Up, up and away

The airline industry has been facing hard times as the impact of the global financial downturn reduces passenger numbers.

Thales, the aerospace and defense electronic group, is deeply involved in this turbulent world. The France-based company said in its third quarter financial release that it would miss its 2008 profitability goal after taking a 60 million euro hit due to delays to a major defense project, the Airbus A400M military transport plane.

A week ago, its biggest shareholder telecom-equipment maker Alcatel-Lucent said it reached a preliminary agreement to sell its 20.8 percent stake in Thales to plane maker Dassult Aviation, a move that will help Alcatal-Lucent better withstand the economic meltdown.

Francois Quentin, vice-president of Thales Group, recently spoke with China Business Weekly reporter Zhang Qi about the company's business strategies, the potential market in China and the firm's long-term ambitions.

Q: The airline industry has been slack recently. Some budget airlines were even shut down in Europe and the US. How does the recession affect Thales' business?

A: Some American airlines acquired old airplanes that are very expensive in term of high fuel consumption. But well-managed airlines are still making money these days.

In the medium and long term, the airline industry grows at 5 percent each year, despite going up and down amid the economic turbulence.

Both Airbus and Boeing still have big orders these years. They are not yet seeing any conflictions in the new orders.

And I don't believe we are close to a crisis like 2001 and 2002 after the September 11 terrorist attack. I am optimistic about the market in the coming two or three years.

Q: Since the price of crude oil has dropped to less than $50 per barrel, do you think it is a good signal for airlines' recovery?

A: Yes, it will help ease the losses that airline companies have suffered. But I believe the oil price staying at $60 to $70 per barrel would be a good price. Companies need economic incentives to switch old types to new types with less fuel consumption and less CO2 emissions.

Q: China's manufacturing industry has suffered from rising labor and raw material costs, and yuan appreciation. Will Thales consider moving its Chinese manufacturing base to cheaper countries like Vietnam?

A: We have manufacturing bases in Beijing, Shanghai and Nanjing, providing equipment to Chinese and overseas markets. But we don't believe the main attractiveness of China is manufacturing. We are more interested in services, development, and knowledge.

China has very good universities and professional talents. Our mission in China is to enjoy sustainable development, rather than using China as a low-cost manufacturing base.

Q: Then what is Thales' expectation for the Chinese market?

A: China's aviation market is the fastest growing in the world. China's air traffic has maintained an average annual growth rate of 18 percent since 1980, three times the world's average air traffic growth rate during the same period, according to figures from the Civil Aviation Administration of China (CAAC).

The Chinese airline industry transported 185 million passengers last year, up 15.9 percent year-on-year, compared with just 3.43 million passengers in 1980.

With a fleet of over 1,000 (planes) China will remain the world's second largest commercial aircraft market over the next 20 years.

Airbus forecasts that China, driven by double-digit economic growth, will need 100 to 150 aircraft every year in the next 20 years, nearly quadrupling the current fleet by 2026.

With such a huge market potential it is understandable that Airbus has installed its first A320 final assembly line outside Europe right here in Tianjin and understandable that Thales also seeks to extend our cooperation with the Chinese aviation industry.

Q: And how far has Thales gone through the Chinese market and what are the company's short-term objectives?

A: Thales has been operating in China for more than 20 years and employs close to 600 people. Its industrial presence comprises 10 wholly-owned entities and joint-venture companies located throughout China: Beijing, Shanghai, Nanjing, and Guangzhou.

Chinese customers generate an average annual order intake of 300 million euros.

Thales' business is concentrated on the following sectors: aviation, space, and ground transportation.

Recent successes include the modernization of Beijing Air Traffic Approach Center to prepare the capital airport for the 2008 Olympics, and the modernization of the ticketing systems of three Beijing metro lines.

Thales is one of two leading players worldwide in in-flight entertainment systems (IFE), which refers to the electronic entertainment available to aircraft passengers during a flight in the form of videos, games.

With the continued, fast development of Chinese airlines - IFE for new aircraft represents an important potential in China.

Now Thales holds 80 percent of the Chinese IFE market. In the last two years, Thales has won five major IFE contracts with Chinese airlines worth in excess of $300 million to equip 57 aircraft, of which 40 are Boeing 787.

Talking about goals and objectives, Thales is not making it in big bounds but by developing step by step.

(China Daily 12/01/2008 page6)