BC’s aerospace sector could be running into serious economic turbulence, thanks to Ottawa’s decision to hit the pause button on the F-35 stealth fighter jet program and the Radarsat Constellation Mission (RCM).
MacDonald, Dettwiler and Associates Ltd. (TSX:MDA) has announced that it might have to resort to layoffs, after scanning the federal budget and finding no money in it to continue the multimillion-dollar satellite program.
Meanwhile, Ottawa also announced that funding for the F-35 is being frozen while the program is reviewed. Canada’s auditor general said the program is $9 billion over budget. It’s not clear what effect that decision will have on local manufacturers like Delta’s Avcorp Industries Inc. (TSX:AVP), which has a contract connected to the Joint Strike Fighter program.
MDA is a key partner in the Radarsat Constellation Mission (RCM), which would put three new satellites into orbit in 2014 and 2015 to provide Canada with maritime surveillance, disaster management and environmental monitoring.
The federal government has allocated $497 million to the RCM, only a portion of which has been spent, and according to MDA, the program’s design phase will be wrapping up over the next few months. Whether the final phase will proceed as planned is now a matter of speculation.
“[The] possibility of funding stoppage, which would impact our workforce, remains a possibility in the near term,” MDA stated in an email to Business in Vancouver.
MDA planned to wind down the program’s design phase as it neared completion. But in the absence of funding in the federal budget to complete the final phase, MDA issued a terse press release stating it will now have to accelerate the restructuring it had planned. The company declined to elaborate on how many of its 800 employees might be affected.
Asked if the RCM program will be scrapped or deferred, Industry Canada added to the uncertainty with an email that describes work that is already funded.
“It would be inappropriate for the government to speak on behalf of MDA in terms of its future business plans, but contractors are continuing work on the design phase of the Radarsat Constellation Mission, which is scheduled to be completed by August 2012,” Industry Canada spokesman Michel Cimpaye said in an email.
“Industry Canada and the [Canadian Space Agency] will continue to work with the space industry on key issues and impacts in economic competitiveness and growth.”
Those kinds of mealy-mouthed responses from the federal government to questions about the RCM program prompted BMO Capital Markets analyst Thanos Moschopoulos to trim MDA’s target stock price to $48 per share, down from $50. MDA’s shares have been hovering in the $44 range since the federal budget came down on March 29.
“We believe that an outright cancellation of the RCM, while possible, is unlikely,” Moschopoulos writes in a recent company analysis. “However, in our view it’s very possible that the program could be delayed or scaled back.”
MDA is Richmond’s biggest high-tech employer. Richmond Mayor Malcolm Brodie said the city is trying to get clarification on the federal government’s intention, with respect to the RCM program.
“We’re hopeful that any restructuring is simply one of those matters that every company deals with from time to time,” Brodie told BIV. “We would be very alarmed, with such an important company, if the budget has a greater impact on MDA. We hope to get timely clarification of their position in due course.”
MDA isn’t the only B.C. aerospace company that could be affected by recent federal government policy changes. Avcorp had filed its annual financial report just two days before Ottawa announced that it’s freezing F-35 program funding.
The company posted increased revenue and lower net losses for 2011, thanks in part to a contract it has with BAE Systems Operations Ltd. to manufacture the outboard wings for the F-35 Carrier Variant. Canada is one of the partners in the Joint Strike Fighter program, which also includes the U.S., the U.K., Australia and Italy. It’s not clear what Canada’s reconsideration of the program will mean for companies like Avcorp, which declined an interview request.
Langley’s Advanced Integration Technologies (AIT) also has a contract related to the F-35 program, but the company will not be affected by Canada’s decision to review its participation in the program. AIT makes equipment used to assemble the F-35.
Said AIT sales manager Lazo Turanjanin, “Regardless of the number of planes, an assembly line has to be established anyway.” •
