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Airbus Agonistes

By Thomas Lifson

Airbus, the European champion of the cause of state-directed enterprise, is in crisis. Even French President Jacques Chirac has been forced to acknowledge "management problems" at Airbus' parent EADS, which is partially owned by the French State.

Going into the last weekend, a spokesman for the French Finance Minister Thierry Breton offered a 72 hour deadline to "sort out" Airbus and its parent EADS. There are plenty of problems to sort out, and the deadline has come and gone with not much sorting, and almost no outing, evident in the public sphere.

The announcement almost two weeks ago of another delay in the delivery of the A 380 superjumbo jet is the proximate cause of the crisis. The new half-year delay in has sparked open discontent among customers. Some are demanding substantial contractual compensation for lost opportunities to fly, replacement "loaner" aircraft, and other contractual penalties now reckoned to cost EADS about 2.5 billion dollars.

Costly though this will be, the damage to Airbus' credibility could be even cotlier. Most industry observers are skeptical about other important promises not yet delivered, including critical range and fuel economy specifications. One observer noted:

'There is huge reputational damage here. Would you buy an aircraft from these people today? The answer is probably no. You'd go to Boeing.'

Worldwide attention is now focused on the tensions between French and German operations of Airbus, and on the awkward dual management system, with bizarre titles like "Co-Chief Executive Officer" reflecting a system where every key job going to a Frenchman has to be balanced by another key job with a German, and where it seems nobody is in charge.

Take the dispute over the wiring harnesses for the A 380, which are publicly blamed for the delivery delays. The finger-pointing duel between French and German operations would be comic if so much didn't depend on it. The International Herald-Tribune summed-up the observations of many:

For the second time in a year, senior Airbus executives in France pointed to defects in the hundreds of kilometers of wire produced in Hamburg, which is then shipped to the final assembly plant in Toulouse, France, to be snaked through the plane's systems for everything from navigation to climate control to entertainment. But interviews with Airbus executives and close observers of the company suggest the problems probably were also exacerbated by directives from Toulouse, as well as an unrealistically ambitious delivery schedule that the Airbus sales force promised to airlines that ordered the plane. In any case, no one apparently took steps to solve the problem, including [EADS Co-Chief Executive] Forgeard, who was head of Airbus until a year ago and has been taken to task for not reporting the delays sooner.

Meanwhile, M. Forgeard, whose political connections to President Chirac are the basis for his aviation career, has become a political liability, with a criminal investigation of his family's sell-off of shares just before bad news on deliveries drove down the stock price by a third in one day. But firing him will do little or nothing to solve the fundamental problems.

Meanwhile, EADS is contending with the leak of minutes of its audit committee, wherein the possibility of restating its earnings was debated. The company's response, reported by Dow-Jones, is more revealing than the leaked minutes themselves:

"EADS is shocked to find the content of a strictly confidential document in the press," EADS spokesman Michael Hauger said. "...Obviously the document appears to be leaked deliberately with the intention of pointing to alleged Franco-German tensions, which are not existing and which the document does not itself evidence in any way shape or form."
[emphasis added]

Anyone who hopes that Airbus and EADS are going to honestly confront the problems facing them and move decisively to solve them is not going to be comforted by that bit of PR flackery. A second Dow-Jones report reinforces the image of a company in denial, afraid to upset too many applecarts in a complex political situation:

Core shareholders in European Aeronautic Defence & Space Co. have decided to leave the Franco-German group's dual-management structure unchanged and are pursuing talks to fix problems at EADS's Airbus subsidiary, said a person familiar with the situation.

"The dual structure is here to stay," the person said.

Talks between the French government, media company Lagardère SCA and auto maker DaimlerChrysler AG, which represent French and German interests in EADS, are centering on management changes, and a decision could be announced late this week or early next week, the person said.

EADS Co-Chief Executive Noël Forgeard could lose his job as part of a broader management reshuffle, but a final decision has yet to be made, the person added. An EADS spokeswoman couldn't be reached for comment.

Forgeard's public regard is so low that Jean-Marie Le Pen, leader of the far right, made fun of him.

Le Pen told Reuters, "I think that if I was a shareholder there wouldn't be a shadow of a doubt. I would send him off to the Benedictines (monks) to learn a bit of moderation, thought and wisdom."

Meanwhile, A 380 customers are biding their time and considering their options. The two leading contenders for outright cancellation of some or all of their A 380 orders are International Lease Finance Corporation, which has ordered ten jets to lease to airline customers, and Malaysian Air System, which ordered six A 380s, and which is financially pinched, selling off assets and buying out employees in a staff reduction.

If even one airline cancels some or all of its order, the A 380 program will suffer a huge blow. After the initial round of orders was announced, very few additional orders have come in. For the order book to start shrinking would cast doubt on the longer term viability of the A 380. Airbus is having to starve its next generation smaller twinjet jumbo, the planned competitor to Boeing's 787 Dreamliner, of financial and engineering resources in order to fix, produce and deliver the A 380.

Delays in the Airbus twin jet have caused dissatisfaction among existing Airbus customers. Qatar Airways has just announced a 20 plane order for the Boeing 777, and, according to a European magazine

the airline has been vocal in its dissatisfaction with Airbus over the possible two year delay to the A350 [the 787 competitor] entry-into-service target from 2010 to 2012, if the aircraft undergoes a redesign as is widely expected.

Meanwhile, American politicians are doing their best to aggravate the crisis at Airbus. Noting that no American carrier has ordered a passenger version of the A 380, Rep. John Mica, House Aviation Chairman,

said he plans to introduce legislation that would prohibit using federal airport grants on any A380-related construction project.

Because of its size and weight, modifications to taxiways, gate areas, and other facilities at America airports to accommodate the A 380 are reckoned to cost between 720 million and 927 million dollars. Of course, Boeing has announced a stretch version of its own 747 to compete with the A 380, and it, too, might require some of these same modifications. Moreover, it is unclear how Fedex and UPS, which have each ordered 10 freight versions of the A 380, could manage to operate without at least some of the runway and taxiway improvements necessary for the passenger version.

In short, Rep. Mica's bill would give the Europeans ammunition to defend their own governmental interference in the marketplace.

Perhaps on the theory that bad news ought to be gotten out all at once, Airbus has just announced a 4.7% price hike for the A 380. An alternative explanation is that during the weekend crisis meetings someone noticed that current pricing with all the new expenses being incurred might result in a dumping lawsuit for selling below cost. Whatever the motivation for the announcement, it is not going to make new orders easier to get. The plane needs to sell around 300 copies to break even, according to calculations done before the current crisis.

It is far too soon to write off the A 380, and Boeing faces many challenges of its own in delivering on its promises for the 787. But for the moment, the agony of Airbus shows no sign of abating.

Hat tips to Dennis Sevakis and Ed Lasky.

Thomas Lifson is the editor and publisher of American Thinker.

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