Remarks by: Eric Siegel
President and Chief Executive Officer
Ottawa - October 14, 2009

Good afternoon.  First of all, let me thank Claude Lajeunesse and the AIAC for their kind invitation.  The AIAC has been an important partner for Export Development Canada –throughout my career at EDC, I’ve had the opportunity to work with many of the people in this room.  And I’m proud of the work our organizations have done to help some truly world-class companies succeed on the international stage.

This year we are celebrating 100 years of flight in Canada.  Who could have imagined, back when  J.A.D. McCurdy made his flight from Baddeck, Nova Scotia in 1909, the achievements that the aerospace industry would attain in the hundred years since? 

This year also marks the 65th anniversary of our organization, a Crown corporation that was created after the Second World War to help the Canadian economy get back on its feet.  For 65 years, we’ve been helping Canadian companies to find new markets and customers, to manage the risks associated with foreign trade, and to access the capital to take on new projects around the world.  And for 65 years, we’ve been committed to Canada’s aerospace industry.

In fact, just a couple of weeks ago, a team of 25 EDC employees emerged victorious, dragging an 81,000 kg Airbus 310 aircraft a distance of 3.5 metres in 5.5 seconds, in a competition to raise money for local charities.  Now that’s “pulling for” the industry!

Joking aside, EDC has a solid track record of support for Canada’s aerospace industry – an industry that exports about 80 per cent of all it produces, supporting 80,000 jobs in Canada. EDC’s history and that of Canada’s aerospace industry are inextricably linked.

The theme of today’s conference is “Positioning for Recovery,” and I’m here to assure you that EDC will continue to help in this positioning – by building on our experience in the industry and continuing to develop relationships, expertise and strategic capacity to help the sector remain a world leader.

Let me begin with a bit of an overview of the aerospace industry as EDC sees it.

Too often when Canadians think of aerospace, they think only of the commercial travel sector, but that’s only one segment of a vast and diverse industry.  EDC takes a broad view of the aerospace industry, and today engages the market across five main segments: first, of course, we have commercial aviation; then, corporate aviation; third, the military segment; fourth, aviation infrastructure; and finally, space —for both government and commercial applications.

History has demonstrated that each of these market segments has undergone significant change and faced major challenges --- some are struggling today under the current economic pressures. Over this historical backdrop, the Canadian aerospace industry has grown in global prominence and has often been at the forefront of developing and delivering next generation equipment and services.

For example, let’s look at commercial aviation. It’s easy to see what is currently happening in this sector and attribute the challenges to the present economic recession.  But the seeds of this turmoil were sown many years ago.  Over the last 20 years, we’ve seen deregulation, privatization of national carriers, mergers, fuel shocks, and devastating terrorist attacks.  There’s no doubt these are troubled times, and the recent credit crunch and economic downturn are stressing carriers globally.

But throughout this period, Canada’s aerospace industry has seen some tremendous successes – for example, the market for regional commercial aircraft.  Back in the 1980s, the regional market was largely a turbo-prop market and EDC’s lending supported Twin Otter, Dash 7 and Dash 8 sales, while our insurance and financing assisted the supply of Pratt and Whitney engines to virtually all of the turbo-prop manufacturers or OEMs.

But Canadian ingenuity re-shaped the commercial aviation segment with the establishment of the “hub and spoke” model of independent regional operators, providing feeder traffic to the mainline carriers at international gateways.  And EDC was there throughout this period supporting Canadian industry in this evolution.

The design and development of the CRJ from the Challenger platform was both an untested product and concept. So the risks were certainly significant.  Many traditional credit sources just looked at the risks involved and took a “wait and see” attitude, lacking either the knowledge or confidence in the regional industry.  EDC however looked beyond the immediate risks to the tremendous potential that the CRJs represented.  This was a pivotal moment for EDC’s relationship with the Canadian aerospace industry as EDC, in partnership with Bombardier and its suppliers, stepped up to support sales to early buyers of the CRJ. 

Based on our experience with this segment of the market, EDC made a strategic decision to invest time and energy to understand the future of the market, and the complex and sophisticated leasing structures that defined aircraft financing throughout the 1990s.  We made the extra effort to look beyond the risks associated with a new product, to the future of the industry. 

Our experience with the CRJ – the realization that we needed to develop in-depth expertise within a specific industry sector – was a key driver behind EDC’s internal re-organization in 1994, which involved the creation of the sector-specific business teams still in place at EDC today. 

The outcome of this venture entailed a significant transformation for commercial aviation.  EDC played an important role in this development, by financing, into commercial structures, nearly half of the 1,400 aircraft that make up the CRJ fleet today.

