Canadian Defence Review
February 28th, 2014
CAE: Canadian Defence Reviews #1 defence company
This global modeling, simulation and training solutions leader gets our pick for 2014.
Nassim Nicholas Taleb, one of the planet’s most gifted management thinkers, recently released a book entitled Antifragile. In it, Taleb posited that some things not only don’t break under stress, they actually become stronger. Taleb did not specifically mention training and simulations solutions provider CAE. But he should have.
In recent years, global defence sector players have been struggling to adapt to budget cutbacks, procurement delays and shifting priorities; but CAE, under the guidance of Mark Parent, its president and chief executive officer, has been deftly navigating the storm.
“It’s much cheaper for a pilot to spend an hour in a simulator, than it is for him to fly a $100 million aircraft,” says Parent, who this year is celebrating his 30th year in the aerospace sector. “So it should come as no surprise that simulation and training are growing fields, not just on the military front, but on the civilian side as well.”
“We are the solution to many of the problems facing the defence sector today,” says Parent. “The U.S. Air Force’s rule of thumb is that simulator-based training costs only a tenth of what flight-based solutions do. The U.S. Government Accountability Office (GAO) has lauded the benefits of simulation and training for the United States Navy. Others have made similar comments regarding land systems.”
A dominant position
CAE’s dominant position in a fast-growing field would be reason enough to justify its nomination as Canadian Defence Review’s #1 Defence player for 2014. But that is just the tip of the iceberg.
Size matters and there too CAE has clout. The company employs 8,000 professionals, including 4,000 locals. But even that mass of talent only tells part of the story.
The value of what they produce also counts. CAE’s status as an original equipment manufacturer, that builds intellectual property while producing a world class, value-added product, puts the company in a wholly different category than say a parts manufacturer, whose workers (skilled though they may be) do duplicatable work.
The technology, expertise, and future potential benefits to Canada’s defence sector and its economy stemming from the export of a $12 million flight simulator, are incomparably larger than those stemming from the production of a similar dollar value “commodity” product that could be made anywhere. That impact has expanded in recent years due to the growth in the ancillary services that CAE now provides customers ranging from trainers to upgrades and course materials.
The growth of training and simulation
Here in Canada one of Parent’s key allies is Lieutenant-General Yvan Blondin, commander of the Royal Canadian Air Force. Blondin has been a big booster of aligning Canada’s defence contracting with local aerospace industry capabilities – especially flight simulation. “I could cut my costs by 30 percent if I had more access to simulators,” Blondin told the Montreal Gazette, last month following a presentation to the Conseil des Relations International de Montréal (CORIM).
“There are things that I can do in a simulator that I cannot in flight,” said Blondin. “The technology allows better detection around the aircraft as well as of other aircraft. It also offers training that I don’t have in flight. You can take off from Bagotville in January at midnight (but) there are not a lot of targets there.”
Parent is the first to admit that much of the defence simulation and training industry’s progress has been driven by advances in entertainment, gaming, projection, data processing, storage and other technologies. However CAE isn’t just going along for the ride. The company devotes close to 10 percent of its revenues to research and development to enable it to move quickly and aggressively to leverage these advances.
Those efforts got a big boost earlier this year, when Denis Lebel, the federal minister in charge of the Economic Development Agency of Canada (Quebec regions) announced a massive $250 million loan to CAE, to assist in the development of a new generation of civilian and military simulators. Development, which will be done in close collaboration with a range of educational and research institutions and a cross-country suppler network, will take place in the company’s Montreal locale, where most of its Canadian staff are based.
CAE’s dynamic synthetic environment
Those investments are paying off. CAE’s dynamic synthetic environment and common database platform, which includes detailed models of many of the world’s key conflict zones vastly improves pilot training and broader mission rehearsal potential. This platform facilitates correlation and interoperability between simulation applications using one database.
“Technological innovations are facilitating the creation of learning environments that increasingly approach that of a real experience,” says Parent. “Through the imagery, terrain, elevation and other information contained within, you can do more today than ever before.”
For this report, CDR randomly requested a simulation demonstrating aerial views of various environments and cities such as Hong Kong (a crucial global trading hub which this author is familiar with). The level of detail in the environments, which can also include weather, weapons detonation and localized damage effects, was staggering.
