[OVERSEAS VIEW]Political influences are sinking Airbus

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[OVERSEAS VIEW]Political influences are sinking Airbus

HAMBURG, Germany ― The world airplane market is ruled by two giants: Boeing and Airbus. Boeing is booming and Airbus is in a tailspin after years of besting its American rivals all over the world.
Today, the Airbus chairman Christian Streiff has this to say: “It will take about 10 years for us to get back to the level of Boeing in terms of development and efficiency. We have to roll up our sleeves, eliminate the bad habits of the past and reorganize ourselves.”
What has happened? And what are the underlying reasons for this deep fall?
The tip of the iceberg is Airbus’ new mega-plane, the A380 super jumbo, which could carry about twice the number of passengers as Boeing’s 747 ― until now the world’s largest civilian airliner. Just a few days ago, Airbus had to announce yet another 12-month delay.
A number of Asian airlines, among them Korean Air and Singapore Airlines, have ordered the super jumbo. Now, Airbus might have to pay almost $200 million to Singapore alone in compensation for the delay. All together, Airbus is looking at $6 billion in lost profits over the next four years. Meanwhile, Boeing’s “Dreamliner,” a smaller long-range jet which is not only cheaper but cheaper to operate, is racking up orders around the world in triple-digit numbers.
Airbus has 159 orders for its mammoth plane, but how many of them will be canceled is anybody’s guess. Emirates Airlines, the biggest customer with 43 planes on order, is the critical player in this game. If Emirates cancels, the whole package of 159 orders might unravel.
How did Airbus get into this mess?
The technical answer is: 500 kilometers of cables for each plane. Airbus had granted each customer a different arrangement, for instance, for video and telephony. But that meant a different cable system for each plane ― and thus the loss of efficiency that comes from standardized production. Hence delays followed by delays, and of course cost overruns. But that is just a technical issue, the obvious part of the issue. The deeper cause of Airbus’ tailspin is political.
Airbus is a strange political animal, the fusion of French, German, Spanish and British aerospace companies. On top sits a parent company, EADS, which stands for the European Aeronautic Defense and Space Company. Though publicly traded, EADS is at heart a state-dominated, especially French-dominated, firm. This is where the trouble began in 1970, when Airbus was born as a consortium brought together by several European governments.
The idea was to break Boeing’s quasi-monopoly, and this with taxpayer money the sum of which is still carefully concealed. But the bill runs into many billions. So here was the first problem: Efficient or not, profitable or not ― Airbus could always fall back on governmental generosity.
The second problem is industrial policy. Naturally, the governments were less interested in profitability than in jobs for their own nations. Hence Airbus is produced in 16 places around Europe. For instance, the front and the back of the 380’s fuselage are put together in Hamburg, Germany, the middle in Nantes, France. Then everything is shipped to both Toulouse in France and Hamburg in Germany, where the whole plane is finally assembled. That is a costly way to build a plane. Boeing finally understood this problem, reducing its production sites drastically to nine.
Third handicap: a double-headed executive. EADS, the parent company of Airbus, has two bosses ― one French and one German. Try to run Boeing with a duo at the top, and then with two passports, where each boss must not only think in terms of profitability, but also of loyalty to his own country.
You wonder why Airbus even came to its exalted position on the global market ― presumably because the taxpayer could always be hit for yet another infusion into the company’s coffers. But when things get tough, when losses mount and state subsidies dwindle, restructuring becomes even tougher. Goldman Sachs, the investment bank, has suggested that Airbus reduce its 16 production sites to nine, the other seven being redundant. But tell that to the governments. When the French intimated that Hamburg might just as well be closed down, the Economics Minister of Germany waded in. After some tough talking as well as nationalist appeals, EADS quickly caved in. And so Hamburg stays.
When governments have so much power over company decisions, good management must take a back seat to political imperatives. This is the difference between Boeing, a private company, and Airbus.
Not long ago, Boeing was in real trouble, beaten by Airbus in terms of orders.
But then Boeing went through a drastic management overhaul and cost-reduction strategy, and today it is soaring while Airbus is sinking.
Mr. Streiff is absolutely right when he says: “We must eliminate the bad habits of the past and reorganize ourselves.” But how do you do this when the “bad habits” are rooted in the very structure of the company: too many heads and too much power of governments who think about efficiency and profitability last?

* The writer, the publisher-editor of Die Zeit in Germany, is now teaching U.S. foreign policy at Stanford University, where he is also a fellow at the Hoover Institution.

by Josef Joffe
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