Alenia Aermacchi, the Italian maker of the C-27J, is warning the U.S. government that it will refuse to support the aircraft it sold to the United States if the U.S. resells them to other nations. (Senior Master Sgt. David Lipp / Air Force)
Feb. 27, 2012 By VAGO MURADIAN – Defense news
SINGAPORE — In what analysts see as an unprecedented move, Alenia Aermacchi, the Italian maker of the C-27J, is warning the U.S. government that it will refuse to support the aircraft it sold to the United States if the U.S. resells them to other nations.
The move caught some U.S. officials by surprise and threatens to undermine American efforts to resell the planes on the international market, most likely to Australia, Canada or Taiwan.
Giuseppi Giordo, CEO of Alenia Aermacchi, explained his position in an interview at the Singapore Air Show here, before continuing on for meetings in Australia.
“Obviously, we don’t like the [U.S.] decision,” he said. “However, we respect it and we will try to mitigate any negative impacts from the cancellation of the C-27J.”
Giordo explained that the company would continue to support efforts to sell new C-27Js through the U.S. Foreign Military Sales program, but would exercise its contractual rights not to support the aircraft originally sold to the U.S. if those planes were resold on the international market, essentially competing with Giordo’s company.
“If they want to sell additional airplanes as FMS, we will support them, but not those 21 airplanes,” Giordo said. “In fact, we will do our best — not only us, but the Italian government — not to support those planes. In that case the U.S. government will be competing against our international campaigns in a market where 21 airplanes is a big deal.”
The U.S. Air Force announced it would end the program earlier this month after spending $1.6 billion for 21 aircraft, 12 of which have been delivered, four in final assembly and testing, and five in production. Officials have not specified plans for the C-27Js, and options include parking them in the desert for future use, transferring the planes to the Air Guard, Special Operations Command or another agency, such as Homeland Security, or reselling the aircraft internationally.
Air Force spokesmen said the decision was driven by a change in U.S. strategy and budget pressures, and is not a reflection on the aircraft or its performance. Officials simply concluded they could meet mission requirements with their fleet of C-130 and C-17 transports.
“We’re working through those issues for the C-27, also the Global Hawk, which in both cases represent new airframes,” Air Force Secretary Michael Donley told an audience at the Air Force Association’s winter conference in Orlando, Fla. “So we will probably set rules for Type-1,000 recoverable storage and lesser numbers for availability for us. Our international affairs staff ... are communicating to potential countries interested and partners asking for them to identify their interest.
“I think there are a number of avenues available to us. We have not selected a particular course of action. We will be putting that together and it does include potentially making these airframes available for sale to [partners].”
Heidi Grant, deputy undersecretary of the Air Force for international affairs, said foreign interest is high in C-27Js, C-130H transports and Global Hawk reconnaissance aircraft.
In Singapore, Grant met with nearly two dozen of her international counterparts during her visit to the Asian city-state. The aircraft to be divested by the U.S. since 2001, she said, would constitute the world’s seventh largest air force.
Grant added the Air Force is working to determine the future of the planes and waiting to see whether Congress approves the service’s budget. Selling excess aircraft is of interest, she said, because her mission is to improve “the capability and capacity of our partners.”
A Rare Stand
For the U.S. Air Force, ending the purchase of C-27J transport planes was just one of thousands of decisions needed to help cut Pentagon spending by nearly a half-trillion dollars over the coming decade.
But for Alenia, a Finmeccanica company, the decision is a threat to the future of the twin-engine plane and 1,000 workers at two factories that build it.
Once a nearly $6 billion Army program for 145 aircraft, the Air Force took over the effort in 2009 and capped the purchase of C-27Js at 38 planes. But in its recent 2013 budget request, it decided to end the program at 21 aircraft, 17 fewer than expected, and retire the fleet next year.
It remains unclear how much the Air Force will save by deferring the option for 17 additional aircraft, or if the service will even be required to pay Alenia a termination fee, sources said.
Analysts called Giordo’s stance unprecedented, but understandable in light of market dynamics and the Italian company’s bitter experience with Pentagon contracting over the past decade.
Alenia’s sister company, AgustaWestland, beat longtime incumbent Sikorsky to win the U.S. presidential helicopter contract, only to have the $6 billion program for 28 aircraft canceled in the early days of the Obama administration after constant design changes by the government sent costs soaring. Nine helicopters were delivered when the program was canceled; they were later sold to Canada for $164 million.
Defense trade has emerged as the source of uncharacteristic discord between Washington and Rome, which have long been close allies. Italy hosts thousands of U.S. troops on its soil and remains a major buyer of American military gear, most notably the Joint Strike Fighter that will cost Rome about $15 billion for 100 aircraft. But the fact that America won’t buy Italian products infuriates some executives and officials.
Giordo maintains his tough line on the C-27J won’t hurt his company’s prospects in the U.S. Alenia remains a key partner on the multinational Joint Strike Fighter program and will pursue the Air Force’s trainer replacement contract when that competition gets underway formally in a few years. And Finmeccanica’s DRS Technologies continues to serve as the cornerstone of the Italian giant’s U.S. operation and a key DoD supplier, now under the leadership of former Deputy Defense Secretary Bill Lynn.
L-3 Communications is the prime contractor for the U.S. C-27J program, performing final integration of the aircraft in Waco, Texas. The company declined to comment on Giordo’s stance, noting it’s a matter between Alenia and the Air Force.