Not only are key airports, ports, facilities, and major buildings mapped out, the scale is so precise, that surveillance, target acquisition and other drills can be rehearsed related to a single floor in one of the many buildings represented. Indeed CAE favours an open database format, which can be implemented using existing industry file formats, as well as added to and improved upon, through third-party content plug-ins.
Yet Parent is the first to admit that CAE and the rest of the industry has considerable work left to do. “Right now there is a record aircraft backlog, with exceptionally high deliveries to airlines. This, coupled with projected growth in civilian air traffic and a global pilot shortage is creating significant opportunities,” said Parent. “On the civil side, 100% of an airline pilot’s training can be done using simulation. We are far from that on the military side. But we’ll get there one day.”
Mark Parent: a seasoned CEO leads
Like most technology companies, CAE’s most important assets walk out the door every evening. The company oozes with talented professionals including Parent, who was nominated Canadian Defence Review’s defence executive of the year in 2011. A graduate from Montreal’s prestigious École Polytechnique and the Harvard Business School’s advanced management program, Parent joined CAE in 2005 and took over the responsibility for the defence division the following year.
However whoever handed Parent the CEO spot in 2009 did the equivalent of passing him a stick of dynamite. At the time CAE was reeling from a plunge in civilian work that hit following the 2007 recession. Undeterred, Parent kept his eyes on the road ahead and led CAE to four consecutive years of sales increases.
These successes culminated in 2013 when revenues exceeded $2 billion for the first time. Growth was driven primarily by CAE’s civil division, which offset slightly slower defence activity, due to delays in the attribution of certain US contracts, and lower demand in Europe. During the year the company continued to also generate business from enduring aircraft platforms like the C130-J Hercules transport and MH-60R Seahawk helicopter.
CAE’s Canadian defence footprint
While CAE’s international successes are generally well-known to aerospace and defence insiders, the company also has a substantial defence presence on the ground in Canada, where the company provides training support services for most of the Royal Canadian Air Force’s existing flight simulators.
That presence includes employees in 15 locations across the country, many of which showcase capabilities beyond the company’s core training and simulation expertise, which CAE hopes to further market on the world stage. These include systems integration, intelligence, surveillance, reconnaissance, (ISR), in-service support management and a variety of other solutions.
“We are a truly full-service defence company that offers capabilities along the entire Canadian land, sea and air defence life cycle,” says Gene Colabatistto CAE’s group president (military products, training and services). “That includes everything from research and concept analysis, to system design and development to training, to ultimately putting something in operation and supporting it.”
CF-18 fighters, maritime helicopters and C-130J transport aircraft
CAE’s substantial Canadian presence includes close to 200 software developers, systems engineers and data management professionals who work out of a range of L-3 MAS and Department of National Defence facilities. There they maintain and upgrade the mission systems on Canada’s fleet of CF-18 jet fighters. This highly-specialized, multi-disciplinary team recently achieved Capability Maturity Model Integration (CMMI) Level 5 certification, one of only a few Canadian organizations to do so.
CAE is also the prime contractor on Canada’s operational training systems provider program, which includes development of in-service training support for Canada’s CH-147 helicopters and its C-130J transport aircraft, many of which are based at the new Air Mobility Center in Trenton.
“The next few years will be an important time for the Air Force, as they explore next generation training solutions,” says Colabatistto. “Canada is not unlike other defence forces that are grappling with requirements to maintain readiness in a challenging budget environment. As a global simulation and training provider, with a unique perspective, we look forward to participating in the dialogue and debate.”
One model that the Canadian government will surely want to study closely, is the CAE Oxford Aviation Academy in the United Kingdom. There the company operates a fleet of more than 225 aircraft, in what company officials bill as the “world’s largest ab initio training facility,” where more than 100,000 pilots get training each year. A similar facility in Canada would almost certainly optimize domestic pilot training, and could serve as a showcase facility that could be duplicated in other countries.
New opportunities in Canada
In October of last year, Colabatistto took an important step forward when he appointed Mike Greenley, as vice-president and general manager of CAE Canada (military). Greenley will be based in Ottawa, where he hopes to leverage his skills to build on opportunities in the nation’s capital’s demanding procurement environment.
