Comptroller: Israel Aerospace’s Executive Jet Business Hurts Other Operations

Report says unit’s losses prevent state-owned company from investing in other, more promising businesses.

Reuters

The flagging executive jet business has cost Israel Aerospace Industries tens of millions of dollars in losses over the past 13 years, depriving the state-owned company’s other operations of the capital they need, the State Comptroller’s Office said in a report released Monday.

“These losses, together with investments totaling hundreds of millions of dollars, were financed in part from the profits from [IAI’s] other operations, mainly defense, and had a negative impact on them in the medium- and long- term,” said the report, which focused on the defense establishment.

It said the money spent on developing executive jets would have been more effectively spent on areas with more promising profit potential, including research and development.

“This is likely to have a negative impact on the company’s medium- and long-term strategic development and its future business,” the report said.

Israel Aerospace manufactures and markets executive jets developed by Gulfstream, a unit of the U.S. company General Dynamics. Demand for the aircraft has been weak over the last decade, especially after the 2008 economic crisis.

The comptroller said it was Israel Aerospace that took most of the risk in the joint venture with General Dynamics

The report cited a 2012 McKinsey study conducted for IAI that concluded the company would have to sell far more of the jets than it does now to become profitable, and that the G-150 and the newer G-280 it now makes would be unlikely to help the company achieve that.

Israel Aerospace is paying full-time salaries to hundreds of employees who do little or no work, the comptroller found. In response to the report, which asserted that manpower costs were the main reason for the executive jet unit’s lack of profits, IAI said it was taking cost-cutting steps.

Meanwhile, the State Comptroller’s Office faulted Israel Military Industries — an arms maker the government plans to privatize — for retaining some 100 outside consultants every year at an average cost of 8.4 million shekels ($2.1 million).

“The way in which IMI contracted consultants for its CEO during those years — without any competitive bidding or an application for an exemption from competitive bidding as required — should be examined carefully. The matter doesn’t accord with the terms of the Mandatory Tenders Law, regulations or IMI procedures,” the comptroller said.

IMI said it had made changes in management practices after the comptroller’s 2010-12 report and would do the same regarding the critiques in this year’s report.

Meanwhile, the report criticized the Defense Ministry for failing to establish which defense production lines needed to be kept in operation and invested in because they are critical to national security.

Israel has invested heavily in building production lines to make arms and ammunition, in an effort to minimize its reliance on imported materiel. But the defense establishment has failed to make follow-on investment and buys too little of their output to ensure they operate efficiently.

The Defense Ministry said it does maintain a list of production lines for materiel critical for the military. “Nevertheless, because of budget pressure, the defense establishment has established minimum targets to preserve these lines and prevent their being shut down,” it said, addingt it would set up a joint team with the military to make sure the army’s needs are, in fact, being met.