Volvo 1998 Annual Report Download - page 39

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Possible cutbacks in the Swedish Defense Forces constitute a factor of uncer-
tainty with respect to future maintenance of Gripen and Viggen aircraft for the
Swedish Air Force.
Commercial Engines: Strong increase in sales
Net sales increased again in 1998, due in part to substantial sales of spare parts
and a strong US dollar. The cooperation agreement covering technological and
product development with MTU, the German manufacturer of aircraft engines,
is in its implementation phase.
Commercial Engine Services: Many important orders
Sales increased substantially in 1998. Five new contracts were signed, including
one with Continental Airlines, worth SEK 2 billion over a period of five years,
and one with Challenge Air Cargo, worth SEK 1.5 billion over ten years.
Space Propulsion: Successful launch of Ariane 503 rocket
A successful launch of the Ariane 503 European space rocket took place in
October 1998 and the rocket thereby qualified for commercial launches. During
the year Volvo received an order from Société Européenne de Propulsion
covering deliveries of combustion chambers for the Ariane 4 during the 1999-
2001 period.
Aviation Support Service: Continuing expansion
During the year Volvo Aero’s American subsidiary, the AGES group became the
first supplier in the industry in the US to be certified in accordance with ISO
9002 and AS9000 standards. In association with Engine Lease Finance LLC and
BTM Capital, Volvo and AGES formed a leasing company to handle long-term
leasing of aircraft engines; AGES owns 44% of the share capital and Volvo 5%.
Land & Marine Gas Turbines: Important hospital orders
During the year a letter of intent was signed with Honeywell Control Systems
whereby Volvo Aero will be a priority supplier to Honeywell’s electrical and
heating installations in British hospitals. The system involved initially is Volvo
Aero’s CHP (Combined Heat and Power) VT600 plant, which supplies the
hospitals with both power and heat under a long-term contract in which a
customer pays only for the electricity delivered. In addition, Volvo Aero and
ABB formed a joint-venture company that will develop, market and manufacture
small generator plants powered by gas turbines.
Net sales and operating income
Volvo Aero’s net sales rose to SEK 8,584 M (7,476) as a result of higher net
sales in several business areas. Operating income amounted to SEK 527 M (472).
The operating margin declined slightly, to 6.1% (6.3), due to increased develop-
ment costs in programs for commercial aircraft engines and gas turbines. Return
on operating capital was 23% (>25).
About half of Volvo Aero’s sales are attrib-
utable to service, maintenance and aircraft
engine leasing. In 1998 the company
introduced a new maintenance concept
whereby an aviation company pays per
hour of aircraft usage, a form of contract
in which both buyer and seller have a
common interest in keeping engines in
such good shape that they can be
operated a maximum amount of time
and minimize periods for service and
maintenance.
Operations also include development
and production of commercial and military
aircraft engines in association with the
major engine manufacturers - Pratt &
Whitney, General Electric and Rolls-Royce
- with Volvo Aero having approximately 4
to 9 percent of a program during the
entire life of an engine, 30 to 40 years.
Aero is also developing and manufactu-
ring engine components for the Ariane
rockets, which account for 40 percent of
all of the world’s space launches.
A new concept for plants providing
electricity and heat production was
launched within Aero’s Land & Marine Gas
Turbine business area in which, similar to
the aircraft maintenance concept, the
customer is only charged for the time the
equipment is used.
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