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Brinksmanship at Airbus

By Thomas Lifson

When a political project like Airbus falters while competing with a commercial enterprise like Boeing, political considerations predominate in developing countermeasures. The turbulent events of the past week demonstrate that the European rival of Boeing is still guided by politicians unwilling to concede the need for painful but necessary remedies, and more interested in looking good to their constituents than in solving the problems at the company.

Last Friday saw a summit meeting between Chancellor Merkel of Germany and President Chirac of France, their last such opportunity before Chirac leaves office following the French elections in two months. Despite public statements aimed at calming public worries,

("Germany and France will continue to support Airbus politically, German Chancellor Angela Merkel said on Friday at a joint news conference with French President Jacques Chirac." - Reuters),

nobody is fooled.

(An extraordinary diplomatic row was under way between France and Germany last night as both countries traded blows over the crisis at Airbus, the European planemaker. - Times of London)

In an interview with the French business newspaper Les Echos on Thursday, Jean Pierson, the former chief of Airbus between 1985 and 1998, in its days as a consortium of independent companies, spoke with startling bluntness:

"The system we have now cannot last. EADS as a company is heading into the wall. I don't see who is going to agree to make concessions"....

The current situation is doomed to failure. Clients will first lose patience and then confidence," he told the French newspaper.... [emphasis added]

The problems at Airbus now go beyond the row over which country will lose more jobs, and which country will build the next generation high tech model (with spillover potential for other high technology jobs), as explained in American Thinker last week. Although France and Germany continue to paper over the developing crises, they cannot do so forever. An extraordinary set of problems is leading to a pattern of brinksmanship, deferring tough choices until they explode. Thereby magnifying the damage.

The A380 Freighter problem

With the rise of just-in-time inventory systems and the general boom in world trade, the market for jet freighters has mushroomed. Fedex and UPS are two of the largest airlines in the world without carrying a single revenue passenger. Airbus regarded the freighter version of the A380 as a key part of its plan to sell the 400-some copies of the A380 it needs just to break even on development costs. Orders initially were booked for 25 freighters: 10 each from Fedex and UPS, and another five from International Lease Finance Corporation (ILFC), which planned to lease them to air freight operators. But the embarrassing and costly delay in delivery of the A380 super jumbo jet has led to the specter of a possible outright cancellation of the freighter version of the aircraft.

The delivery delays in the A380 meant that Fedex and UPS had to find alternative airlift capacity. Fedex outright cancelled its order for 10 A380Fs and purchased Boeing 777Fs. ILFC converted its order to passenger versions of the A380. And UPS, which had previously laid down cash and ordered A300 twin-jet jumbo freighters, only to convert that order to A380Fs, had a substantial non-refundable deposit at stake. UPS entered into negotiations with Airbus for compensation for the delay, and then ordered Boeing 767F twinjet freighters as an interim substitute. Boeing, anxious to keep its 767 assembly line operating in the face of a dearth of orders for the aging design, no doubt gave UPS a highly advantageous deal on the planes.

Late last week, Airbus and UPS announced that they had come to an agreement on the order for 10 A380Fs. As is usually the case in airliner orders, both sides are keeping the basic details of the agreement secret. But the vagueness of the statements each company has given to the press could serve as a model for diplomats anxious to conceal the underlying reality of the hardball negotiations and the deal which resulted.

The BBC reports,

"The new agreement allows UPS to cancel its order if there are any more delays,"

which seems to imply that absent any further delay to the (secret) new commitment on delivery dates, UPS is obligated to keep its order intact.

But the Wall Street Journal reports,

UPS needs to finish its internal evaluation of its future needs on the trans-Pacific route and then determine if the A380 would be available when the Atlanta company needs it, UPS spokesman Norman Black said. The package delivery company's final decision is contingent on the results of that review, he added.

"This gives both sides a clear timetable for going ahead or not with this, and it says that either side at the proper time can cancel the order."

