Corporate Profile: Airbus Industrie - Mission Impossible

Airbus is cleared for take-off as a fully fledged company. But before it can ground its arch-rival Boeing, the four-nation consortium must calm the turbulence in the boardroom, where rival European egos are playing a high-stakes game. Fasten your seatbelts...
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The Independent Online
IF AIRBUS Industrie did not exist, would anyone bother to invent it? On one level the answer must be an unequivocal yes, for this is an outstanding European success story by any standards. In the space of three decades, it has destroyed America's monopoly of the big jet airliner market, forcing one US manufacturer out of business in the process and capturing almost half of world demand.

But on another level the answer has to be an equally resounding no. Starting with a blank paper, no one of sane mind would construct an organisation as flawed as Airbus. It has swallowed billions of pounds in taxpayers' money, yet its accountability is almost non-existent. Airbus adheres to none of the normal commercial disciplines that drive other, similar- sized businesses, instead handing out work on the basis of Buggins's turn. It is a partnership but its partners spend half their lives at war with one another. Political compromise lurks behind every decision Airbus makes. But not, perhaps for much longer.

At last month's Paris Air Show, ministers from the four Airbus governments - Britain, France, Germany and Spain - gave the consortium until the end of the summer to make concrete progress towards the holy grail of converting to a Single Corporate Entity (SCE).

Deadlines are not new to the Airbus partners, British Aerospace, Aerospatiale Matra of France, Germany's DaimlerChrysler Aerospace and Casa of Spain. Nor is breaking them. The idea of converting Airbus into a commercial company surfaced eight years ago in a report to the four governments commissioned by Lord Sterling of Plaistow, the chairman of P&O.

The issue was ducked repeatedly until January 1997 when Airbus finally began preparations for becoming an SCE. It was supposed to have jettisoned its curious French structure as a Groupement d'Interet Economique (GIE) at the start of this year. Had things gone to plan it would now be on the runway towards flotation as a conventionally constituted plc with shareholders (rather than "work-sharing partners") and a proper asset base.

The GIE structure may have been appropriate to the circumstances when Airbus began life in December 1970 more as a statement of political intent than a serious business proposition. The set-up provided for a degree of flexibility and allowed the original partners, the Germans and French, to bring in new partners as the programme grew and more financial resource was needed.

But, by almost universal consent, it looks badly out of place today. Because each partner's workshare is guaranteed - Britain makes the wings, the Germans the fuselage, the French the cockpit, the Spanish the tailplane - there is no scope for competitive tendering. And because the partners charge Airbus in Toulouse a fixed sum, Airbus takes the exchange rate risk and the losses, while the partners book the profit. A lot is riding on the ability of the Airbus partners to resolve their differences and turn the consortium into an SCE. Airbus is one of the biggest businesses in Europe with sales of $14bn a year and 37,000 employees across the four countries. Last year it booked orders worth $39bn for 556 planes and delivered 229 aircraft. Although orders will fall this year, reflecting the downturn in the air travel market, production will rise by a quarter to nearly 300 aircraft. With a total order book standing at 3,425 aircraft, of which 2,032 are in service Airbus can truly be said to have arrived. If the company keeps its nerve it can build and sell some 7,500 aircraft worth $600bn in the next 20 years, half of the potential market.

The timing could not be more opportune. Boeing, its arch-rival, is in an uncharacteristic period of corporate remission, having overreached itself, plunged into loss for the first time in its history, sacked the head of its civil aircraft business and laid off 10 per cent of the workforce. But when Boeing recovers it will be an even more formidable competitor.

Noel Forgeard, parachuted in as chief executive of Airbus 15 months ago after spending 12 years with the privately owned French defence manufacturer Matra, is under no illusions over the critical juncture the business has reached. "The biggest risk Airbus runs is complacency," he says. "Boeing is handicapped by a product range which is old and will need a lot of money to be rejuvenated. Boeing is not earning a sufficient margin from its ongoing production to finance that. It needs to restore its margins before it restores its credibility.

"But it is an absolute necessity that we make the transformation as soon as possible. The privatisation of Aerospatiale and the de facto privatisation of Casa mean that all partners share the same culture. I am optimistic. If the [SCE] process drags, we will not be in the right shape to respond when Boeing recovers. I am absolutely confident the transformation will happen."

But former senior Airbus executive says: "The SCE will not see the light of day for two years. People, not the structure of a business, keep it moving forward. Today, the the chemistry has gone because there is no trust left among the partners. They are like children squabbling over the family jewels and who will inherit what."

There are widening stress fractures within the consortium. Relations took a dramatic turn for the worse late last year with BAe and DaimlerChrysler Aerospace (Dasa) on the point of a merger in pursuit of the wider goal of a single European aerospace and defence company.

The French immediately withdrew from the Airbus SCE negotiations and still feel bruised. In the event, BAe chose the "national solution" of joining forces with GEC Marconi, which infuriated the Germans.

Dasa agreed terms to take over the smallest of the Airbus partners, Casa. Then Sir Dick Evans, the chairman of BAe, suggested that if Airbus could not move to an SCE in one go perhaps a "bilateral agreement" would be next best. He meant a merger of BAe's Airbus interests with those of the French. Confused? Keeping track of which company is linking up with which partner is not easy.

