April 18 (Bloomberg) -- In June 2011, Alabama Governor Robert Bentley traveled to the Paris Air Show, Europe’s largest aerospace industry gathering, in hopes of luring foreign investment to his state.
Of the dozen meetings he lined up, the most important was with Tom Enders, then chief executive officer of the giant European aircraft maker Airbus SAS. The two had never met, though they were familiar with each other.
Six months earlier, Airbus’s parent company, European Aeronautic, Defence & Space Co., had lost a bid for a $35 billion contract with the U.S. Department of Defense to build military tankers at the Brookley Aeroplex, an 1,800-acre site in Alabama’s port city of Mobile. Airbus had spent years lobbying the Pentagon and was narrowly beaten by its rival Boeing Co.
In Paris, Enders told the Republican governor that he was still eager to build Airbus’s first U.S. factory, possibly in Alabama, Bloomberg Businessweek reports in its April 22 issue. So began a secret, yearlong negotiation that culminated in this month’s groundbreaking for Airbus’s Brookley Aeroplex plant, which will assemble the company’s best-selling jetliner, the A320.
The extensive back and forth, as recounted by Alabama officials and a top Airbus executive, shows how eager the company was to gain a foothold in the U.S. and how much Alabama was willing to promise to bring an estimated $600 million in investment and 4,000 jobs to the state.
During their first meeting, Enders, now CEO of EADS, asked Bentley if Alabama would be willing to offer Airbus millions of dollars in tax breaks and other incentives, similar to those that would have been part of the lost Pentagon contract.
Bentley was ready to deal. He said he’d keep the incentives, “to give them time to look into the possibility of building commercial aircraft in the U.S., especially if they would be interested in coming to Alabama.”
The governor had reason to agree to sweeteners upfront. Airbus was looking at several other states, including North Carolina and Texas. “We saw just about every site that had an industrial capacity,” says Airbus Americas Chairman Allan McArtor.
In December 2011, Enders and Bentley, along with McArtor and Alabama’s Commerce Director Greg Canfield, met in a conference room at Montgomery Regional Airport to start talking details. Airbus insisted that Bentley keep the negotiations out of the press. According to McArtor, the company was concerned any news of a possible deal would provoke opposition from unions in Europe, where the offshoring of jobs was an issue in the French presidential election.
“We tried to keep it as secretive as we possibly could,” says Bentley.
Enders told Bentley that Airbus’s market share in the U.S., where Boeing dominates, was below 30 percent, a sore point for a company that closely competes with Boeing elsewhere in the world.
U.S. sales of commercial airliners are rising, in part because high oil prices give airlines an incentive to modernize their aging fleets. In pitching the A320, Airbus stressed that the jetliner is 15 percent more fuel-efficient than the previous model. Bentley says Enders told him the big lesson he’d learned from the failed tanker bid was that geographical proximity to a potential customer can mean the difference between making the sale or losing it.
Some Airbus executives were skeptical of building a plant in the Deep South.
“The image of Alabama in the minds of many Europeans who haven’t traveled extensively was what they’d seen in movies,” McArtor says. “They didn’t actually believe you could build airplanes there.”
So the state arranged for executives of Alabama construction companies to travel to Airbus headquarters in Toulouse, France, to assure officials that construction deadlines would be met. Faculty from the aerospace departments of colleges in the state briefed Airbus about the training the schools would provide to the plant’s American employees.
More important, Bentley came through on incentives totaling $158 million. According to the Alabama Department of Commerce, they include $82 million in funds for capital investments in the plant and other expenses; and $51.9 million for a 40,000-square-foot on-site training center where workers will be prepared, at state expense, for their new jobs. The deal also includes tax breaks on manufacturing equipment and a state corporate income tax credit.
In exchange, Bentley demanded that Airbus create no fewer than 1,000 permanent jobs. The agreement allows the state to withhold cash if Airbus doesn’t meet the target. Construction will temporarily employ about 3,000 workers, and the plant, expected to start production in late 2015, will eventually turn out four planes a month. Bentley says Alabama taxpayers will recoup the investment more than twofold within three years.
Settling in Alabama, a right-to-work state, will mean lower labor costs for Airbus since plant employees won’t be unionized. Yet opening up shop in Alabama isn’t about saving Airbus money. The Mobile facility won’t make entire airplanes. It will assemble pieces made overseas.
Partially completed sections, from cockpit to tail, will be transported by barge from the company’s European factories to Alabama, where they’ll be put together. The cost of transporting the pieces means that even with lower labor costs, planes completed in the U.S. will cost more to manufacture than those made start to finish in Europe, says Zafar Khan, an aerospace analyst with Societe Generale SA.
McArtor says having a presence in the U.S. is worth the cost and complications if it helps the company to sell more planes. “Being close to the customer always works—in any industry,” he says. “We believe, similar to other industries, including the auto industry, that if we create an industrial presence in the U.S. our market share will go up.”
The company may have another, more ambitious reason for setting down roots in the U.S.: increasing its chances of landing the kind of multibillion-dollar military contract it lost to Boeing.
“They want to be seen as an American company,” says Scott Hamilton, an aerospace analyst at Leeham Co. “The larger strategy is how this positions EADS long term. In 10 or more years, they’ll be able to go back to the Pentagon and say, we have a good solid U.S. footprint.”
McArtor won’t say whether the company has any current plans to compete for such contracts. Yet he’s mindful that putting Americans to work can open doors in Washington.
“When you create jobs, create foreign investment,” he says, “you’re just received differently on Capitol Hill.”
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