Europe Cooks Up More Grief For U.S. Plane Makers

In their 20-year struggle to break the U. S. hold on the airliner business, European governments have given themselves budgetary indigestion and Washington trade officials fits by sinking $13 billion into the Airbus consortium. But fasten your seat belts: The Europeans are roaring down the runway again, with a controversial new aircraft company that could spread more anguish across the Atlantic and certainly within Europe.

This time, the Europeans are going after the downscale market--commuter jets and turboprops. By spring, the new powerhouse called International Commuter should be formed. Its founders already claim a 50% share of the world market for commuter planes under 80 seats. In its boldest move, the new group will be hitting up hesitant European governments for help in developing a 120-seat jet that would challenge Boeing Co.'s top-selling 737 and McDonnell Douglas Corp.'s MD87. The stakes are huge: a $40 billion market over 15 years.

GERMAN DESIGNERS. IC will start to take shape later this month when commuter-plane builder ATR, owned by France's Aerospatiale and Italy's Alenia (formerly Aeritalia), completes an estimated $200 million purchase of Canada's beleaguered de Havilland from Boeing. They will be joined by Germany's Deutsche Aerospace. Sources say that the consortium will be based in Toulouse--Airbus' home town--and that its chief executive will be Henri-Paul Puel, ATR's French chairman.

But the Germans are the driving force behind the consortium. Daimler Benz, the German automotive giant that is Deutsche Aerospace's parent company, sees aviation as a key area for future growth. Daimler has created a new company that will include the French and Italians to build the new jet, to be marketed by IC. It would be German-assembled from a largely German design, known as the MPC75, with development costs of $2.2 billion. The project is crucial for Deutsche Aerospace, since peace budgets are likely to kill its key defense program, the Jaeger 90 fighter. A decision on the jet will be made within six months, and the Germans want it on the market by 1996.

But to develop the new jet, the partners must go the Airbus route and ask European governments to help fund development costs. That's likely to stir up a hornet's nest. U. S. trade negotiators are alarmed by the heavy state financing. As with Airbus, Washington will take a tough position on IC, says S. Linn Williams, Deputy U. S. Trade Representative.

The entrance of IC is bound to cause turmoil in the profitable market for 100- to 120-seat commuter planes. Airline deregulation in the U. S. and Europe with hub-and-spoke flight routing has created a hot new growth area for short-hop airplanes. But with a big new player backed by German money and design savvy poised to jump in, the market could get bloody.

Already, British Aerospace and Fokker of the Netherlands plan new models. Airbus intends to shrink its 150-seat A320 to a commuter-sized 115 seats. But if IC's new jet takes off, Airbus will almost certainly abandon its scheme. That's because IC partners Deutsche Aerospace and Aerospatiale are key members of the Airbus consortium.

Another Airbus member, British Aerospace, is already badly shaken by the IC challenge. It's hoping to kill plans for the new jet and persuade the same partners to jointly build a new BAe commuter plane, mainly with private funding. BAe claims it would cost only half as much as the consortium's model. IC is also going after market leader Fokker, now successfully emerging from a painful financial turnaround.

Still, the new jet faces many obstacles. Some analysts are skeptical that the group's plans for a 120-seat jet will ever get off the drawing board. And European competitors are actively fighting the German-led project. "Governments have agreed that their companies will not build planes that hurt Airbus," snaps Airbus Industrie Chairman Jean Pierson.

Even without the new jet, IC will be a major player in the commuter field. Among them, ATR, de Havilland, and the Dornier unit of Deutsche Aerospace build five turboprops with up to 72 seats. The partners will merge marketing and after-sales support. They may also raise prices. By buying de Havilland, they neutralize a competitor that controls 20% of the market. "It's a great monopoly," says analyst Howard A. Rubel of C. J. Lawrence, Morgan Grenfell Inc. in New York. Just by entering the aviation mix, IC has made competitors' flight paths a bit more bumpy.

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