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:: March 2007 Letter ::

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Dear Fellow Irony Miners,

What is Irony? A movie character played by Winona Ryder said she couldn’t define it, but she knew it when she saw it. She was right. Just look at Airbus and Europe:

Irony 1: Don Rumsfeld shows why the US is a great country. I’ve given up investigating whether the US or Europe has worse politicians. There are plenty of incompetent stooges to go around. As Henry Kissinger said, 90% of politicians give the other 10% a bad reputation. The difference is scope of authority. The US is better run because its politicians are less inclined to monkey around with commercial enterprise (the Dubai Ports debacle was a lamentable exception). By contrast it’s perfectly fine for Continental European politicos to invest state funds in commercial firms, determine where and when businesses can fire people, control the flow of work across borders, or treat yogurt as a strategic industry. US politicians like Rumsfeld can be just as dumb as Europe’s Thierry Breton or Segolene Royal, but at least in the US they have very little control over the economy.

Side note: who will write the definitive comparison of the mismanagement of Iraq with mismanagement of the A380 program? There are numerous parallel blunders: underestimation of resource requirements, misunderstanding of long-term consequences, miscomprehension of how the enemy would react, the appointment of well-connected political hacks rather than qualified people to do the job, failure to understand customer needs (airlines or the Iraqi “street”), the victimization of smarter, innocent leaders who knew what they were doing, just to name a few.

Irony 2: Good men make things worse. Speaking of hacks, the departure of Noel Forgeard produced unintended consequences. When Forgeard was around you could understand the source of Airbus’s management problems. But with Louis Gallois and Tom Enders, you have two honest and competent guys disagreeing. This is different from a petty dictator with an alleged fondness for dubious stock sales. Gallois and Enders disagree because of divergent (and perhaps irreconcilable) national goals. That sounds harder to get around than one lone egomaniac.

Irony 2.1: An enterprise designed to bring Europe together is helping to tear it apart. That’s just a corollary to the previous irony.

Irony 3: The A380 US tour. Meant to raise morale and provide positive news while Airbus struggles with political and labor problems. Yet the political problems and labor unrest wouldn’t be happening if it weren’t for the A380. Which somehow reminds me of another movie character’s quip about Star Wars: never forget the thousands of innocent blue collar workers killed when the rebels destroyed the Death Star. And the very idea of needing to fire thousands of workers in the midst of a tremendous boom jetliner market is ironic by itself.

Irony 4: Private equity might help save a European champion. Some European leaders hate market economies, but can’t come out and say it, so they lash out at globalization or private equity. Just two years ago Franz Müntefering, chief of Germany’s then-ruling SPD party compared private equity firms to a “swarm of locusts” that “graze” on under-valued businesses, fire employees and then re-sell the firm for a big profit. Yet if Airbus divests some of its structures factories under Power8 private equity could play a very helpful role, as with Boeing’s Spirit AeroSystems spin-off. Europe’s anti-capitalists might then realize that private finance saved the day for a cherished national champion after government institutions failed to do anything useful.

Irony 4.1: Those private sector “locusts” wouldn’t have permitted the A380 launch. Governments enabled it. Who are the real locusts?

Irony 5: General ironic moment. Daimler Chrysler now wants EADS to pay a dividend. The French Government doesn't want to get a dividend, because firing workers while earning a profit is embarrassing.

Irony 6: Inadequate outsourcing could create new competitors. The accepted wisdom is that outsourcing disseminates technology and knowledge that could enable new jetmakers in Asia. Despite recent diplomatic flattery by Boeing’s Jim McNerney and ILFC’s Steve Udvar-Hazy and a curious government announcement from China, I’ve never been a big believer in emerging market aviation competitors for many reasons. And outsourcing has had the opposite effect: Boeing’s work in Japan has co-opted a potential competitor for over 30 years, bringing them into a mutually lucrative international partnership and giving Boeing a source of product development cash. Both manufacturers have a similar goal in China. Airbus needs to use outsourcing to become an integrator, like Boeing. If Airbus continues to keep its structural work in-house for political reasons, new products like the A350 XWB and A320-X will be much harder to launch. Holes will appear in the Airbus product line. This will give emerging market producers something to attack and exploit. Outsourcing and global partnerships could save Airbus from emerging manufacturer predation.

Actually, you can define irony. Paul Fussell, in The Great War And Modern Memory, defines it as “a satire of circumstance.” This means things are often worse than they appear. That brings up the final irony: Airbus’s defenders enable its marginalization. Every politician and labor leader needs to understand that the outlook for Airbus is much worse than it appears. Failure to take action—outsourcing, plant divestitures, and ruthless implementation of Power8—will reduce Airbus to a niche player by 2012. This will make 2006, described by EADS Co-CEO Tom Enders as an annus horribilis, look like a golden age before the great implosion.

Final, final irony: I’m an optimist. Teal Group’s forecast calls for the A350 XWB to arrive in 2014, followed by a new A320 replacement about 18 months later. This will be tough to pull off, but we’re hoping that everyone involved realizes what’s at stake.

Teal updates this month include the Joint Strike Fighter, A320, A300, 737/MMA, Harrier, K-8, E-2, Gulfstreams, PC-12, S-76, SA 365, Hawker 400, Islander, and Bell’s 206/407/429/ARH. Have a great month.

Yours, Until Things Cease Falling Apart,

Richard Aboulafia

 

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