August 2012

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Airbus Divests to the Euro-Zone, World Asks Why?

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When asked in early November at the Dubai Air Show about the impact of the weak dollar on Boeing, VP of Marketing for Boeing, Randy Tinseth replied, "I don't know if it necessarily hurts or helps us, but I'm sure it's not helping our competition."

Less than two weeks later, Airbus CEO Tom Enders was saying that the Euro had passed, "The pain barrier" and was forcing cuts to the European aerospace giant's research and development budget.

Louis Gallois, CEO of EADS reinforced the need for a change in an interview in early December, saying, "if the dollar rate stays the way it is now, we will have to shift parts of our production and supplier business to the dollar zone."

In response to its Power8 reorganization plan, Airbus decided to divest itself from French manufacturing plants in Meault, Saint Nazaire, German plants in Nordenham, Varel and Augsburg, as well as a plant in Filton in the UK.

Airbus announced its decision today to distribute the the sites amongst GKN, Latecoere, and MT Aerospace, all three are European companies based in the UK, France and Germany respectively. It had been thought that Kansas based Spirit Aerosystems was the leading contender to receive all of the sites because it allowed Airbus to move key portions of its business into the dollar-zone, thus beginning to deliver some relief from the weak dollar, which it sells its airplanes in. Had Spirit been selected it would've given an opportunity to potentially relocate the manufacturing capability outside of the euro-zone to an area with lower costs and a more favorable exchange rate.

In fact, this decision achieves virtually the opposite effect by working with partners who share the same euro-based burden as Airbus itself is carrying. GKN, Latecoere and MT Aerospace will undoubtedly end up as risk-sharing partners for the A350 program, largely negating the benefit if operating on the euro.

In an interview today, Clay McConnell, VP of Communication for Airbus North America, said that today's decision, "Is one component of the overall Power8, and doesn't put work in the dollar-zone, but is a significant initial step in reducing overall costs and spreading risk."

Mr. McConnell affirmed that this was the first step towards a larger plan that would eventually see investment in the dollar-zone. However, there is "no firm timeline" for Airbus to make the move.

One has to expect that another "dollar-zone" opportunity could present itself when the US Air Force makes its final decision on the KC-X program. EADS and Airbus have been talking about the possibility of moving some final assembly work for the KC-30 to Mobile, AL. As a corollary to this discussion, the A330-200F would likely also undergo final assembly in the US as well, but likely only if the tanker goes, at least in part, to Northrop Grumman. Needless to say, this is a sizable gamble for Airbus if the contract is awarded only to Boeing.

On the other side of the pond, Boeing should take comfort in this (at least partial) validation of its 787 business model. Just as Airbus is doing with the A350, Boeing sold its commercial operation in Wichita to assist in paying for the 787 development costs, and in the process earned a solid partner in Spirit, which is building the nose sections of the 787.

By snubbing Spirit as a potential partner, Airbus also turns away a well-traveled voice of experience in composite technology. Airbus may find itself regretting its decision when it comes time to build the A350. Latecoere and GKN are both suppliers on the 787 program, but not nearly to the extent as Spirit.

The decision though, appears largely based on national interest, not necessarily good business. Airbus has taken a big decision which had significant potential to help their bottom line and only serves to largely solidify their issues with the euro-dollar exchange rate.

Officials in both the French and German Governments had been quoted in recent weeks as being enthusiastically supportive of keeping the manufacturing capability in house to protect national economic interests.

This kind of political consideration for decision making isn't new to Airbus, but actively making the decision to just survive instead of thrive is no way to operate.

Politics and planes often fly in formation, and it appears they are once again.

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