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Dassault Aviation Seek Tighter Cost Control at Thales

July 24, 2009

Dassault Aviation wants to see a simpler structure and tighter cost control at Thales as ways of lifting profits at the defense systems company, Charles Edelstenne, chief executive of the aircraft maker, said July 23.

Dassault holds 26 percent of Thales after paying 1.96 billion euros for the stake earlier this year. The aim is to gradually optimise Thales' results in order to "make money on our investment," he told journalists and market analysts on Dassault's first half results. Cancellations of Falcon business jets cut first half sales by 10 percent and slashed net profits. Asked how the profit boost at Thales would be achieved, Edelstenne said, "First of all, it will be through a simplification, because it's a complex organization."

There would be a closer control to reduce costs, he said. "There's no magic formula, it's just a case of laborious work," he said. Edelstenne declined to give a profitability target for Thales. "I will leave that to the chairman of Thales to set," he said.

Asked if he expected the government to object if the profitability measures included lay-offs, Edestenne said Thales would be "managed as a private company." The government holds 26.5 percent of Thales and is the biggest single shareholder. Edelstenne highlighted the "complementarity" between Thales and Dassault. "It's a matter of working even better with this company because we are complementary," he said. "It's the global strategy of the group to make the Dassault group the most high-technology group in Europe."

There was complementarity in the portfolio that comprised aircraft, electronics and software, notably in product life cycle management (PLM), he said. On technology, Thales fits its most sophisticated systems in combat aircraft and could use Dassault's Catia PLM software in design of those systems, as well as other products, he said. On the commercial side, Thales and Dassault would work closely to make more competitive export bids, he said.

The period of familiarization with Thales would be "relatively quick, a few months, not years," he said. "We've already got a few ideas." The planned order for two Rafales brought forward as part of a defense stimulus plan by the French government will have only a small impact on production, Edelstenne said. "We're happy to have them but it's not much," he said. The early order for two aircraft was intended to maintain flow on the assembly line as Dassault needs a minimum production rate of one Rafale per month.

The stimulus package also includes spending on feasibility studies, which are important for maintenance of competences, Edelstenne said. Talks are going on for these studies, he said. Negotiations for the next order of a batch of Rafales are currently under way. "The DGA has set a target of making the order this year." Edelstenne said he was confident the order would be made as "the DGA is a very determined player."

Dassault will send two Rafales equipped with the new generation active electronically scanned array (AESA) radars for flight trials to India in September, the head of military aircraft, Eric Trappier said. "India is a marathon, not a sprint," he said, referring to India's international tender for 126 medium range multi-role combat aircraft.

In a separate, long-awaited deal for the Indian Air Force, Thales is negotiating for a $1.4 billion modernization contract for 51 Mirage 2000-H aircraft. French industry, led by Thales, would handle the upgrade of the initial four Mirages, with the first two in France, and the latter two at Hindustan Aeronautics Ltd.'s facilities in India, a Thales spokeswoman said.

Dassault is taking part in three fighter competitions: Brazil, India and Switzerland, and is waiting for news on possible orders from Libya and United Arab Emirates. Privately, Dassault executives are keeping fingers crossed on Abu Dhabi announcing a buy of 60 Rafales at the Dubai Air Show in November. Dassault reported a drop in net attributable profit to 118 million euros in the first half to June 30 from 167 million a year ago, operating profit down at 114 million from 202 million, on a 10 percent decline in sales of 1.38 billion from 1.54 billion.

New orders fell to a net minus 1.13 billion euros due to cancellations of Falcon jets, from a positive 2.39 billion euros a year ago. The total order book stood at 14.55 billion, down from a peak of 17.05 billion. Net cash stood at 1.69 billion euros after 4.43 billion at the end of 2008. Net profit margin was 8.5 percent of sales. Sales for full year 2009 would be "a little lower," Edelstenne said, though it was unclear what would happen between now and the end of the year.

There were signs of a "stabilization of market," in business jets, with the beginnings of customer enquiries and a pick-up in sales of secondhand jets, he said. The recent wave of cancellations meant the "froth has come off the market," he said.