As with any transformative change, this market has encountered its share of setbacks.  Post 9/11, EDC was thrust into dealing with a series of bankruptcies, which, for the U.S. market, included United Airlines, US Airways, Northwest Airlines, Delta Air Lines and Independence Air. 

They say what doesn’t kill you makes you stronger and for EDC this was definitely the case.  As the major creditor to Northwest and Delta Airlines, EDC played a significant role in their restructuring and, eventually, their emergence from bankruptcy protection. 

Through our experiences of restructuring lease contracts, renegotiating loan agreements, repossessing, refurbishing and re-selling or re-leasing aircraft, EDC has not only secured its own financial position, we helped ensure the ongoing viability of the regional jet market and the CRJ.  In doing so, EDC has acquired competencies and strategic relationships in all stages of the product life-cycle.

Through it all, the Bombardier CRJs remain an excellent example of how Canadian expertise and exceptional products have allowed our companies to remain world leaders, despite the troubles facing the industry.   Bombardier’s CRJs continue to be an aircraft of choice – these aircraft are now being used in more than 30 countries – and EDC has helped finance the sales in at least half of those markets.

The history of the Bombardier CRJ is an integral part of EDC’s history – a key example of how EDC and Canadian aerospace have grown up together.  But our relationship with the commercial aviation sector spans its full market-reach.

There are any number of examples here, but let me just give you a few:

• Support for the simulation and training expertise of CAE and Mechtronix run the gamut from individual sales to financing of flight training centres.
• We are involved throughout the OEM supply chain, through our support so far this year, for more than 120 Tier 1 and Tier 2 suppliers making everything from seat upholstery to landing gear, not only through financing but also with our bonding and receivables insurance services. 
• And, we’re involved in the after-sales market, through our support of the Maintenance, Repair and Overhaul or MRO segment.  Not only do we offer insurance and financing solutions to these companies; as the owner of a significant number of aircraft, we’re also a customer!

Commercial aviation is just one part of this broad and diverse industry. 

One area of long time EDC participation that continues to evolve is the corporate aviation segment. EDC has for many years supported Pratt & Whitney jet engine sales to manufacturers such as Pilatus Aircraft, Hawker Beechcraft and Cessna through a very successful receivable purchase program.  In 2008 alone, this support exceeded $800 million.

Recently, prior to the current economic recession, we witnessed a period of unprecedented growth in corporate profits and in wealth around the world, notably in emerging markets.  This has led to the emergence of new business models where operators of corporate jet fleets sell block hours of flight to corporate users.  And EDC has been there helping these new operators such as XO Jet procure aircraft from Bombardier with financing support in excess of $150 million.

But corporate applications go far beyond executive jets: there are dozens of corporate, industrial and institutional uses for aircraft.  As the resource sector continues to move farther afield, to more remote locations, the demand for helicopter and fixed-wing aircraft increases. 

• The offshore oil and gas industry, for example, continues to expand the market for helicopters and small aircraft to transport workers and equipment.  
• Heli-logging has created a market for companies like Canada Air Crane.  
• Companies like Cessna and Embraer – and of course Pratt & Whitney -- continue to develop the market potential for Very Light Jets or VLJs.  
• And the application of helicopters to government policing and medical emergency services has grown exponentially, often through third party providers.

Turning now to a more traditional market, military equipment procurement continues to be a significant segment of the aerospace business, although historically EDC’s involvement in this segment has been more limited. 

Military equipment purchases have traditionally been accomplished through government budgets, and the prominent role of Canadian Commercial Corporation has reduced the need for financing and focused the utilization of EDC’s services to non-OECD markets.

But the traditional contractual arrangements have been changing and may be significantly impacted by the budgetary constraints many governments now face.  As governments look to reduce capital cost outlays and to manage operating expenses through outsourcing, public-private-partnerships and private finance initiatives or PFIs, the demand for structured finance solutions will increase, as will the value of EDC receivables and bonding insurance programs. 

The Medium Support Helicopter (MSH) training program, which CAE operates under the UK PFI model, and their submarine training facility are examples of projects for which EDC’s financing solutions have been integral.

As commercial travel becomes accessible to a new middle class in emerging markets, new airports present tremendous opportunity for Canadian investment, design, construction and operation.  EDC has supported airport projects around the world, in diverse markets such as Cuba, the Dominican Republic, Hungary and Ecuador.  We’ve evolved closely with companies like the Aecon Group and Vancouver’s YVR, who are turning their expertise in airport construction and management to growth opportunities in key emerging markets.

But the goal is not just to facilitate construction; it is to expand Canadian ownership of this critical infrastructure. EDC has been pleased to team up with pension funds such as Teachers, CPP and CDP, helping them finance the acquisition of air transportation infrastructure globally.

