Canada's Role in World-Wide Aerospace

BGEN. ANDRUNYK:

Members and friends of The Empire Club of Canada: A recent Air Industries Association of Canada report stated that the aerospace industry in Ontario was in a strong growth period that was expected to carry through to the end of the decade and beyond. Setting the pace for that growth, the report added, was De Havilland Aircraft of Canada, which with its new Dash 8 commuter airline program complementing its Dash 7 and Twin Otter short takeoff and landing aircraft would add 3,000 people to its present workforce of 5,000.

This is great news indeed and to tell us more about the aviation industry in Canada and its role in worldwide aerospace, and in particular De Havilland's contribution to that industry, we have as our guest speaker today the President and Chief Executive Officer of De Havilland, Mr. John W. Sandford.

John Sandford's involvement in the aviation industry reads like an adventure story. He started as an engineering apprentice at the age of fourteen with Westland Aircraft of England. Upon receiving his master's degree from the Cranfield Institute of Technology in 1957 he came to Canada and joined Avro Aircraft as a design engineer but soon found himself unemployed when the Avro Arrow program was scrapped. He then joined a group of former Avro engineers to form Avian Industries in Georgetown where an autogyro was developed. However, he saw greater opportunities south of the border and joined Rockwell International where he worked in the forefront of the United States aerospace industry.

As Director of Engineering for advanced launch systems, John Sandford worked on the Apollo spacecraft and the Saturn V launch vehicle used for the manned lunar mission. The success of these programs led him to the development of the space shuttle program and it was his design that won the NASA contract for the production of the shuttle vehicle system.

John Sandford returned to Canada in 1974 as President of Rockwell's subsidiary, Canadian Admiral Corporation, until recently a major manufacturer of televisions and appliances.

He joined De Havilland Aircraft of Canada as its President and Chief Executive Officer in mid-1978 and in that capacity is responsible to the Board of Directors for all operations associated with the design, production and sale of aircraft and related products. He is also accountable for the company's financial performance and future growth strategy. Considering that sales jumped from 124 million dollars in 1978 to over 350 million dollars in fiscal year 1981 and the fact that advance orders for the new Dash 8 aircraft have surpassed a hundred, there is every reason to be optimistic about De Havilland's future in the aviation industry.

Ladies and gentlemen, please join me in extending to Mr. John W. Sandford the usual warm welcome to The Empire Club of Canada.

MR. SANDFORD:

Ladies and gentlemen: It is a great pleasure to be here with you today to talk about the world-wide aerospace industry and, specifically, about Canada's role in this industry. The aerospace industry is a very exciting and dynamic one. The growth in aircraft, space and communications systems has been nothing less than miraculous. It's a little over fifty years ago that Lindbergh first flew solo across the Atlantic. Today, almost nineteen million people fly the Atlantic each year. In the late 1940s, a few experimental test pilots risked life and limb to break the "speed of sound." Today, the Concorde flies schedules every day with a hundred passengers at twice that speed. Most of you will recall the fall of 1957 when the Russians first put Sputnik into earth orbit. Since then we have seen man on the moon, close-up photos of the planets Jupiter and Saturn, and astronauts Young and Crippen return from orbit in the shuttle spacecraft and land on a spot in the California desert better than I can park a car in a nearby parking lot. To show that it was no fluke they did it again with the shuttle a couple of weeks ago.

In the area of communications, who of you now thinks twice about receiving television direct from around the world via satellite, or direct dialing most places in Europe, or an aircraft being guided through lousy weather onto a runway after it has flown four thousand miles, most of which is over open ocean. There isn't a business person here who isn't anxiously awaiting the introduction of the electronic mail system. Lots of people speak of high technology and then have difficulty in defining what they mean. What I have just described is my definition of the application of technology. That, ladies and gentlemen, is technology; that is the aerospace industry; and that is the industry that I am proud to be involved in. Is there any wonder why I claim it's exciting!

In order that you hardnosed bankers and business people out there don't regard me as a romantic "space cadet," let me give you a few facts about the business side.

