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The Self-Humiliation of Airbus

By Thomas Lifson

Yesterday, Airbus humiliated itself before the world civil aviation community. Already suffering a massive loss of credibility due to the repeated delivery delays for the A 380 super jumbo, the company was to have unveiled its recovery plan, dubbed Power8, consisting of restructuring and cost saving measures intended to save $2.8 billion per year by 2010.

Instead of triumphantly presenting Power8 to the world, the company admitted it could not come to an internal agreement on cost-saving measures, and word leaked out of heated arguments among the members of its board of directors. So much for boldly moving forward to solve its many problems. Airline customers cannot be comforted by the company's continued internal squabbling, the principal factor said to be at the root of the 380's repeated delivery delays.

The money supposed to be saved by Power8 is crucial to the survival of Airbus. With its cash flow languishing (undelivered 380s bring in no cash), and its cost structure inflated by the high value of the euro relative to the dollar, the company urgently needs the savings in order to have the funds necessary to develop the A 350XWB, a next-generation airliner needed to compete with Boeing's wildly successful 787 Dreamliner. The 787 has sold more copies than any other airliner in Boeing history at a comparable stage of development. Right now it has the market to itself, and the earliest Airbus could launch its competitor was said to be 2014 - prior to its de facto admission yesterday that it can't even yet agree on where to build it.

Even Airbus today recognizes that the big market for profitable airliners is in mid-size long range, fuel efficient twinjets, built largely of composites, not metal. The ultra-large aluminum-based 380, with its four engines, may not even be cheaper to run per passenger mile than the 787 and 350XWB (assuming Airbus ever gets it built). No formal word has yet come from Airbus about the performance guarantees it gave to airlines regarding range and fuel consumption of the 380 (not a good sign, since the airplane has been flying for months), while the 787 has yet to take flight. But if the super jumbo proves no cheaper to operate than the smaller plane on a per-passenger mile basis, its market prospects will be highly truncated.

Commercial enterprise or jobs program?

The fundamental problem at Airbus remains what it has been ever since I began chronicling the company's problems almost two years ago: its political nature as an expression of Europe's ambitions to equal and surpass America in aviation, and its status as a jobs program. Right now, it appears from press reports that Germany is balking at the job cuts it would suffer and the airplanes it would build under the Power8 measures pushed by Airbus' French CEO Louis Gallois. Bloomberg reported,

EADS's board "interrupted" work on the proposal late yesterday after failing to agree on "cross-national sharing" of the workload on the A350 XWB, Airbus said today in a statement.

Translation: Earlier press reports had indicated the company planned to concentrate all widebody production in Toulouse, France, including all the interior finishing work on the 380 being carried out in Hamburg, and all production of A 330, 340, and planned 350XWB twin jets. Hamburg was to focus on production of the single-aisle A320 twin jet and its variants.

Given the fact that the 320 continues to sell very well, the Germans might seem to be getting a good bargain. But Airbus has also announced plans to open an assembly line for the 320 in Tianjin, China, where workers would earn a tiny fraction of their German counterparts' pay packets. Moreover, the 320, while a modern aircraft, has not been given the same degree of technological upgrading as its competitor, the Boeing 737. Originally a short range twin jet, the newest 737s have both long range and fuel efficiency so impressive that Boeing recently delivered a jet to Prague by flying it nonstop from Seattle. The 320 can make it from Boston to Los Angeles, but not much further.

The 320 also faces competition from below, as commuter jet makers Embraer of Brazil and Bombardier of Canada continue to develop larger and larger aircraft, which are beginning to compete with the smaller models of the 320 family, and which compete on price. That does not augur well for the future of a high cost assembly location like Hamburg.

Widebody twinjets are the profitable end of the business, and the technologically more interesting and rewarding area for a nation to concentrate its aviation sector. The Germans most likely want to keep their hands in this segment, rather than face a future of watching more and more work sent to China.
The French and German combatants dueling over whose factories will build what, and whose workers will be get the pink slips, are speaking in opaque code. Reuters reports:

France wants cuts shared on the basis of "fairness", while Berlin insists on "equality", implying a one-for-one share of job cuts in each country, the source close to the matter said.

So tortured is the use of language that the French seem to be arguing for an end to political interference and free market efficiency tests.

In a television and radio interview, French Finance Minister Thierry Breton also said any burden should be shared fairly but added the company should be left to take its own decisions.

"All excessive interference ... could be counterproductive," he said.

The unlikely spectacle of a French Finance Minister being involved in the management of a partially state-owned enterprise in order to urge private managerial autonomy is matched by a French union official demanding that politics be put aside and workers get back to work:

"It's time to calm the storm. We need to get back to making planes, not politics," said Jean Francois Knepper, a senior official with France's Force Ouvriere union at Airbus.

The latest report, coming from Hamburg-based German newspaper Die Welt, is that 380 interior work is not going to be moved to Toulouse, but left in Hamburg. If true, this runs contrary to earlier claims that consolidating 380 work in one location would help solve the problems that have bedeviled that aircraft. This looks a lot like chaos.

Will Airbus survive?

The Times of London has gone so far as to headline that "Airbus faces break-up as Germans and French Fail to Agree", pointing out that moving all 320 production to Germany and all widebody production to France would vastly simplify splitting the company between France and Germany.

Other knowledgeable observers are beginning to speculate that Airbus may not survive

"All parties involved need to realize the huge risk here," said Richard Aboulafia, vice president of the Teal Group, a Fairfax, Virginia-based consulting company. "Failure is in fact an option."

Power8 was supposed to power Airbus forward, funding the new airplane it needs to remain a full line competitor to Boeing, so if it cannot be implemented, or if its implementation is delayed or incomplete (as now looks certainly more likely than before), Airbus faces a very grim future. American partisans of Boeing should take no comfort, though. The world desperately needs viable competition in this business.

France faces an election in just over two months, with Airbus a potential issue. President Chirac and Chancellor Merkel are set to meet Friday this week, and sources affirm that Airbus will be on the agenda. Tom Enders, the German co-CEO of Airbus parent EADS, is on the record saying that the Airbus board would take its time to get Power8 right. For the moment, it appears that Frech and German interests are playing a game of brinksmanship. The best that could reasonably be expected is a wishy-washy compromise on zero-sum issues of job loss and production relocation.

Airliner manufacturers sell some of the most complicated machines known to mankind. But before they deliver actual airplanes, they also sell promises - of performance, delivery, and reliability. Lately, Airbus has been breaking promises, hardly reassuring its customers that its commitments are to be trusted. In addition to its other woes, Airbus must now attend to serious credibility issues.

In the end, bureaucrats and governments being what they are, nobody is likely to want to see Airbus fail, and so French and German taxpayers are likely to be on the hook for even more billions of dollars. And American trade lawyers will be likely to stay busier than a Boeing factory launching trade complaints against European subsidies.

Thomas Lifson is the editor and publisher of American Thinker.

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