Austal – World’s Leading Aluminium Ship Builder is riding a Wave of Success
Austal is an Australian-based global ship building company and defense prime contractor that specializes in the design, construction and support of defense and commercial vessels. With their market leading designs of high performance aluminum vessels, the company expects their presence in global export markets to continue to increase, much more than they have seen in recent years.
Strong Financial Position – No Debt on Balance Sheets
With reflection upon Austal’s results for the last financial year, Mr. Singleton shared that the results were good except for the fact that they took a provision due to higher-than-expected costs on its Littoral Combat Ship (LCS) program in the United States. Following the $115 million write-off announcement, the company’s stock price dropped from A$1.21 on June 30 to A$0.95 cents and recovered to A$1.12 by July 5. Mr. Singleton said that program remains profitable and drew attention to the fact that the program is in the very beginning of its production program, and indicated that the cost of building and modifying LCSs to meet the new shock rating standard and US Naval Vessel Rules is “materially more than what was previously estimated. That’s been a bit more expensive to do than we perhaps had imagined but nonetheless, it’s been a very successful outcome. “The rest of the organization has performed very well. We’re seeing good performance both in the US and in Australia. We are seeing some improvements now in our commercial business, which is mostly centered in the Philippines as well. The key about Austal is that we have no debt on our balance sheets, so we have an extremely strong financial position for both the Australian Naval programs going forward, but also for any exports that we look at over the next few years.”
Differentiated Product Shapes Promising Outlook on Exports and Sales for the Upcoming year
Fittingly expressing invariable caution about predicting defense exports overseas, Mr. Singleton said “defense exports are notoriously difficult to determine when they happen, but we are engaged in a number of campaigns around the world - several in the Middle East but also in other parts of the world as well. I think that we’ve got such a differentiated product range compared to most ship yards that it puts us in a strong position. What I mean by that is that if you look at the types of ships that we are producing in the United States at the moment for instance, all aluminum catamaran, trimaran vessels, it’s a market where there are relatively few other players. If a navy is interested in that style of vessel, then Austal is always going to be somebody they are going to want to talk to.”
Export Market Focus Points – Product Focused rather than Regionally Focused
Elaborating on the company’s product focused approach, Mr. Singleton said “We are less regionally focused and more product focused. “As I’ve said before, because we are such a heavily differentiated company in the type of product that we put forward, we don’t so much concentrate in any particular geographic area, but by product type. If somebody is looking for fast aluminium vessels or is looking for transport vessels like those we have in the United States or a very novel style of ship like the LCS from the United States, then we’ll go to that market. Although there is a lot of activity in the Middle East at the moment, for instance, we don’t see that as simply concentrating on the Middle East but really concentrating on the product type that we have. We don’t go and chase monohull steel vessels for example, because that is not our core market, but fast aluminium vessels, typically the low end of speed typically 25 knots to the high end speed 45 knots; that sort of market with low weight, high speed vessels is what we concentrate on. Austal has an intrinsic understanding of aluminum and its outstanding capabilities as a construction material. We developed highly specialized, proprietary process to design and construct vessels with optimal strength and minimal weight. Our “Finite Element Structural Analysis” allows for an optimal design solution to be developed based on the customer operating requirements.”
Ongoing Programs in Middle East Countries
Mr. Singleton shared insight into how they are doing business in the Middle East market. “A really good example is the Royal Navy of Oman contract for two 72 meter High Speed Support Vessels, won in 2014 and deliveries just completed. Similar in concept and type to the EPF 103 m in the United States - which is in itself an utterly unique concept – there’s no other similar vessel to in the world. It’s a very cost effective high speed troop and equipment transport vessel. What we were able to do for Oman is to take the proven EPF design concept and produce a vessel that suited them; a slightly smaller vessel than the US but with a very similar mission profile. The 2 vessels we delivered absolutely on time and within cost are now in use in Oman. That style of (high speed support) vessel we are seeing increasing interest in from a number of countries around the world, from the Middle East and outside of the Middle East as well.”
