Turbulence for Airbus
Some self-inflicted, some dollar-inflicted
By blackhedd Posted in Economy — Comments (13) / Email this page » / Leave a comment »
Airbus Industrie, the airliner manufacturer that is one of Europe's economic champions, has been hitting a lot of rough air in the last couple of years. The problems shed light on the special issues of European business, but also on the continuing disorders in global finance. (And even just a little bit on Ron Paul.)
Three key words: corruption, unions, and dollar-weakness.
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You've probably heard about the evil problems Airbus has had in launching their new flagship product, the enormous four-engine A-380. This product is based on a bet that the explosively-growing East Asian economies will generate sustained demand-growth for long-haul air travel over the next few decades.
(Airbus competitor, Boeing's Commercial Airplanes division, made a very different bet. They believe that future travel patterns will favor more flight legs, with passenger-counts not as high as in the Airbus vision, which led them to invest in the 787 Dreamliner platform. The competition among Boeing and Airbus will ultimately be decided by how well each firm has read their tea leaves.)
The A-380 (which has now had its successful maiden flights) will join the world's commercial fleets. Notice I was careful not to say that the product will be commercially successful, as this term means something different in Europe. As I wrote here several months ago, Airbus is more than a business. It's also an industrial "champion," a source of pride for the European governments that part-own it, and a focus for labor unrest as they've tried to cut costs by shedding jobs. Airbus doesn't define success only in euros and eurocents.
But the A-380's road to production has been studded with terrible execution problems. I'm working very hard now to resist the urge to say that the American way of management (which demands strict performance to quarterly financial metrics) necessarily results in better execution. We have our own problems.
But on the whole, American businesses don't have to deal with problems like internal corruption:
France's stock market regulator is investigating top executives at Airbus, its parent company European Aeronautic Defense And Space..., and major EADS shareholders DaimlerChrysler... and defense conglomerate Lagardere... over alleged insider trading that occurred between late 2005 and mid-2006.
...
According to Le Figaro, the investigation will focus on 21 executives across the three companies involved, who apparently sold EADS shares with insider knowledge that mounting delays and manufacturing problems in 2005 were becoming insurmountable. When the damage became public in mid-June 2006, after the executives had allegedly completed their stock sales, it caused EADS' share price to fall 26% in one day.
What I loved most about the story was this reaction by senior management at Airbus' parent company:
"EADS is most surprised by the publication of information in today's press concerning the investigation currently conducted by the French stock market authority," said EADS on Wednesday. "EADS considers that such leaks constitute an unlawful violation of the confidentiality of the current investigations and of the principle of the presumption of innocence."
Riiiiiiight: they think the problem is not self-dealing and criminal malfeasance by corporate managers. It's the press. As you can see, journalists are an occupational hazard even in places without a First Amendment.
All of these are problems of Airbus' own making. The more important and more general story relates to value of the US dollar:
The Franco-German plane-maker said... that it would have to find an extra 1 billion euros ($1.4 billion) in savings if the strong euro continued to outpace the dollar at such an alarming rate...
A spokesman for Airbus said that for every 10 cent increase in the euro's value, the company stands to lose 1 billion euros ($1.4 billion). He declined to comment further on whether more job losses could be expected as a result of the exchange rate...
Airbus, like other peer firms in the aerospace industry... already has some tactics in place to mitigate the effect of a weaker greenback. These include hedging the dollar in the financial markets, as well as "dollarizing" the supply chain by sourcing more suppliers from the U.S.
I like that phrase: "dollarizing the supply chain." I think I'll lift it for my own use. It basically means more jobs and more industrial output for Americans. That's the inexorable logic of how exchange rates interact with global trade flows: it's a self-correcting feedback loop of gargantuan size.
But the reason this story caught my eye is because it follows right along with the theme I sounded here:
Europe's monetary policy is being whipsawed by the Federal Reserve's recent cut in interest rates. And Europe's large economies, particularly Germany, are considerably more export-driven than ours, so the strong euro hits them hard.
Europe, and its top central banker Jean-Claude Trichet, are facing an extremely tricky decision matrix with regard to short-term interest rates in the next few months. Especially with French President Nicolas Sarkozy nipping at Trichet's heels to lower rates, largely for political reasons.
Inflation is already hot and getting hotter in Germany. If Trichet cuts the benchmark euro interest rate, the inflation fires will probably burn even brighter and hotter, eventually causing an economic slowdown.
But if he tightens or stands pat, then overstrength in the euro (now at an all-time high of nearly $1.43) may do the job for him.
Update: Here's a wire story about today's ECB meeting in Vienna.
As a final note about American inflation: partly as a result of the continuous waves of Ron Paul insanity rolling through RedState recently, I've been poring through the Federal Reserve's published data on money-creation here at home.
I'm now confirmed in a suspicion I've had for several months now: the US economy suffers more from deflation in certain sectors than from inflation. I've got a complete story in the works on this subject, so stay tuned.
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Turbulence for Airbus 13 Comments (0 topical, 13 editorial, 0 hidden) Post a comment »
There's a huge role for services and logistics, etc. But that's a general statement. I don't know enough about Airbus' supply chains to give a specific answer.
Manufacturing is currently about 10% of the US economy. It's generally very high value-added stuff, though, including subassemblies for final assembly in China. We also have a big share of tooling and heavy industry, although I'd say that Japan is the dominant player in those areas.
