:: October 2006 Letter ::
Just back from France with Part 27 of my comprehensive fact-finding project: “Who has the dumbest politicians, the US or France?” I’m pleased to report a winner: Thierry Breton, France’s Finance/Industry/Economy Minister, tips the balance in France’s favor.
Breton told the Financial Times (October 4) that “In Airbus and EADS we have European companies that are really a European success…There is no question. We will defend this model.” Now, there’s something in the back of my head that vaguely bothers me about that statement…what could it be? Oh yeah: Why the hell would a successful model need defending?
Let’s back up. Airbus was created when European governments orchestrated their economies, creating new national and continental champions as per politicians’ whims. But as far as industrial policy goes, Airbus was a no-brainer: The jetliner industry offers guaranteed growth rates and extremely high barriers to entry. Take some legacy industrial assets, insert government cash, find some talented sales people like John Leahy, and watch it go. Every other European industrial scheme—shipbuilding, cars, Concorde, Minitel terminals—obliterated value. Airbus was the only state-supported success. Unfortunately, Europe’s politicians forgot a crucial fact: Airbus succeeded despite government industrial policy, not because of it. In fact, this government interference has created some serious trouble.
Look at the Airbus record: a series of moderate successes (A300/310, 330), one huge home run (A319/320/321), and some lamentable but forgivable near misses (A340, A340-500/600). But with the full support and connivance of parent governments, they launched a spine-breaking horror (guess). Without the A380, Airbus would still be a tremendous success. Instead, they’ve got a serious industrial crisis, right in the middle of the best bull jetliner market in years. So, Breton’s “model” of state-guided industries is alchemy in reverse: spinning gold into straw.
Airbus is a good plane maker. But as an industrial model, it’s in dire need of change. The bad old days of getting 70% of its equity from governments and their large industrial proxies is ending. EADS/Airbus needs cash (equity or debt) from new private sector investors. What does a broad float of new investors get them?
1. Freedom. With private cash, Airbus will be free to shift production between sites, to outsource, to sign global industrial partnerships, all without political interference. The A350 won’t happen without that freedom. Airbus also needs to be able to fire workers in one place, and hire them in other places, without anyone caring that the jobs balance was shifting between countries. Most of all, it needs the freedom to launch and kill programs depending on market needs. IF Airbus cannot launch the A350 while continuing with the A380, they need the political freedom to shelve the A380. Streiff’s exit and Gallois’s entrance are good indicators that this freedom is a long way off. Germany’s renewed talk of an equity stake means it might be moving even further away.
2. Feedback. A company held by large stakeholders can do something dumb as long as those stakeholders are coerced or incentivized to go along for the ride. Hence the A380. But a broad float gives you instant feedback and discipline. Do something dumb, and your stock will drop until you cease doing that dumb something.
3. Survivability. We’ve been here before. Think back to 2002 and the collapse of Fairchild Dornier. When the two sole major stakeholders withdrew, there was no broad float to hold up the table. FD went from major player to RJ dust in two months. That can happen when there isn’t a broad market for a company’s shares. Anyone who thinks the A380 is bulletproof need merely look at the prototype 728JET. That’s right, you can’t. It was scrapped.
My friend George Hamlin, VP Business Consulting at Morten Beyer & Agnew, brings up another point concerning imminent money requirements: A380 delays could cause a cash shortage. Airliners are paid for largely at delivery, which removes several billion dollars in the next two years at Airbus. The expenses, of course, go on unabated (and could even increase due to overtime, out of sequence work, etc.). On top of that, what will Airbus/EADS’s cash position be after buying back BAE’s shares? And when Airbus SAS was created, did the partners capitalize it with a pile of money which is now being seriously eroded? Private sector cash isn’t just useful; it might be very necessary.
Back to M. Breton. If you were a member of the French government elite, letting Airbus join the Anglo-US club of independent companies owned by private sector cash would be admitting defeat. To many in France, the role of the state is to manage economies, not let globalization and the private sector run the show. They view Airbus as proof that they are right. The dysfunction: because of the current crisis, Airbus has also become the final proof that they are very wrong. Hence, it’s a “successful model”…that, ummm, needs “defending.”
What’s the real danger of Breton’s thinking? Time for my favorite metaphor, The Windmill. If a storm comes, you can fix your windmill blades in place, or you can let them spin freely. But if you try to slow them down, to manage them as they spin, the gears inside will be ripped apart. Metaphor translation: EADS/Airbus can be re-nationalized (blades fixed in place). Or, they can float all the shares, with totally independent management (blades spinning freely). But if Breton and his government cronies (in all parent countries, possibly including Russia) persist in interfering, EADS/Airbus will resemble that managed windmill. Subject to market forces, but unable to respond as needed. It will be ripped apart.
So once again, the US has fallen behind in a key strategic race—political stupidity. The US may have some serious buffoons, but with leaders like Breton, the Chirac administration is in first place. Giving Breton and his cohorts a decision making role in the Airbus affair is like putting Mark Foley in charge of the Missing & Exploited Children program. Heaven help the people they are supposed to protect.
We’ll update the A380 in the October supplement. Other updates include the C-5, Premier One, Caravan, 717, 757, CL-215, OH-1, and Bell 430. Have a less eventful month.
Yours, ‘Til The Right Guys Prevail,
© Richard Aboulafia 1997-2006, All rights reserved.