Collapse of a high-flying gamble

MARC CLARK November 10 1986

Collapse of a high-flying gamble

MARC CLARK November 10 1986

Collapse of a high-flying gamble


Both the scheme, and the product, were supposed to shine. On Oct. 7, 1983, the Liberal federal government announced that it had convinced the world’s première manufacturer of helicopters, Texas-based Bell Helicopter Textron Inc., to set up shop in Mirabel, Que. The project was a $514-million gamble, with Ottawa to pay $165 million, Quebec $110 million and Bell the remainder. But according to Edward Lumley, then the minister in charge of the department of industry, trade and commerce (ITC)— which two months later became the department of regional industrial expansion (DRÍE) —the payoff was clear: 3,800 high-paying jobs over 20 years—2,100 jobs at the plant and another 1,700 with Canadian parts suppliers. Now, three years later, the plant employs only 375 people and probably will not employ more than 800 unless world markets drastically improve.

Plans to produce a light helicopter by 1985 have vanished in favor of transferring production of four older models from the U.S. parent company. And the future is bleak for a sophisticated new design that carried with it the company’s hopes for a leap into the front lines of aerospace technology.

To some government officials in the 1970s and early 1980s, Canada appeared ripe to enter the helicopter business. In 1981 the country had the world’s second-largest commercial fleet of helicopters—close to 1,200 machines, compared to the United States’ 9,500. With an oil boom fuelling the profits of oil companies—the largest civil users of helicopters—that market was expected to increase. As a result, said Joe Harrison, former chief of the aerospace division of ITC, “the question was frequently asked: ‘Why aren’t we in the helicopter industry?’ ”

Ottawa began to seriously address that question in 1981, after the release of a study by a minor ITC official. That report, prepared by Edward Owen, now a defence programs project officer with DRIE, concluded that the Canadi-

an helicopter industry—until then almost nonexistent—was on the verge of massive expansion. Owen’s conclusion contrasted with that of the Air Transport Association of Canada (ATAC), which represents Canadian aircraft operators—and which Owen had consulted. “We told Owen the facts and put him in contact with the operators,” said Gordon Lindsay, a former ATAC vice-president. “Everybody told him, ‘There is no market—anybody who

might buy the things is broke.’ ” But the Owen report became the object of much interest. Recalled Brian Smith, then acting director of ITC’S aerospace directorate: “Because it attracted so much attention—including the minister’s—the pressure was on us to take it a step further.”

In the summer of 1981 Lumley visited the Fort Worth headquarters of Bell—whose helicopters make up twothirds of the Canadian fleet—to gauge the U.S. giant’s interest in establishing a plant in Canada. He received a discouraging response. But within months company chairman Jim Atkins’s interest was engaged after he read of the Owen report in Canadian Aviation magazine. Said Atkins: “Money was the main attraction.”

At the same time, the government was building a case for a full-fledged assault on the helicopter market. A

federal government committee reported that most forecasters predicted steady world growth for the helicopter industry, a prognosis based largely on the belief in a continuing oil boom. Bell was also optimistic: an influential 1981 study by the company—a factor in the Canadian committee’s reportclaimed that annual helicopter sales would double to 2,995 by 1990. And based on oil company reports, Bell also singled out light twin-engined helicop-

ters as the wave of the future.

Some ITC officials remained skeptical. “We suspected that Bell, because they were the market leader, had influenced all the other surveys,” said Smith. Helicopter users also questioned the projections. At one 1982 meeting of ATAC’s helicopter committee, two government officials sounded out the association about the potential scheme. Said Lindsay: “Our members told them they were out of their minds.” ATAC members also pointed out that even though a second engine provides an extra margin of safety, the costs were prohibitive. One single-engined light helicopter, made by French manufacturer Aérospatiale, now sells for $675,000; a twin-engined version sells for $1.1 million.

But the government had what appeared to be a clear vision. By the late 1970s aircraft engine manufacturer

Pratt & Whitney Canada Inc. in Montreal had already approached Ottawa for money to develop a twin-turbine engine. Smith says it was a “happy coincidence”: a chance to arrange for a light twin-engined helicopter to be built in Canada, and at the same time guarantee a market for Pratt’s new engine. Added Lumley: “If Bell had not agreed to buy the Pratt engine, then we would not have given them the money.” Lumley insists that none of the questions about the viability of light twins “ever crossed my desk.” But some federal officials have said privately that key department people told Lumley only what he wanted to hear—and that he was more than willing to believe them. Said Smith: “He was hell-bent to make a name for himself.”

Then, in 1982, the world helicopter market collapsed, largely because of an oil slump and general recession. But Ottawa’s program had acquired its own momentum. In December, 1982, Lumley—clearly hoping that the market would again improve—formally asked eight manufacturers to submit proposals. By the following spring, three serious applicants had come forward—Bell, Aérospatiale and Messerschmitt-Bölkow-Blohm GmbH (MBB) of Germany—with modest plans based on existing models.

Ottawa accepted MBB’S offer much as it was proposed. Since then, the company’s plant in Fort Erie, Ont., which opened last July and produces a light twin-turbine helicopter, has met every production and hiring target and created jobs at a fraction of the price of the Bell plant. But government officials pressed Aérospatiale and Bell for grander proposals because of Lumley’s insistence that the project give rise to thousands of jobs and a company able to design and build a new model using the Pratt engine. By September, 1983, Bell had edged out Aérospatiale. The company agreed to begin producing the Model 400—its standard twin-engined helicopter—in Canada in 1985, then substitute the new Pratt motor and create the Model 400A by 1988. And Bell was to design a new, sophisticated Model 440—with Ottawa and Quebec covering 60 per cent of development costs.

A month later, Ottawa proclaimed that Canada was in the helicopter-building business and at the same time announced that it would invest $100 million in Pratt & Whitney’s new $252million engine program. And in spite of a continuing decline in the market, the new Conservative government plowed ahead with the project after 1984. When Bell officials advised Ottawa in October, 1985, that market conditions simply did

not warrant production of the Model 400, the two sides renegotiated their agreement. Bell scrapped plans to produce the Model 400, but agreed to begin producing the Model 400A with the Pratt engine in 1989. By 1988 Bell will also shift production of four older models to the Mirabel plant—which did not open until December, 1985. One model is already being turned out: the 206 B JetRanger. But although development will continue, Bell is now unwilling to commit itself to production of the 440, and some competitors express doubt that the machine will ever enter production.

Bell is also attempting to take advantage of its new status in Canada. Spokesmen have said that next year they will pursue an estimated $2-billion contract to replace the Canadian navy’s 35 old antisubmarine helicopters. Ottawa is also expected to purchase up to 60 light helicopters for the army within the next decade. Some observers say that such contracts should go to Bell. Said Harrison: “What is the point of paying to establish an industry if the government does not insist that its child be the beneficiary of procurements?” Bell may be counting on similar arguments cropping up in Ottawa to bolster its order book—and to deflect criticism that its plant was a bad investment.

— MARC CLARK in Ottawa