RichardAboulafia.com 

:: June 2010 Letter ::

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Dear Fellow Bad Car Aficionados,

Can’t decide which car to buy? If you’d like a reminder of what life is like if you can’t make basic consumer choices, rent a Trabant, East Germany’s contribution to the Museum of Commie Industrial Atrocities. Today, bad car lovers rejoice, you can rent a vintage Trabant at www.trabi-safari.de. At this year’s ILA, I folded myself into one with fellow Tealies Bill Storey, Phil Finnegan, and Joel Johnson. Bill drove.

It was atrocious, of course. Joel and I had our knees banged with every road bump and crack we hit. Phil quickly started wheezing, understandable given the fumes from a filthy two-stroke engine. Bill, the most unflappable person I’ve ever known, acquired a facial tic. This too was understandable given the sheer terror of maneuvering in Berlin traffic in a car-sized shipping crate (to save on steel, the Trabant’s structure was largely constructed of cotton and glue) powered by a lawn mower engine with a column-mounted gear shift. Exiting the vehicle was the highlight of our day.

The experience reminded me of the evils of industrial policy. The Trabant was part of an East German auto industry development scheme, and it was the only car you could get in the DDR. (East Germany had a national jet too: on its second flight in 1958 the Baade 152 provided a tragic and deadly illustration of what would have happened if the Trabant had been designed with wings and jets.) Very simply, government industrial policy is designed to help the producer, and that usually hurts the consumer.

This theme is true for military products as well. Creating national military programs and keeping out competition hurts national air forces. Airbus is right about tankers: if the US military market is closed to foreign competitors, the US military will suffer, as any military does when it doesn’t have the freedom to procure weapons globally.

This is one of my favorite themes in the civil aerospace industry too. Government-funded national airplanes hurt national airlines. For decades, governments in Indonesia, India, Russia, and other emerging aviation players have gotten the bright idea of creating national planes, which usually means sealing the borders and forcing local airlines to take them. Heaven help, for example, any Chinese carriers forced to accept ARJ 21s.

A new variation on this theme: Funding a national airplane and subsidizing foreign carriers to take it. Not only are you hurting taxpayers with a subsidized airplane, but you’re hurting your airline industry too. This brings us to the big event at ILA: Emirates’ order for 32 more A380s. This somewhat overhyped event (Airfinance Journal reports that it was compensation for a Dubai Aerospace Enterprise Airbus orders “restructuring”) represents the only significant A380 order in years. It also cements Emirates’ status as the only enthusiastic A380 customer.

The A380 isn’t a Trabant. Having flown on it, it offers a very quiet and comfortable passenger experience. But it’s a commercial disaster. Put aside Emirates’ 90 planes and the latest round of dumb hype (“it takes an A380 to compete with an A380!”), and Airbus has sold a dismal 144 aircraft over 10 years (this month marks the 10th anniversary of the commercial launch decision, which was followed by Singapore’s order). Some of those 144 A380 orders are basically dead, and many others have been deferred.

The only hope for the A380 program, therefore, is Emirates. Like its wannabe colleagues Etihad and Qatar, Emirates is enjoying remarkable growth rates by grabbing other people’s traffic. Airbus tacitly acknowledges this. Their latest Global Market Forecast calls for 6.9% annual Mideast traffic growth. To absorb the current backlog of 90 A380s, 200+ A350XWBs, 200 777s and 787s, and scads of other planes, Emirates and its pals need to grow at a much faster pace than 6.9%. It’s very unlikely that they’ll grow fast enough to absorb all 90 A380s, but they have enjoyed impressive growth. They’ve achieved that by siphoning traffic away from European legacy carriers, especially Lufthansa, Air France/KLM, and British Airways (these three very large carriers, by the way, have ordered a combined total of just 39 A380s).

Emirates is an excellent airline that has won that traffic by offering great service at a good price (with some help from its home base). Europe would only hurt its consumers if it kept Emirates out of its air travel markets, and protectionism is a bad idea. But the A380 represents a publically funded way to help Emirates beat up on those European airlines. Europe is subsidizing the aeronautical rope that Emirates is using to hang European airlines in four ways:

1. Export Credit Finance. Many A380s exported to the Mideast enjoy European government export credit finance, which is particularly important as Dubai’s financial uncertainties affect capital availability. ECA finance, of course, is not available for the European carriers whose traffic is Emirate’s favorite lunch.

2. Landing Rights. According to many press reports, the latest round of A380 orders was announced in Berlin to curry favor with German authorities. The goal is to gain landing rights for Emirates at Lufthansa’s expense.

3. A380 Development Funding. The A380 itself would have been impossible without billions in taxpayer euros that will never, ever be paid back.

4. A350XWB Development Funding. Airbus might not need public cash for this new plane if it weren’t losing tens of millions on each A380 it delivers. Airbus now says that A380 production won’t turn cash-positive until at least 2015. Until then, losses on each plane delivered to Emirates will effectively be made good by A350XWB launch aid.

In short, from Emirate’s viewpoint, the A380 represents Europe’s fat and vulnerable aviation underbelly. Europe has shown it is quite willing to protect its national plane, even if that means throwing its national airlines under a bus.

After ILA I joined my family in Amsterdam. As I landed at Schiphol, it occurred to me that the Netherlands holds a unique distinction. It had a national jet and a national airline, and it let go of both of them. Fokker and KLM were good, but not good enough, or big enough, to be successful global players. Fokker devolved into a components manufacturer, and KLM, of course, was rolled into Air France. The Netherlands has one of the most advanced economies in the world. Perhaps protecting national airplanes and national airlines is merely a phase countries go through as they grow up.

Until then, as Europe supports the A380 by getting Emirates and friends to take them, Lufthansa and its fellow European carriers face a tough time. On that note, this month’s WMCAB updates include the Trainer and Military Transport Aircraft Overviews, and updates of India’s LCA and ALH, the Learjet series, and the AMX and Tornado reports. See you on Farnborough’s melting tarmac.

Yours, ‘Til US Transcon Routes Are Routed Through Dubai,
Richard Aboulafia
 

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