BUSINESS

Raising the ante in aerospace

LINDA MCQUAIG November 28 1983
BUSINESS

Raising the ante in aerospace

LINDA MCQUAIG November 28 1983

Raising the ante in aerospace

BUSINESS

For Industry Minister Edward Lumley, the aerospace industry is a potential bright spot in Canada’s economic future. To that end, he announced recently that Ottawa has signed an agreement with Bell Helicopter Textron Inc. of Fort Worth, Tex., to build helicopters in Canada for the first time. But as the government worked out the final details in the official contract last week, it remained unclear whether or not Ottawa’s latest venture into the aerospace trade will be a success.

Canada’s attempt to keep its aerospace industry alive has a spotty record. Ottawa paid out hundreds of millions of dollars in the mid-1970s to acquire Toronto’s de Havilland Aircraft of Canada Ltd. and Canadair Ltd. of Montreal from their foreign parents. Since then, both firms have suffered financial losses. Canadair faltered when its Challenger executive jet proved—initially at least—to be a financial and commercial albatross. Now, Ottawa is apparently turning back the clock by injecting large amounts of government money into private, foreign-owned operations, its practice before the de Havilland

and Canadair purchases.

Under the terms of last month’s deal, Bell Helicopter will develop and market three models of light, twin-engine helicopters at a plant near Mirabel Airport outside Montreal. The governments of Canada and Quebec will jointly contribute $275 million over the next five years to the $514-million project. (The government also announced plans to contribute $468 million over the next 10 years toward research and development costs for Pratt & Whitney Canada Inc.

of Montreal, a U.S.-owned firm which will make engines for two of Bell Helicopter’s three models and which is one of the most successful Canadian aerospace firms.) The governments estimate that the Bell Helicopter project will create roughly 2,800 permanent jobs over a 20-year period, but there are no specific employment guarantees in the agreement with Bell. In fact, the arrangement requires only that the multinational giant, which last year had sales of nearly $1 billion and which is

the largest U.S. helicopter manufacturer, “try its best to maintain employment levels,” according to Raj Dayal, senior project officer in the government’s aerospace branch. Dayal said that the job estimates are calculated on the basis of conservative growth estimates for the fast-growing, twin-engine light helicopter market. But he added that, if the market proves to be less than buoyant, the job commitments “are not worth too much.”

Without solid job guarantees, some critics contend that the deal may not be in Canada’s best economic interests. Myron Gordon, a professor of finance at the University of Toronto’s faculty of management studies, said that Canada is taking the largest risk in the deal. “It seems that the government is bearing a very, very disproportionate share of the investment and the risk,” he added. Gordon’s concerns arise from the fact that Canada is putting up 65 per cent of the $400-million initial development funds—money which in any venture is the most exposed. For one thing, Ottawa might invest its money, then discover that projections for the helicopter market were optimistic and that the company might cut its hiring.

Ottawa also has dreams of a second helicopter plant, this one in Ontario, but talks with foreign manufacturers are only in the preliminary stages. The federal fascination with helicopters is not just an attraction to the romance of flight; Canada’s fleet of civilian helicopters is the second-largest in the world and projected to mushroom over the next 20 years. The goal of the Mirabel plant is the construction of light, twinengine helicopters that are faster and more efficient than the current models. They will be sold for civilian uses, such as servicing offshore drilling rigs. When the company develops the technology—which it will use for the three helicopter models to be built in Canada—it will become the property of its Canadian subsidiary. That means that the U.S. parent firm will not be allowed to produce helicopters that compete with its subsidiary’s products. But Dayal said that the parent company could negotiate with its subsidiary to use the technology to develop another type of helicopter which would not compete directly with the three Canadianmade models.

Federal officials stress that Canada could recover all of its investment money, if the helicopter models prove popular, through a two-per-cent royalty on all sales after Jan. 1,1990. Still, Gordon is concerned that estimates of market demand may be inflated. But that is a calculated gamble which the government appears willing to take in its quest to create more jobs.

-LINDA MCQUAIG in Toronto.