Corporate Socialism Crashes At Airbus

By Erick Posted in Comments (48) / Email this page » / Leave a comment »

What do you get when you combine the national interests of multiple socialist countries into one big economic enterprise? It's one word. Come on. It's not hard. That's right, that's the answer. Airbus.

For five years it has dominated Boeing in the airplane race. It has introduced scores of planes and then had its European national parents subsidize the costs of the plane so airlines would find them attractive.

In the process, Airbus has grown heavy under union contracts, labor problems, controlling countries blocking restructuring programs, multiple problems caused by the use of multiple languages, etc. Now, for the first time in six years, Boeing has beaten Airbus in the annual plane race -- taking 1,044 orders in 2006, compared to just 790 net orders for Airbus (and we won't talk about the cancellations of so many A380's by major airlines).

As Boeing has sought to be more nimble while creating more fuel efficient twin engine jets, such as the new 787, along with a redesigned 747-800 that is much more fuel efficient and quieter, Airbus fixated on the 380 cluster . . . .

Mixing socialism, national trade policy, and corporatist aspirations is now coming home to roost in the 10,000 jobs Airbus will now have to cut -- one-fifth of its workforce.

For more, go here.


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And Emirates is having to rent Boeings until it does.
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"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777

Now if we can just learn the lesson and apply it at home in our farm policies.

A Constitution of Government once changed from Freedom, can never be restored. Liberty, once lost, is lost forever. -John Adams

education and...
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Congressmen who willfully take actions during wartime that damage morale and undermine the military are saboteurs and should be arrested, exiled, or hanged.
J. Michael Waller

It would be nice if the Big Three(Two) could learn from Boeing. Obviously many of Airbus's problems are self inflicted, starting with the fact that the A380 is going over like a Lead Zeppelin. But Boeing is doing what US automakers must do: build the products that consumers want.

All the declarations about fixing cost structures... are irrelevant unless you actually sell products.

I didn't realize this was a problem for airbus. To me though one airplane is like the next.

On the other hand you're dead on with the big three. Even if they start making better cars/trucks they are going to overcome their bad rep now.

A Constitution of Government once changed from Freedom, can never be restored. Liberty, once lost, is lost forever. -John Adams

Well, in time the A380 might become a profitable workhorse, especially on the long haul flights. But the delays are killing it. It's also gonna be interesting to see how flyers respond to de-planeing with 600 others passengers. Baggage claim at LGA is disgraceful on a flight with 150, never mind 500+.

It makes me sad about the US auto manufactures. Lasts year we were looking to buy a medium sized crossover, and I looked at the Pacifica, and it simply wasn't that good. I would have liked to buy US, but it didn't happen. Last year at the NYC Auto show, I nearly fell asleep walking through the Chevy displays. Product line is everything!

LGA only has 7000 feet. The A380 ain't landing there. (I've also heard things about runways needing to be widened to accomodate it.)

Not really so much of an issue with Airbus/Boeing since both are high cost manufacturers. They are comparable to the US automakers back in the 50s. Now if someone else wanted to get into the game with much lower labor costs, they'll both have serious problems down the road.

The meme about the US automakers' problems being all due to having undesirable products is simply BS. When one guy is paying his employees $100 an hour to make a product where labor is a large part of the unit cost, and the guy down the street is paying $37 an hour to make the same product, how is the $100 an hour guy going to compete? He isn't. That is the situation the US automakers are in. Their total labor costs are almost 3x as high as their competition.
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Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman

starts turning out jetliners to compete with Airbus and Boeing? They have everything they need.

Supposedly the $10,000 SUV from a Chinese manufacturer is going to hit the market soon, which will undercut even Kia for bargain vehicles.

lesterblog.blogspot.com

Boeing was one of the very first companies into China when they opened up after the Gang of Four was Gone, All Four. And the Chinese, being no fools, insisted that Boeing transfer manufacturing and design technology to them as a condition of the deal, and also that as much of the product be made in China as possible. As I recall, Boeing taught them how to do almost everything but make wings (which was pretty secret sauce at the time).

Sure, the US car companies have some disadvantages with legacy costs. But they've failed with uninspiring product lines too. Ford has completely let it's non-truck/SUV lineup die. The Taurus was a breakthrough car that was the best selling model in America. Then they let it linger for ten years without a redesign, turned it into the ultimate rental car, then ended production. Great job guys!

Cadillac has the same costs that other GM brands have, but it is performing because the product line excites people.

