul aircraft components that it had manufactured itself. The certification according to EN 9110 now allows us to also repair components manufactured by other companies. After Wichita, this business is to be rolled out to Montreal and then to Asia.
How is business developing in China? Thanks to your majority shareholder AVIC, you have established a solid position in this important growth market ...
China has proved to be a stable market, even during the pandemic; no rate cuts were made here last year. On the contrary, in 2020 we even grew slightly on the platforms of relevance to us. And the outlook for 2021 is also promising: The hundredth COMAC ARJ21 is scheduled for delivery this year – after 47 units delivered so far, this represents 53 more aircraft of this model in just one year. Similarly, the COMAC C919 is scheduled to enter service in 2021. Parallel to this, we are acting as a key partner in the development of the Xi’an MA700. In sum, this translates into high momentum for FACC in China.
This development shows that when we started investing in these projects in 2004, our belief in China as a highly promising market was justified. As “early believers”, we are now reaping the rewards of this visionary decision at that time.
Were you also able to generate new business in 2020 – in spite of the crisis?
We did, as a matter of fact, as we worked very diligently on acquiring new contracts in addition to all the other activities of the previous year, some of which were forced upon us. In 2020, we were able to secure major new projects with an order value in excess of EUR 1 billion. At the same time, we reached important milestones on new programs, such as the first delivery of the new entrance area for the Airbus A320 family and the completion of the initial prototype production of the new radomes for the A220 family. And in the case of the new XL bins for the A320, we have increased the production rate to series production.
Innovation has always been a key factor of your success. What progress was made here in the past year?
We continued to invest in this area, even during the crisis, and equipped our technology center with a high-performance thermoplastic press, for example. At the same time, we worked intensively on the Wing of Tomorrow project, the second phase of which is currently focusing on equipment parts such as flaps and spoilers. The aim is to produce these complex components faster, more simply and more cost-efficiently. Research into new, green materials for lightweight construction has also continued at an intensive pace. Interesting biological – and thus recyclable – new materials are being developed here, particularly for the cabin area. The Lav4All, an innovative barrier-free lavatory for single-aisle aircraft, was completed in 2020. In response to the corona pandemic, we have recently also started working on new types of antiviral and antibacterial surfaces as well as air purification systems. Last but not least, we took over the CoLT test center and materials testing laboratory in its entirety in 2020, which will enable us to make even better use of synergies.
Where will things go from here – will aviation after corona ever be able to get back to what it was before the crisis?
We are convinced of this. After all, it is impossible to imagine today’s society and economy without aviation; the world is simply organized around the division of labor, and densely networked. Just think: 4.9 billion people traveled by airplane in 2019, while 80 percent of the world’s population has never seen an aircraft from the inside. This fact alone shows the immense potential that exists here. Current forecasts predict that air travel volumes will return to their pre-crisis levels in 2024 or 2025, and continue to grow in stages thereafter. However, this will involve a significant shift from the highly developed Western countries toward Asia.
A major factor underlying this growth is urbanization, or the trend toward megacities, which will generate more and more point-to-point air traffic. This will increase demand for middle-of-the-market aircraft in particular. In parallel, very ambitious targets have been set for the aviation industry for more sustainable travel and flying in view of the climate debate. With our lightweight components, we have the right technology to meet these goals.
That sounds quite optimistic. What strategy are you pursuing in this environment?
Our course will continue to be focused on growth, at least in the medium term. In mid-2020, as the previous FACC 2020 strategy had reached its end in terms of time, we began to develop a strategy for the next ten years with a focus on two key questions in particular: What is the potential in the core aviation segment, and what other opportunities does aviation offer? The second question was: What additional areas of applications exist for our core competencies? Lightweight technology is a high-tech application that is also rapidly gaining importance in other mobility sectors, such as in the rail or automotive industries, in the wind energy segment or for industrial applications. However, competition in these sectors is extremely fierce due to the relatively low material and quality requirements. Overall, these markets are therefore not attractive for us. This is because aviation – expanded to include additional areas – offers significantly greater and more interesting high-end potential, which we intend to exploit for our high-quality growth.