He brings a wealth of attributes to the new post. These include extensive experience managing an army, navy, and air force client base, coupled with a broad industry perspective, which he acquired through volunteer work at sector organizations, such as the Canadian Association of Defence and Security Organizations, where he currently serves as chair.
CAE also announced a partnership that will include Lockheed Martin and several other major players, which will be named Canada’s Naval Combat Systems (CNCS) team. The group, most of whom already have extensive portfolios of accomplishments with the Royal Canadian Navy, will be angling to get work on the upcoming Canadian Surface Combatant ships, which are designed to replace Canada’s Halifax Class Frigates, as their useful lives come to an end. CAE also recently announced a teaming with Elbit, an Israel-based company, to bid on the upcoming Integrated Soldier Systems Program.
However one of CAE’s most attractive potential opportunities relate to the F-35 Joint Strike Fighter program. The company has already inked a memorandum of understanding with Lockheed Martin to support an in-country F-35 training effort for Canada, which would come into effect if Canada goes through with the deal. If that happens, CAE will work closely with Lockheed and the Royal Canadian Air Force to design an overall training solution.
That would involve leading a training needs and media analysis to help the RCAF identify required tasks and the most appropriate media needed to accomplish them. CAE would then leverage existing F-35 simulation products and solutions to deliver an overall training solution.
According to Greenley the company could ultimately provide Canada with an extensive range of F-35 related training and services. These include integrating F-35 training systems within DND’s current architecture and simulation environment, design and development of Canada-specific courseware, operation as well as support and maintenance of the F-35 training system.
Developments on the international stage
The hope is then to leverage a Canadian F-35 training model and CAE’s existing global footprint, to assist other Joint Strike Fighter partner nations with their F-35 training needs. Indeed building on CAE’s existing export strength is a key priority for Parent going forward. Last year CAE, which has an existing customer base of over 50 national defence forces, delivered military simulation products or training services to more than 30 countries.
This included personnel on site at more than 80 military bases, as well as engineers and technicians at more than 20 sites in Europe, who maintain pretty much all of the German Armed Forces’ flight simulators currently in service. “Technology exports, which are a major focus at CAE, bring significant benefits to the Canadian economy,” notes Parent. “These range from the revenues that these sales generate, which are repatriated into Canada, the domestic investments made to support exports and the number of jobs created.”
CAE’s recent inking of a joint-venture deal with the Brunei government, to set up a multi-purpose training center there, could also serve as a template, for similar moves in other countries, particularly in Asia and the Middle East. The new facility, which will house training of personnel from the Royal Brunei Armed Forces, offshore oil company pilots as well as S-70i Black Hawk, S-92 helicopter and PC-7 trainer aircraft flight simulators, which CAE is currently developing.
Looking to the future
As a result of the long lead times needed to develop and implement many of the solutions CAE provides, planning personnel at the company typically take a longer term view than in players in other sectors. During coming half-decade Parent expects CAE to push further into a variety of new areas ranging from homeland security, to critical infrastructure.
A five-year deal to train with the U.S. Air Force Predator and Reaper pilot and sensor operators, also positions CAE well to grow in the $475 million remotely piloted aircraft, flight training and simulation market. Teaming agreements with General Atomics to pursue international training solutions opportunities for the Predator and Reaper, and to offer variants of the latter here in Canada are also showing promise.
Parent also acknowledges the importance of CAE’s partnerships with government, through initiatives such as the Strategic Aerospace and Defence Initiative (SADI) investments, which (as in almost all international defence markets) are crucial to the development of local champions. He regards the recent Jenkins Report, which labelled training as a key Canadian industrial capability, coupled with the government’s recent commitment to consider the Canadian industrial base on all defence procurements of more than $20 million, as positive developments on that front.
“Quite simply, you need to succeed at home before you do so abroad, particularly in defence,” says Parent. “The good news is that we have had decades of positive results with this model, specifically with civil and military simulation and training systems. This success has been good for us, but also for Canada too. Our job right now is to make sure that continues.”
Highlight these quotes:
“On the civil side, 100% of an airline pilot’s training can be done using simulation. We are far from that on the military side. But we’ll get there one day.”
“The U.S. Air Force’s rule of thumb is that simulator-based training costs only a tenth of what flight-based solutions do.”
Mark Parent, CAE president and chief executive officer.
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Peter Diekmeyer Communications Inc.