Canadian Defence Review

 

January 14, 2015

 

Alberta Aerospace and Defence Report 2015

Freefalling oil prices could force Alberta to finally get serious about diversifying its economy. Defence contractors could be among the big winners.

 

Alberta politicians talk about economic diversification, but when it comes to concrete action, the oil and gas industry comes first. Everyone else can wait in line. That shouldn’t be too surprising; with Calgary’s and Edmonton’s unemployment rates hovering around 5% at year-end few complain. However the recent fall in oil prices could change that. Defence companies could be among the big winners.

 

“We have seen a massive realization that Alberta cannot restrict itself to being an energy economy,” says Kimberly Van Vliet, a spokesperson for Aviation Alberta and president of WaVv Enhanced Business Development Solutions. The consultancy services both oil and gas and defence sector clients. It also provides Van Vliet an ideal platform to view developments in both industries. Like many experts we spoke to Van Vliet believes that the slump in oil prices will force the Alberta government to pay more attention to other industries.

 

Deanean Tomlin, executive director of the Western Canadian Defence Industries Association, agrees.  “This is their (politicians) chance to pull their head out of the oil sands,” she says with a smile. “There are many energy industry skill sets that transfer well to defence applications. One widely quoted statistic is that due to the energy sector drilling expertise there are more marine engineers in Alberta (which borders no oceans) than in any other Canadian province. Alberta naval sector suppliers to programs such as the National Shipbuilding Procurement Strategy may be able to use that talent.”

 

Rallying the industry

WCDIA, which recently hired away Tomlin, to represent the industry full time in British Columbia, Saskatchewan, Manitoba and Alberta, clearly sees a major opportunity in the latter province, as do almost all of the sector experts we spoke to. The fall in the loonie (from USD $0.94 in July of 2014 to USD $0.79 by January 2015, has made Alberta (and all Canadian) products 16 percent cheaper in foreign markets – a huge advantage in today’s competitive economy.

 

Furthermore while falling oil prices may hurt energy companies, they help defence manufacturers by cutting their heating and transport costs. Talent made available from energy sector layoffs, could also help defence firms, many of whom couldn’t compete with the high wages paid by oil and gas companies. However leadership by the Alberta government (which refused comment on this story) on the defence front has been lacking so far.

 

“The new administration is still getting settled in,” explains Tomlin, jumping to their defence, noting that Premier Jim Prentice took over from Dave Hancock in September of 2014, who in turn replaced the scandal-plagued Alison Redford following her resignation six months earlier. “So it’s not totally surprising that no provincial minister has yet emerged as an industry champion the way that Michelle Remple (Minister of State for Western Economic Diversification) has on the federal scene.”

 

Alberta government indecision played out squarely last year at the WESDEF defence industry trade show which draws a slew of well-heeled tourists. Despite this provincial officials refused to match federal contributions to the 2014 version of the show. Tomlin however remains focused squarely on the future. “There are good opportunities on the table if we all work together,” she notes. “We have meetings scheduled with provincial officials in coming weeks and I am highly optimistic.” 

 

Attractions of investing in Alberta

Tomlin is right to be bullish says James Gillespie, director of programs at Harris Canada. This program management and maintenance support services holder of the CF-18 avionics Optimized Weapons Systems Support contract, has been a big beneficiary of the recent economic trends.

 

Harris Canada, which, along with other Alberta-based suppliers such as Teledyne Varisystems, Avmax, MicroLynx, 3C1, Qsine and others, got a great momentum boost late last year, when the defence department announced that it would be extending use of the CF-18 fighter jet until at least 2025.

“Like many defence contractors our funding had been cut by some 25 percent, but some of that money came back because DND found extra room in their operation budget,” says Gillespie. “Lower fuel costs likely had something to do with that.”

Harris Canada also got a boost on the manpower front, when a recent search for eight new workers drew resumes from former oil and gas sector workers. This would have been almost unthinkable during normal times. In fact Alberta is increasingly an ideal place for defence contractors do business says Gillespie. He cites low provincial tax rates, broadly business-friendly regulations and strong existing Canadian Forces base assets as key selling points.

 

Alberta’s natural open air spaces, which provide companies such as target drone developer and producer Meggitt Training Systems and the Canadian Center for Unmanned Vehicle Systems (CCUVS) ideal training grounds also help. However as Peter Longstaff, Meggitt’s president notes, although the company continues to see success on the international stage, domestically things have been slow. “Large equipment procurement delays and uncertainties continue to affect defence companies across Canada,” Longstaff notes, echoing an oft-repeated statement among sector stakeholders across the country.

 

That said, Alberta defence industry insiders are surprisingly reluctant to criticize the Harper Government, which has strong support in the province, for throwing the industry under the bus. Although almost all are feeling the pain, suppliers appear to accept their powerlessness in the face of Tory program, procurement and readiness cuts, made to pay for election goodies for the Harper Government’s other, higher-priority, electoral constituencies. As a result, many are turning to exports. For example NovAtel, a small, but nimble Calgary-based developer, has been challenging international players, with its innovative and accessible line of COTS and custom receivers, antennas and anti-jam devices.

