TCS Daily

Airbus Deflates

By Jeremy Slater - August 18, 2006 12:00 AM

How the aircraft-building industry has changed. Consider the situation of Airbus Industrie, the European consortium, which as recently as the end of last year was beating its American rival Boeing. For five years in a row Airbus had outsold Boeing and it ended 2005 by announcing it had just picked up an order from China for 150 of its airplanes -- including its new flagship superjumbo, the A380.

This plane, which got off the ground last fall to much acclaim with a test flight at Airbus's French manufacturing base in Toulouse, was going to be key component of the company's earnings for the next 10-20 years. But at the moment it seems more like an albatross than a golden egg. The company has announced it will fail to deliver the plane on time to clients all around the world. The reason is allegedly to do with the electronics that control the plane's entertainment system, but the company has officially denied this claiming that a problem was identified in June and is being rectified.

Trouble is that even with a solution the technical glitch has delayed deliveries of the new superjumbo by seven months. At a cost of $340 million (€300 million) for each plane several clients have asked for money back from the company.

If that was not enough to worry about the stock price of the company that owns Airbus, the European aerospace giant EADS, has been falling (it dropped 34 percent in the middle of June before recovering almost half the loss). Confidence in the airplane manufacturer was further rocked by reports that investment bank NM Rothschild had severely reduced its valuation of Airbus. This swiftly led one of its main partners, BAE, to consider bailing out of the consortium.

All this proved too much for Airbus's CEO Noël Forgeard, a former engineer who has been under scrutiny from securities officials for allegedly selling a bloc of shares in the company weeks before the current crisis occurred. He resigned in early July along with his German co-CEO, Gustav Humbert.

The news out of the company since has not improved as Airbus has announced that the launch of another new airplane, the A350, which is meant to rival Boeing's Dreamliner for long-haul international flights, is to be delayed, as the new management wants to reconsider the venture.

All in all, it is hard not to think of a major company that has so audaciously snatched defeat from the mouth of victory in the past few years. It will be hard for observers in the US not to say, "I told you so". They will point to a classic example of government meddling in the market place, a poor rate of productivity and other microeconomic issues that have left the continent's two biggest economies moribund for several years all leading to yet another European company failing. Further they will gloat that it is obvious that even when Europe tries to work together its efforts are scuppered by national rivalries or simply poor management practice that borders on the criminal.

It's hard to disagree with that assessment. Still, Airbus has come from nowhere in 35 years, restructuring old and largely failing national manufacturers into a world-beater. Since 2000 has outsold its main global competitor Boeing. There may be justified accusations that this success is due to government subsidies from the US side of the Atlantic, an issue that is being dealt with laboriously by the World Trade Organization's complaints procedure in Geneva, but Europe can still wonder about the backing Boeing gets from the US military for new product development.

Anything built on a European foundation and based on the desires and jealousies of different peoples of old and proud nation states is going to require deft management. That in part is why it is so difficult to run a multinational European company as different ideas about the way of doing things can lead to management systems that halt any swift decision making. One of the main problems in resolving engineering difficulties with the A380 was caused by both French and German management teams fighting each other over the correct solution.

Airbus is largely a privately financed organization; just consider what a similarly structured one paid for by the taxpayer might resemble. The EU, perhaps?

Jeremy Slater is a TCS Daily contributor


1 Comment

Private financing....BUT....
Airbus still had no problem in going to the governments which are the public, not private, sources of funds when they decided it would be just swell to get another $10billion to build a competing jet to the Boeing 787 Dreamliner AND still try to meet all the obligations of the new super jumbo at the same time. After all, it was just taxpayers forking it over....and those saps don't really need to be answered to....
Couldn't happen to a nicer consortium !!

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