Ford has completely let it's non-truck/SUV lineup die.

Unprofitable product lines aren't going to get much attention. Trucks and SUVs make Ford money. Escorts lose Ford money. The only reason they even build small cars is because CAFE requires they build them (and sell them, at a loss if need be) if they want to build the bigger cars they could make money on.

Cadillac has the same costs that other GM brands have, but it is performing because the product line excites people.

Cadillac sells some of the highest margin products, so it isn't a surprise that they do better. An Escalade doesn't require 4x the labor cost to build compared to a Cavalier, so the impact of the huge labor cost discrepancy is greatly reduced. They can't reproduce this with $15,000 cars.
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Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman

But the mid-sized family sedan is bread and butter. The Taurus sold 400K+ units a year in the early 90's. How do you just give that up? Plus, when Ford's F150 and SUV sales declined, that's when they really got hammered because they get nothing out of their car models.

Sure the margin for small cars is low, but if you can get buyers into a Focus early, maybe you'd build some early brand loyalty like Honda does with the Civic.

When I was looking at domestic v. foreign last year, it wasn't price that swayed me. It was quality, reliability, design, and refinement.

To tie this back to aerospace, Boeing is succeeding because in the Dreamliner, it is giving the airlines the product with the features they want: fuel efficiency, range, and flexibility.

I had one as a loaner. The thing is as bad as the original seats on the new subway cars in NYC.
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"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777

True, but Toyota is doing it with Scion. Seems logical the 23 year-old Scion buyer becomes the 30-something Camry or Highlander buyer down the road.

But they've failed with uninspiring product lines too.

I'm not sure what is so exciting or inspiring about a Camry or an Accord, compared to, say, the 500. I don't see it.
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Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman

As you know, Ford Motor's chairman, Billy Ford, recently fired himself as CEO and hired in Alan Mulally.

What was Mulally's previous job? CEO of Boeing Commercial Airplanes!

If you didn't already know that, mediumcool, I'm impressed. LOL!

In recent years, Boeing has had trouble finding a CEO without woman problems, corruption allegations, or both. Mulally got passed over for the top job so he bailed. How Billy managed to recruit him into one of the sickest enterprises in the world is way beyond me.

You know, I do remember that Mulally was from Boeing, after Bill Ford moved over (evidence that you DON'T keep it in the family in a Fortune 500 public company).

But I was comparing Boeing to GM and Ford because some suggest GM and Ford's decline is representative of US industrial strength. Boeing shows we can compete, if you have a workforce and management that sees the future and looks ahead.

competition is a EuroState conglomerate.
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Congressmen who willfully take actions during wartime that damage morale and undermine the military are saboteurs and should be arrested, exiled, or hanged.
J. Michael Waller

You have noticed that the big three are changing their ways right?

The labor contracts have been renegotiated with givebacks on raises and healthcare. The labor for is being trimmed. I should know, I just took the buy out package Ford is offering. Monday was my last day.

The vehicle lineup is changing, at a pretty good clip for an automotive company too. The fusion replaced the old Escorts, no one will ever say the escort was the lap of luxury, but the fusion is probably a little better in that respect. The 500/Taurus is the new mid to high end auto. The Fseries is being redesigned which is a major undertaking. The Mustang is only a couple of years old in this configuration but they're still making upgrades to it every year. The Edge crossover is expected to do solidly in it's market and keep the plant producing it on overtime for the next couple of years. The only thing being left alone right now are the large SUV's. They're the least popular vehicles with the most design concerns. In 09 the Explorer will be entirely revamped with the other's following.

With respect to Toyota and Honda, the reason they are profitable on fewer sales than Ford is is not the generally accepted fat union worker. Hourly wages and benefits are comparable between the two workforces within the United States. UAW workers enjoying only a dollar or so premium over Toyota employees. The benefits are very similar, UAW workers recieving a bit more than the Toyota employees, but not the wide margins popularly imagined.

It largely comes down to capacity utilization. Ford and GM are geared for larger volumes than they currently produce, meaning physical plant and employees are used less than optimaly. Toyota and Honda however are currently near optimum capacity. The sunk costs of benefits, wages and physical equipment are spread over different volumes of autos.

As Toyota and Honda expand capacity it is inevitable that they will reach a slowdown that puts them into an overcapacity situation. With or without Union contracts, they'll lose money as the company pays the sunk costs on plant structures, tooling, equipment and personnel.

