Wherever aerospace executives gather to discuss consolidation of Europe's aerospace industry, it will not be long before the talk turns to Airbus Industrie and its anxiously awaited restructuring.
Whatever other pitfalls may yet befall Europe on the way towards the holy grail of consolidation, it has become an article of faith that the starting point should be to transform Airbus from a consortium into a fully-fledged stand-alone company - or in the somewhat cumbersome language of such things, the Single Corporate Entity (SCE).
Details have still to be hammered out, but the plan now is to move towards a SCE at the beginning of 1999.Urgency for change has been building up, in part as a response to the radical restructuring which has been going on across the Atlantic. Europe is under increasing pressure to make a response to the new US giants and Airbus was the obvious flag around which to rally. Once Boeing had absorbed McDonnell Douglas, the Airbus restructuring moved from being a goal to an absolute necessity.
Even before the emergence of the US giants, it had already become clear that Airbus was fast outgrowing its consortium structure. After taking to the skies 25 years ago, Airbus is now no longer a fledgling venture leaning on the reputations of its partners. Annual aircraft sales are likely to top $10 billion this year, which would see Airbus edge into the world's top ten aerospace groupings, although still below the US giants. It should also put the consortium on a par with its three major shareholders, Aerospatiale, British Aerospace and Daimler-Benz Aerospace (Dasa), and comfortably ahead of others including CASA.
The real prize, however, lies in Airbus' potential. If long-term growth trends hold in the world airliner market and with Airbus gaining a rising share of new orders, it is easy to predict that the consortium could double its sales volume over the next five years.
To maintain these growth plans and fulfil long-running ambitions to draw level with Boeing, there is little doubt that Airbus needed a new level of control over its production, financing and destiny that the consortium structure could no longer provide.
The history of the structure dates back to December 1970, when Airbus Industrie was founded as a Franco-German civil aircraft venture. Such cross-border deals were rare and the structure chosen was the French Groupement d'Interêt Economique (GIE), literally a consortium of economic interests. In a Europe which was still decades away from becoming a single market, the GIE neatly side-stepped the issues of national laws and taxes, leaving the partner companies still fully independent.
As a result, the GIE employs only around 2,200 staff mainly involved in management, sales, marketing and support in Toulouse. The bulk of the work is instead split between the partners, roughly (although not entirely) in line with their shareholdings: Aerospatiale and Dasa each on 37.9%, BAe holding 20% and CASA with 4.2%. By contrast to the head office, the partner Airbus subsidiaries employ close to 30,000.
The A320 is fairly representative (see diagram). Aerospatiale took around 34% of the project with its work on the forward fuselage, doors, pylons and the final assembly at its hangars in Toulouse. Dasa Airbus took a similar 34.6% with work on the rear and central fuselage, vertical tail, flaps and interior installation. BAe Airbus took its traditional slice of wing design, as well as main gear doors, giving it 24%, while CASA took up the remaining 5.4% with a mix of work on the horizontal stabilisers and rear fuselage skins. Similar shares hold for other members of the family, with the notable exception that Dasa carries out final assembly for the A321 and A319 at its plant in Hamburg.
Within this structure, the partners continue to run and fund their own individual businesses. Their influence over the GIE is through a seven-strong supervisory board. Under the chairmanship of Edzard Reuter, former head of the Daimler-Benz group, it also includes the four partner presidents, Airbus chief executive Jean Pierson and his financial controller Ian Massey. This supervisory board is responsible for financial decision-making by the partners, including workshares, aircraft launches and the direction of the restructuring itself.
At operating level comes Pierson's executive board, which includes the heads of the four partner Airbus operating companies, as well as Massey and chief operating officer Volker Von Tein.
Essentially the partners act as subcontractors, dealing with the consortium, like other suppliers, under fixed-price dollar contracts. As partners, however, they also take a share of the Airbus "commercial profits" - representing the difference between the costs that the consortium has incurred from its suppliers (including the partners) and the value of aircraft sales.
Airbus, not incorporated as a legal company, is not obliged to give out any profit figures and the profitability of the overall operation remains shrouded in mystery. The individual partners are generally showing profits from their Airbus involvement, representing a mix of returns from their work and profit shares. However, given the complexities of transfer pricing, four different currencies and various accounting standards, there are the partners themselves will admit that an exact figure is near impossible to calculate.
In the early years, the GIE structure served Airbus well. The heavy spend on research and development required to launch seven separate aircraft programmes, on its own demanded some major backers with access to national government launch aid. With Airbus comfortably launched on the world stage, the constraints of the GIE are now beginning to show. Perhaps the most obvious drawback comes from the simple fact that Airbus, unlike Boeing, does not ultimately control its own fate.
The partners deny that the split production is necessarily a problem and in the main Airbus has stayed neck-and-neck with Boeing in terms of cutting production cycles or aircraft pricing. Yet Airbus clearly does not have the same control as Boeing over its supplier base or support structure. Component design, for example, is split throughout the partners, while production decisions, to some extent, depend on the workshare negotiations. These have in the past led to tussles between partners, with BAe at one point fighting a rear-guard action to prevent wing-work going to Gemany.
Perhaps a more fundamental issue surrounds financing. Within the GIE, the partners have arranged for their own shares of financing for R&D and launch costs, potentially leaving Airbus prey to the funding priorities and balance-sheet strength of its shareholders and to some extent their governments. Airbus has raised funds on its own account, although until the setting up of a separate finance arm a few years ago, even those liabilities were borne jointly and severely on each of the partner balance sheets.
As a major standalone company, Airbus would be free to raise cash on the strength of its own published accounts. Judging by the scribblings of financial analysts over the last year or so, share and debt markets would be more than ready to oblige. Raising at least some funding in this way may be a necessity as Airbus moves towards the A3XX programme. With a starting price-tag of $10 billion, the programme would prove a heavy commitment for the partners even with a 40% share earmarked for outside partners. The growing US opposition to government launch aid, capped at one third of programme costs since 1992, is another incentive to open up new channels of financing.
A more conventional company structure should also help ease the way towards the kind of outside partnership that Airbus is already beginning to create. Airbus was quick to sign up others in Europe to the A3XX programme, including Saab Aircraft, Finland's Finavitec and Finmeccanica/Alenia - achieving a long-running ambition to bring Italy into the fold. South Korea is a strong candidate for a major Asian risk-share and there are hopes of picking up a US partner.
The consortium was also quick to take over the lead on the 100-seat aircraft project with China, setting up Airbus Industrie Asia to take over from Aero International (Regional). The proposed AE31X programme again brings in Finmeccanica, partner of BAe and Aerospatiale within AI(R).
Equally intriguingly are the moves to create Airbus Military Company to manage the Future Large Aircraft transport programme. If and when it is launched, that will bring in Finmeccanica and an array of other associates from Belgium, Portugal and Turkey. It will also give Airbus its first real taste of defence. Lockheed Martin, keen to develop links in Europe, has significantly shown an interest in the programme, raising the possibility of a future transatlantic axis.
This may just be scratching the surface of what Airbus could achieve once it finds its feet as an independent company. Before then there are still some tough questions for the partners to thrash out on valuations and structures, but basic agreement is in place that what will emerge from the negotiations is some form of integrated business covering everything from design and production through to sales and financing.
There are encouraging signs too, that the pace of the talks is beginning to gather place with the promise of a blueprint for the new structure early in 1998, ready for implementation a year later. Reuter and Pierson also plan to step down early next year, perhaps emphasising the start of Airbus' new journey.
Source: Flight International
