MoD looks for partner for LOM – will it be Honeywell?

Czech Defense Ministry general secretary Jan Vylita doesn’t rule out at least partial sale of aviation repair and support firm LOM

Kdo získá LOM Praha? Zájemců by mohlo být víc, ale favoritem je americký zbrojařský gigant Honeywell. foto: © ČESKÁPOZICE, Jan KunderaČeská pozice

Kdo získá LOM Praha? Zájemců by mohlo být víc, ale favoritem je americký zbrojařský gigant Honeywell.

According to the White Paper outlining reforms at the Czech Ministry of Defense, the state-owned aviation repair and modernization enterprise LOM Praha with 980 employees is to be restructured and superfluous assets shed. That, however, is pretty much all that is known as the leadership at the ministry has not revealed more details about its plans for the strategic firm.

Nevertheless, speculation has emerged that the government intends to privatize LOM, and according to Czech Position’s information, the US corporation Honeywell is interested.

Czech defense ministry officials this June visited Honeywell’s headquarters in Morristown, New Jersey, where they discussed the potential strategic investment into LOM Praha by the US firm with an annual turnover of around $37 billion. The officials who took part in the talks in the US were first deputy defense minister Jiří Šedivý, general secretary of the minister’s office Jan Vylita, and military diplomat Martin Dvořák.  

Sale not on official agenda

Defense ministry spokesman Jan Pejšek confirmed Šedivý and Dvořák’s visit to Honeywell; however, he claims the purpose was The official explanation begs the question as to why the first deputy minister would lead a delegation to the US just to discuss pilot trainingnot the sale of LOM Praha. “They discussed strategic cooperation with Honeywell, namely the training of foreign pilots at the Aviation Training Center. The issue of the potential sale of LOM Praha is not on the agenda,” Pejšek told Czech Position.

Defence Minister Alexandr Vondra (Civic Democrats, ODS) also said the future of LOM was not discussed. “It was about cooperation in pilot training where both firms [already] cooperate,” he said. But the official explanation begs the question as to why the first deputy minister would lead a delegation to the US just to discuss pilot training.

“State enterprises fall under the general secretary. Therefore, I would understand Vylita making the journey. But what is strange is why they didn’t have aviation and training experts with them if they went only to discuss those matters,” a source familiar with developments at the defense ministry told Czech Position on condition of anonymity.

“Representatives of LOM Praha weren’t present at the meeting in question,” company spokeswoman Martina Fišerová told Czech Position. This fact also suggests that pilot training was not the only subject of discussion between the MoD officials and Honeywell.

Nevertheless, Honeywell is currently using LOM’s pilot training services with US and Afghan pilots being trained the Czech firm’s training center in Pardubice, eastern Bohemia, from July through to September. Fišerová did point out that if there were a change of ownership of LOM, a whole range of new certification would be required from manufacturers — a process that would take several months.               

A change of ownership would involve other bureaucratic hurdles: The Minister of Defense would firstly have to secure approval from the government. “Before the actual privatization it’s necessary to prepare a transformation project, reform the state enterprise as a limited public company and issue a public tender. And this would take many months,” Karel Dřevínek, a lawyer with the firm Weil, Gotshal & Manges who worked on the transformation of Prague’s airport from a state enterprise to a public limited company, told Czech Position.  

Dilemmas for MoD

Under pressure to reduce spending, the defense ministry is now looking to make internal savings in part by reducing the quantity of services and repairs it commissions with LOM. “This also has a bearing on whether it will remain a state enterprise, or will It is known that the Czech aviation manufacturer Aero Vodochody is interested in buying LOM Praha.transformed into a public company in which the state will keep a majority stake or a so-called golden share. All of these options are open,” general secretary Vylita said.           

The ministry sees dangers of LOM Praha being dependent on orders from the Czech military — because if foreign clients’ access to LOM Praha is limited, the number of orders falls, and prices of services rise because of rising overheads, it is the ministry that will require more budget funds. In such a scenario, it’s logical that calls would grow to find a private entity to invest in the state enterprise.        