In the next twelve months the Western world-wide aerospace sector will sell over $100 billion in products and services. That is about forty per cent of the GNP of Canada--or about five times all the oil and gas, foodstuffs and minerals that we exported last year.

The industry has also been rewarding for its investors. Fortune magazine reports that the aerospace industry sector in the United States returned 20.9 per cent to the investor over the last ten years. That's even ahead of the mining, oil and gas sector that on average returned 19.9 per cent. By way of reference, over the same ten-year period, the auto industry returned a little over five per cent. Not bad, eh! This is really big league stuff.

So what about Canada? Not bad either. In 1981 the Canadian aerospace sector sales will be over $2.5 billion. Of this approximately $2.2 billion will be to the export market. The sales growth has been about three times over the last ten years. It is also noteworthy that it is an aerospace company that gives the highest return on equity to the investors in Canada--I'm sure that is a surprise to many of you. Today, the industry employs approximately 47,000 Canadians. Many of them are highly skilled workers and engineers.

The Canadian industry is very broadly based. For example, Pratt & Whitney is the world's largest supplier of small gas turbine engines. Canadair markets business jets, a seaplane and a surveillance drone. Every Douglas DC-9 and DC-10 that flies--and there are well over a thousand of them--have wings and other major structural components supplied by the McDonnell Douglas plant at Malton. Our aerospace industry also supplies specialized electronic equipment, rockets, guidance systems, radars, satellites and high quality precision castings. In addition, many of the over one hundred companies that make up the industry supply parts, large and small, to the makers of the commercial jets, like the 727, 747 and L-1011, that fly the world today.

About half a dozen years ago, Canadair and De Havilland were both acquired from their original foreign owners by the federal government. This makes you and every other Canadian a sort of shareholder in De Havilland--so, for the remaining part of this report I shall treat this as a quasi annual general meeting and address you as shareholders.

I think, shareholders, that you should know the Crown's decision to buy De Havilland back in 1974 was a smart one. Since that time we have experienced considerable sales growth. In our fiscal year 1981, which ended in May, sales were $350 million and profits were at a record level. This represents an almost threefold sales growth in three years. This was due to the continued sales of Twin Otters. To date we have delivered over 750 into about eighty-five different countries. The Dash 7 is also selling well and there are over sixty-five of this $7 million airplane out in service with eighteen airlines in eleven countries.

At this moment, shareholders, we are in the middle of a $60 million expansion at our plant in Downsview. This investment is being made for our new Dash 8 aircraft. Development of the Dash 8 will cost about $200 million. It has been underway for two years. The aircraft will first fly in 1983 and deliveries will be made following certification in 1984. The first one will go to Norontair. This aircraft will carry thirty-six passengers and is powered by two quiet turboprop engines. It is positioned in size between the nineteen passenger Twin Otter and the fifty passenger Dash 7. Every indication is that, because of its relatively high cruising speed and superior fuel economics, it will be a winner. Today, we hold deposits on over a hundred Dash 8 aircraft. This is an unprecedented kickoff to any sales effort in the history of your company.

All of what I have told you so far, shareholders, is good news for the future. However, I must caution you that there are some stormclouds ahead that could spell difficulty for your company and for other aerospace companies in Canada and the U.S. I would like to explain this a little more.

Two factors are at work that will cause major changes in the next few years. They are, first--a major rationalization of commercial jet aircraft design and manufacture. This will change the way the large companies like Boeing and Lockheed will do business in the future. This in turn will affect the Canadian suppliers. And second--many developing nations are starting to build up an aerospace subcontract and parts supplier capability. This could mean that the Canadian companies will be forced to compete against low wage countries when bidding to Boeing, Lockheed and others. Back to the first point--rationalization. Throughout the post-World War II period the U.S. aircraft industry has supplied over ninety per cent of the large commercial aircraft. During the 1970s, shareholders, we have watched the major European aerospace companies join together to develop a commercial transport aircraft. They have called their combined company Airbus. It produces two types of wide-bodied jet aircraft that carry between two hundred and three hundred passengers. Airbus aircraft fly into Toronto regularly in the colours of Eastern Airlines. Max Ward recently ordered six Airbus aircraft. They have been extremely successful in selling their aircraft around the world, so successful that while companies like Lockheed and McDonnell Douglas are rapidly cutting back production, Airbus partners are trying to double their production output. One can see that Europe may produce as much as thirty per cent, or maybe forty per cent, of the world's larger commercial aircraft later in this decade. De Havilland, and the majority of our industry, do no work with Airbus--in fact you cannot unless you were a risk-sharing partner in the original design program for the aircraft. This means that we could be locked out of forty per cent of the available sub-contract business that today many of our companies in Canada depend heavily upon.

