Labor Unrest and Nationalism Hit Airbus

The airplane maker is hearing warnings from labor and politicians that its cost-cutting plans could provoke trouble

Could the European Aeronautics Defence & Space Co. (EADS) be headed for more turbulence from its troubled Airbus subsidiary? As Airbus prepares a plan to slash billions in operating costs, German politicians and labor unions are already warning that big cuts in the plane maker's German payroll could provoke disruptive labor protests and even the possible loss of German defense contracts.

Economics Minister Michael Glos said on Feb. 4 that Berlin would "review" its defense contracts with EADS if Airbus's German factories bore a disproportionate share of job losses. Ministry officials later tried to downplay the warning, saying the government was "not making any threats." Still, German newspapers reported that Chancellor Angela Merkel would meet soon with Louis Gallois, the EADS co-chief executive who also runs Airbus.

More worrisome for EADS is the possibility that strikes or slowdowns could disrupt Airbus assembly lines. On Feb. 2, as thousands of workers took part in protests at Airbus's German factories, a representative of the IG Metall union warned that labor disruptions could force the company "to revise its delivery schedules for 2007."

"In a Fragile State"

That would be a nightmare scenario for Airbus. Germany accounts for 50% of production of Airbus's best-selling A320 aircraft family—a critical source of cash flow as Airbus struggles to recover from costly delays on its A380 megaplane while raising money to build the new A350 to counter Boeing's (BA) 787 Dreamliner. In an average month, 16 A320-class planes roll off assembly lines at the Airbus Finkenwerder factory near Hamburg. And Airbus is in the process of ramping up A320 production 20% by the end of next year.

Anxiety is running high at all of Airbus's 16 European factories as Gallois prepares to unveil a plan this month to slash $2.7 billion in annual operating costs by 2010 (see, 1/17/07, "Airbus Heads Back to the Gate"). Although no details have been released officially, Airbus unions say that as many as 8,000 jobs could be eliminated from the current German payroll of about 29,000. Workers and politicians have two big fears—that some work on the A380 may be shifted from Germany to France and that German factories won't get a big share of work on the new A350.

German unions may hesitate to make good on strike and slowdown threats, though. "They know that the group is in a fragile state and cannot afford serious disruptions," says Nick Cunningham, an analyst at the London brokerage Panmure Gordon. "So ultimately, management has a strong hand in its ability to argue that it simply cannot afford not to push through key changes."

British Government Reaction?

Indeed, the unions already seem to be cooling their rhetoric. Daniel Friedrich, an IG Metall spokesman, told on Feb. 5 that Airbus's existing labor contracts contain a no-strike clause. There are exceptions, if an issue arises that's not covered by the contract, he says, but "we hope that's not necessary."

German government retaliation against EADS also seems unlikely. True, EADS has some significant German defense work, including a 60-aircraft order for the new A400M military-transport plane that Airbus is building. But tampering with that order could further weaken Airbus, putting more German jobs in jeopardy.

A more serious threat to EADS' defense business could come from Britain. Currently, British factories produce the wings for all Airbus planes. The British government has warned it might take defense business away from EADS if some Airbus wing production—for the new A350, for example—were shifted to other countries. Britain's defense budget is far larger than Germany's. And unlike Germany, Britain has a sizeable domestic defense industry that could pick up any business EADS lost.

Cross-border political tension has never been far below the surface at EADS, since its creation in 2000 in a delicately negotiated Franco-German merger. But as Airbus tries to pull out of its current crisis, those strains will be stronger than ever.

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