It is known that the Czech aviation manufacturer Aero Vodochody, owned by the Czech/Slovak investment group Penta, is interested in buying LOM Praha. “In my opinion, privatization is the only option, in which case we would certainly be interested in LOM. It would logically tie in with our activities,” Aero Vodochody president Ladislav Šimek told Czech position last Friday.

There is still talk in defense community about interest of development firms in purchasing land belonging to LOM in the Prague districts of Malešice and Kbely. Prior to the crisis in 2008, LOM’s land plots measuring approximately 300,000 square meters were valued at around Kč 650 million.

No long-term plan

Over the summer Czech Position has attempted to ascertain how exactly LOM is functioning, what are its weak points and in what respects the company stands out. We asked LOM’s director Jindřich Ploch, and the general secretary of the defense ministry Jan Vylita about the enterprise’s future.

With its know-how and provision of comprehensive services in repairing and modernizing Soviet and Russia Mil helicopters, LOM is unique in the European Union. Nevertheless, the company says the ministry lacks vision for the firm’s development. “The founder [i.e. the defense ministry] should say clearly what it demands of the state enterprise. The White Paper contains a basic outline; nevertheless, the ministry should say which services it should have this year, in two years and beyond,” Ploch says.‘As the director, now I need to know exactly what will be in 2013. But I don’t know’

It is essential for LOM to plan several years in advance because among other reasons, Russian helicopter manufacturers have sold orders for the following five years and it’s equally difficult to obtain spare parts,” Ploch explains. “As the director, now I need to know exactly what will be in 2013. But I don’t know,” he adds.

As an opposite example Ploch cites Britain’s Royal Air Force’s 25-year contract with the firm QinetiQ, which does not contain specific contracts for the company but clearly defines the scope of cooperation between the Air Force and QinetiQ, which enables the firm to accurately plan for resources and capacity requirements.

Delivery times for parts from Mig and other Russian producers are typically around nine months and up to a year for parts from the US. General repair of a helicopter takes around six months, while modernization requires nine months.

Growing financial independence

As for the financial state of the enterprise, according to the latest figures this year LOM forecasts a turnover of around Kč 1.8 billion, Ploch proposes selling unneeded property and moving the company’s operations at the two sprawling sites in Prague to a single locationand a post-tax profit of Kč 18 million. Almost half of the company’s turnover comes from orders from foreign entities and therefore Ploch rejects criticisms that LOM has not managed to lower dependence on commissions from the Czech defense ministry.

What’s keeping LOM in the black?  

  • A two-year contract for the training of pilots from the US, Pakistan and Afghanistan worth Kč 250 million;
  • a three-year project involving piston engines and helicopter power generators for an unnamed North African country;
  • cooperation with Honeywell on the modernization of several helicopters.  

One of Ploch’s greatest concerns is that the potential restructuring of LOM should not involve layoffs of personnel, saying that the experts are essential for the company’s success. “Either we preserve the functioning team, or we’ll lose key skills and know-how,” he warns.     

In the way of improving company finances, Ploch proposes selling unneeded property and moving the company’s operations at the two sprawling sites in Kbely and Malešice in Prague to a single location. The cost of running the Malešice site where the firm pretty much uses just two hangars amounts to Kč 30 million a year, but LOM’s requests over several years to the defense ministry to be allowed to sell-off unused property have so far been unsuccessful.

Audit underway

Defense ministry secretary Vylita told Czech Position that before any specific restructuring measures can be implemented, a two to three month assessment of the current state of LOM is required. “We have sent a joint team of people from the defense ministry and the independent auditing firm KPMG there. They are mapping the situation in LOM in areas of sales, production and costs,” he said, adding that a strategy for the future development of the company will be based upon the findings of the audit.

Vylita says the development strategy will contain proposals of what to do with each area of the firm’s activities – the airplane division, the pilot training center, the fuel units division, the separate aviation piston engine factory, and Military Technical Institute of Aviation and Air Defense.

The ministry and first and foremost the Czech Air Force must together establish what level of repair, modernization and pilot training services they will require from LOM in the midterm, which they are reportedly in the process of working on. Once the Czech military’s requirements are known, decisions can be taken about whether the company will need to look for more foreign customers, and whether the company will be downsized or privatized.