I was just imagining a thousand little firms out there, all making specific parts in their relatively small operations.
And then all those firms need supplies, and then they're also available for the next time someone else wants to open up shop in the US and needs someone to buy from, and...
"Who will stand/On either hand/And guard this bridge with me?" (Macaulay)
Realize they can't understand it, so instead of learning how it works they decide to smash it.
______________________________
"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
We saw the effect in the housing bubble, which was a combination of:
Lower interest rates, obviously.
Partly driven by a need to inject capital into the consumer end.
and
A value correction due to a deflated dollar.
This last reason has gotten short play. As an asset with low liquidity, the gap can get quite large before there is movement. Unfortunately, we wasted a great opporunity to increase the savings rate of Americans by driving the correction too quickly. Pretty much, we drilled, got a gusher, and then didn't cap it.
All new models have teething problems, but the A380's have been exceptional. Development snags & production delays have alienated customers and resulted in order cancellations. The ambitious size of the airplane has resulted in special problems. If the aircraft is not turned properly, its weight digs up the tarmac. Airports need to re-engineer gates to accomodate it. Emplaning a full load of passengers is a headache. Insuring the aircraft is a HUGE headache because of the scale of the potential liabilities.
Meanwhile, Airbus, caught off guard by the success of the B787 concept, found that no one wanted its offering in that part of the market, the A350, so they went back to the drawing board on that one. Which means they are competing against the B787 aircraft with a paper airplane.
Markets, like airplanes, are very unforgiving when corporate pilots make mistakes. No wonder the Europeans like protection and dirigisme!
>>>>as well as "dollarizing" the supply chain by sourcing more suppliers from the U.S.
It's pretty basic. They have set the Euro up to be a stronger currency than the dollar and are now experiencing the same headaches we did when Reagan made our currency strong.
At least they'll get cheaper parts from here, even if it means they lose jobs and deal with political backlash over outsourcing.
Freedom Fighter in Occupied VA
'Morning, Blackie!
Actually, this was really good timing. In a couple of lectures which I gave last week in Windhoek (Namibia) and this past Monday in Pretoria (South Africa), I actually cited the A380 vs. B787 as an outcome of improper vs. proper engineering philosophy.
Have you ever heard of the late Petr Beckmann? He escaped from Czechoslovakia in 1968 and went on to become a very respected professor (of electrical engineering) at the University of Colorado. In 1971, he published a wonderful and charming little book entitled "A History of Pi" - highly recommended and it's still in print. His contempt for both the Nazis and the Communists pokes through in numerous places, but at one point he laid down a guideline so marvelous that I've come to refer to it as "Beckmann's postulate." I paraphrase it a little, but here it is verbatim from one of my lecture slides:
In a healthy society, engineering design gets smarter and smarter; in an [unhealthy society], it gets bigger and bigger.
He compares the Allied efforts in WWII of inventing radar and splitting the atom with the gigantic-ism of Nazi engineering and the similar gigantic-ism endemic to all the Communist engineering.
When I first heard about the A380, my reaction was to expect a fiasco since it seemed to clearly be flying in the face of Beckmann's postulate - and this also says a great deal (all of it bad) about the present state of affairs in the societies of "old Europe."
There's little innovative in the A380 - it's just bigger and bigger.
In contrast, the B787 has a number of innovations that really ring true to anyone who is a frequent flyer. It cruises at over 600mph (most of its predecessors cruise in the low 500s), and that means that it will cut at least an hour off a trans-Atlantic flight - which is a big deal if you travel a lot and want to get home more quickly (or at least increase the probability of making your connections!!) The composites of the body will also allow for both higher air pressure and higher humidity in the passenger cabin - which is a much more comfortable and healthy environment.
Having in the past two weeks endured both the 15 hour direct long haul from Washington to Johannesburg and the 18 hour return trip (Tuesday night to Wednesday morning), which requires a fill-'er-up stop in Dakar, the B787 improvements mean a lot more to me than just having a bigger monster to try to board and unboard.
The A380 is like the one you got pregnant!
Ha ha! This discussion could go rapidly downhill so I'll stop there.
But Airbus has managed to come up with something which does neither - neither speed nor comfort.
(And given your earlier comment I thought you'd like "Beckmann's Postulate." :-) )
it will prepare us for a boom in Soviet retro-chic when Hillary is president.
Time for a drink, I think.
I know very little about Airbus, but in view of this article from Human Events by Oliver North, I think this whole matter needs to be reexamined.
" Last week, while Mr. Waxman and his fellow Democrats in Congress were attempting to pillory Mr. Prince and Blackwater USA, the Autorite des Marches Financiers (AMF) -- France’s stock market regulator – sent a criminal referral to a Paris prosecutor about possible insider trading by the former managers and top shareholders at EADS.
According to the French daily Le Figaro, and the Associated Press (AP), AMF regulators believe that twenty one of EADS's senior officers and shareholders engaged in “massive insider trading” once they became aware of production delays, technical difficulties and profitability problems with the new Airbus A380 super jumbo and their mid-range A350 passenger jet liners. German prosecutors are also said to be investigating suspected insider trading at EADS."
IMO; this is a no-brainer, this order should go to Boeing.
America should get their military aircraft from American sources.
Firms in Japan already did it, now firms in the EU are going to do it? Nice.
Oh, but manufacturing is dying in the US. You know, because the only manufacuring that counts are GM, Ford, and cheap chinese toys and clothing.
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