International -- European Business: Aerospace
Overhauling Airbus (int'l edition)
A bigger, meaner consortium poses a threat to Boeing
It could be Boeing Co.'s worst nightmare. Hordes of visitors to the Paris Air Show of 2005 strain to watch the takeoff of a dazzling new Airbus superjumbo, the world's biggest commercial jet. Amid fanfare over the new plane, swelling orders and rising profits, Airbus executives drop the real bombshell: Lockheed Martin Corp. and Mitsubishi Heavy Industries Ltd. will strengthen longterm ties to Airbus, become equity partners in a European aerospace company, and collaborate on both commercial and military projects.
That vision may well come to pass in the next few years. While Boeing executives for years have dismissed Airbus as a clumsy consortium propped up by state subsidies, their European rival has become a strapping adversary. For sure, Boeing on July 15 reported a big jump in second-quarter profits. But in the first half of 1999, Airbus' orders surged to 66% of the global market. And Airbus is on the brink of a radical restructuring that could transform the European commercial jet collaboration and turbocharge its competitiveness. Boeing may have turned around. But the race with Airbus is growing even fiercer.BETTER EARLIER. For Airbus to build on its gains, it must finally shed its status as a marketing consortium and become a real corporation. That's likely to happen next year. The catalyst will be a series of defense industry deals in the next few months, involving Airbus partners Aerospatiale Matra, DaimlerChrysler Aerospace (DASA), and British Aerospace. Their goal: To turn Airbus into a publicly traded company that will be part of a giant European defense and aerospace group--with all the financial clout, management focus, and manufacturing mass to match Boeing. Says DASA CEO Manfred Bischoff: "The earlier the better."
Indeed, the momentum for an Airbus makeover is stronger than it has ever been. For years, Airbus partners have bickered over setting up a corporation under one management. Now, for the first time, all the partners are private companies intent on boosting profits. The effective privatization in June of France's state-owned Aerospatiale through a merger with Matra High Technologies has cleared away a key stumbling block to an Airbus makeover. Aerospatiale had long resisted such a transformation, but the CEO of the new Aerospatiale Matra, Philippe Camus, strongly backs it. "Airbus will be the core of a large aerospace group with other activities in defense--one of two or three major groups in Europe," he says.
Airbus partners are now racing to make acquisitions and improve their leverage before launching the final negotiations over an Airbus corporation. On June 11, DASA acquired CASA, Airbus' state-owned Spanish partner, through a share swap. That gives Germany the largest stake in Airbus--42.1% vs. Aerospatiale Matra's 37.9%. The next target is likely to be Italian aerospace company Alenia, a unit of Finmeccanica, which has expressed interest in joining Airbus. British Aerospace, DASA, and Aerospatiale Matra are all wooing the Italian company.FRANCO-GERMAN. Ultimately, aerospace sources say, the remade Airbus is also likely to have a German-French core. Some insiders speculate that British Aerospace, recently merged with Britain's General Electric Co. (GEC), may eventually sell its 20% stake to one of the other partners and simply continue to produce wings for Airbus. For now, though, BAe CEO John Weston says "it's unlikely someone would put enough money on the table for us to sell." BAe also produces wings for Boeing.
One thing is clear about Airbus' future: The company is sure to seek American and Asian partners. Lockheed Martin executives at the Paris Air Show in June said that the U.S. defense giant would be interested in one day becoming a fifth Airbus partner. "We would welcome an American partner in Airbus," says DASA's Bischoff.
Even though it could take a few years to work out a transatlantic defense alliance, Lockheed Martin is already working with European partners more closely. On June 17, it announced an agreement with Aerospatiale Matra to bid on a strategic tanker aircraft. A day earlier, the two agreed to build a global team for collaboration with the new Korean Aircraft Industries, a major Asian player in aerospace.
Executives at both Aerospatiale Matra and Lockheed Martin say the agreements could be the first steps toward a longer-term relationship. That might involve Lockheed Martin taking an equity stake in a new Airbus corporation. "What are now national champions will become coalitions--transatlantic industrial entities," says Robbin Laird, a Washington-based aerospace consultant. Airbus will also be courting Japanese companies such as Mitsubishi.
For Airbus, the driving force behind its makeover into a single corporation is its rivalry with Boeing. Airbus must keep pace with the Seattle-based giant's productivity gains, as well as finance its superjumbo, dubbed the A3XX. Investors will be reluctant to plunk down cash unless Airbus' financial accounts are transparent. That's why Noel Forgeard, appointed to manage a restructured Airbus, is counting on the consortium's partners to create the new corporation next year. "Boeing is a formidable competitor, and they will recover. We cannot afford not to be streamlined when they are back in good shape," says Forgeard, who is now president of Airbus Industrie, the consortium's marketing organization.SINGLE TEAM. Forgeard is eager to streamline everything from purchasing to manufacturing at Airbus. Once the new company is created, only one management team would control engineering and production of new models--instead of the four engineering teams vetting design now. With sales in 1998 topping $13 billion, "the overwhelming factor is the size of operations," says Forgeard. "Everything has to be put in one hand," he adds.
The pressure on Airbus is mounting. "The reality is that Boeing is very profitable and Airbus isn't so profitable," says Joseph F. Campbell, aerospace analyst at Lehman Brothers Inc. in New York. Boeing's profits surged 172% for the second quarter of 1999, and it's now aiming to slash costs by 25%. For its part, Airbus faces $12 billion in R&D spending on its superjumbo plane, just as it is seeking to enhance profits and team up with new partners.
As a new era of commercial jet competition dawns in the 21st century, it's no longer an upstart Airbus against a Goliath Boeing. They're looking more and more like equals. As a real corporation rather than unwieldy consortium, Airbus would have an even greater chance of making a bid for market leadership. That should cause a few sleepless nights in Seattle.By Gail Edmondson in Toulouse, with Janet Rae-Dupree in San Mateo and Kerry Capell in LondonReturn to top