1 COMMERCIAL SUCCESS OF THE JETPROP AIRCRAFT, 1992 NUMBER OF CONTINENT

EXHIBIT 20.1 COMMERCIAL SUCCESS OF THE JETPROP AIRCRAFT, 1992 NUMBER OF CONTINENT

JETPKOPS SOLD Africa

11 America: North and South

25 (20) h Oceania

1 Figure.­ in parentheses indicates total sales to United States and Qinada. ! Fijiuru in parentheses indicates sales to UK operators.

Sains Organisation The BGA's sales organization was responsible for selling the Jelprop. It covered civil and military sales, since several air forces had bought 30 .letprops. A small number became VIP transports for heads of state. Each year markets were analyzed and a list was made of the most likely sales prospects for the coming 12 months. Area sales managers then received "designated areas' comprising a number of prospective customers. These

were usually grouped geographically, although there were exceptions due to special relationships that a salesperson had developed in the past. With

time, new prospects were added to the designated areas, and the areas also had to be changed to balance the workload that developed.

Doug Watts was the area sales manager eventually responsible for the NAF prospect. Until then, his designated area included the air forces of Malaysia. Thailand. Zaire and Germany. Like several other area sales managers.

he had joined Britcral't after a distinguished career in the UK's Royal Air Force (RAF). Immediately before joining the company in 1990 he was Group Captain, Air Flans RAF Germany. Three of the area sales managers had no RAF experience, but had previously worked in one or more of the company's technical departments. One had been in the Sales Engineering Department for A number of years before being promoted to the Sales Department. In the company the Sales Department had a very high status, occupying a series of offices on the ground floor at the front of the Jetprop factory.

The sales engineers were all technically qualified, a number having post­ graduate degrees. Most had become sales engineers directly after completing

a technical apprenticeship with the company, although some came from other technical departments. They were responsible for providing technical support to the Sales Department, but also did considerable routine work associated with the sales effort. Although the sales engineers were not working directly for the area sales managers, the work of each sales engineer usually related to one part of the world, requiring frequent contact with one

or two people in the Sales Department. The Sales Engineering Department was close to the Sales Department and could be reached by a corridor that let! from the 'front corridor' to the Sales Department in a corner of the

design office occupied by the sales engineers. Ian Crawford, the marketing director of all Briteraft, worked at Britcraft's TIQ. in London. He was responsible for marketing for the whole of Britcrait Aviation in the United Kingdom and overseas. lie also managed Britcraft Aviation's regional executives ­ senior executives strategically based to cover all the world's markets.

Case 20: Briteraft .laprop $77

The Opening Phase After receiving the telephone call from Wing Commander Weir, Bob Lomas circulated news of the prospect, while Doug Watts took overall responsibility for it. Although BCA had agents in the Country, these had either not heard of the NAF requirement or failed to tell the company about ir. Since the

agents seemed dormant, BGA made direct contact with the national auth­ orities in the Country. Following a visit to Herr Hans Schijlter, the defence secretary, Rob Lomas was asked to send copies of the standard Jetprop mili­ tary brochure directly to the Ministry of Defence for the minister. A few days later. Lieutenant Colonel Schemann, junior defence secretary, wrote thanking Bob Lomas. The next contact made was with Lieutenant General Baron von. Forster, defence attache to the Country's embassy in London, whom Bob Lomas had met at the Hanover Air Show. The general confirmed

the NAF's interest in new equipment and asked for details of the Jetprop to pass on the authorities.

On 6 July, Air Commodore Ncthcrton informed John Upton of Britcraft that the NAF probably had a requirement for a state VIP aircraft. The air commodore had lived in the capital of the Country for eight years sinec retiring from the KAF, where he had been responsible for the Queen's Flight. After completing his military career he had become a founder member of Eilluft AG, a group that dominated civil aircraft maintenance and light aircraft operations in the Country. Britcraft had later used him as an ad hoc agent for the prospective sale of fighter aircraft. Having become an accred­ ited agent for BMA, he was proposed as an agent in the Country for BCA.

Besides the Jetprop, Britcraft made another aircraft sold for VIP purposes. This was the Britcraft Executive Jet. a small, twin­jet aircraft manufactured and marketed by BEA. The sales organizations of both BEA and BCA were told of the sales opportunity.