UAE Business Model – Support from Local Incumbent Company
“In the UAE we would typically work with Abu Dhabi Ship Building (ADSB); they would be involved in some of the activities associated with the vessel itself but also in the support activities. We think it’s important that there is a local incumbent company involved in support to make sure that the support to the vessel over the long term is adequately performed. We do have a service center in Oman, which supports the Royal Navy of Oman, so we can use that capability if we need to.”
Asia Pacific, Azerbaijan, Turkey
“We don’t have any programs at the moment in the Philippines and Vietnam, we’re looking at programs in those sorts of countries but we don’t have any active programs.”
“We’re familiar with the Fast Patrol Boat program coming up in Turkey; that has some interest to us, and there are some opportunities in Azerbaijan as well, so we will potentially put forward what we believe are very cost effective solutions for those two markets and then work with local shipyards and supplier companies in those countries in order to transfer the capability into the country. We will pursue the markets through our Consultant, Akman Marin of Turkey who introduced us to Naval Markets while making us aware of the local rules and regulations in this region. In our view, most countries, like Australia, want to have the capability of building and supporting ships in their own market, so therefore it is important for us to be able to transfer that technology and capability into those countries.”
LCS Program for the US Navy
Austal is the Prime Contractor for 2 major U.S. Navy shipbuilding programs, of which LCS is one. Expressing that the LCS program has been a very transformational program for Austal, Mr. Singleton commented that “Austal is the first foreign company in the world ever to be a prime contractor for ships to the US Navy. We’ve done that essentially from beginning to end and then transfer that capability into the US business. When I say beginning to end, we bought land in Alabama, we built a very modern and sophisticated shipyard, designed the vessel and put the vessel into production in the United States and we did that with Australian personnel out of our main center in Henderson Western Australia. We, then withdrew those people very rapidly, and so all of the people in our United States shipyard are now US citizens who are focused solely on those US programs.” He continued to share details of the program, “The program for the Independence-variant of LCS is stated by the US Navy to be a 26 ship program. They have released orders for 13 vessels so far and we have delivered 4 of those, there’s 9 vessels to go on the current buy. We’re expecting additional orders in Fiscal Year 2017, so that will take us beyond the 13 vessels that have already been contracted. Whether that’s an additional 1 or 2, we’re not yet clear. Nine (9) LCSs are under construction in Mobile, all in various stages of completion, ranging from ships in the water in the final stages of fitting out, to those just beginning fabrication. I think what’s interesting about the program now is that it looks as if what the US Navy is intending to do is transform the program from the Littoral Combat Ship program into a Frigate program; which means a series of design modifications and capability changes to the LCS platform in order to make it suitable for a Frigate program. That’s missile upgrades, radar upgrades, new combat systems on-board, which will probably the Lockheed Martin combat system, and then some capability will be taken off the ship in order to compensate for that additional capacity that goes in. We expect, we don’t know yet, that the LCS program will probably turn into the Frigate program somewhere around 2019 -2020. The US Navy will make its decision on that presumably over the next couple of years. ”
20+ Year Program, 15% of the US Naval Fleet
“The 9 LCS vessels under construction will be delivered progressively out to 2021. Our first delivery was in 2010; that was the first buy of the 13 ships. We are expecting, based on the current program, another 13 ships beyond that, which will take us out at least another decade beyond 2021. In the long term it’s going to be a 20 year+ program by the time it’s finished. If you look at the number of ships that we will have produced by the end of these two programs, namely LCS and EPF, Austal will have supplied approximately 15% of the entire U.S. Navy surface fleet.”
The US Navy’s LCS Program - two Distinctly Different Vessels Doing Similar Missions
“In principle, the two LCS ship variants are intended to perform the same mission, contribute to Sea Shield through its unique capability to respond quickly, to operate in the littoral environment, and to conduct focused missions with a variety of networked off-board systems. The antisubmarine warfare, mine countermeasures, and surface warfare missions associated with Sea Shield will be enhanced through the employment of a distributed LCS force. Both LCS variants – the Lockheed Martin ‘Freedom’ variant and our ‘Independence’ variant are designed to do the same activities, although we are now seeing that the US Department of Defense is beginning to look at more specialization in one vessel than the other. What’s interesting of course is that the two vessels are quite different. The Freedom variant is a steel monohull; more of a classic designed vessel, and of course ours is an aluminium trimaran hull. You’ve got two quite distinctly different vessels doing similar missions, so the presumption from that is that the US Navy sees one of the vessels as more suitable for one style of application and the other for another, and I think as they use the vessels over time we’ll see that distinction start to come out, but it’s still very early days, we’ve only delivered 4 of the vessels.”
