ZOOM! AIRBUS COMES ON STRONG
The consortium that no one took seriously a few years ago is finally making inroads in the U.S.
All Jim Bryan wants is a little more respect. For five years, he has been president of Airbus Industrie of North America Inc., and for just as long, people have been putting him on the defensive. At cocktail parties, he is asked why a subsidized European consortium should be allowed to threaten its U. S. competitors with aggressive, headline-grabbing deals. Customers make him jump through hoops to prove why his planes are any better than the Boeing jets they've flown for years.
Bryan doesn't worry much about the cocktail circuit. But the airline executives are making him sweat. Although Airbus has come on strong in the U. S. market over the last five years, every sale has been an underdog effort.
Now, Airbus faces what Bryan thinks is a turning point in the U. S. market. If American Airlines Inc. chooses Airbus for its upcoming multibillion-dollar order of twin-engine widebody aircraft, it would mark a dramatic coming of age. Airbus has some big U. S. customers. It has even sold some older planes to American. But much of its U. S. business is with smaller and weaker airlines, and Airbus needs to hitch its future to a sure survivor. Says Bryan: "We have to win the American order."
GRAND AMBITIONS. Maybe so. But even if Airbus doesn't win it, the controversial consortium is flying high. Airbus was once written off as a European folly--a propped-up white elephant that might sell a few airplanes but would never really amount to much. Instead, the Europeans have built a high-tech family of airplanes with global appeal, despite political infighting and bureaucratic inertia. In recent years, the feisty Europeans have blown by McDonnell Douglas Corp. to become the world's second-largest airframe maker in terms of orders. Their momentum now threatens the very survival of Douglas' commercial aircraft business.
Boeing beware. The recent onslaught of 20-year-old Airbus is a testament to the consortium's tenacity. Six years ago, Airbus had orders for just 200 planes worldwide. Its backlog now totals 1,600 planes, worth a cool $70 billion. Mighty Boeing Co.'s 53% world market share still dwarfs the 30% held by Airbus (charts). But the U. S. giant should heed this ominous fact: Excluding Boeing's humpbacked 747, against which Airbus does not yet compete, the Europeans sold the largest number of jets last year. And it's a measure of their grand ambition that plans are in the works to develop a new 600-seat aircraft to take on the Boeing jumbo. Airbus "has surprised everybody," says John C. Pope, vice-chairman of United Airlines parent UAL Inc. "Five years ago, it just wasn't a factor."
For U. S. industry, that's a chilling realization. Airliners are America's biggest industrial export and one of the few havens from Japanese competition. They are so expensive that the outcome of a single order can tip the balance of a nation's trade. Boeing reckons that the world's airlines will spend $617 billion on new planes over the next 15 years--a sum approaching Britain's gross national product. Without Airbus, the U. S. would have that pie virtually to itself.
That's why U. S. trade officials are up in arms, pushing hard to end fat development loans to the consortium from Airbus partners France, Germany, Britain, and Spain. Even disgruntled British and German pols have made loud calls for establishing a new accounting system at Airbus aimed at cutting costs and state funding. The consortium's complex books are so impenetrable that the real cost of producing its airplanes remains a mystery. "Airbus is a company out of control," argues S. Linn Williams, a deputy U. S. trade representative.
European officials voice utter disdain for American complaints. "Listen," says State Secretary Erich Riedl, who oversees aerospace for the German Economics Ministry. "We have built our aircraft industry from scratch. Now, we're a major power. That's how the world sees it. And that's why we don't care about any criticism from small-minded pencil-pushers." Airbus is more concerned about how it will produce the vast number of airplanes it has sold. And scaling up to build the new A330/A340 family of long-range widebodies will be a huge challenge.
Airbus also must solidify its place in the U. S. market. With a few notable exceptions, Airbus has scratched out its American customer base largely by selling to weak airlines that needed cheap financing. Many of those carriers now face tough times or bankruptcy, and two of them--Eastern Air Lines Inc. and Braniff Inc.--have stopped flying altogether. The future lies in winning a big widebody order from one of the sure survivors: United, American, or Delta. Having lost an epic battle for a piece of United's record $22 billion order last fall, Airbus is sharpening its sword for the American competition this summer.
