Military growing more reliant on contractors — a boon for CAE, chief executive says

MONTREAL — CAE Inc. chief executive Marc Parent says a growing reliance on private contractors by Western armed forces — including Canada’s — bodes well for his company and global security, even as questions linger around spending and accountability.

Escalating strife and international conflict have sparked a military build-up that means governments contending with personnel shortfalls depend increasingly on private sector firms for everything from catering and construction to hired guns.

“Nobody’s happy about the rise of geopolitical tensions around the world. But what is happening for sure is that defence budgets are on the rise,” Parent said in an interview.

“Militaries literally don’t have enough uniformed personnel to be able to conduct their operations themselves … In Canada, they’re turning to private industry to be able to do more and more contracted services in support of the military.”

Last month, a joint venture between Montreal-based CAE and B.C.-based KF Aerospace secured an $11.2-billion contract from the federal government to train aircrews and provide 40-plus flight simulators for the Royal Canadian Air Force.

The 25-year deal represents a vast expansion of the simulator maker's previous role in RCAF training, as the partnership, dubbed SkyAlyne, takes on more responsibilities such as training support crews and procuring trainer aircraft.

“We’ll essentially be running the bases here,” Parent said, referring to air bases in Moose Jaw, Sask., Winnipeg and Portage la Prairie, Man.

“This is the Canadian government essentially transforming the way they do pilot crew training,” he said, adding that “pretty much everything” in that realm will be outsourced.

In a world of technologically complex warfare, companies can fill critical niches for armed forces already short of recruits.

Defence Minister Bill Blair has said the Canadian Armed Forces faces a shortfall of 16,500 members that could take years to resolve.

David Perry, president of the Canadian Global Affairs Institute, said tapping large corporations and niche outfits makes sense in order to draw on “specialized skill sets related to digital technology,” among other areas.

“The private sector unquestionably can be more efficient, more nimble, faster decision making,” Perry said.

He cited a "big push" toward privatization of publicly owned entities and services that dates back to the Mulroney government's sale of more than 20 Crown corporations, including Air Canada and Petro-Canada, starting in the late 1980s.

More recently, outsourcing practices have come under fire, sparked by the ArriveCan controversy, which revealed that a company at the centre of the development of the pandemic-era travel app received more than $100 million in federal contracts since 2011, according to Canada's comptroller general.

Brown University’s Costs of War project argues that militaries in particular are spending more and more of their budgets on contractors with little accountability for how the funds are doled out.

In a 2020 report, the Public Service Alliance of Canada claimed there is scant evidence that the billions of public dollars spent each year on defence contracts amount to an efficient use of funds.

"The companies cited in the report have often found themselves in hot water, here and around the world, on issues such as human rights, health and safety and workers' rights," it wrote.

Canadian defence spending rose by more than two-thirds between 2014 and 2021, according to the Parliamentary Budget Office, with further increases since. Last year, the government announced $30 billion in new defence deals, mainly with U.S. firms.

For CAE's chief executive, however, the selection of Canadian companies for a critical training role shows how the state and the private sector can work hand in glove to bolster security at home and abroad.

"It's training for Canadians, by Canadians," Parent said of the recent deal.

The $11.2-billion contract from two weeks ago couldn't have come soon enough for the 77-year-old company.

Two days earlier, CAE had reported a half-billion-dollar net loss in its fourth quarter after massive one-time charges linked to its defence business, including a $568-million “goodwill impairment.”

"It represented more than we thought," Parent said.

Nonetheless, the segment represents a rising source of revenue at the company.

So-called transformational defence contracts — like the one signed with the RCAF, those that encompass long-term, wide-scoped deals — amounted to three per cent of CAE's defence revenue last year, but will comprise 15 per cent this year, he said.

Industry watchers also have an upbeat take.

In a recent research note on CAE, National Bank analyst Cameron Doerksen wrote: "The defence end market outlook remains supportive for 2024 and beyond as global military spending to address growing threats continues to increase — Ukraine war, China’s more aggressive defence posture, conflict in the Middle East being the major drivers."

This report by The Canadian Press was first published June 11, 2024.

Companies in this story: (TSX:CAE)

Christopher Reynolds, The Canadian Press