On the Record with
MOSHE KERET, PRESIDENT, ISRAEL AIRCRAFT INDUSTRIES

IAI Cashes in on Consolidation

Seemingly flying above economic downturn and political tumult, Israel Aircraft Industries has positioned itself in recent years among the leading aerospace and defense companies. IAI has successfully navigated a consolidating market to achieve continuous growth, through diversification and cooperation, despite intensifying competition.

Some of IAI's allies today were its competitors only a few years ago, as the trend toward cooperation continues.

"The market is going through rationalization," says IAI president Moshe Keret. "We saw it among the prime contractors a few years ago, and we see it now among the second- and third-tier manufacturers and subcontractors. IAI and the Israel's defense industries as a whole are becoming part of this global trend."

As a government-owned company, IAI has never been an easy partner for mergers or acquisitions. But things are changing. The recently disclosed merger of Texas-based IAI subsidiary Galaxy Aerospace with General Dynamics' Gulfstream Aerospace is an indicator of a basic change in the wind. Moshe Keret considers such actions inevitable-when they work best for both sides.

IAI's commercial operations are more receptive and open for mergers and acquisitions. "The recent acquisition of Galaxy Aerospace is an example of such opportunity," says Keret. "The market for business aviation is growing, our products are well positioned to address a specific segment of the market, and these products were proven important for one of the leading players.

"For both sides, this was an opportunity that should not be missed."

A similar opening was created when IAI developed its space and satellite capabilities. "With matured technologies and proven capabilities, we forged an international co-operation under a separate company, which was funded with American and European investments," says Keret. The resultant Imagesat has already launched Eros-1, the first of a constellation of low-orbit, remote-sensing satellites designed to provide sophisticated, high resolution imagery to commercial and government users around the world.

IAI commercial space activities are also expanding in communications services-an order for a follow-on Amos-2 satellite has been received from Israel's Halal Group, the operator of Amos-1. Furthermore, according to recent news, the Israel Ministry of Defense is also considering an order for a domestically produced defense communications satellite.

Last year was a period of exceptional achievement for IAI in which the company surpassed all previous records in sales, profits, backlog and exports. With total sales of $2.14 billion in year 2000, and $2.6 billion worth of new new business (some 1,600 contracts) written during the year, total IAI backlog has risen to approximately $3.5 billion. The civilian content of the new contracts signed in 2000 has risen to $1.1 billion.

"As we look forward to 2001, our strategic initiatives continue to bear fruit," Keret says.
With $1.5 billion worth of defense programs, constituting 58% of its new contracts in 2000, IAI is the largest defense exporter in Israel, and one of the world's most diversified defense companies. Aircraft and helicopter upgrading, missiles, UAVs for patrol, reconnaissance and assault missions, electronic components and naval weapon systems, all contributed to IAI's record sales tally for 2000.

The recovery of the defense sector is evident in the many armies, navies and air forces that delayed modernizations in the early 1990s but are becoming IAI customers now. Aging equipment, growing political instability and potential risks have all contributed to increased interest and procurements. Some activities, especially those based on upgradable systems and electronic systems modernization, are growing quickly, while others, mostly major weapons systems and equipment modernization, are more moderately paced.

"With the fast growth in the developed world, we have witnessed substantial growth in our commercial and business aviation operations," says Keret. "These sectors are softening now, as the economy is slowing down, but in the near future, our military operations are expected to sustain the company's growth."

The increase in its defense activity is derived by IAI global marketing activities and the cooperation policy the company fostered with customers and business partners. IAI's annual reports show that the company's U.S. marketing efforts yielded $900 million worth of new contracts in year 2000, in Asia there has been $800 million in new business, and Europe and the CIS countries some $300 million. IAI's domestic sales accounted $480 million.

"We feel we have reached a balanced distribution, both geographically and between defense and commercial activities," says Keret. "However, we consider that the weight of our European sales should be increased, and we are investing much effort to increase sales in Europe, both in the defense, government and commercial sectors." Some of IAI successes in these efforts reflect the trend toward partnerships and cooperation-as shown in the recent sale of training systems to the Dutch and Belgian air forces, and supply of high altitude long endurance UAVs to France. IAI is also participating in several European R&D programs, and is expecting at least part of this cooperation to develop into full scale programs in the future.