Saab Fails to Land Gripen Orders, Threatening Output (Update2)
By Sabine Pirone
April 14 (Bloomberg) -- Saab AB, the Swedish maker of the $40 million Gripen jet fighter, may fail to win enough orders to guarantee the plane’s future as the build rate slows and parts- makers halt production.
Norway dealt Saab a blow in November with a contract for 48 Lockheed Martin Corp. Joint Strike Fighters after analysts predicted the Gripen would win. The Netherlands selected the JSF as the best candidate to replace 85 older aircraft a month later, and Denmark may also pick the U.S. plane this year.
Work on Gripens for South Africa and Thailand runs out in 2012 and only 26 deliveries remain, pushing output down to 10-12 aircraft a year from about 15 previously. Linkoeping-based Saab is holding out for orders from India and Brazil to rescue the flagship product of an aeronautics unit that contributes 20 percent of sales. Suppliers including Volvo Aero, maker of the plane’s RM12 engine, are already winding down production.
“After South Africa we have no more orders and that’s a fact,” said Fredrik Fryklund, a spokesman for the Volvo AB unit, which gets 7 percent of its revenue from work on the Gripen. “Next year some time we’ll probably deliver the last engine. Maybe another country will like our Gripen with the RM12. Otherwise, the production line will be closed.”
Saab fell 4.9 percent to 62.50 kronor in Stockholm trading, the sharpest drop in five weeks. The stock’s decline compares with a 0.7 percent fall in the Bloomberg World Aerospace and Defense Index of 17 industry leaders not including Saab.
Marketing Plans
The planemaker reiterated after losing the Norwegian contract that it aims to sell 200 more Gripens abroad and is marketing the 1,320 mile-per-hour aircraft to eight potential new customers. Spokesman Lasse Jansson says the production rate has always been flexible and that the company has no supply- chain problem because it only buys parts based on orders.
Norway said it placed the 18 billion-kroner ($2.7 billion) JSF order, worth another 145 billion kroner in maintenance and repair over 30 years, after judging the plane to be 6 billion kroner cheaper than the Gripen and better in all of its main duties. Saab said Dec. 10 that the pricing was faulty and it was “surprised” at the choice, given that Norway had indicated it wanted closer cooperation with neighboring Sweden.
Lockheed’s hand may have been strengthened by Norway’s role as one of eight partner countries helping the U.S. develop the JSF, also called the F-35. Denmark is also involved, as is the Netherlands, with 84 Dutch companies making parts including cables and doors valued at 750 million euros ($1 billion).
Dutch Jobs
Dutch defense ministry spokeswoman Sascha Louwhoff said that while the competition will remain open until a contract is signed next year, the JSF has become important to the industrial base, with the government having invested $800 million. Two demonstrator planes are about to be ordered.
“We’ve invested a lot of money in the JSF program, you cannot wipe that out,” she said. “For the armed forces it’s important that they have the best aircraft. For the Netherlands as a whole it’s also important that we get orders and jobs from it. It’s a two-way approach.”
Danish defense spokesman Henrik Levysohn said the country will also hold an open contest between the Gripen, JSF and Boeing Co. F/A-18 Super Hornet, with a preliminary choice to be made this year. Test aircraft will be commissioned before a contract is signed in 2012.
“The potential is still there, but as they lost in Norway, the likelihood of success in European countries like Denmark and the Netherlands has decreased,” said Stefan Cederberg, an analyst at Enskilda Securities in Stockholm who recommends buying Saab stock.
Supply Chain
While Saab can sustain Gripen production at a reduced level, the company needs contracts now if it’s to safeguard the supplier base, since companies normally provide parts well ahead of manufacturing, said Sandy Morris, an analyst at Royal Bank of Scotland Group Plc in London with a “buy” rating on the stock.
“They need an order in 2009,” Morris said. “Gripen production may not cease this year, but further down the chain, suppliers are likely going to run out of work.”
While Saab may be able to keep production lines moving by doing upgrades, that won’t in itself be enough to retain design capabilities and the supply chain, he said.
The Gripen’s suppliers include aircraft-electronics manufacturers Honeywell International Inc. and Thales SA, Goodyear Tire & Rubber Co., which makes the wheels, Martin-Baker Aircraft Co., an ejector-seat specialist, and Rheinmetall AG, which makes 27 millimeter cannon, as well as dozens of smaller companies, many Swedish.
‘Crunch Time’
Richard Aboulafia, an analyst at Teal Group in Fairfax, Virginia, said deliveries generally need to be running two years ahead to sustain the supply chain.
“If they don’t get orders soon, the production line starts to dry up,” he said. “It is coming down to crunch time. You can be flexible in speeding up or slowing down, but if a line goes cold it’s out of your hands.”
Saab says it has submitted binding responses to tenders from Brazil, Denmark, India, Romania and Switzerland and is also looking at bidding for orders from Bulgaria, Croatia and Greece, as well as the Netherlands. The Gripen made its first flight in 1988 and entered service in 1993. The first export contract was signed by South Africa in 1999.
Imperiled Orders
Awards from India or Brazil -- which may number 126 and 36 aircraft respectively -- are still some way off and any contracts in Eastern Europe have receded by at least five years because of the global financial crisis, Morris said.
Switzerland has delayed selection until December at least and may represent Saab’s best chance of a new Gripen contract, analysts say. Swiss relations with Germany, where the rival Eurofighter Typhoon program is based, have been strained by the countries’ dispute over tax evasion.
Volvo Aero said that while Switzerland is a candidate for planes using the RM12 engine, based on the F404 from Fairfield, Connecticut-based General Electric Co., any contract from India or Brazil would probably be for the Next Generation Gripen with power plants direct from GE.
“We have been preparing for a commercial change in our company for many years,” Volvo spokesman Fryklund said from the unit’s base in Trollhaettan, Sweden. “We have foreseen this, so we are not in trouble.”
Leach International, a supplier of electrical-power distribution assemblies for the Gripen, has already finished shipments, spokesman Jean Emmanuel Metz said by telephone from Strasbourg, France.
While Sweden may provide further upgrades to keep the Gripen line going, Saab may have to drop plans for a new assembly line or close it temporarily, Morris said.
The Gripen has 250 orders, 204 of them from Sweden, which has leased out 14 planes to the Czech Republic and is also upgrading a further 31. South Africa has ordered 26 planes, of which 20 are still to be delivered, and Thailand has contracts for six. Hungary has leased 14 planes which it may buy after 10 years of operation.
To contact the reporter on this story: Sabine Pirone in London at
spirone@bloomberg.net.
