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The Airbus Tragedy

By Thomas Lifson

Like characters in an ancient Greek tragedy, players in the Airbus drama are betraying their fatal flaws, and moving, almost inevitably, toward a dénouement that will bring serious misfortune to all. Despite failure upon failure, no one is willing to suggest openly killing the troubled A 380 program, which seems to destined to drag down not just the still viable parts of the company, but also the workers, localities hosting factories, and even the governments of France and Germany.

Airbus wanly puts an official happy face on the setbacks of the past week, and is squandering its credibility - an essential quality for an airliner manufacturer -- at an alarming rate.

The sole remaining customer for the freighter version of its A 380 super jumbo canceled late last week, yet the company insists that the freighter program will live on, because someday, some freighter version somehow may be ordered. Boeing, meanwhile, has booked more than 50 orders for its only slightly smaller 747-8F freighter, and promises 24 percent lower fuel burn per ton, 20 percent lower trip costs and 23 percent lower ton-mile costs than the A380F. It is hard to see how any new customers would be attracted to the Airbus cargo craft.

UPS, the last customer for the A 380F, makes no secret of its unhappiness with the way Airbus treated it:

"UPS had intended to complete an internal study of whether it could wait until 2012 for the aircraft, but now understands Airbus is diverting employees from the A380 freighter program to work on the passenger version of the plane," it said.

But Airbus pretends that the separation was amicable:

"UPS is and remains a valuable and strong customer and business partner for Airbus."

The Power8 restructuring plan, over which previous CEO Christian Streiff was fired, was delayed in February when French and German board members clashed over whose jobs were to be lost, and was finally released amidst bitter criticism. Yet Airbus trumpeted the plan with a press release hailing unanimity and the advent of a "new Airbus."

Airbus has the full support of all EADS [parent company of Airbus- ed.] core shareholders for Power8. The EADS and Airbus management has reviewed the programme thoroughly and is convinced that the envisaged measures will deliver on its economic promises. "The core objective of the programme is to make Airbus more efficient and competitive, so as to produce the most advanced and profitable products, and to serve its customers better in the future", the CEOs of EADS Tom Enders and Louis Gallois said.

The financial markets don't believe the company's optimistic gloss:

Shares in EADS have slumped by about 11.5 percent since the plan was announced on Wednesday because of scepticism that the restructuring can be applied in the face of a highly unionised workforce and political pressures.

Airbus unions are having nothing of it, either. Tuesday, 15,000 French workers went on strike and marched through Toulouse, waving banners, blowing whistles, and setting off firecrackers, joined by thousands more in other Airbus French manufacturing locations.

The German workers are not happy either. Here a rough translation of a workers' screed:

Unlimited strike in all Airbus plants. European-wide! Now! The Power-8 Program must be cancelled completely! Permanent and agency workers, workers with limited-term contracts of employment, workers of suppliers: we are one single workforce! Whoever attacks one of us, attacks all of us. The struggle must be waged rigorously, actively and with democratic consultation and decision making.

While some elements of the Power8 program make sense, such as the use of more outsourcing, other elements do not fit together as a coherent whole. The company plans to downsize its workforce and increase the rate of production of existing airplanes as a way of generating more cash, which it desperately needs. Moving assembly of the A 380 and A 320 airplanes from plant to plant, as the company intends, inevitably will require worker retraining, so a production speed-up will have to wait for the remaining workers to acquire new skills or apply old skills in new settings.

Perhaps worst of all, domestic French and intra-EU politics are becoming more, not less involved in company decision-making, aggravating the tragic flaw that has gotten the company into its existing mess. Instead of operating more like a rational private business, as the company must, state intervention looms even larger.

Both candidates in the coming election for the French presidency have pledged to inject state funds into Airbus. Nicolas Sarkozy ominously raised the specter of Airbus failing:

"I have not decided to let Airbus fail. We recapitalised Alstom. If we need to boost the state's stake in Airbus, why not?"

Why not? For one thing, injecting French state funds into Airbus would ignite a trade war with the United States. For another, further subsidies would encourage Airbus to pursue uneconomic policies. New capital would also require changing the basic agreement under which Airbus was set up, requiring German approval for any changes in capitalization, and balance between French and German shares in the company. Arab investors, Russia, and maybe even the Chinese (the latter two parties obviously interested in acquiring technology and markets for their own industries and workers) are possible sources of additional outside capital, but there would be strings and problems attached to any of these alternatives.

Sarkozy's presidential opponent, Socialist Segolene Royal, not only pledged public monies to Airbus, she also promised to suspend Power8 if elected, and for good measure repudiated market forces, saying

"The state must emerge from its lethargy and inertia and stop thinking that the market can solve everything," Royal said.

At the conclusion of a meeting between Royal and German Chancellor Angela Merkel yesterday, the usual diplomatic phrases about European unity could not paper over the rising tensions between France and Germany.

German officials have said a capital increase for Airbus is not currently on the agenda, and it is primarily up to company management to resolve the crisis.

Royal conceded that "the state is much less directly involved in Germany than in France, so the questions are a little different."

Asked whether Merkel agreed more public money should be put into Airbus, Royal replied: "She believes that if public intervention is necessary, this public intervention concerns research."

"She didn't rule anything out, but she made no commitment on a recapitalization by the state," Royal said.

All this talk of recapitalization, state aid and the failure of Airbus is an admission that the company is no longer self-sufficient as a commercial enterprise. No satisfactory alternative exists to extricate from the corner into which Airbus has painted itself.

It was a huge mistake to pursue the glory of the world's biggest airliner. A future president of France may be able to fly to a summit meeting with the president of the United States and sneer, "Mine's bigger," but it will be an empty boast, even if both presidents aren't females, as they might well be by the time the A 380 flies in normal service.

As orders for the A 380 have languished, Boeing's mid-size new technology 787 is enjoying such unprecedented success that the company says it is seriously considering ramping up production from 7 to 10 airplanes per month, a commitment that would require huge investments from both Boeing and its suppliers, and confidence that demand will remain robust for many years.

If Boeing's promises for the 747-8 and 787 planes come true, it is hard to imagine many new orders for the A 380, yet that airplane continues to suck up cash, labor, and especially engineering talent that are needed to develop new medium and small models. The most successful current Airbus model, the narrow-body A 320 has fallen behind its rival Boeing model in terms of new refinements. Even worse, the planned rival for the Boeing 787 will not be on the market until 2014 at the earliest, with further delays not an impossibility.

Given the fatal flaw of state backers, sits own two-headed management structure with French and German executives sharing power and often pulling in different directions, and the anger of its unions over the consequences of mismanagement, the prospect is for matters to get even worse.

Once a symbol of European unity and promise, Airbus has become a contentious issue dividing Germany and France. Like the Ancient Mariner's albatross, this bird brings no good.

Thomas Lifson is the editor and publisher of American Thinker.

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