WSJ Column: How Airbus Lost Its Bearings
WSJ(5/24) Column: How Airbus Lost Its Bearings
From THE WALL STREET JOURNAL)
By Holman W. Jenkins Jr.
(Editors Note: Mr. Jenkins is a member of The Wall Street Journals Editorial Board and author of the weekly Business World column.)
Airbus partisans weren’t pleased with a column here [in the WSJ] a year ago suggesting it was time to grow up and dispense with government handouts. This would not be an act of charity to Boeing or the U.S. government, we said. It would let Airbus run its business like a business.
That’s exactly what Boeing has done, even as management has stepped in more than its share of scandal over recent years (costing two CEOs their jobs and sending a senior executive to jail). Bad behaviour is bad behaviour, but along the way, Boeing dramatically cut costs, built up its defence business and resisted the temptation to squander shareholder capital by going toe-to-toe with Airbus’s forthcoming superjumbo. Instead, it stole a march of its own by launching its mid-sized 787, with a fuselage made of composite materials (rather than aluminium) to allow greater fuel economy while giving passengers more elbow room.
Boeing is thriving. Production slots for the 787, which will fly next year, are sold out well into 2011. Its board, one of the best in business, has kept its eye on the ball, namely building shareholder wealth.
Airbus has had its scandals too, with a telling difference: These have mostly involved a political tussle for control of its vast patronage levers. Last year was consumed in a murky intrigue by French President Jacques Chirac to get Airbus executive Noel Forgeard named sole chief executive of both Airbus and its parent company, the growing defence giant EADS. The French vs. German battle dragged on for months, until Mr. Forgeard was finally confined to a co-CEO’s position at EADS, a job he shares with a German -- though not before the then-head of DaimlerChrysler, which owns 30% of Airbus’s parent company, called him a "compulsive liar."
Phew, that’s over, thought Airbus supporters. Or is it? Last month, French police raided Mr. Forgeard’s office and several others looking for the culprit behind an anonymous letter and faked evidence linking French political and business notables to defence kickbacks and secret offshore accounts. Mr. Forgeard’s close adviser, Jean-Louis Gergorin, now admits to being the anonymous informant (but denies forging evidence). At least one more EADS executive has been implicated. The investigation continues.
Don’t put it past the French establishment to find a way to pull the carpet over a matter that says much about how the elite conducts its battles for preferment (this one seems to have involved as much the question of who will run France as who will run Airbus). In the meantime, however, Airbus has gotten its business into a deeper fix than many realize.
Its plane to compete with Boeings 787, the proposed A350, has been panned by big customers. Its four-engine A340, which competes against Boeings reinvigorated twin-jet 777, has seen sales dry up thanks to high fuel prices. Influential customers have gone public with unprecedented calls for Airbus to tear up its existing programs and spend heavily to overhaul its aircraft lineup.
In the case of the A350, going back to the drawing board would mean investing an additional $5 billion and delaying the planes arrival in the marketplace against Boeings 787 by several years. Remember, its customers want a bargaining chip to keep Boeings prices down: They don’t care if Airbus makes a profit. Airbus management is mulling its unappetizing options now but nothing in recent history gives confidence that financial realism would prevail if it meant an embarrassing climb-down in front of the company’s political patrons (which may be exactly what Airbus’s customers, and the Airbus executives they’ve likely been conspiring with, are counting on. For one thing, they assume European taxpayers can always be tapped to cover Airbus’s losses).
The planemaker is navigating dangerous currents. Indeed, the ultimate casualty could be its lucrative lead in the narrow-body market. Its A320 has been outselling Boeings 737 for years, and the fencing has already begun over which company will be first to launch an all-new successor. But Airbus is stretched thin delivering its superjumbo and would be stretched thinner if it decides to overhaul the planes customers have been complaining about. Meanwhile, Boeings work on the 787 gives it a strong head-start in applying lightweight composites to its own next-generation narrow-body.
These planes don’t have the highest price tags but they sell in huge numbers (Boeing has sold 6,000 737s and Airbus more than 4,200 A320s), so are an important foundation for the economies of scale in the aircraft business. Advantage here is rapidly swinging in Boeings direction.
In the wake of all this, maybe its no surprise British Aerospace has announced it will invoke an option to sell back to Airbus’s parent its 20% stake in the company, which should soak up at least $4 billion in cash. BAE’s Mike Turner says he wants the money to concentrate on BAE’s defence business in the U.S. market. But, note, he was a conspicuous critic of the Airbus power struggle as well as an early voice of concern on its A350 plans.
Likewise, French conglomerate Lagardere has also announced plans to reduce its stake in the Airbus parent. Lagardere was directly and repeatedly squeezed by President Chirac to support the Forgeard powerplay. And DaimlerChrysler is moving to trim its stake too.
It’s hard not to suspect these insiders are getting out while the getting is good. Just think back to the media’s flaying of Boeing as a has-been and its executives as weenie-slaves of the stock market when its board refused to throw shareholder capital into a no-win fight against the A380. Airbus faces just such a choice now. We won’t attempt to play aerospace executive and tell the company what to do. Suffice it to say, if Airbus had Boeings board and Boeings strict accountability to the stock market, its decision would likely be very different than the one Airbus will end up making. Permanent advantage: Boeing.
(END) Dow Jones Newswires
24-05-06 0011GMT
Copyright (c) 2006 Dow Jones & Company, Inc.