Toyota and Honda are enjoying the upswing of the business cycle, Ford GM the downside. Eventually the tides will shift and I will wait with open ears for why it is that Toyota and Honda suddenly aren't able to be profitable because of the next new reason.

Yeah, and the facts are scary right now for GM and Ford. Ford lost $12B last year, which is amazing considering it wasn't due to accounting adjustments. Toyota might pass GM in total sales this year, which would have been inconceivable 20 years ago. They might have changed their ways, but that's not to say the ship is turned around.

Yes, restructuring will help, but it is mostly dressing unless GM and Ford deliver the goods.

I hope Ford gets it's product flowing. I think Ford hit it out of the park in style and design with the new Mustang, but reliability will be the key. I was shopping for the Freestyle last year, but the reliability numbers were horrific.

Thanks for your interesting and informative comments. My understanding about underutilization in the case of F and GM is that union rules keep them from closing plants, which they obviously should do, both for the capacity reasons you mention and because many are old and inefficient.

I expect that "rightsizing" (such a loaded word) US manufacturing capacity will be much easier for Toyota and Honda than it is for F and GM. What do you think?

On labor costs, though:

With respect to Toyota and Honda, the reason they are profitable on fewer sales than Ford is is not the generally accepted fat union worker. Hourly wages and benefits are comparable between the two workforces within the United States. UAW workers enjoying only a dollar or so premium over Toyota employees. The benefits are very similar, UAW workers recieving a bit more than the Toyota employees, but not the wide margins popularly imagined.

GM's total hourly labor costs are nearly 3x as high as Toyota's. This is mostly because of the massive legacy costs being racked up by their retired employees. Scaling back production actually increases their total labor costs per hour because it leads to a lower ratio of active workers versus supported retires.

I would guess the price tag on the benefits for current employees is substantial as well. Small changes to a health plan (such as being able to go to any doctor versus having to lock into one for the year) can rack up massive increases in premiums, so this cost is not readily apparent to the employee. Unions of all kinds seem to prioritize extremely expensive health plans above all else, including pay, for some reason. I'd rather have a cheaper health plan and bring home the difference, myself.
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Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman

I recommend Pat Buchanan's article on the subject of the US automakers:
http://buchanan.org/blog/?p=670

This country hasn't been very smart about setting up an environment in which the US auto manufacturers can compete effectively.

Run like Reagan!

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Congressmen who willfully take actions during wartime that damage morale and undermine the military are saboteurs and should be arrested, exiled, or hanged.
J. Michael Waller

Airbus and Boeing seem almost perfectly anologous to European capitalism and U.S. capitalism.

Airlines are just a ghoulish business to be in. Across the whole history of commercial air transport, I don't think the industry has made a penny of net earnings. It looked like Bob Crandall (a world-class son-of-a-female-dog, by the way) had solved that problem when his American Airlines perfected yield management. But along came 9/11 and high fuel prices to blow it all apart again. As I said the other day, if I ever decide to get into this business, I hope someone shoots me.

I don't think there's any way to fix this problem. The revenue opportunities just aren't there. About the only known success model is the flag-carriers that you see in other countries. And of course by basically running the enterprise as a foundation, where the government funds your losses every year, you're completely giving up the financial and marketing discipline that result in great companies.

You see the trouble that American airlines have, trying to stay in this business as actual businesses, exposed to capital-market discipline.

The large-airliner business has some of the same characteristics. The people who organized Airbus had very much in mind the goal of national prestige for the European partners. Airbus is a political enterprise, even a geopolitical enterprise, in ways that Boeing will never be. As such, Airbus really doesn't face the same risk profile that Boeing does.

And yet, the airliner business is one in which you have a small number of widely-spaced opportunities to predict the future and place your bets, and the price of a wrong bet is death. That happened several years ago when Airbus, betting that long-haul trips with huge passenger counts would be the future, chose to develop the A380 platform. Boeing made the other bet, that regional and short-haul air traffic would come to the fore, and chose to "freshen" their existing platforms instead. The amount of capital and time that is committed to decisions like these is completely staggering- totally dwarfs the investment profiles you see in the auto industry.

Evaluating the business performance of Airbus is always mystifying to me because of the close involvement of the governments. It seems to me that JetBlue is the moderate financial success that it is, because taxpayers in France and Germany shouldered some of the finance costs of JetBlue's new fleet. So where does that go in the ROE calculation?