Advantages of Aluminium
“The Independence variant LCS is a unique, all aluminium trimaran design, offering greater speed for the same installed power, improved fuel consumption and greater range when operating at the same speeds - that results in 40% savings, plus greatly improved comfort when operating in the same sea conditions and an ability to operate in higher wave heights and maintain higher speeds in waves. In addition to all of those advantages the beam on the vessel enable provides greater carrying capacity for mission packages, vehicles and equipment. It is however, the first all aluminium vessel to go into service with the US Navy, so we will see over time how that works and what they think of an all aluminium vessel compared to a steel vessel. The Independence variant LCS also features a shallow draft because it needs to go into coastal waters –the trimaran design again delivering a real advantage.
Shock Trials Successfully Completed
“To our knowledge, this is the first time that an all aluminium vessel has been through shock trials. This is to check the performance of the vessel when there is an underwater explosion, like a torpedo or bomb going off close to the vessel. It’s the first time that the US Navy has shock trialed a vessel since 2008. The good news is that the vessel successfully passed 3 sets of trial processes and performed “exceptionally well”. It’s been successful. It’s met the requirement. So, what’s key in all of that is, that we now can demonstrate that an all aluminium vessel can meet the same shock trial requirements as a steel vessel.”
EPF – High Speed Support Vessels – Technology and Capability from the Commercial Business Flows into the Military Business
“The EPF and HSSV are good examples of how our commercial business creates opportunities for our military business. I think we are quite unique in the way those two businesses come together. The EPF owes its heritage to our catamaran ferry design and the LCS also owes its heritage to our trimaran ferry design as well. These are commercial hulls that have then been refined and further developed for naval application and military activities, and so you get that pull through of technology and capability from the commercial business into the military business. As far as EPF is concerned, I think we have been very much on the trend there for several years in that there was a move some years ago towards starting to use large commercial ferries as a way of moving troops and equipment from one area to another, into full deployed positions. The US was quite early in that process as indeed was Oman, who both had modified commercial ferries for moving troops and equipment. The US had a vessel that we leased to them for some years called the WestPac Express and it was essentially a commercial ferry that was modified for military use and was leased into US military sealift command (USMSC). The utility of that vessel became so clear to the military that they then wanted us to design a fully militarized version of that vessel, which is what the EPF is. It has been a real leader in the way that troop movements have transformed, from aircraft or landing craft type applications into militarized versions of vehicle-passenger ferries. I think what we are seeing now is that a number of other navies beginning to see the value of low cost, high capacity movement of troops and equipment around there forward operation areas with these types of vessels. Oman has been an early adopter in that and we are seeing interest in a number of other countries around the world. As more EPF’s gets deployed around Southeast Asia and in the Middle East, which is now happening, I think navies will see these vessels and realize that it has value for their own operations.”
Approach to International Market – Interest in the Turkish Corvette Program
“What we look for is, does the style of our product, high speed aluminium vessels, meet the requirement of the customer in a way that actually gives them a real advantage. If we think it gives them a real advantage in terms of range, or speed or sea keeping, or its ability to transfer large amounts of equipment and troops, then that’s a market that we would go into. We are also very clear and very familiar that many markets want to see some transfer of capability into their own shipyards, and if that’s a requirement that we are very happy to work with that. In the same way that the Australian government is demanding transfer of technology for any of the ships that it buys from overseas, we have that anticipation that exactly that will happen. So, in Turkey, for instance, we would absolutely see that the right way for us to approach that market is to have product that meets that requirement, that is different to what other people can offer and to find a good partner that can work with us in Turkey.
We have talked about the Fast Patrol Boat program, that is something that we will look at to see what we are capable of offering, either with developments of our Cape-class patrol boat (8 vessels delivered to the Australian Border Forces), or our trimaran, or catamaran style products. If one of those offers something of real value to the navy in Turkey, then we will respond to that program.”