And with new airport construction comes a wide array of opportunities for makers of navigational equipment, air traffic control systems and ground support equipment including specialty vehicles.

Last but not least, we come to the space segment, particularly satellite technologies.

Communications, navigation, earth observation and mineral exploration are just a few of the satellite applications that are expanding exponentially, and EDC has been instrumental in helping this sector take flight, so to speak – companies like MDA, ComDev, Digital Earth and Telesat.  MDA, for one, which has used EDC financing for many of its international deals, has delivered many world-firsts in satellite technology – from direct broadcasting to advanced radar imagery.  

Today a key emerging opportunity lies in a new generation of smaller satellites. Instead of costing hundreds of millions, they’re more in the order of tens of millions.  This makes it feasible for major corporations to buy or lease them.  A prime example is German company RapidEye, which, with EDC’s financing support, contracted MDA to deliver five such satellites last year to provide geospatial information for various industries.

So, as you can see, Canada has developed tremendous expertise in each of these five segments and EDC has been there in support of the industry every step of the way. 

The depth of our commitment to the industry is most apparent from our business volume.  Currently the aerospace sector represents our largest loan exposure, accounting for more than $7.5 billion – including airports -- of our $30 billion in loan receivables, and we’re continuing to add to it.

While we’re on the subject of EDC capacity and exposure, I’d like to take a moment to address EDC’s role in the use of the Canada Account.  There’s a lot of confusion out there about how Canada Account transactions work, so let me try to provide some clarity. 

The Canada Account is separate from EDC’s corporate account, and the decision to use these funds rests with the federal Cabinet, but the funds are administered by EDC. This model is unique to Canada, and allows the government to take on certain transactions where the amount or the risk is higher than what EDC would normally take on its own books.  The Canada Account has played a strategic role in the development of Canada’s aerospace industry; it has allowed the Canadian government to step in at a few pivotal moments in Canada’s aerospace history – financing the very first sale of CRJ’s for example. 

That being said, EDC’s objective is to do the most we can with our corporate account.  This may be surprising to some, but since 2006, less than 10 per cent of aircraft financing has been done through the Canada Account.

But financing is only part of the story.  As I mentioned earlier, EDC has or is supporting, this year alone, more than 120 companies in Canada – nearly a third of the industry.  That’s component manufacturers, simulation and training companies, metal machining companies, and many others associated with the industry – every one of them as much a part of the industry as Bombardier, CAE Bell Helicopter or Pratt & Whitney.  In fact, more than 100 of EDC’s aerospace sector clients are small and medium-sized enterprises. 

All told, EDC supported nearly $5 billion in business in the sector last year, about 20 per cent of the industry total. Financing solutions are still the biggest part of EDC’s business volume in the aerospace sector, but we also provided more than a billion dollars in credit insurance across the sector.  Through services like accounts receivable insurance and contract insurance and bonding solutions, we’re helping smaller companies manage risk more effectively, which also helps them to access credit from their banks when they need it.

And right now is one of those times.  Credit is hard to come by and cash is king, making credit insurance and bonding all the more essential.  There’s no doubt that the past year or so has presented tremendous challenges, not just in this sector, but across the board.  The aerospace sector is in the unenviable position of being one of the first industries affected by economic downturns, and one of the last to recover. 

These are exceptional economic times, but EDC is helping Canadian companies weather the storm and position themselves to take advantage of global economic recovery.  As I’m sure many of you know, the Government of Canada has expanded our mandate and financial capacity.  This has given us greater flexibility to expand our core business – developing Canada’s international trade – and allowed us to provide financing and insurance services in the domestic market for a two-year period.  As a result, we can now facilitate more of your international business, while also being able to apply our insurance, financing and bonding solutions to a wide range of Canadian domestic activities that are trade-related. 

This role – filling gaps in the traditional credit market – is one we’ve played in the aerospace sector for some time.  This is an industry that has grappled with “credit crunches” long before the current downturn.

The fact is, EDC has an established track record with Canada’s aerospace industry; we’ve been there together through product life-cycles, through economic cycles of boom and bust, and through industry transformations -- and through it all we’ve acquired the expertise needed to be a trusted partner for the industry. 

We’ve developed extensive knowledge of industry players, as well as financing structures, financial intermediaries and markets.  We have the in-house expertise needed to manage risks along the full spectrum of aerospace transactions. 

That’s good for our business, but more importantly it is good for your business.  Through our involvement in such a wide array of transactions across every sector of the industry, we have become a known strategic player on the world stage.  We are now at a point where our history helps open doors for Canadian companies, helps leverage private sector involvement, and helps create opportunities in new markets.