With the U.S. order capped and the aftermath of U.S. and European budget cuts, the C-27J’s prospects have dimmed. A derivative of Alenia’s G222 with new engines and avionics, 62 C-27Js have been sold worldwide: 21 to America, 12 to Italy, eight to Greece, seven to Romania, four to Mexico, four to Morocco, three to Bulgaria and three to Lithuania.
Alenia has identified South Africa, Nigeria, Ghana, Taiwan, Egypt, Oman, Canada, Saudi Arabia, Indonesia, Qatar and “potentially UAE” as future customers.
Richard Aboulafia, an analyst with the Teal Group in Virginia, said the 21 planes the U.S. might want to sell constitutes the bulk of the world market for such small transports — and is equivalent to two years’ output from Alenia’s factories.
That explains why the stakes are high enough for Giordo to take such a hard stance.
“I am pragmatic,” Giordo said. “I prefer they put the airplanes in the desert.”
Message to Potential Buyers
Giordo said he will take his message that his company won’t support U.S. aircraft to all his potential C-27J customers such as Australia, which has expressed interest in the planes. He visited Australia Feb. 15-17.
The message to the Australians is that “you can buy on FMS and we will support the FMS case for 10 additional airplanes,” Giordo said. “But if they consider selling the 21 [U.S. planes], no way. They can sell, but as the original equipment manufacturer, I will not give spares, not guarantee configuration control, and so on.”
Alenia has fought an uphill battle to crack the U.S. market. Lockheed Martin first partnered with Alenia on the C-27J, only to abandon the program when it concluded it would compete with Lockheed’s four-engine C-130J. Then Boeing signed on as a partner, but it too withdrew its support. Eventually, Alenia partnered with L-3 and won a deal for up to 145 light battlefield transports valued at $6 billion, beating EADS’ C-295.
“We have two problems,” Giordo said. “First of all, the price that we have with the U.S. government is a very, very, low, low price because to win the competition we had to reduce the price. Second, the volume at the beginning was 145, then 78, then 38, now 21 with firm, fixed price. We are losing money.
“So, how can I allow the U.S. government to sell 21 airplanes they have in their inventory where I lose money and they also kill my international marketing?”
Sympathy for Alenia
But that stance does have its risks for Alenia Aermacchi, which stands to compete when the U.S. Air Force launches a new jet trainer competition in three years.
That competition was to have gotten underway later this year, with Alenia to bid a U.S. version of its M-346 trainer against the T-50 by Korea Aerospace Industries and Lockheed Martin and a new version of BAE Systems’ Hawk trainer sold by Northrop Grumman. Boeing is also considering developing an all new aircraft for the competition.
Asked whether his C-27J stance could damage relations with the U.S. Air Force, Giordo said, “I do not see what consequences our decision should have. Our decision is based on a product of a specific program and not meant to jeopardize the relationship with such an important customer and partner. I am sure that we will continue our collaboration with the United States, on, for example the [Joint Strike Fighter] program.”
He added that he is confident the M-346, which was selected by Singapore and most recently Israel, is a strong product that would satisfy U.S. requirements.
Senior U.S. aerospace executives expressed sympathy for Giordo, saying Alenia has been dealt a particularly tough hand.
“They fought like hell to win that contract and priced the plane to win but didn’t leave a lot of profit margin,” said one senior executive. “That’s why he can’t afford to have the U.S. government sell the planes they have. But we’ve all been through that. We bid for programs that we think will be for hundreds of planes that over time dwindle to a handful; it’s just that Alenia’s smaller than we are, so this kind of thing hurts even more.”
“No doubt about it, it’s a tough message, but you can’t blame them because by any objective measure, this company has faced a series of setbacks not of its making,” said Loren Thompson of the Lexington Institute think tank, who also has served as a strategic adviser to Alenia’s parent, Finmeccanica. “It invested heavily to break into the U.S. market, winning the presidential helicopter and the Joint Cargo Aircraft. Both were terminated, and two Air Force helicopter programs they were eager to compete for, search and rescue and supporting ICBM fields, were canceled.”
Teal analyst Aboulafia agreed, noting that the only recent parallel to Alenia’s position was between Boeing and Airbus two decades ago.
“Back in the ‘90s, Airbus said it wouldn’t support A340s Boeing took from Singapore in exchange for 777s,” he said. “It was ultimately resolved after Airbus realized that not supporting the planes would hurt residual values for all A340s. What Alenia wants to do is effectively embargo its own product. It’s an aggressive stance, but my question is how this plays out in reality. It’s extremely difficult to enforce on any sophisticated product with a whole lot of subcontractors and third-party suppliers.”
Aboulafia suggested the move is more a negotiating tactic than a final position, noting it’s never good for business to squeeze a customer.
“Customers have a tendency of noticing how you treat other customers,” he said. “On the other hand, it’s a great little airplane that’s living hand to mouth at a run rate of just under one per month, not a lot in the pipeline and with few prospects like Taiwan and Australia.
“You can say one thing in Finmeccanica’s favor, they’ve worked hard. Given all that’s happened, whether cancellation of the 27, the presidential helicopter, competitions going away or being delayed like the trainer, the degree of fatigue and annoyance with U.S. procurement of foreign systems is quite understandable, so what do they really have to lose? It’s very understandable, but it might not be tenable.”
Marcus Weisgerber in Washington and Tom Kington in Rome contributed to this report.