So two years after the partners began work on the great SCE project, they have still to exchange valuations of what each other's Airbus assets are worth. This will be critical, since at this point their shareholdings in the Airbus plc will be set in stone. Initially, the French insisted on having a 50 per cent stake in the new company. BAe demanded compensation, saying its Airbus assets were more efficient and more profitable than those of the other partners. Now BAe and Dasa are trying to strengthen their negotiating positions by courting the Italian aerospace group Alenia to join their rival groupings.

Noel Forgeard believes he can hold this increasingly fractious assembly together. He belongs to that charmed circle of meritocrats who run French politics and commerce. A graduate of the Ecole Polytechnique, he worked in industry and the Elysee Palace, including a stint in the Eighties as industrial affairs adviser to Jacques Chirac, then Prime Minister.

When Mr Forgeard joined Airbus he saw the heavy losses Airbus endured in the mid-Nineties from a cut-throat price war with Boeing in the short- haul jet market and imposed exceptional charges of pounds 400m in its accounts for the next three years. The result was a pounds 120m loss in 1998.

But his task may still turn out to be "Mission Impossible". The Airbus chief executive is trapped between egos playing a high- stakes game. Yves Michot, the chairman of Aerospatiale Matra, believes Airbus has no future unless it is part of a wider European aerospace and defence company. Jurgen Schrempp, the chairman of Dasa, believes this wider grouping is dead, and Sir Dick Evans and John Weston of BAe believe the future lies in global aerospace companies. BAe furiously denies it might sell its stake in Airbus to the French if that presaged a merger with a US aerospace contractor.

Some Airbus insiders do not rate highly M Forgeard's life expectancy in the job. "He saw himself joining Airbus and within six months becoming the Phil Conduit [chairman of Boeing] of Europe," says one. "My gut feeling is that come September he will be gone."

What might save Mr Forgeard and the hopes of turning Airbus into an SCE is a paper plane known as the A3XX. This is the 555-seater double- deck super-jumbo Airbus wants to build for the next millennium. But that would cost at least pounds 7bn to develop.

To help to fund this, the Airbus partners intend to apply for pounds 2bn in state aid, of which Britain's share could be pounds 400m. Ministers have told Airbus no SCE, no launch aid. John Battle, the UK's Aerospace minister, said in Paris that achieving SCE status will be "vital" to the A3XX project.

But is there is a need for such a beast? Airbus puts the market at 1,500 planes. Boeing, which has cancelled work on its own super-jumbo, estimates demand at 350, far too few to justify such colossal expenditure.

Although 20 of the world's biggest airlines, including British Airways, are working with Airbus on the A3XX, none has decided to buy. And the market where the A3XX has most obvious potential, the Pacific Rim, remains in the doldrums. The A3XX represents a huge gamble. If Airbus converts to plc status in return for being allowed its super-jumbo, it could be swapping its current problems for an even bigger one.

Log-Book

Turnover: $13.3bn

Orders: $39bn in 1998. Total order book: 3,425 aircraft

Main business: Airbus is a four-nation consortium that designs and builds civil aircraft. The partners are France's Aerospatiale Matra (37.9 per cent), Germany's DaimlerChrysler Aerospace (37.9 per cent), British Aerospace (20 per cent), and Spain's Casa (4.2 per cent). Headquarters is in Toulouse and main production at Toulouse, Hamburg, Madrid, and Chester. The aircraft model range includes the A300, A310, A319, A320, A321, A330, A340. The A318 and A3XX are planned

Key executives: Chief executive, Noel Forgeard (pictured above); chairman, Jurgen Schrempp; chief operating officer, Dietrich Russell

Number of employees: 3,000 direct; and 37,000 including those in partner companies

FLIGHT OF FANCY: A EUROPEAN DREAM

December 1970: France and Germany form Airbus Industrie as a Groupement d'Interet Economique with headquarters in Paris

November 1971: Air France becomes first customer with an order for the first Airbus aircraft, the A300, which makes its maiden flight in October 1972

1971: Casa of Spain joins Airbus consortium

1974: Airbus headquarters move to Toulouse, home of aircraft final assembly

1975: Airbus achieves 10 per cent share of world market

May 1977: Airbus wins first US order, Eastern Airlines taking four A300s The A310 is launched the next year

1979: British Aerospace joins Airbus

March 1984: Airbus launches the A320 with orders from four airlines

1985: Jean Pierson takes over as Airbus managing director

June 1987: Airbus A330-A340 family launched. Two years later, aircraft deliveries exceed 100 for the first time and aircraft orders exceed 400 Launches A321 programme and builds second assembly line in Hamburg

1991: Lord Sterling's panel of "four wise men" recommends to Airbus governments that the consortium be converted into a public company

March 1996: Orders reach 2,000 aircraft for 123 customers

January 1997: Airbus partners agree to convert to Single Corporate Entity

October 1997: Airbus receives record $18bn order for up to 400 aircraft from US Airways

April 1998: Noel Forgeard succeeds Jean Pierson as chief executive. Orders for 1998 reach a record 556 aircraft and plans go ahead on the 555-seater A3XX

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