The bottom line:  EDC is a proven competitive advantage for Canadian aerospace firms, at a time when the industry is positioning itself for recovery.

Now, there have been times when EDC has come under fire for the degree of support we’ve offered the Canadian aerospace sector.  Some have questioned whether our support exposes taxpayers to too much risk, whether it constitutes a subsidy. 

In response to that, I would say that we have to understand that the intensive capital costs and long lead times involved in aerospace projects mean that government involvement is absolutely necessary.  This is not news – no aerospace industry in the world could survive without government support, whether it takes the form of R&D investment or financing.

However, in Canada, a large part of that government support comes through EDC, and as I mentioned, our priority is to take on as much business as we can through our corporate account, on commercial terms.

Let me be clear: there is no subsidy in what we do.

Export credit agencies (ECAs) have always been an important source of lending and risk capacity to the aerospace market.  In the best of times, the capital intensive nature and long gestation periods associated with aerospace products and the airline industry have posed a challenge to the bank lending sector.  The number and capacity of banks covering aircraft financing for the airline sector has steadily decreased in the last 10 years.  The current challenge facing banks to deleverage and rebuild their capital bases pretty well ensures that this trend will not be reversed in the foreseeable future. 

Under these conditions, ECAs will have an even more essential role to play.

The demand for and availability of ECA support, however, should not, and need not, become a reason not to employ commercial disciplines in judging, pricing and administering credit.  The funding and risk realities which we are all experiencing in today’s financial markets underscore the need to continue the work in international forums to bring commercial terms to all ECA support. 

This is important not just because it levels the playing field, while reducing the burden on government treasuries, but because it complements private sector sources of financial capacity and will hasten the return of greater private sector appetite.  As much as the industry needs ECAs – needs EDC – we need the private sector.

Going forward, maintaining our capacity and appetite for risk, and finding private sector partners, will be a key part of EDC’s aerospace strategy.  The commercial model has been tremendously successful for EDC, and we’ve increased our capacity to take on new projects nearly ten-fold – our capital base has grown to nearly $10 billion from the $1.3 billion the government has invested in EDC, and the business we support has grown to more than $85 billion last year from $17 billion back in 1995.  Our goal is to keep that growth on track – the bigger our capital base, the more of your business we can support. 

We recognize that we have an obligation to stretch beyond our “comfort zone” to find ways to open up new markets.  Emerging markets are expected to outpace traditional markets for the foreseeable future, and we need to find innovative ways to deal with the higher risk levels involved and to partner with the private sector. 

One example is our recent work with CAE, the Solidarity Fund QFL and Société générale de financement du Québec (SGF):  together we successfully developed a new financial tool to provide competitive lease financing so that customers around the world can access CAE’s civil flight simulation equipment.

Another important part of EDC’s strategy for the medium-term will be looking for opportunities to support the global supply chains that OEMs are building.  Globalization and integrative trade are part of the new reality, and EDC is seeking to maintain our flexibility and looking for ways that we can grow our involvement.

This morning, you heard an excellent presentation from KPMG and EDC’s own Fergus Groundwater about how supply chain dynamics can be optimized – this research is just one example of how EDC is building strategic capacity in this area.  Another example is the fact that we are expanding and diversifying our foreign representations, ensuring that Canadian companies will have access to our expertise on-the-ground, in many of the high-growth markets they explore.

We are finally starting to see some encouraging signs that recovery is on its way.  For instance, Canada recently saw impressive gains in monthly GDP growth, wholesale trade and employment data.   And the long-term outlook is promising for Canadian aerospace.  There have recently been some exciting new developments. From the new Bombardier C series aircraft, to Pratt and Whitney winning the contract to build “green” engines for Cessna, Canadian companies are showing that they are positioned at the technological forefront.

We are well-positioned to take advantage of new opportunities, but we need to remain vigilant – the industry is changing fast, and we need to be prepared to deal with new challenges.

To conclude, let me remind you that EDC will continue to help your companies overcome some of those key challenges – enabling you to finance more international sales and investments, reducing your credit risk and thereby enabling access to more working capital.

Like EDC’s victorious plane-pulling team – which apparently beat out much heftier contestants – their strength, they told us, lay in a three-pronged approach:

• Strategic planning – careful observation of their competitors -- what they were doing wrong and, more importantly, what they were doing best.
• Focus on a common purpose – working together with trusted colleagues who were all focused on the same goal – to WIN.
• Teamwork – Ultimately, sharing the load and relying on each others’ different strengths made what first seemed like a Herculean task, highly doable.

I have every confidence that together – building on our shared history and your hundred-year legacy of achievements – we can position Canadian aerospace to take advantage of the recovery and continue to be a world leader.