This version seems to imply that UPS has the option of cancelling without penalty for any reason of its choosing. It is consistent with the Associated Press report:

"UPS said late last week that it had signed an agreement with Airbus changing delivery dates on the company's order for the delay-plagued A380 super-jumbo jet and allowing either party to terminate the purchase order later this year,"

Of course, neither company is responsible for whatever implications readers may draw from such vague statements. In other words, obfuscation is the name of the game.

Except for one tantalizing addition: the additional information that Airbus itself may cancel the order.

With only 10 aircraft on order, the additional cost of producing a freighter version of the A380 may be greater than any possible financial benefit to Airbus for completing the engineering, tooling, and other costs involved in modifying the passenger version for freight use. Airbus desperately needs both engineering talent and money to work on the twin jet A350XWB next-generation composite technology airliner, to compete with Boeing in the largest market segment for jumbo jets. If it decides to concentrate its resources where the payoff is greater, that might be a rational business decision.

Moreover, if the UPS delivery slots are vacated, it frees them up to be used by passenger airline customers, whose own orders would be less delayed as a result. This could lessen the penalty payments Airbus must make to these airlines, adding to financial benefits of a cancellation.

The freighter version of the A380 faces a difficult market ahead anyway. Because of its double deck configuration, it is best suited to comparatively lightweight package service of the sort UPS and Fedex specialize in. It cannot carry high density heavy cargo as well as the various 747 freighter models (including the forthcoming 747-8F stretch version). Boeing has already sold more than 50 copies of the 747-8F before it even takes to the air.

However, if Airbus finally admits defeat and cancels the A380 freighter, this might set a precedent for cancelling the entire A380 project, something that has so far been regarded as absolutely unthinkable in political terms. However, a freighter cancellation might also throw a scare into Airbus workers and labor unions, targets of another sort of brinksmanship.

Brinksmanship with the Unions

Perhaps the most dramatic news to leak out of Airbus over the weekend following the Franco-German summit was notice that Airbus might ask its workers to put in a 40 hour week, instead of the 35 hours per week they have been working. For no extra pay. Via Reuters:

Airbus is considering extending its workweek to 40 hours from 35 hours without compensation as part of the European planemaker's restructuring plans, German magazine Focus reported.

The reported proposal is likely to ring alarm bells in France, where a 35-hour work week was introduced by a Socialist government in 2000 and remains a potentially divisive issue ahead of April-June presidential and legislative elections.

"Management apparently is talking to unions about longer hours: 40 instead of 35 per week are envisaged," Focus reported in its Monday edition.

EADS unit Airbus declined comment and union representatives could not be reached.

French and German labor laws probably would have to be changed to permit a 40 hour week, but indications are that this could well happen.

Socialist presidential candidate Segolene Royal has promised to review the 35-hour work week with the aim of "reducing negative consequences for workers and employees."

Conservative candidate Nicolas Sarkozy says the 35-hour week should be retained but viewed as a minimum, not a maximum, with people free to work more or longer if they want.

Retreating on the 35 hour work week would itself be a humiliating retreat for France and Germany, which have taken pride in their more civilized approach than the savage Americans. No doubt, vicious American competition would be blamed, but one wonders if other sectors of the French and German labor force would welcome such an increase in work at no additional compensation, just because their political leaders backed a grandiose airliner. Once Airbus is allowed to inhumanely exploit its laborers in this way, what greedy capitalist could fail to demand the same from his own laborers?

Capital structure brinksmanship

A balance between French-owned and German-owned shares in EADS, the publicly-traded parent of Airbus, has been deemed essential to date. Daimler-Chrysler, whose troubles at its Chrysler unit have drawn much attention, recently reduced its ownership from 22.5% to 15%, but only after German financial institutions were prevailed upon to take custody of the shares, keeping them in German hands. Many observers suspect some sort of quiet guarantee indemnifying them from capital losses, should the shares continue to decline in price as they have over the past year.

