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The Growing Fiasco of Airbus A380 and the EU

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France, Germany and Spain have poured billions into an attempted direct threat to American enterprise, the Airbus A380, hoping to wrest the civil airline business from Boeing, in particular. I remember the festivities when they rolled out this plane.

They have just announced their third devastating setback. From an excellent analysis (with links) fromThe American Thinker:

Yesterday’s announcement of a third round of delay, this time for roughly a year, in the delivery of Airbus A 380 superjumbo airliners drove down shares of parent company EADS so far that trading in them had to be suspended on the Paris arm of the Euronext market after they breached their 10 per cent loss limit. Trading resumed, but the shares drifted even lower.

The A 380 has now become the largest scale business fiasco in the history of manufacturing. That is very bad news indeed for European ambitions to displace the United States as the epicenter of the world civil aviation industry. Staggering financial losses from the delay – over six billion dollars at latest count – loom, and the reputation of Airbus is so tattered that its largest customer, Emirates, accounting for almost 30% of orders for the plane has issued a coded threat to cancel some or all of its massive order, and is reported to be talking with Boeing about ordering a smaller rival in the superjumbo game, the latest stretch derivative of the 747 lineage, a model; clearly aimed the jugular of the A 380.

What went wrong? Among other things...
The company identified the installation of wiring and wiring harnesses as the source of the previous delays. Yesterday, it began to provide more detail, and own up to the classic business blunder of the age: a failure to use compatible computer systems in different parts of the company whose efforts must be tightly integrated.[....]

The CAD divide echoes the nationalistic passions which the European Project, as it is known, was supposed to relegate to the ash heap of history. To unify, either the Germans were going to have to put aside current tasks and spend a year or so learning to do their jobs on a radically different system, or the French would. Computer language in the same role as national language, this round.

The failure with the A380 is, of course, spilling over to other Airbus products. The company is also considering outsourcing labor to Russia and China, which will cause serious labor problems in France, Germany and Spain, none of which can afford them.

Edited by oldsalt
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As the violence continues in France, there are those who are calling it an "intifada". From The Telegraph:

Radical Muslims in France's housing estates are waging an undeclared "intifada" against the police, with violent clashes injuring an average of 14 officers each day.

As the interior ministry said that nearly 2,500 officers had been wounded this year, a police union declared that its members were "in a state of civil war" with Muslims in the most depressed "banlieue" estates which are heavily populated by unemployed youths of north African origin.

There is a disagreement about the nature of their problem:
Senior officers insisted that the problem was essentially criminal in nature, with crime bosses on the estates fighting back against tough tactics.[....]

However, not all officers on the ground accept that essentially secular interpretation. Michel Thoomis, the secretary general of the hardline Action Police trade union, has written to Mr Sarkozy warning of an "intifada" on the estates and demanding that officers be given armoured cars in the most dangerous areas.

He said yesterday: "We are in a state of civil war, orchestrated by radical Islamists. This is not a question of urban violence any more, it is an intifada, with stones and Molotov cocktails. You no longer see two or three youths confronting police, you see whole tower blocks emptying into the streets to set their 'comrades' free when they are arrested."

It is no surprise, of course, that they are having trouble distinguishing between mafia-type gang warfare and Islamist intafadas, since there is little to distinguish the two in method or motivation. The Islamist may claim religious motivation, and believe it, but they live by crime none-the-less than any gang.

The philosophy that has driven the EU's rhetoric concerning the mess in the Middle East, now drives their own discussion:

Mayors in the worst affected suburbs, which saw weeks of riots and car-burning a year ago, have expressed fears of a vicious circle, as attacks by locals lead the police to harden their tactics, further increasing resentment.

With that attitude, the violence won't end any sooner, or easier, than it has in Gaza and the West Bank. Of course, in Gaza the gangs have turned on each other. Surprise, surprise.

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France, Germany and Spain have poured billions into an attempted direct threat to American enterprise, the Airbus A380, hoping to wrest the civil airline business from Boeing, in particular.

By massively subsidizing Airbus, the EU is effectively taking billions from European taxpayers and giving it to "American enterprise" in the form of cheaper airplanes. Europeans have a right to be outraged, but we might as well enjoy the cheap flights.

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From my studies of Airbus-like projects in grad school, I understand that one of the reasons these state-controlled companies are usually incompetently executed and over budget is that the states bankrolling them pressure executives into distributing facilities and contracts all over the member countries, regardless of whether it makes business sense. As typical in America, this makes the politicians bringing the pork home look good at the expense of taxpayers and competitors.

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This is such a long-term business. We must catch up. In 15 years I hope we are ahead of Boeing again.... ...

We have not yet found the right cost base to get to profitability targets

(ref.)

If one looks at AirBus's accounts, one might see a seeming profit or a seeming loss, and never know what it means, because not only are the costs controlled by various government decisions, but so are the revenues. Many airlines are government-owned and purchase decisions are often made by governments for a variety of reasons.

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From my studies of Airbus-like projects in grad school, I understand that one of the reasons these state-controlled companies are usually incompetently executed and over budget is that the states bankrolling them pressure executives into distributing facilities and contracts all over the member countries, regardless of whether it makes business sense. As typical in America, this makes the politicians bringing the pork home look good at the expense of taxpayers and competitors.

American defense contractors do their version of this by trying to spread projects over as many congressional districts as possible in order to ensure that no congressperson really wants to cancel a project.

The result being overbudgeted projects which are difficult to cancel even if it isn't clear what need they are meeting (cf. the Crusader mobile howitzer, or the Seawolf submarine), and quite possibly deployed systems to the military that don't work to expectations.