In response, Geoff Lancaster, deputy sales manager of Britcraft Civil Aviation, sent copies of the Jetprop brochure to Air Commodore Netherlon requesting that they be passed on to the prospective customer. As the air

commodore was not familiar with the Jetprop, a letter enclosed with the brochures outlined some of the selling points that he could use:

Although the JETPROP docs not have the glamour of a fast jet aircraft, it has many other advantages which make it perhaps the most suitable choice for a State Aircraft ... the size of the accommodation coupled with reasonably low purchase price. Most VIP layouts consist of a large rear state room with seats for four or five persons. These would be of the fully reclining and swivelling type. The forward part of the cabin would accommodate anything up to 20 attendants. The large size of the Jetprop also allows full galley and toilet facilities to be placed if need be both forward and aft in the aircraft, so that the VIP party could have complete privacy

... uses short airfields ... credit terms are available. The (etter also mentioned that the Country's minister of defence had

recently flown in a Jetprop of the Queen's Flight and was favourably impressed.

On 10 July, Air Commodore Netherton met the officer in charge of the Operations Requirements Branch of the NAF, who confirmed that there was

a study into the replacement of several types of transport aircraft. Simultaneously, Wing Commander Weir contacted Ron Hill, the executive director of marketing for BCA, saying that it was imperative that the

878 Chapter 20 Personal Sailing and Saks Management

company made direct contact with the Long Term Planning Department of the NAF about its requirement. Major Graff was the best contact, although Colonel Beauers and Lieutenant Colonel Morten were suitable alternatives if

he was not available. Since Doug Watts was out of the country, Brian Cowley, the Jetprop sales manager, arranged a meeting. An exploratory meeting on

26 July preceded another on 7 August when Ron Hill would meet the senior personnel responsible for aircraft procurement. Work in Iran prevented Ron Hill from attending the meeting, so Steve Williams, his executive assistant, took his place. The discussions ­ between Steve Williams, Air Commodore Netherton, Major Graff and Lieutenant Colonel riorten went well. Lieutenant Colonel llorten, the second in command of the Planning Department, outlined the need for the NAP completely to re­equip its tactical and transport squadrons before 1996. Large Lockheed Hercules had already been ordered, but the NAF was still looking for a small, more flexible aircraft. Major Graff, the officer in command of re­equipment evaluations, explained that he had already completed preliminary analysis of suitable replacements, which had included the Jetprop. Fokker had already demonstrated its aircraft, which

many in the NAF favoured because a large part of the airframe was constructed in the Country. The final requirement would be for two or three general transport aircraft plus possibly one for the paratroop training school at NAF­Graz. A Short Skyvan had already given a demonstration as a paradrop aircraft and the Canadians wanted to demonstrate their aircraft.

The Jetprop's demonstration to the NAF would be on 20 October. Major Graff asked for further evidence to support the Jetprop. The advantages of the Jetprop over the Fokker aircraft were highlighted, which were lack of bonding and spot welding, no pneumatics, fail­safe design, progressive main­

tenance and rough­airfield performance. Also, since Hercules were already ordered, it would be advantageous if there was commonality of avionics.

During the visit they met briefly with Colonel Beauers. the officer commanding the Long Range Planning Department. • Air Commodore Netherton had known him well for a number of years, but found that Colonel Beauers was soon to move to NATO HQ and would be replaced by an officer whom he did not know. After the meeting the air commodore expressed the

hope [hat, provided the presentation in October went well and the NAF wanted the aircraft, the political people would agree to the purchase. He

added that the sale of the paradrop aircraft seemed likely to depend upon support from Colonel Smit, the commanding officer of NAF­Graz, while the main issue, he thought, would be the aircraft's ability to operate safely, fully loaded for a parachute­training mission, from the NAF­Graz airstrip, which was grass and only 650 metres long.

Following the visit, Ernie Wise, a senior sales engineer, managed die technical selling effort. Through the Sales Department customer specifi­

cations engineer, the Production Planning Department was asked for a delivery schedule and the Estimating Department was requested to cost the

aircraft. Other technical departments also became involved in supplying cost and performance evaluations. Eventually it would fall to the Contracts Department to negotiate a price for the package of aircraft, spares, guaran­ tees, and after­sales services required.

