July 26, 2017 / 6:13 AM / 25 days ago

Airplane maker leads Czech arms industry revival

A fighter plane stands in a hangar of an aircraft manufacturer Aero Vodochody near the town of Odolena Voda, Czech Republic, July 11, 2017.David W Cerny

PRAGUE (Reuters) - During the last days of the Cold War in 1988, Czechoslovakia's Aero Vodochody's factory outside Prague produced a record 250 of its Albatros L-39 training jets for Soviet bloc air forces.

Those customers disappeared with the collapse of Communism as successive governments focused on building a market economy and steered away from arms exports, sending the industry into a tailspin. Numerous comeback attempts sputtered for Aero, which halted jet production between 2003 and 2015.

Now a growing number of conflicts around the world is helping to fuel demand for arms, providing Czech firms an opportunity to sell to customers looking for a supplier from a country that does not usually impose political strings.

This combined with the political support at home that is essential for doing deals with foreign militaries, the industry is experiencing a revival as Aero and other companies ramp up production and target new customers, particularly in emerging markets.

"The influence of big countries in emerging markets is changing," said Aero Chief Executive Giuseppe Giordo told Reuters. "It gives us the opportunity to compete in more international markets."

"If countries make a deal with Czech Republic they are making a deal with a neutral country," said the former chief of the aeronautical unit of Italy's Leonardo, one of the market leaders a revamped Aero is targeting in its come back.

Boeing bought a stake in Aero in the 1990s but sold it back to the government after failing to land new contracts. Czech-Slovak private equity group Penta bought Aero in 2006.

Giordo, who took the helm at Aero in 2016, has overseen the relaunch of the L-159 and is pushing plans for the next generation L-39 trainer. It aims to produce up to 26 aircraft annually over the next 10 to 15 years.

The company has also re-launched production of new parts for the L-39 -- which can turn into a light version of the combat fighter at the flick of a switch -- in recent weeks.

Aero delivered 12 L-159 jets to the Iraqi air force at the end of last year, including one made in 2016, the first since 2003. The company revamped 11 other jets that had been in storage.

Aero expects to seal two contracts for the next generation L-39 jet trainer in central Europe and is pursuing three potential deals in Asia, South America and Europe, Giordo said.

The company relaunched full production of the jet in July and expects to produce three next generation L-39s for testing and a fourth ready for delivery to a customer in 2020.

"In 2017 we are focusing all of our attention on capturing new markets for both the L-159 and the next generation L-39 training jet," he said.

GOVERNMENT SUPPORT

Aero, founded in 1919, moved to its current facilities in 1953, a sprawling complex of low-rise hangers, assembly areas and corporate offices to focus on manufacturing Soviet MiG fighters.

Production of the supersonic MiG-19 and MiG-21 aircraft paved the way for Aero's own models, including the L-39 Albatros which first rolled off the line in 1972 and is one of the most popular jet trainers in the world.

A desire to improve national security and support the domestic economy has spurred the government to re-engage in the international arms arena, Deputy Defence Minister Tomas Kuchta told Reuters.

"It is a field where ties between states or on a personal level often play a role," he said. "It is not the question of quality and price but it is about making a long-term, close relationship, where some chemistry must work. You cannot do that over email."

The efforts are paying off. Czech military manufacturing exports nearly tripled over the past four years to more than 18 billion Czech crowns in 2016 and should surpass that amount in 2017, according to the association representing the country's arms makers.

Government officials are also taking more foreign trips - around 40 expected this year - to help win new contracts for the country's military technology makers, vehicle manufacturers and light arms producers.

NEW DEPARTMENTS, OLD EXPERTISE

Speeding export licenses and creating a special export department at the Defence Ministry have helped military manufacturers land high-profile contracts and compete in Asia and North America.

Another marquee deal for the Czech industry was Ceska Zbrojovka's agreement to supply the elite French anti-terrorist unit GIGN with an initial order of 68 Bren 2 assault rifles.

The company -- which produced the original Bren assault rifle for British troops in World War I -- is now targeting other foreign militaries and elite units, including a deal to supply the Pakistan military with assault rifles.

"The deal with France is a huge reference because the GIGN unit buys the best weapons in the world and makes us seen as a very competitive player," Ceska Zbrojovka Chief Executive Lubomir Kovarik told Reuters.

The company, whose rivals include Germany's Heckler & Koch, U.S. gun maker Colt and Italy's Beretta, plans to produce 300,000 weapons in 2017 -- double the production six years ago, Kovarik said.

Czech arms exports surged 233 percent in the years from 2012 to 2016 compared with the four-year period from 2007-2011, the Stockholm International Peace Research Institute said. It was the world's 22nd largest exporter of major weapons in 2016, the institute said.

Conflicts in places such as Iraq are helping to drive demand, said Jiri Hynek, head of the Czech Defence and Security Industry Association.

"Our exports are growing," Hynek said. "Today many countries don't want another country to rule them through military equipment shipments... and our advantage is that we don't have such ambitions."

Editing by Anna Willard

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