I don't believe American defense contractors have managed a failure on this scale yet though.

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We too studied this in grad school. A massive game of chicken, as there is only room enough at the top end of the market for one super jumbo jet. It was governement backing that caused Airbus to push on the accelerator, when they should have been jumping out of the car. Boeing is now sitting pretty on its 787 dreamliner for which there will be ample demand, and it will probably also benefit be getting extra orders for the 747-800 from those who bail on the A380.

Even if you count the fact that taxpayers rarely look for a return on their money, it is doubtful, given all that had to be invested in development that this project will ever be financially sound. Someone is going to take a bath. Additionally by diverting resources ot this project, Airbus' other healthy projects will suffer. There is a reason people who make these decisions are paid well; because hte stakes are high, and a wrong decision to proceed is much more damaging than a conservative decision to sit out.

Ironically, AIrbus officials will probably get blamed for their incompetence, and yet, the fundamental decision to fund the project lies in the hands of the politicians, who will probably skate clean. A blunder of this type would be unforgivable in the private sector. Heads would roll.

Airbus/EADS officials concede Boeing advantage, question A350 viability

Friday October 6, 2006

Airbus CEO Christian Streiff admitted that the manufacturer now is up to a whole decade behind rival Boeing, while parent EADS co-CEO Tom Enders conceded that it no longer may be feasible to pursue the A350 XWB program.

The revelations came yesterday as Airbus continued to deal with the fallout from Tuesday's announcement that the A380 will be delayed an additional year and the company will undergo a radical restructuring dubbed "Power8" aimed at slashing overhead costs by 30% (ATWOnline, Oct. 4).

Streiff told Le Monde that his review of Airbus operations has uncovered serious production inefficiencies. "It will take us about 10 years to catch up with Boeing in terms of development and efficiency," he said.

Enders, speaking at a Berlin news conference, said the A350 XWB program is under review. "We will discuss intensively in the next weeks whether we have the financial and engineering resources to actually take on this program," he said.

Both executives and EADS co-CEO Louis Gallois have said repeatedly this week that no firm decisions regarding the Power8 plan have been made. "Everything's possible but nothing's decided," Streiff said. Speculation over job cuts and transferring assembly work, including moving A380 production from Hamburg to Toulouse, already have generated political controversy in France and Germany.

German Economics Minister Michael Glos warned at a press briefing that job cuts and facility closures must be "equally [and] fairly distributed" between France and Germany. Airbus employs 42,000 workers in Germany, including 11,000 in Hamburg.

Enders said details of the restructuring will be revealed "within four months." When pressed during a Tuesday conference call with analysts and reporters to explain what was meant by cutting overhead by 30%, he said, "We don't want to define this figure."

What is clear, however, is that EADS will incur significant losses due to the A380 delays. "Compared to our old plan...the shortfall in terms of cash generation, in the timeframe until 2010, is slightly more than €6 billion ($7.62 billion)," EADS COO Hans Peter Ring said during the Tuesday conference call, adding, "the situation is very serious." He said the EADS board has "not excluded" pursuing civil or criminal complaints against individuals it believes are responsible for the extensive program delays. "We're talking about billions that the company, that the shareholders effectively are losing," he said. "This is why the board of directors has reserved the right to investigate who is responsible for that situation."

Former Airbus CEO Gustav Humbert and former EADS co-CEO Noel Forgeard resigned shortly after a six-month delay to the A380 program was announced in June (ATWOnline, July 3). Airbus now says it "underestimated" its problems at that time.

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German Economics Minister Michael Glos warned at a press briefing that job cuts and facility closures must be "equally [and]fairly distributed" between France and Germany. Airbus employs 42,000 workers in Germany, including 11,000 in Hamburg.

There is a lot to be inferred from that statement. Compare this with the way Ford, for instance, considers where to cut costs and employees. There is no consideration here of who is doing what and whether that activity needs to be cut, but the fact that none of the EU countries can afford financially or politically to lose jobs. It is a rather Atlas Shrugged scenario, except there is no John Galt in the wings waiting with his friends to rebuild. No, the only one standing in the wings is some Cuffy Mohammed Meigs, and he has no intention to rebuild anything.

The way I look at this is a bit different than those who understand what they are looking at when they look at spreadsheets and shareholder reports. What is worrying to me about the Airbus fiasco is that it further weakens the EU at a time when they can ill afford it. I'm not happy to see this happen because it weakens Europe's ability to fight off the Islamic incursions they must eventually fight if they are to survive. I know that there are many who have written them off, but I'm not quite ready to do that. Perhaps it is wishful thinking on my part, but a weak Europe puts a greater burden on us in the end. We are burdened enough with our own inept politicians.

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That's the 2nd resignation. The first CEO resigned 3 months ago when the news first broke.

Oh forgot to add. This 2nd resignation is very indiciative of more serious problems than first imagined. Usually a first CEO resigns when the news breaks because he's disgraced. A 2nd CEO resigning 3 months later is worse. He was selected as a savior. After 3 months he knows wether or not he's going to stake his reputation on being able to save the company. Now we all know how he's betting.

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Compare this with the way Ford, for instance, considers where to cut costs and employees.

You mean, by the dictates of their United Auto Workers overloards? Sorry, not to detract from your point. But our industries are often forced to make their decisions based on criteria almost as insane as the ones Airbus does. As you said, "We are burdened enough with our own inept politicians."

Edited by Inspector
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