 

GDLS: supporting the local economy

According to Doug Wilson-Hodge, a spokesperson for General Dynamics Land Systems, one often unrecognized fact about Alberta’s aerospace and defence players, which governments need to recognize, is that their roots in local communities are not just business-related. True, GDLS’s Edmonton involvement in the LAV III Upgrade project has shifted the focus of its Edmonton operations from major repair work to build and assembly operations, a move that has generated spin-off benefits throughout the province.  For example GDLS recently invested in its 153,000 square foot site, by installing a new overhead crane and incorporating an enterprise resource planning system, both of which either added or maintained local employment.

 

However Wilson Hodge also notes that many of its hires are either reservists or ex-soldiers from the province’s four major military bases (CFB Edmonton, CFB Cold Lake, CFB Wainwright and CFB Suffield). GDLS’s Edmonton operations also support the local United Way campaign and sponsored the True Patriot Love Foundation’s Calgary dinner.

 

GD Canada: innovate or die

That said, General Dynamics, whose combined operations make it Canada’s largest defence contractor, also make it the most vulnerable to the current shifting business environment. “Continued pressure on defence spending requires companies to innovate,” notes Craig Jansen, vice-president (land & joint solutions) at GD Canada, who cites the company’s three EDGE Centers, which help fill military, security and public safety capability gaps through rapid proto-typing, as one such initiative. “A key area where our Calgary facility plays a leading role is in developing network hardware and software that integrates sensors, communications and applications in vehicles.”

 

An engineering and integration support contract for the Land Command Support System continues to be the predominant bread winner for GD Canada’s Calgary facility, which houses a significant chunk of the firm’s 300 Alberta-based employees. The firm’s visibility among Canadian Forces front-line soldiers will increase significantly in coming months. Last year GD Canada won a three-year contract to provide new combat net radios, which will be installed in the LAV III upgrades and other vehicles. Shipments will begin in May.

 

C4I Consultants expands again…outside of Canada

Bruce Gilkes, president of C4i Consultants and chairman of WCDIA, whose offices are located in the same building, agrees that innovation is key. “Within Canada many projects are suffering delays or cancellation,” says the industry veteran. “Success accrues to those who adapt to meet needs that emerge during though times.”

 

C41 Consultants, which supplies simulation, communication planning, battle management and custom software development solutions, has been remarkably successful on that front. Although training was one area that was particularly hard hit by Harper Government cuts, the company, which houses 30 of its 35 Canadian employees in Alberta, managed to grow anyway.

 

Exports have been a big part of the picture. Last year C4i Consultants set up a formal business development team to better market its MIL-C2, HSE-Ops, RADIUS and other systems. Staff members have been working closely with Canadian Trade Commissioner Services offices in several countries, particularly in the far and Middle East. Here at home, Gilkes remains focused on getting work from the Land Vehicle Crew Training System initiative, which he is hoping will get the go-ahead from the Treasury Board later this year.

 

Pelican Products: no more “fly over” Alberta

In fact Alberta appears to be well positioned to play a bigger role on the defence front in the coming years says one industry veteran. “Years ago industry buyers might have been able to fly over Alberta,” says Ed Dwyer, managing director at Pelican Products Canada, which markets protective case solutions and portable lighting systems.  “Now there are hundreds of companies doing innovative work and employing thousands of highly skilled people.”

 

Pelican, which houses just over half of its 35 Canadian employees at its Edmonton facility is one of those businesses. During coming years, one of company’s products is slated to become a crucial piece of kit for front line soldiers. In 2014 Pelican inked a three-year deal to supply Canadian Forces personnel with a custom-designed “individual campaign boxes” that will be used for general purpose storage and transport. A key feature of this contract is that the new units will be able to fit army, navy and air force personnel’s C7 rifles.

 

Bright spots on the horizon

Terry Manion, vice-president and general manager at Raytheon Canada Limited Support Services Division, which has also been forced to deal with a stagnant business environment, nevertheless cites bright spots on the horizon. These include the recent roll-out of the federal government’s new defence procurement strategy, which Manion hopes will generate more maintenance, repaid and overhaul and C4i integration work for the company’s 150 Alberta employees. 

 

“The full impact will become more evident over the next 12 months,” notes Manion. “But first indications are that the strong requirements for Canadian industrial participation in defence procurements will provide increased business for Canadian operations such as ours.

 

Provincially, although the forces of inertia are strong, the outlook can also be summarized as broadly optimistic. Despite the rough outlook for the oil and gas sector, Alberta accounted for nearly a third of all jobs created in Canada last year, including 5,700 in December alone. So at first glance there is little reason for the government to shift its attention elsewhere. Alberta politicians have weathered energy price cuts before and there is no reason to believe that they can’t do it again.

 

That said slower oil drilling activity and production slowdowns are expected to take their toll in coming months. In late 2014 Prentice warned that the Alberta government’s revenues would fall by $7 billion during 2015. That was when oil prices were trading at $63.82 per barrel. As these words are written, oil is trading a $45 a barrel.

 

In the end, as always in such matters, Alberta’s defence industry will be subject to what happens on the political front. With federal elections scheduled to take place later this year and provincial elections in 2016, it will be up to industry officials, many of whom will be gathering in Calgary at WESDEF 2015 between July 5th and 7th, to show voters what the sector can bring to the table.

 

 

Please use attached photos with these captions:

Photo: Canadian Soldiers testing GD Canada’s enhanced Combat Net Radio functionality.

 

peter@peterdiekmeyer.com

 

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