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4-Nation Concern Restructures Management : Giant Airbus Consortium Struggles to Show a Profit

From Financial Times

After almost a year of intricate negotiations, marked by frequent infighting at the ministerial and industrial level, backers of the four-nation European Airbus have finally agreed that the pursuit of international prestige must be made to show a profit.

With roughly 1,000 commercial aircraft delivered or on order, Airbus has captured a share of the world market second only to Boeing of the United States. It has also acquired potent symbolic status as Europe’s most successful exercise in industrial collaboration.

However, the venture has been severely handicapped by its failure to develop into a soundly based business enterprise. Its unwieldy and fragmented corporate structure, which has remained unchanged since it was set up 20 years ago, has frustrated firm management control and has been increasingly criticized for encouraging inefficiency and high costs.

The management restructuring of the Airbus Industrie consortium, confirmed by its Toulouse headquarters Tuesday, is intended to tackle these shortcomings by creating a framework in which much firmer commercial disciplines can be imposed.

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Even on the most optimistic projections, the heavily subsidized Airbus firm had never been expected to be profitable by now. But the consortium’s growing ambitions, coupled with adverse currency fluctuations, have dramatically increased the scale of its actual and potential losses.

Eager to capture as big a share as possible of the booming world airliner market, Airbus has been rapidly stepping up production and plans a substantial expansion of its model range.

The heavy investments involved have to be paid for in European currencies. However, Airbus sales are priced in U.S. dollars. Since the dollar began falling 3 1/2 years ago, the program’s losses have grown with every Airbus sold.

The four European governments involved in Airbus have grown increasingly reluctant to continue making good this deficit out of the public purse. They have also come under mounting political pressure from the United States, which has complained that Airbus subsidies are illegal and distort competition.

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At the start of last year, the European governments asked four senior businessmen from each of the Airbus countries to recommend a way out of this impasse. Their report, delivered last April, concluded that without radical reforms to improve the program’s efficiency, its survival would be in jeopardy.

Though the report’s proposals have not been adopted to the letter, much of their thrust has been incorporated in the reorganization plan, which will take effect on April 1. Its main elements are:

* Appointment for the first time of a finance director for the Airbus Industrie consortium, charged with ensuring “full open accounting” throughout the Airbus system.

* A streamlining of the Airbus supervisory board, which will be reduced from 17 to five members.

* Creation of an executive board. It will be made up of Jean Pierson, the French managing director of Airbus; Heribert Flohsdorff, its German chief operating officer; Robert Smith, its British finance director, and senior executives of the four national aerospace companies involved in the program.

Decisions by the executive board, which will have broad operational responsibility for Airbus, will be taken by qualified majority vote and will require approval by partner companies commanding at least 60% of the consortium’s shares.

The first test of the new structure will be how far it enables Smith, the finance director, to ferret out information about Airbus’ overall financial position and the costs and margins of its member companies.

Until now, the peculiarly fragmented structure of Airbus has resulted in financial opacity. Sales and marketing have been handled by Airbus Industrie, while development and production have remained the jealously guarded domain of its four shareholders.

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These are Aerospatiale of France and Messerschmitt-Bolkow-Blohm of West Germany, each of which owns 37.8%of the consortium; British Aerospace with 20% and Casa with 4.2%. Each has kept to itself financial information about its Airbus work.

Smith has been given authority to inspect the companies’ books and costs. However, his powers of investigation may not extend beyond Airbus work, and he will be prohibited from sharing his findings with anyone other than the company itself and Hans Friderichs, the chairman of the supervisory board.

How serious these limitations will prove in practice remains to be seen. Airbus insiders believe much will depend both on Smith’s own persistence and Friderichs’ ability to stamp his authority on recalcitrant partner companies.

The drive for greater efficiency may be helped by a change in the bidding system approved for the next proposed model, a “stretched” version of its A-320. The four companies will submit competitive tenders for the whole of this project, instead of dividing up the work between them.

In the longer term, adoption of this approach could also smooth the way for a rationalization of the Airbus production system. At present, parts of aircraft are made in more than two dozen factories scattered around Europe and shipped to Toulouse for final assembly.

The system has been blamed for wasteful duplication. Many experts believe efficiency could be greatly improved by concentrating production in fewer sites. Such a move would, however, risk provoking arguments between partner companies.

Nationalism and the pursuit of self-interest have never lain far below the surface of Airbus’ veneer of European solidarity, and few observers rule out the possibility that such sentiments will flare again in the future.

Optimists argue, however, that while the reorganization does not guarantee solutions to Airbus’ problems, it does mark an important psychological turning point and reflects a new sense of commercial realism among all involved. Whether that change of attitude has gone far enough to bring the elusive goal of profitability within reach may not become clear for some time.

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