Israeli corporate jet hurts defense firm's bottom line
State Comptroller finds that Israel Aerospace Industries failed to properly assess risks and report progress; losses partly funded by profits from miltary projects.
State Comptroller Yosef Shapira found that shortcomings led to the loss of tens of millions of dollars during the development of a new executive airliner by Israel Aerospace Industries. The massive investment in the civilian craft diminished the firm's profits from its military-sector developments, according to the report published Monday.
Aerospace Industries signed a series of agreements in the between 2001 and 2004 dealing with the purchase, operation, and maintenance of business jets with US-based Gulfstream Aerospace Corporation. The company's board of directors approved in December of 2005 a plan to develop and produce Gulfstream G280 model of executive planes.
Data showed that IAI invested tens of millions of dollars between 2002 and 2012 in development of business jet models, as well as in research and development costs. The company accrued operational losses of tens of millions of dollars during that period.
Former judge Shapira noted a number of flaws in the decision-making process during the project's feasibility study. IAI's CEO appointed a team in 2005 to evaluate the project's technical, engineering, and managerial risks. That team presented their findings to management, who did not review the likelihood of the risks materializing or specifying the investment required to deal with and reduce them.
IAI's management did not use an independent survey to examine the G-280's potential market share, according to the report.
Meanwhile, IAI's finance committee told management to analyze all the alternatives to activities in the field.
IAI and another company signed a "letter of intent" in December 2005 that arranged in principle an agreement to develop the G280. In practice, by the time the report was completed, IAI had not signed an updated and detailed agreement with the company, even though eight years have passed.
The report further found that IAI management did not report on the project's progress. In addition, between September 2010 and completion of the report, there were discussions in which management reported the project's business plan to the board of directors or finance committee. The comptroller found that deviations from the schedule built up over this period. He remarked that this behavior was improper.
Although losses of tens of millions of dollars were registered, the board did not request progress reports from management. According to the comptroller, the lack of notes from management meetings in no way conforms to standard managerial rules.
The comptroller also found lapses in the Government Companies Authority's monitoring, saying it did not satisfactorily inspect IAI's activity regarding business jets and did not confront it with the financial ramifications.
Lack of oversight
The comptroller concluded that despite the IAI's considerable experience in the field of business jets, it failed for years to match its goals, and thus incurred losses.
These losses and the investment of millions of dollars were partly funded by the company's profits in other fields, primarily defense, according to the report. They were enough to negatively affect IAI's financial situation in both the medium and long term, as well as its ability to invest in other, potentially more lucrative products.
The comptroller said the losses were caused, among other things, by flaws in administrative work, in the decision-making process to approve a development and production plan, and in the monitoring procedures by senior figures in IAI, chief among them the management and board of directors.
IAI responds
IAI responded: "Aerospace Industries is internalizing the lessons from the comptroller's comments, and is acting vigorously to arrange the necessary procedures, with the goal of boosting, strengthening, and guaranteeing effective monitoring procedures by the management and board.
"However, the subject of business jets is central to the company, which is one of the only ones in the country working in the field, and it is characterized by substantial, long-term investments at the development stage, with the goal of attaining significant achievements in the long-term. When development began in 2005, there was no way to predict the global financial crisis that arose in 2008, its duration, and the force of its influence on civil aviation in general and mid-size business jets in particular.
"Although the effects of the crisis are still evident, the G-280 jet is considered one of the best of its kind in the world, and we estimate, based on updated marker predictions, that the project will become profitable. The company is currently examining the manner and scope of its civilian activity, in light of the changing circumstances in the global market and its competitive position against global companies providing similar solutions."