That Airbus has been able to get even this far is a wonder. Ponderously political, the four-country consortium should have been the proverbial committee that planned a horse but designed a camel. State-backed efforts to fight U. S. and Japanese dominance in computers and other products of the future are falling flat. Only Airbus, among Europe's forays into the high-tech arena, is making its mark on the world scene.That's in spite of its byzantine structure. Airbus isn't really a company at all; it's essentially a marketing cooperative. Much as farmers peddle cotton through a co-op, the three industrial partners sell their wings, fuselages, and tails through Airbus Industrie.
No one knows how much the Airbus venture loses overall. A U. S. Commerce Dept. study insists the consortium remains a profitless sinkhole. Since it was founded, France and Germany have pumped in $13.5 billion, the study says. A French government official concurs: "Without loans from the state, Airbus couldn't survive the next five years."
ALREADY PROFITABLE? At the center of this tangled web is Jean Pierson, Airbus' brusque and burly French managing director. Known as "the bear of the Pyrenees," Pierson's attitude is that building market share is critical; profits will flow from that. Pierson declined to be interviewed for this article. But he has publicly claimed that Airbus is already making money on operations, if the consortium's development loans are excluded. To those who claim Airbus competes unfairly, Pierson insists that Boeing and Douglas are subsidized by U. S. defense work.
Many credit Pierson's strong personality for the momentum Airbus has built over the last five years. He took over in 1985. The Germans insisted on setting up a two-man directorate. But once in place, Pierson would have none of his German co-equal, Johann Schaeffler. Says an Airbus insider: "Pierson told him, `There's no room at the top for two people. I am it, and you are not.' " The German left after six months.
Pierson has championed Airbus' product development. As manufacturing chief in the early 1980s, he pushed the best-selling narrowbody A320. As managing director, he deemed it time for a new 350-seat widebody to replace the aging fleet of Douglas DC-10s. Airlines wanted a big, long-distance plane for routes that had too little traffic to fill up a 747 jumbo.
Now, the A330 and A340 are fueling Airbus' growth. They have garnered more orders than Douglas' own update, the MD-11, or Boeing's new 777. The A330 lost out to the 777 at United last fall. But the program still gives Airbus a fighting chance to win the big American order this summer, or a Delta order after that.
LOSS LEADERS. Pierson's predecessors had been repeatedly frustrated by the American devotion to Boeing and Douglas. Airbus is strongest in Europe, where government-owned airlines are routinely steered to buy its planes. Negotiations with U. S. carriers are a riverboat poker game. Extravagant bets and promises are routine, bluffs a way of life.
Early on, the Airbus strategy was simply to buy its way into the U. S. market. In the late 1970s, troubled Eastern Airlines took 34 A300s, but sources say the planes were supplied at very little cost to Eastern. By 1984, Eastern was still the only U. S. customer. So the Europeans went after Pan American World Airways Inc., figuring the cash-strapped carrier would leap at a complex lease arrangement involving 100% financing and guaranteed maintenance. It did. Trouble was, Pan Am insiders say, Airbus lost $300,000 a month on that deal for several years.
The Europeans were convinced that a close-up look at their fuel-efficient, technology-laden aircraft would so wow the U. S. industry that Pan Am's order would break the dam. It didn't. The problem was Airbus' short-term approach, particularly when it came to product support. A grounded plane can cost an airline thousands of dollars a day in missed revenue. Boeing's proven reliability--not to mention its ability to service planes all over the world within hours--meant more to a solvent airline than quick financing. "From 1970 to 1985, there was a European way of doing things, and we didn't sell any airplanes in the U. S.," says one Airbus insider.
After Pierson arrived, Airbus finally started to play the distinctive American game. Under U. S. Chairman Alan Boyd, Transportation Secretary in the Johnson Administration and the former chairman of Amtrak, Airbus has built up its U. S. sales force. It currently has a North American staff of 200 and has established a training center in Miami and a big parts warehouse at Dulles airport near Washington, D. C.
This growing presence of Airbus as an aggressive player has raised the ante in the U. S., and airline executives love it. Kenneth A. Raff, managing director of fleet planning at American, says Airbus' ascension offers "the opportunity for getting a better deal." The fierce competition means that airlines are demanding--and getting--enormous concessions from Boeing and Airbus.
