Astrium To Seek Better Terms from Ariane 5 Subcontractors

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  Space News Business

Astrium To Seek Better Terms from Ariane 5 Subcontractors

By PETER B. de SELDING
Space News Staff Writer
posted: 02 April 2007
04:21 pm ET


PARIS — The builder of Ariane 5 launch vehicles is serving notice to its subcontractors that some of them will need to accept lower profit margins in a coming order for 30 vehicles to compensate for overly generous terms they won in a similar order three years ago.

Francois Auque, chief executive of Astrium, whose divisions include Ariane 5 prime contractor Astrium Space Transportation, said his company and a few others took the brunt of the price cuts that were part of a 30-rocket order concluded in 2004 — before Astrium was prime contractor.

Things will be different for the upcoming order, he said.

“We consider that we made an effort for the first Ariane 5 batch that was not shared by all our suppliers,” Auque told reporters March 11 during a briefing in Kourou, French Guiana, home to Europe’s Guiana Space Center spaceport. “What we want is a situation in which everybody shares the pain. For this second batch, those who made the most sacrifice for the first batch should make a smaller effort — and those who made a lesser effort then should make that effort now.”

The Arianespace launch consortium of Evry, France, and its contractors recently agreed to increase the vehicle’s production rate from the current six to eight vehicles per year beginning in 2008. Arianespace has said a new 30-rocket order is likely this year given the commercial launch market rebound.

But unlike the 2004 order, the next batch of Ariane 5 vehicles will be purchased from a rearranged industrial team in which Astrium is prime contractor. For the earlier contract, valued at 3 billion euros ($3.9 billion), the French space agency, CNES, had an Ariane 5 management function that substituted for a prime contractor.

Auque said that for the 2004 30-rocket order, Astrium — which has long been the prime on major pieces of the vehicle — signed contracts with many of its suppliers before it had completed negotiations with Arianespace. With the commercial-launch market suffering at the time from low demand and a price war among launch-service suppliers, Arianespace insisted on terms and conditions that Astrium was unable to apply to subcontractors.

“There is an expectation by Arianespace of further price decreases this time,” Auque said. “The fact is that we were not profitable in the first batch. Our aim, of course, is to be decently profitable.”

A prime contractor in principle has the ability to pressure subcontractors with the threat of taking its business elsewhere. Auque conceded that this is not necessarily the case with Astrium on the Ariane 5 program.

Many of the Ariane 5 component builders, including Astrium, are shareholders in Arianespace, meaning companies are asked, in effect, to take a tough negotiating line on themselves. In addition, the Ariane 5 contracting team has been settled for years for all the major components, and finding competitive bids in Europe will not be easy. Going outside Europe — to the United States, Russia, Japan or elsewhere — would be politically difficult.

“The possibility of procuring outside of Europe is extremely limited,” Auque said.

At least one Ariane 5 contractor agreed that the Ariane 5 negotiations this year will be difficult. “Some of what Auque is saying is part of the normal strategy of a prime before negotiations start,” said Marco R. Fuchs, chief executive of Bremen, Germany-based OHB Technology, which owns 70 percent of MT Aerospace. MT Aerospace builds about 10 percent of the Ariane 5 rocket.

“I know our people at MT Aerospace think we made an effort in the earlier batch,” Fuchs said in a May 28 interview. “My feeling is that for this next order, there will be real commercial negotiations. We are in a market with strong demand; business is booming and it may be hard to reduce prices in this context. But we will go into these talks with an open mind.”

The coming negotiations over the next big Ariane 5 order come at a time when Astrium Space Transportation, which is based in France and Germany, is unable to count on any new space-hardware program to occupy its design teams.

The company has received modest research and development funding from CNES to tide these design teams over between assignments, but no new projects are on the horizon.

Work on the French M-51 strategic missile also has helped. Ballistic missile development is performed by a different division inside Astrium Space Transportation but the company has been able to move design engineers to the missile work in the absence of space investment.

“Without the French Ministry of Defense, we could not have maintained our competence,” Auque said.