Airbus: Who's Flying This Plane?

Airbus' headaches are only getting worse as its CEO search continues

Airbus has been flying under the radar. With archrival Boeing Co. (BA ) reeling from the ouster of Chief Executive Harry C. Stonecipher, it's easy to forget that the European planemaker has a vacancy, too. The current boss, Noël Forgeard, was picked in December as co-chief executive of Airbus' parent, European Aeronautic Defence & Space Co. But infighting between French and German interests within EADS has delayed the choice of a successor. The company now says it won't name a new Airbus chief executive until Forgeard decamps to EADS in early May.

The new boss could be in for a bumpy ride -- even as Airbus in 2005 looks set to celebrate its third consecutive year as the world's largest planemaker. A nasty U.S.-European dispute over aircraft subsidies is complicating the financing of its next new plane, the midsize A350. A weak dollar is squeezing the bottom line, because Airbus planes are priced in dollars but manufactured mainly in the euro zone. The search for Forgeard's successor could leave bruised feelings, too.

Until recently it was assumed that when Forgeard left, he'd pass the controls to Gérard Blanc, an Airbus veteran who's now chief operating officer. But Blanc was vetoed by German interests within EADS, who resented him for pushing to locate the assembly facility for Airbus' superjumbo A380 in France rather than Germany. The leading candidate for the top job, insiders say, is Fabrice Brégier, the 43-year-old head of EADS' helicopter business, Eurocopter. But while he's a well-regarded manager, Brégier has no experience in the commercial jet business. "There's a danger he could be a figurehead," says Doug McVitie, a Scottish aerospace analyst who formerly worked for Airbus.

The latest trouble to hit Airbus involves a transatlantic spat over aircraft subsidies. Washington and Brussels began talks in January, after the U.S. threatened to pursue a complaint before the World Trade Organization over European government loans that have financed up to one-third of the development costs of Airbus planes. On Mar. 18, U.S. negotiators said the talks had broken down because the European Union had balked at ending the loans. The Europeans countered that the U.S. had been unwilling to discuss subsidies that benefit Boeing, including Japanese government aid to local companies that are major suppliers on its new, fuel-efficient 787 Dreamliner. The two sides say they're willing to return to the bargaining table, if necessary extending an Apr. 11 deadline they had set earlier to reach agreement.


Yet the longer the fight goes on, the greater the risk to the A350, Airbus' answer to the 787. Airbus wants to get the plane airborne by 2010, two years after the Dreamliner is scheduled to enter service. Development of the 787 is already well under way, with supply contracts awarded and 64 firm orders in hand from airlines. Airbus, by contrast, is still in the delicate early stages of canvassing prospective customers before settling on the A350's design. Customers are likely to push for changes, such as enhanced fuel efficiency, so the A350 could come close to matching the 787's promised 20% fuel savings. But alterations would increase the A350's expected $5.2 billion in startup costs. Uncertainty over how Airbus will finance those outlays is likely to spook potential customers and contractors alike, says Richard L. Aboulafia, an aviation analyst with Virginia-based Teal Group Corp.

Indeed, Airbus doesn't have much cash to spare for a big new project, even though the company posted an impressive 42% gain in operating profits in 2004, to $2.5 billion, on sales of $26 billion. But its parent, EADS, was left with only $2.3 billion in free cash flow last year, 16% less than in 2003, after shelling out more than $2 billion for research and development on the A380. What's more, the dollar's continued weakness has pushed up the cost of the A380. Philippe Camus, the outgoing EADS co-CEO, says that at the current exchange rate the megaplane will break even several years later than expected.

Couldn't the European governments just fork over the loans for the new A350 and take their chances on a fight at the WTO? EU and EADS officials have said they are prepared to do just that if the Americans don't make concessions, such as ending Boeing's practice of relying on foreign contractors, mainly in Japan, who in turn receive aid from their own governments. But the new EU Trade Commissioner, Peter Mandelson, is eager to avoid that scenario. "He feels it's important that this issue not contaminate other EU-U.S. relations," a source close to Mandelson says. Rather than risk a trade war -- which also could jeopardize efforts to sell air-refueling tankers to the U.S. Air Force -- EADS will probably settle for the best negotiated deal it can get. But if Airbus can no longer get government loans, it will have to build the A350 on an extra-lean budget, foregoing some improvements that could bolster its chances against the 787.

With such strong headwinds, some Airbus watchers suspect that Forgeard will try to keep steering the company even after he moves over to EADS. Perhaps -- but he'll have plenty of other things to keep him busy. EADS is scrambling to bulk up its defense business, particularly in the crucial U.S. market, to offset its dependence on the cyclical commercial-plane business. Forgeard also may need to mend fences with DaimlerChrysler (DCX ), EADS' chief German shareholder. The Germans swatted down a French proposal last year to name Forgeard as the sole CEO, replacing the current Franco-German dual CEO arrangement. They also recently vetoed a suggestion that EADS seek a merger with French defense company Thales Group. A smooth flight for EADS and Airbus? Not likely.

By Carol Matlack in Paris

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