Glynn Wills, a sales engineer who worked closely with Ernie Wise in the specification and requisitioning of artwork for the demonstration, became particularly involved with the avionics requirements. Several requests for detailed information were received from Major Graff, including details of the

take­off and landing performance of the Jetprop at NAF­Graz. Since it was

Case 20: Britcraft Jetprtip 879

marginal, Air Commodore Netherton concluded that the only course was to convince the airfield's commanding officer to extend the runway.

Before the scheduled demonstration, the UK's biennial Farnborough Air Show took place. Invitations to attend went to a number of die NAF personnel, several of whom visited the show where they were entertained by Briteraft. The guests were: Lt. Col. Morten (chief of Plans and Studies). Lt. Col. Wabber (chief of Pilot Training). Major Bayer and Major Graff (Plans and Studies). The meeting progressed well, providing a useful prelude to the ful] demonstration. Then nine NAF officers visited BOA for the demonstra­

tion of the Jetprop in October, including officers from NAF Planning, Plans and Studies, Avionics, Technical Section, Supply/Spares and HI) Transport.

During the visit, technical specialists looked after most of the NAF offi­ cers, while the Long Range Planning Department people discussed contrac­ tual details. Prices presented for the aircraft in three configurations were £900,000 for the basic version, $950,000 for the basic version with strength­ ened floor for cargo operations, and £1,125,000 for the basic version with strengthened floor and large freight door. The cost of avionics, spares and other equipment that allowed the aircraft to perform a wide variety of roles would be additional.

On the whole, the demonstration and presentation went very well, although Major von Betterei, 'from whom it was difficult even to wring a smile", was evidently 'Fokker oriented'. Air Commodore Netherton and he had been able to talk separately with the senior officer present, with whom they had a 'long and useful discussion about compensation'.

The Second Phase Compensation or offset is an increasingly common part of large inter­

national sales. It usually involves a provision being made for the vendor or the vendor's country to buy goods from the customer's country. The size of

the offset varies considerably, ranging from a fraction of the contracted price to, on rare occasions, more than the contracted price. The discussion with Colonel Zvinek, of NAF Planning, Plans and Studies, during the demon­ stration marked the first occasion when offset appeared accompanying the

NAF's procurement of transport aircraft. BCA conducted investigations to determine the importance of offset arrangements to the Country's national government. News from BEA

suggested that offset was critical, BEA had been attempting to sell two execu­ tive jet aircraft to the NAF: 'sales of the Briteraft Executive Jet failed mainly

due to offset being ignored.' Two French aircraft were bought instead by the NAF as VIP transports witli very high offset. This had been easy for the

French to arrange as the aircraft were partly built in the Country. While continuing internal studies into offset, BMA warned BCA not to use any of the compensation it had already earmarked for a possible sale of military trainer aircraft.

To clarify the offset situation, Air Commodore Netherton visited Ilcrr Maximilian, an under­secretary in the Ministry of Economic Affairs, who was responsible for advising the Country's ministerial committee on such matters. lierr Maximilian said offset had recently been between 60 and 70 per cent of the value of a contract and had been completed by the delivery date of the last aircraft, lie felt that ideally the work should relate directly to the major project being considered, but should not involve the manufacture of main subassemblies such as wings, air frames or engines. He concluded by saying that negotiations were the responsibility of the vendor alone, who should not increase prices as a result of the required activities.

880 Chapter 20 Personal Selling and tiales Management

Soon after his visit to Ilerr Maximilian, the air commodore had obtained some encouraging information about the prospective sale. The NAF had given the replacement top priority with a schedule for action defined as

follows:

March 1993 Finalized requirement. Mid­199,1 Signing of letter of intent. Late 1991 Signing of contract and deposit payment.

1994 Delivery and full payment. Colonel Zvinek. who had originally been doubtful about the Jetprop, had

been converted since the demonstration, together with all the other import­ ant NAF officers concerned. Also, since the government had already earmarked funds for the procurement oi' three aircraft, all that was neces­ sary was to assemble an acceptable offset.

Some time passed with little further progress being made with the sale. It became evident that, although the NAF staff officers favoured the Jetprop, Fokker was offering a very substantial offset. One reason for Fokker's ability to do this was its shareholding in Baden GmbH, which itself, owned Nationale Flugzeugwerke AG (NFW), the Country's largest airframe manu­ facturer. Since NFW already manufactured Fokker parts, it was easy for it to show an advantageous offset capability.