The High Speed Support Vessel (HSSV) is a multi mission theatre support solution and is a strong, proven high speed catamaran platform which we believe will be of interest to the Turkish Navy. It has a shallow draft, medium-lift-aviation and offers high speed performance and maneuverability, outstanding payload capacity for vehicles, equipment, troops, and stores. With a helicopter platform, multi-deck hoist, stern ramp and crane, the vessel is prepared for any military, SAR or humanitarian/disaster relief missions.
Cape-Class Patrol Boat, more Militarized Version Available
The market for offshore patrol vessels (OPV’s) is buoyant as countries seek to modernize, upgrade, and replace platforms to keep up with the pace of technology change and evolving threat spectrum. Their multi-role capabilities also makes them a popular choice for militaries and governments while they seek cost efficiency.
“The Cape-class has been a great development of our fast monohull aluminium style of vessels, it was designed for the Australian Border Force, and we delivered the last of eight in 2015. We got orders for 2 new vessels for the Royal Australian Navy; Capes 9 & 10 and they are under construction in the Western Australian shipyard at the moment. We expect those to be delivered in the first half of next year. They are getting a lot of strong positive feedback from Australian Border Force and the Royal Australian Navy, so we are very pleased with that. They are operating very well in what are quite difficult sea conditions off the northern coast of Australia. That style of vessel is very suitable for border protection but it also has utility in other areas, a for different zones around the world, where perhaps a missile protection or missile assault activities might be useful, so we’ve got a version of that we’ve been developing for a potential Middle East customer, and also an anti-mine warfare version of it as well. It’s a great product of which there are a number of variants that I think we will see will come through over time. NEW CAPEability range includes new NAVAL (Maritime Security) and SUBSEA (Mine Warfare) variants that add to the successful PATROL (Border Protection) configuration that is now an integral maritime asset of the ABF and Royal Australian Navy (RAN). Bringing together the best attributes of both vessel types, the NEW CAPEability
variants clearly demonstrate how the multi-mission characteristics of a larger, more
expensive Offshore Patrol Vessel (OPV) can be achieved by a faster, lighter extremely cost effective solution. “
We also have a game changing contract for the design, construction and support of nineteen (19) 40 meter steel-hull Pacific Patrol Boats for the Commonwealth of Australia, to be delivered to 12 Pacific Island nations from 2018 – 2023 The construction of these vessels, commencing H2 of CY2017 will see us well prepared to deliver the Commonwealth of Australia’s Offshore Patrol Vessel (SEA1180) program, which we will be bidding for over the coming months.
“We think that the trimaran vessel, that has been extremely successful in its ferry version, and now of course in the US Navy, is something that will continue to find new applications in the future. A lot of our R & D focus is around developing the trimaran concept for other applications - we’re seeing a real interest in trimarans for offshore transfer of personnel and goods in the oil and gas industry, where the use of helicopters has been problematic for many years. Trimarans offer very good sea keeping capability, passenger comfort and speed and therefore are a very good application in that commercial market. We are also beginning to see more applications in the naval (defense) sector as well, and a lot of our R & D are going into those applications going forward. It is a complex area and it requires a lot of investment in order to take that concept forward.”
Vision for the Next Decade in the Military and Commercial
“As far as military is concerned, the key focus for us now is the transfer of the Littoral Combat Ship into the future Frigate program for the United States. That will fundamentally change the use and the profile of that vessel both in the United States and overseas, so there is a lot of activity going into that over the next few years. In Australia, we have two big new programs, the Offshore Patrol Vessel (SEA1180) and Future Frigate (SEA5000) programs, and as Australia’s leading ship builder we expect to play a major role in those two programs over the coming decades. The third area is exports. We’ve seen quite a lift in export activity, from interested navies around the world and as a result of that, we are looking at focusing on defense in those overseas markets as well. So the focus is US LCS, Australian naval programs and the existing platforms into the export market.”
“Approximately 75% of the ships that we have built in 28 years of our operation have been for exports; our commercial exports all over the world, from the Americas, through Europe, through Asia, China, and in Australia, so we have vessels in pretty much every market around the world. Our focus on high speed aluminium vessels we think is becoming more in focus with a number of navies around the world and I think you will see Austal’s presence even more strongly around the world in export markets than we have seen in the last few years.”