Boeing, Airbus and McDonnell' Douglas are all considering the development of a new commercial jet. It would carry about 150 passengers. It has been reported in the press that Boeing is joining in partnership with Italy and Japan on this aircraft. McDonnell Douglas have signed an agreement with Fokker of Holland to team on their 150 passenger aircraft project, and Airbus already is teamed with companies in the United Kingdom, France, Germany and Spain. You will notice, shareholders, that I didn't mention Canada because, so far, we aren't involved in any development partnership. It's not that bad--don't sell your shares in De Havilland yet. All of the teams I have just mentioned respect our capabilities and I believe we could join with one or all of them. However--it's not that easy. The name of the game has changed. These big name companies now demand that you join as a risk-sharing partner. Canadian companies will no longer be able to be major suppliers without having to put big money into the joint team kitty for designing and developing the new aircraft. If you want, say, ten per cent of the work on the aircraft, then you must ante up ten per cent of the total aircraft development cost; the payback will be on the same basis as the major team partner. These large commercial aircraft can cost as much as two billion dollars to develop and pay back can take over ten years. This is not an easy decision to take, shareholders, but you can bet we're in there with the government, taking a very hard look on your behalf. It is noteworthy that Canada is the second largest purchaser of commercial jet aircraft. In the past, Canadian workers have contributed to and benefited from this. It would be ironic if in the future there are no "Made in Canada" parts on these aircraft.

Now to my other point--the low labour rates of new competitors. Countries like Spain, Japan, Brazil, Korea, Greece, India and China have all increased their aerospace manufacturing capabilities during the 1970s. Japan is the largest. The aerospace companies in these countries are all seeking to become suppliers to the builders of the large commercial jets---these are the same companies that the Canadian industry has traditionally supplied for years. Our industry has in the past been innovative and cost competitive. Its main competition in being a supplier to, say, Boeing or McDonnell Douglas has come from American, European or other Canadian companies. The problem ahead occurs because these new countries now coming into the business have labour rates that are half or less than are paid to aerospace workers in North America. To avoid going the way of the television, textile and auto industries, we in Canada must do the following:

Use our skills to continue and to strengthen our unique indigenous products like the Dash 7 and Dash 8, the Challenger and the Pratt & Whitney engines.

Join as risk-sharing partners in new developments like the 150-passenger aircraft--as a partner you become the sole source for various major parts during the production phase.

Continue, and at a faster pace, with the production modernization programs started in the 1970s. Here the government has been particularly helpful.

Continue with research and development programs and develop skilled engineering teams and manufacturing people.

Provide further tax incentives to attract private sector funds to the high-technology, high-risk research and development programs.

I believe, shareholders, that if these broad actions are taken we will continue to grow. We have demonstrated our capabilities with the major sales growth achieved in the 1970s. We have strong management and market teams. We have a skilled and educated workforce. We have good facilities and equipment, and limited support programs already exist within the' federal government, but they need improvement.

In summary, shareholders, Canada participates well in the big league of aerospace. The government understands the value of the industry and continues to support it well. Changes are occurring that are causing a whole restructuring of the aerospace industry in the world. Canada must quickly respond to these changes in order to grow in areas where we have done well in the past. I believe we will--so hold on to your shares. This industry is still going places--dare I say up!

The thanks of the club were expressed to Mr. Sandford by Peter Hermant, a Past President of The Empire Club of Canada.