Early in 1993. Kevin Murphy, the contracts manager for Britcrat't Civil Aviation, sent a firm proposal to Colonel Zvinek. Simultaneously, members of the Sales Engineering Department were attempting to persuade the NAF

to accept performance and weight information that showed Jetprop in a better light. The original figures requested by the NAF Co allow direct

comparison with the Fokker aircraft did not favour the Jetprop. The con­ ditions for the 'paper Comparison' were Fokker's and. not surprisingly, those conditions favoured Fokker's aircraft.

Some days later an urgent fax came from Roger Woods of Britcraft, who had met Colonel Ilorten at a cocktail party in the capital. Uc said that Fokker's exceptional offset looked like losing Britcraft the deal. Panic abated, however, when Air Commodore Netherton talked to Colonel Ilorten and confirmed that the offset was 'not big business'. Further, Messrs Jones and Bedwell of RMA, who were in the Country at that time negotiating a large offset deal with die Ministry of Economic Affairs, found that "offset would not really be involved on such a small order.

Major Graff and Air Commodore Netherton visited BOA on 11 April 1991, to discuss the contract. Major draff said there was a feeling that the Jetprop was inferior to the Fokker on several technical grounds. Also the price of £1,393,000, being asked for an aircraft with a large cargo door and the required equipment, compared unfavourably with the Fokker offer. In addition, when adding the price of spares to the aircraft cost, the total was more than the amount budgeted. Negotiations centred on reducing the number of roles the aircraft had to perform, so reducing the amount of optional equipment supplied. By eliminating paradropping, supply dropping and aero­medical capabilities, the price reduced to a more acceptable £1,323,000. A new formal offer went to the Country before the end of April. This included details of an increased 'all up weight' for the aircraft, which would allow it to carry an extra 1,000 kg of fuel, thereby increasing perfor­

mance over longer flights. At the Paris Air Show on 13 June. Doug Watts again met Major Graff. They talked over two issues. First, the NAF desired to change the specifi­

Case 20: Britcraft Jetprop 881

cations of the aircraft to such an extent that a new quotation would be necessary. Secondly, Major Graff emphasized the importance of offset. Since by this time Steve Williams had left Britcraft, Geoff Lancaster took over negotiations. Wing Commander Weir, the air attache in the capital, was contacted and questioned about the sale. He said he would probably be able

to help in arranging some offset deal, but added that diplomatic circles generally felt that it was 'Britain's turn' to obtain a contract.

On 16 July Geoff Lancaster, Major Graff and Air Commodore Netberton visited llerr M a x i m i l i a n at the Ministry of Economic At't'airs to discuss alter­ native offset arrangements that the company could provide. There were four

suggestions:

1. Bo ught­out equipment for the Jetprop could be purchased from the Country's firms.

2. Basic aircraft could be flown to the Country to be finished and new avionics fitted by a NAF contractor.

3. Britcraft's vendors could subcontract work into the Country.

4. The Country's industry could build a future batch of Jetprops. Herr Maximilian's response to the suggestion was not enthusiastic. His main

point was that offset must not relate directly to the main contract in ques­ tion; nor should it involve the NAF or the government. He explained how critical offset arrangements were to the Country's aerospace industry, which designed and marketed few aircraft and was almost totally dependent upon outside work. To underline his government's concern, he quoted the offset associated with the recent sale of two Boeing aircraft to the Country's national airline. Boeing had agreed lo place £3.000,000 of work with the Country's industry in the first year and £15,000,000 over the next ten years. The figures suggested that the offset was far more than the price of the two aircraft.

After leaving the ministry, Geoff Lancaster told Major Graff the conse­ quence of further delay in placing a firm order. The three aircraft set aside for the NAF would go to other customers and eventually be supplied from a later batch of aircraft. Since each batch was eosted separately, the price per aircraft could increase to almost SI,000,000. The longer the delay, the less likely it would become that Britcraft could supply at the original price. Furthermore, as several customers were on the verge of signing con tracts for Jetprops, there was even greater need for a quick decision. Major Graff worried about the delay, but said there was little he could do. His recom­ mendations for purchase would go on to General f'etsch, at which stage they would constitute the official NAF requirements. They would then go to the air force adviser, and from him to the defence secretary, Hans Schijlter, who would examine the report closely but would not consider offset. The docu­ ments would then be passed to the minister of defence. He, together with the

Prime Minister and the minister for economic affairs, would make the final decision. Before Geoff Lancaster left the Country it was agreed to arrange for

a group of NAF officers to visit Schiller Aviation, an independent airline which had recently bought some Jetprops. When the visit to Schiller took place, as the visitors' chief concern was the operation and maintenance of the aircraft, Chris Dyer helped. As an assistant customer liaison manager for Britcraft, he had been working closely with Schiller Aviation during the early stages of its Jetprop operation.

