Selling six plants to cut production costs is the first step on the road to restoring competitiveness—but it won't address Boeing's currency advantage
Airbus on Dec. 19 edged closer to selling off six European factories, a key element in a cost-cutting plan to restore its competitive edge. Its parent European Aerospace Defence & Space (EAD.PA) announced the selection of three companies from Germany, France, and Britain, as preferred bidders for the factories, which together employ about 7,400 people, about 13% of the Airbus workforce.
It's a big step for Airbus—but only the beginning of what's likely to be a long and difficult road to recovery. Certainly Airbus will get a boost by offloading some $2 billion of its more than $20 billion manufacturing cost-base. And selling the factories will ease pressure on EADS because the buyers are expected to make major investments in the factories. "It helps EADS to reduce financing needs in a period strained by the conjunction of costly programs and weak-dollar uncertainty," EADS Chief Executive Louis Gallois said in announcing the choice of bidders.
The plan calls for British engineering group GKN (GKN.L) to buy an Airbus manufacturing site in western England, while French aerospace company Latécoère (LAEP.PA) will take a majority stake in two French factories, and majority stakes in three German sites would go to German group MT Aerospace.
Factory Buyers Must Boost Efficiency
But selling factories doesn't solve Airbus's most urgent problem: the weakness of the U.S. dollar (BusinessWeek.com, 11/16/07), which has seriously undercut its competitiveness against archrival Boeing (BA), because nearly all Airbus production is in Europe.
Airbus is selling plenty of planes—indeed, this is shaping up as a record-breaking year, with the European company booking more than 1,200 orders and Boeing close behind. But unless Airbus can dramatically reduce production costs, it risks making little or no profit on those planes. The buyers of the six factories "will have to make them much, much more efficient," says a London aerospace analyst.
Are the proposed buyers up to that task? Britain's GKN looks fairly well equipped. It has $7.6 billion in sales and has already acquired some U.S. businesses spun off by Boeing. Latécoère is much smaller, with only $622 million in sales. It announced on Dec. 19 it planned a capital increase to finance the Airbus deal. Smallest of all is MT Aerospace, which has only $158 million in sales and has been promised a German government loan to finance the acquisition.
Spirit Aerosystems Holding (SPR), a Kansas-based spin-off from Boeing, had considered bidding for factories, but in a statement Dec. 19, Spirit CEO Jeff Turner said, "In the end we just couldn't close a business case that met both our customer requirements and our shareholder requirements."