The fact that Airbus has had execution problems with A380 (and have executed a CEO over them) doesn't mean that this platform was a strategic error. The jury is still out on that. The A380 will succeed. It will take longer than expected, but you'll be flying on that plane someday, even if they were wrong about the strategy, because the Europeans won't let them fail. On the other hand, if they are right, then you can expect Boeing's commercial division to become a considerably smaller company.

I think carriers with a realistic business model such as Southwest will be profitable in the long run, barring any 9/11 events. The legacy carriers are dead in the water. But there is money to be made. I'm sure Howard Hughes would agree.

Spot on about capital investment. I would like to see a jumbo (300+ passengers) supersonic plane for Pacific flights, but you are talking $25B+ in R&D. That's just staggering.

To get off a plane with 837 passengers on it ?
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"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777

I'm curious about that. But honestly, when booking Orbitz or whatever, how many people look at the aircraft type? And eventually, on heavy traveled long hauls like New York-London, the A380 might be the only choice.

...so I could be completely wrong. But I don't see how the four-engine A380 can compete on the medium-range NY-London route with the twinjets that are used now. My guess is that the A380 is best suited for the trans-Pacific and East Asia markets. (Not so coincidentally, this is the region that is expected to have the most growth in air travel in coming decades.) Again, I could be completely wrong.

the economics of it. There must be some efficiencies that come from carrying 600+ per plane as opposed to 200 on a major route such as NY-London, even with the higher fuel per passenger per mile ratings of the 787. The twinjets will still own a Cincy-Denver route and the like.

Keep in mind that as they design aircraft, both Airbus and Boeing work in tight collaboration with the airlines and the engine manufacturers (Rolls-Royce and General Electric, with ITT-Pratt & Whitney as something of an also-ran in commercial aviation these days). You can bet a lot of money that British Airways and Airbus came to some very clear understandings about the feasibility of terminal services for an 800+ passenger aircraft before they made the commitments!

I have a hunch that Boeing is seeing one additional factor in their crystal ball, that perhaps Airbus has de-emphasized, and that is a generational improvement in air-traffic control technology. If you're not sanguine that the sky can safely hold a lot more airliners, you'll try to stuff more people into each one. If you believe that technologies like GPS and pilot-management of flight plans (together with quiet, efficient smaller engines) will actually enable a much larger number of short-haul and regional routes, then you'll bet the other way.

I could talk about ATC all afternoon, so I won't get started. Except to say: the US ATC system has been so difficult to overhaul in part for one of the same reasons that the IRS is so dysfunctional: antiquated computers and software that no one has any idea how to replace.

Nobody remembers how they work.
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"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777

and their outdated rules and many many abuses. The union is a huge wall that prevents bringing our ATC system into the 21st century and they could care less (job security is issue #1).

Disclaimer - I've been involved in ATC union arbitration both in the US and Europe
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"Enlightened statesmen will not always be at the helm." -- James Madison

you mean the free market actually works? Indeed.

Yeah, but as blackhedd points out, the capital investment required is so great for development of a new aircraft that a traditional independent company doesn't have the resources required.

If Chevy comes out with a mid-sized sedan that bombs, it's back to the drawing board. If Boeing's Dreamliner (787) bombs, it's Chapter 11.

If Chevy comes out with a mid-sized sedan that bombs, it's back to the drawing board.

If WHEN Chevy comes out with a mid-sized sedan that bombs, it's back to the drawing board.

I fixed it for you :)

Two thirds of the world is covered by water, the other third is covered by Champ Bailey

Actually, the 2008 Malibu is getting good buzz, but Chevy's really got a hard climb to get competitive with the Camry and Accord.

keeps screwing up their recalls, doesn't do something to begin seperating their quality vs the Malibu, and can't stop buying owners new engines, the Malibu will not have much of a climb so much as a short job up a hill.

06, the year Toyota recalled more cars than sold.

I'm sure the suits at Toyota are wondering if they have too much of a good thing. Loyalty can be lost, too. They capped Scion production recently, maybe it's an option for the Toyota brand.

of creating a largely composite aircraft. It's hard enough on the military side, on-time commercial delivery has plenty of risk. The commercial aviation game is high stakes and second place often means losing money.
The fact that Airbus has grown into a socialist operation that has to spread out production and assembly based on French and German government dictum (vice market efficiency) certainly gives Boeing an advantage.
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"Enlightened statesmen will not always be at the helm." -- James Madison

But Airbus also gets to make cash calls to the parents when they are in trouble. Could Boeing have survived if it had the overruns with the A380 like Airbus has?

But then again, Boeing doesn't have to make sure that each wheel is constructed in a different country europe.

 
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