Airbus was chastised roundly in Washington last September, when it teamed up with General Electric Co. to give Northwest Airlines Inc. a $500 million low-interest loan in return for a big order of A320s. The untold story, however, was that Airbus was just protecting its flank. A source involved in the negotiations says Boeing also hinted it might help with a loan if Northwest bought 737s. Northwest used that hint to demand the Airbus loan.
STALKING HORSE. Even when Airbus loses, its presence turns up the heat. At United, Airbus and Boeing squared off again. United's fleet is heavily weighted toward Boeing. But the Europeans almost finessed a major coup when the order got tied up in a fight for control of the airline between United Chairman Stephen M. Wolf and the unions, who were promised hundreds of millions in financing if they helped Airbus get part of the order.
The union effort failed, knocking out Airbus' chances. But its shadow lingered: United squeezed Boeing for every penny it could get. Informed sources say Boeing gave big breaks on the price of both the 777 and on a parallel order of 747s. It provided a rich financing package for those planes and even sweetened terms on Boeing narrowbodies now being delivered. Says United's Pope: "I've never seen Boeing or Airbus be this aggressive."
The real loser was McDonnell Douglas. Having bled $177 million last year in its transport aircraft unit, the St. Louis company couldn't even begin to play such a high-stakes game. And with its defense business imperiled, its finances aren't likely to improve soon. "This is going to be a critical year for the company's future," says a former executive.
As Airbus readies its assault on the American order, the competitive environment is only heating up. American is likely to put the screws to both Boeing and Airbus as it examines the A330/A340 and the 777. "Money is what counts," says Donald J. Carty, American's executive vice-president for planning, adding that "Airbus would do anything to stop Boeing here."
Can anybody afford to compete with three European governments determined to make their showpiece a worldwide success? "The U. S. government does not guarantee our debts," says Raymond J. Waldmann, Boeing's director of government affairs. With recession now slowing a five-year flood of airline buying, Waldmann says "a sugar daddy named Airbus" might grab more orders with state-backed financing.
Griping is one thing. But America's two plane builders aren't raising much of a fuss in Washington. They fear that any strong trade action by the U. S. might spark retaliation in Europe, where state-owned airlines such as Lufthansa and Air France are some of their best customers. In the event of a trade war, says Boyd, the battle for market share would grow truly brutal. "If Airbus has to give away airplanes," he warns, "we will do it."
The real issue--the one that truly threatens Boeing--is that the Europeans insist on financing product development from government coffers. Pierson is moving gingerly forward with plans to build a new 600-seat jumbo airframe to try to crack Boeing's 747 monopoly. Such a project would take vast sums Airbus clearly can't afford alone. U. S. trade officials have been bargaining with the European Community to cut state loans, which in the past funded 75% of plane development costs.
Boeing's response to the Airbus threat is vague, but it clearly has chosen its own way in girding for the future. The Seattle company has been actively courting the Japanese to build supplier relationships that may blossom into joint development projects. It has also joined with Deutsche Airbus to study the development of the next generation of airplanes--commercially viable, environmentally acceptable supersonic transports.
VULNERABLE. Maybe Boeing is wagering that Airbus will lose momentum. The consortium is still a political nightmare, and some of its U. S. customers have big financial problems. The American order is certainly no shoo-in, and Northwest is heavily leveraged and losing money. Airbus took a lot of risks to build market share. It could be more vulnerable to evaporating orders.
U. S. aerospace executives are used to huge, long-term gambles. Risk and risk assessment are a way of life. But soft-pedaling Airbus' long-term challenge while clinging to free-trade orthodoxy may be their biggest gamble yet. Just ask the 8,400 employees Douglas has laid off since last year. The awkward European consortium that no one took seriously a few years ago has changed the shape of the world aerospace industry. Don't expect the proud, stubborn Europeans to stop now.Stewart Toy in Toulouse and Michael Oneal in New York, with Paul Magnusson in Washington, Igor Reichlin in Bonn, Dori Jones Yang in Seattle, and Bureau Reports