Plane maker hits turbulence

By Chris Daniels

Pacific Aerospace shares a small road with a herd of dairy cows that graze on the outskirts of Hamilton Airport.

Pilots taxiing its distinctive flagship 750XL planes, with their "slabby" thick wings and extended snouts, sometimes have to wait for the cows to make their way across to the milking shed before they can get on to the runway.

Behind the cow track in two large sheds lies Pacific Aerospace Corporation which compensates for its less than glamorous exterior with a glowing reputation as a New Zealand innovator and torch bearer for high-tech exports.

A past winner of a Trade and Enterprise export award, PAC is now an example of how export mistakes can be made - in this case the counting of pricey, unhatched chickens.

This month's collapse of a $20 million, 12-plane order has led to the axe being swung. One-quarter of the workforce and senior executives including the chief executive and chief financial officer are leaving the company. Shareholders, some of whom bought into PAC just a year ago, have now been asked to stump up more money to keep the company afloat.

Potential investors were told last year that a sharemarket listing was part of the company's plans, but thoughts are now firmly tuned to survival and turnaround rather than any glittering debut on the NZX.

Questions have even been raised about whether the 12-plane US order - cited as the reason for the redundancies - was ever a real commitment to actually buy planes.

A press release issued by PAC in April 2004 reported a huge backlog of orders for its 750XL planes, saying: "At $1.7 million per plane, Pacific Aerospace Corporation is sitting on export orders in excess of $440 million over the next 10 years." This equates to about 260 planes, yet the collapse of a promise to buy just a dozen has led to a big contraction, with 45 people losing their jobs, including some just recruited from the UK.

Such glowing representations of the company's order book have been endorsed by Trade and Enterprise.

Economic Development Minister Jim Anderton repeated optimistic claims of pending deliveries last year when congratulating PAC on gaining Australian safety accreditation: "Export orders of between $400 to $500 million over the next 10 years are now likely."

In July he announced a $480,000 Trade and Enterprise grant, partly to help fuel PAC's expansion. It was around this time that staff at the company say work was beginning to dry up.

One industry source told the Business Herald that company founder and majority shareholder Brian Hare should not have used the supposed 12-plane order to an unnamed buyer as the excuse for this month's job cuts, since it never should have been counted on in the first place.

"My understanding of the 12-aircraft order simply was that there were expressions of interest from I don't know who the party was, but they didn't come to pass. That's all there was to it, it just didn't come," the source says.

When asked to describe the $440 million of plane orders, Hare says PAC went to "test the market", which was "scoped out" on the basis of how many sales could be made if a plane such as the 750XL was produced.

"If someone says, 'we'd be keen', then we'd chalk it as an option," Hare says.

This led to "speed wobbles", an over-reliance on orders not backed up by solid financial commitments. Hare attributes the failure of the deal in part to the involvement of a middleman, a practice PAC will be eliminating. Things had previously been done on "too relaxed terms", he says, with the 12-plane deal "a major wake-up call".

"We were not robust enough in our processes."

PAC was now "revisiting the financial commitments buyers must make when they sign contracts for aircraft". No longer will planes be built without firm commitments from the buyer - commitments backed up by actual money, either held in escrow or demonstrated with letters of credit.

"Cash is king," Hare says.

He says a good, long pipeline of orders and construction was now being set up, so work was only started after firm commitments were received.

The hole in the PAC production line first became apparent two to three months ago, says former aircraft fitter Grant Quist, 27.

He was part of a team that would fit the inside of the fuselage, installing fibreglass panels for warmth and noise reduction.

He would also help install the wings, rudders, vertical stabilisers and fuel lines - "the guts" of the PAC 750XL.

Quist applied for voluntary redundancy when the layoffs were announced, thinking it was time to move on. He says his action might also have saved someone getting laid off who did not want to go.

Quist says that people began running out of work, and workers were kept on well after it became clear that orders had dried up.

"We all saw this coming ages ago and [Hare] just kept us on. We didn't know why he kept us on. He just kept us all on."

Quist says when the work slowed down, staff began to realise that a contract may have been lost.

"We realised the contract was lost because there were no aircraft getting built. We realised, 'hey hang on a minute, these aircraft orders are not there, we must have lost the contract'. We weren't told anything, but you can figure it out."

Quist, who is applying for jobs overseas, says he heard talk that cast doubt on how solid the order for 12 planes actually was.

"If there was no order, it definitely looked like there was."

Trade and Enterprise defends its decision to pay a grant to PAC while Quist and his team were scratching around looking for work to do, saying its assessment of the company's order book was sound.

Asked if Trade and Enterprise saw firm evidence of a 12-plane order before approving the grant, group general manager Neil Maxwell told the Business Herald due diligence was carried out on PAC, which included a study of financial forecasts and growth potential.

"As part of the application process, NZTE was informed about orders that were confirmed on contractual terms, for the 2004-05 financial year. This included 12 aircraft to a US buyer," he says.

The NZTE website says that PAC was, at the start of 2004, "sitting on export orders for the new aircraft in excess of US$250 million over the next decade".

Maxwell says that financial forecasts provided by PAC as part of its latest grant application were "based on more conservative projections than US$250 million". Since these projections included orders that had been confirmed on contractual terms, they were "assessed as reasonable".

Of the $480,000 approved to go to PAC, $110,918 has already been paid out. This money is to help it get European Aviation Safety Authority certification for the 750XL.

New company chairman, IT pioneer and former chairman of Virtual Spectator Neville Jordan says big changes are being made to the way PAC does business and how it sells the plane.

Costs would be better matched to actual sales and the company would be "right sized for next year's sales budget".

The company will make it as simple as possible to buy one of its aircraft - offering lease options and, hopefully soon, financing deals.

"Shareholders will continue to support it with further investment cash," he says.

"We are now geared to producing to firm orders. We've got every confidence it will be successful."

Jordan says Endeavour Capital, now 25 per cent owner, is in PAC for the long haul and has high hopes for the company.

An industry source says that despite all the problems, the 750XL is a good plane, one New Zealand should be proud of.

"We should all thank Brian Hare for getting it this far," the source says.

"Having said all of that - no one could build this aeroplane had it not been for Brian Hare. No one else has got the balls to do this."

additional reporting: Michelle DaCruz

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