:: March 2005 Letter ::


Dear Fellow Well-Intentioned Globalists,

What makes analysts happy? Two dots. You can connect them and point to a trend. It still amazes me that I get paid to stand in front of people with a cheap laser pointer, drawing a line and pointing to a trend. The Lockheed Martin/AgustaWestland/Bell Helicopter (“Team Mouthful”) US 101 victory in VXX, coupled with Lockheed Martin/Embraer’s ACS victory, are two such dots. The Trend: DoD no longer cares who makes the platform, just so long as the system (and system-of-systems) architecture comes from a US company. Add the Boeing MMA victory, and you’ve got another dot telling you that the platform can be off-the-shelf and non-optimized; the network is what really matters.

This trend could be bad for Boeing, and great for EADS/Airbus. Tankers are back. The latest budget documents show funding starting in FY 2008. If the new Air Force secretary wants to assert his independence and repair relations with Congress, he might just make this stick.

Yet if we’re looking at an FY 2008 tanker start, the 767 could be gone. Boeing’s cunning jetliner strategy revolves around victory through product line euthanasia. The risk-averse board might not fund 767 line preservation, and the 787 probably won’t be ready as a tanker. Airbus’s KC-330 might be the only game in town. IF tanker funding actually materializes, this could mean a huge breakthrough for Airbus, particularly if they team with a US systems integrator, like Northrop Grumman. In fact, the Air Force might favor a non-Boeing bid, to help restore the service’s image.

But EADS and Europe might just snatch defeat from the jaws of victory. Boeing’s political standing and jetliner programs may have weakened, but EADS and France have spent the last months making themselves easy targets for US politicians who oppose giving money to state-run foreign companies.

First was the incredibly strange French Government initiative to force a merger between EADS and Thales. Dissatisfied with a Franco-German aerospace company, the French Government seemed to be advocating…wait for it…a Franco-French one. There was no other explanation — no independent business analysts thought EADS-Thales was a smart idea. Most regarded it as an unwieldy, stupid, vertically-integrated horror, a textbook example of why governments should leave businesses alone. As this is written, this grotesque mockery of a B-School science fair experiment has again emerged as a possible action item.

This was followed by some curious comments from new EADS co-CEO Noël Forgeard. The motivation for his stunning power grab, he told the Financial Times (December 20, 2004), was a vicious campaign against him, orchestrated by a clique operating between “the Café Flor and Fouquets Restaurant.” Oh, and Munich, too. Hmm. We have met the enemy, and they are…sitting in a café, smoking a Gauloise. What to make of this?

First response: Somebody needs a hug…. But it indicates a real problem. EADS is not entirely in the hands of private ownership. The French Government, and its appointees and allies, still play a big role. Many US politicians don’t like that.

The Franco-Forgeard EADS maneuvers were followed by the orgy of Euro-hubris that was the A380 rollout. Most Airbus member country politicians were on hand, celebrating what was clearly Europe’s finest moment since Abba’s Waterloo won the Eurovision song contest. Airbus claimed the program had a 250-aircraft breakeven point, but they didn’t mention pricing, and no one thought to ask. As an aside, the A380 rollout was also accompanied by the unwelcome re-emergence of dumb talk about a flying cruise ship. Long-dormant foolishness about onboard casinos, shuffleboard, and exercise rooms came tumbling out. Virgin’s Richard Branson made some tastefully smutty comments about recliner beds and gambling, but most of the other airlines involved were vague about this nonsense.

Onboard casinos. Imaginary breakeven points. European Commission claims of “A European Success Story.” European politicians falling over themselves to claim credit for a mighty industrial achievement. French general Pierre Bosquet, watching the Charge of the Light Brigade in the Crimean War, remarked "C'est magnifique, mais ce n'est pas la guerre” ( “It is magnificent, but it is not war”). The ghost of general Bosquet might well have commented at the A380 rollout: “It is magnificent, but it is not business.” And it is more ammunition for Congress’s Buy American crowd.

Speaking of ammunition, now there’s the China arms embargo issue. Europe wants to lift this, largely to support their aerospace industries. They justify this move with comments that can be termed – and this is an observation, not criticism – bizarre. Michèle Alliot-Marie, the French defense minister, said, "China is rapidly developing its industry, and today our experts say that in five years China could make exactly the same arms that we have today.” These “experts” are either deceptive or ignorant. There is no third possibility. Alliot-Marie also “reasoned” (a curiously inappropriate word) that weapons sales would result in China slowing down its own arms programs. Yeah, it usually works like that….

If Europe goes ahead with arms sales to China, Congress would likely retaliate by closing the US market for European defense equipment. That would be the end of Boeing’s tanker problem, and the end of a big opportunity for Airbus.

If the China issue is resolved, and if EADS wants to sell to the US military, it will take time to recover from all of this. Serious EADS office politics, the French Government’s world-class industrial meddling, the A380 rollout spectacle, and the China issue constitute an A380-sized load of baggage. Then again, it might just be a matter of aesthetics, good sense, and self-awareness. Incoming EADS co-CEO Tom Enders responded to Forgeard’s comments with a call for “calm” and “discretion.”

Indeed. AgustaWestland’s owner, Finmeccanica, is more statist than EADS, but they have the tact and discretion to keep Byzantine power struggles and intimations of nationalist glory out of the limelight. If they didn’t, Sikorsky would have had a much better chance with VXX. And until EADS takes a page from Finmeccanica’s book, Boeing will have a much better chance with tankers.

As for Teal’s March update, aircraft reports include the A300, A318/319/320/321, Harrier, E-2, Gulfstream's 100/200 and 300/400/500, K-8, and Sikorsky’s S-76. Have an entertaining month.

Yours, ‘Til The Nation State Finally Dies,

Richard Aboulafia


© Richard Aboulafia 1997-2006, All rights reserved.
  ~  Last updated on January 08, 2006