That is the reason why we have decided to continue to focus on this segment. Our new FACC 2030 strategy was therefore launched under the motto “committed to the sky”. In an environment characterized by population growth, urbanization, globalization, digitalization and climate change, our aim is to continue to offer innovative solutions for civil aviation and not only gain market shares here, but also to expand our customer and product portfolio and increase vertical integration. In addition, we are stepping up our activities in the urban air mobility segment, in which we have already established ourselves as a global pioneer together with our partner EHang. By 2030, we aim to have increased the share of total sales generated by transport drones, air taxis and the like to 10 percent. Finally, as a third pillar, we are looking to expand into the field of space travel, which promises growing potential. Here, too, we can position ourselves as an attractive technology partner with our lightweight solutions.
This journey will be divided into three phases: By 2022, we primarily want to compensate for the losses caused by COVID-19; between 2023 and 2025, we intend to gradually improve existing aircraft fleets with completely new components, and from 2025, we will also be entering the new markets mentioned earlier.
You just mentioned the EHang project – what stage are you at here?
With the flight test approval for Austria and Europe, we reached an important milestone here in 2020. In addition, the first certification flights were carried out at our site in St. Martin at the end of the year. This was an extremely important step in establishing autonomous flying in Europe, which has long been a reality in China. However, since passenger transportation is the most complex topic in this field, we also have plans to develop solutions for logistics and monitoring in the next few years, and are currently working on an exciting major logistics project with considerable revenue potential from 2024 or 2025. At the same time, we are intensively pursuing the highly intelligent EHang concept, one element of which is the development of a functioning operating model for production in China. Here, we can contribute a great deal in terms of quality.
And what about the space sector? What kind of opportunities does FACC have here?
We have also implemented a number of smaller projects in this area in the past, which we have been monitoring for a long time. Thanks to the emergence of private-sector players such as Blue Origin by Amazon founder Jeff Bezos or SpaceX by Tesla CEO Elon Musk, this segment is taking on a completely different dimension. This will also create new opportunities for us, as we basically had no chance with the previously predominant government space programs, except perhaps in Europe. Let me briefly illustrate the potential in this segment: While the total composite volume in the aircraft industry before the crisis was just under USD 90 billion per year, that of the space industry is expected to grow to between USD 150 and 200 billion by the end of this decade. For us, too, this will open up the opportunity to put our proven lightweight construction know-how to profitable use.
After this promising look into the future, let’s go back to 2020. How has the financial situation developed in view of COVID-19?
Corona dealt us a hard blow and set us back several years, there is nothing to sugarcoat there. As I mentioned at the beginning, despite a strong first quarter, revenues plummeted by about a quarter of a billion euros to approximately EUR 527 million, and earnings were markedly negative at just over minus EUR 74 million. However, these figures also include corona related write-downs of almost EUR 48 million on goodwill, plants and equipment, receivables and project costs as the crisis has forced us to fully reevaluate our assets. As already mentioned, we started to assess the effects of COVID-19 and to take the resulting measures at a very early stage. In August, we were also one of the first companies to provide renewed guidance.
In 2021, we now have a tight program ahead of us to achieve the targets we have set. This includes further reductions in material and fixed costs, a strict focus on growth investments only, optimization of our working capital through further reductions in inventories, and improvements to our receivables and liabilities structure. In parallel, we are making intensive efforts to acquire new contracts and gain further market shares. In this way, we intend to further increase our capacity utilization alongside the expected rate increases. As mentioned earlier, we have secured our liquidity for 2021 by taking up a COVID-19 credit facility of EUR 60 million and by concluding an agreement with our banks on a financing covenant.
And how will things continue in 2021, what is the short-term outlook?
Growth will be flat, revenues could even be slightly lower than in the previous year due to the lack of such a strong first quarter as in 2020 and amount to around EUR 500 million, while EBIT should break even. We do not expect a recovery in wide-body aircraft rates in the near future, but rates for narrow-body aircraft could pick up again slightly over the next few months. Chinese platforms should at least remain stable, and the COMAC ARJ21 might even grow slightly given the rate increase Yongsheng Wang mentioned earlier. As for business jets, which suffered the least loss in 2020, we expect a return to pre-crisis levels as early as 2022. We are looking at a new start in 2021 with the production of the flaps and wing-to-body fairings for the Airbus A321XLR. At the center of all this is the program mentioned earlier by Aleš Stárek, the implementation of which will demand our full attention in 2021.