German discontent with perceived second class treatment of German interests by Airbus was the reason the Power8 restructuring plan had to be postponed last week. Chancellor Merkel, who does not face an election in the near future, may be tempted to play a tougher hand against the French, in an effort to protect German jobs and secure critical high technology work on the A350 XWB project for German firms. She has two major sources of leverage on Airbus: defense orders for Airbus military aircraft (Germany is the largest customer for Airbus military products), and the threat to encourage a sell-off German capital holdings in EADS.

Waiting in the wings, as it were, are two sources of substitute capital: Arab interest and Russia. reports,

Qatari Investment Authority (QIA) is set to buy up to 10% of EADS, the parent company of airplane manufacturer Airbus, through its US$40bn investment fund. With Airbus on the verge of posting its first ever loss since its A380 model was delayed by two years, EADS may well be tempted to arrange a deal with the Middle Eastern financial powerhouse.

Qatar Airways, it should be noted, is one of the largest customers for the A380 passenger version, and its UAE neighbor Dubai is home of Emirates, by far the largest customer for the super jumbo bird.

Russia has seen its production of airliners plummet since the fall of the Soviet empire. Russian-built airliners are too fuel-inefficient, noisy, polluting, and generally unattractive to find any but specialty market niches. This rankles President Vladimir Putin no end. Flush with petro-dollars, he has already used a state-controlled bank to buy 6% of EADS, and is likely interested in a far greater ownership stake. The Times of London reports:

At a meeting with French defence and finance ministers, Mr Putin said that the Russians would continue to buy shares in EADS, Airbus's parent, unless the company agreed to greater cooperation with Russia. The Russians already have a 6 per cent holding....

...the Russian aerospace industry can only improve if it gains access to Western technology and Mr Putin is trying to lure Airbus into greater cooperation.

Airbus already has a 10 per cent stake in Irkut, which is one of the domestic jet-makers merging to create the United Aircraft Corporation (UAC). It is hoped in Russia that Airbus's involvement in UAC will enable the company to build more advanced aircraft.

Analysts believe that Mr Putin took the opportunity yesterday to push Russia's case forcefully as Airbus is in chaos following a decision by German shareholders to block a restructuring plan, called Power 8.

Mr Putin said that Russian institutions would buy EADS shares on the Paris stock market to force the group's hand in greater cooperation. Vneshtorgbank (VTB), which is planning to list shares in London in the spring, bought a 6 per cent stake last year.

There is a considerable downside for Airbus if Russia becomes a major shareholder. It nearly rules out future sales of defense products to the United States and some other nations. Airbus is strongly pushing a proposal to use the A330 twinjet airframe as the basis of aerial tankers to be assembled in Alabama and sold to the United States Air Force. Because Boeing was found to have violated the law in pushing leases of its 767 airframe as an alternate aerial filling station, there is some sentiment for at least splitting the massive order needed to retire the Boeing 707-based KC 135 fleet.

But if France and Germany cannot agree and Germany decides to pull out of the Airbus and EADS project, France's traditional affinity for Russia and Arabia might well serve to make palatable not only an alternative source of capital, but also a source of massive orders from the Arab and Muslim world. Russia, in addition to offering a market for airliners, could also serve as a low cost manufacturing base for many components, and even final assembly.

This last eventuality of capital realignment must be reckoned highly unlikely at this point. But the problem with brinksmanship is that it sometimes leads those who practice it to the brink and beyond.

None of these stand-offs is a good thing for Airbus in the long run. A 40 hour work week would address one aspect of its cost disadvantage, but might well anathemize the company to a large segment of the European work force. Far better for Airbus, Europe, and the traveling public, would be honest and hard-headed commercial calculations leading to tough choices being made, no matter what domestic political interests might be harmed. That is the logic of capitalism that Europeans denounce as savage and inhumane. Until such logic prevails at Airbus, brinksmanship, with its potential for disasters, will continue to be the order of the day.

Thomas Lifson is the editor and publisher of American Thinker.

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