Air Commodore Netherton escorted the group on the visit and later reported

882 Chapter 20 Personal Selling and Sale* Management

that the airline was Very complimentary' about the aircraft and Brit era ft support.

Ttie Offset In an attempt to arrange the necessary offset, several channels were investi­ gated. One of the main problems facing Britcraft was the large part of a completed Jetprop aircraft being accounted for by very specialized bought­ out equipment. There was little chance of this equipment being bought from anyone other than the normal vendor. The largest bought­out items were the engines. One source for the offset was for the aero­engine supplier to place work with Baden GmbH, which had been undertaking subcontract work for a number of years. Although there was a chance that the aero­engine supplier would help, since it supplied the same engines to Fokker, the offset would not give Britcraft any advantage over the competing supplier.

A team of Britcraft design and production engineers investigated what work could be 'put out' to subcontractors in the Country. They identified three types:

1. Design work on the Britcrafr Quiet Jet, a small jet transport aircraft still at the project stage.

2. Machining of components required in small quantities, but which were difficult and heavy.

3. Sheet­metal work construction. Negotiations with Nationale Flugzeugwerke (NFW), aimed at its doing about

£1,000,000 of work, were started. However, although several exchanges of personnel, specifications and estimates took place, there was little progress towards a satisfactory agreement.

Meanwhile, Ceoff Lancaster contacted Coles & Turf Ltd, a London­ based company which had previously helped the company with offset. Coles & Turf offered to buy £4,500,000 worth of the Country's goods for a com­ mission of 10 per cent. Within days the company again contacted Britcraft

saying it had £1,500,000 worth of lard that was available for use as part of an offset. Meanwhile. Briteraft felt that the commission rate requested left no room for them to make a profit on the contract, so it wrote to Coles & Turf explaining this and stating that it needed £1,500.000 of offset rather than £4,500,000. Coles & Turfs response was to suggest that 10 per cent commis­ sion on &] ,500,000 would leave plenty of room for Britcraft to make a profit and it subsequently offered alternative products for offset. Finally Roden AG, a subsidiary of The Roden Company Ltd, was contacted by Briteraft. After initial talks, packages of parts and drawings went to the eompany so

that it could estimate prices for manufacture and assembly.

The situation became critical on 9 October when Mr Commodore Netherton requested an urgent meeting with Geoff Lancaster at the NFA HQ. It seemed possible to sign 'a letter of intent' by 1 November, with the final

contract signed by 1 April 1994. To achieve this, however, a global level for the total offset had to be presented, with details of it to be broken down.

Negotiations with NFW, Coles & Turf, and Roden intensified as the deadline approached.

On 16 October there came a blow to the NAFdeal. A Brazilian operator signed a contract for six aircraft. This meant that the NAF aircraft would be from the more expensive batch 15 rather than the original batch 14. The aircraft would be of slightly different configurations, and would cost more. The new price estimated for an aircraft with strengthened floor and large

Case 20: Britcraft Jetprop • SS3

freight door was £1,4/0.000. The NAF reluctantly accepted the price increase and signed a letter of intent. Roden AG agreed to accept £450,000 worth of specified subcontract work. With this deal, it looked us though future activities would be mainly the responsibility of the Contracts Department. The pressure was off!

As April approached, a team at Britcraft was preparing to make a trip to the Country for final negotiations and contract signing. Then, a day before they were due to leave, Dick Drake, the commercial director, received a fax from the Country's authorities. It read:

Department of Economic Affairs urgently expect more precision about your commitment and also a sensible increase of work for national industry. It is quite obvious that the 10 per cent offset is absolutely unsatisfactory. A reply is expected by 29 April.

A copy of the message went to Air Commodore Netherton, to which Dick Drake added:

It is virtually certain that it will be necessary for me to reply on Friday that we regret we are unable to increase our commitment and the only other offset is that which they already know about from the aero­ engine supplier. However, before replying, I would like to know whether Weir still believes it is Britain's turn.