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Airbus

Airbus is a leading aircraft manufacturer whose customer focus, commercial know-how, technological leadership and manufacturing efficiency have propelled it to the forefront of the industry. With revenues of over 25 billion euros in 2007, Airbus today consistently captures about half of all commercial airliner orders. The company also continues to broaden its scope and product range by applying its expertise to the military market.

Headquartered in Toulouse, France, Airbus is owned by EADS. It is a truly global enterprise of some 56,000 employees, with fully-owned subsidiaries in the United States, China, Japan and in the Middle East, spare parts centres in Hamburg, Frankfurt, Washington, Beijing and Singapore, training centers in Toulouse, Miami, Hamburg and Beijing and more than 150 field service offices around the world. Airbus also relies on industrial co-operation and partnerships with major companies all over the world, and a network of some 1,500 suppliers in 30 countries.

Through the 1960s, U.S. LCA manufacturers dominated the world market. This dominance was due in part to the commercial failure of several European large aircraft programs. In an effort to establish a successful West European aircraft program, the governments of the United Kingdom and France funded and codeveloped the Concorde Supersonic Transport (SST) program. The Concorde, while a technical success, was ultimately a financial disaster, and only 14 aircraft went into service.

In the late 1960s, the governments of France, West Germany, and the United Kingdom initiated discussions aimed at creating a West European LCA competitor for U.S. LCA producers. In December 1970, Airbus Industrie formally began operations with Arospatiale of France and Deutsche Aerospace as the major partners. Construcciones Aeronuticas S.A. (CASA) of Spain joined in December 1971, and British Aerospace became a partner in January 1979. The French and German partners each own 37.9 percent of the company, the United Kingdom partner owns 20 percent, and the Spanish partner owns 4.2 percent. During the 1970s, Europe's Airbus Industrie emerged to become the strongest rival of Boeing, the world's top commercial planebuilder.

Though based in Europe, Airbus had its origins in the work of an American executive, Frank Kolk of American Airlines. It was 1966; Boeing had just announced that it would build the enormous 747 airliner. This wide-body jet represented a huge leap beyond the biggest jetliners of the day: the Boeing 707 and the Douglas DC-8. Kolk took the view that the airlines needed something intermediate in size, carrying more passengers than a 707 or a DC-8 but fewer than a 747. He wanted a wide-body layout, featuring a big cabin with two aisles. But whereas those other jets had four engines, his called for only two.

In Washington, his concept for a widebody twinjet soon bumped up against federal regulations. On a number of routes, those that crossed the Rockies or flew over oceans, regulations called for a minimum of three engines to provide safety if an engine shut down in flight. Three-engine designs thus shaped the American jetliners - the McDonnell Douglas DC-10 and Lockheed L-1011 - that grew out of Kolk's initiative. On other routes, a twinjet indeed could comply with the safety regulations.

In Europe, however, America's regulations did not apply. At the French firm of Sud Aviation, the chief engineer Roger Beteille took the lead in urging Europe to build Kolk's big twinjet. Such a project was too big for Sud alone to take on, and Beteille won promises of cooperation from government officials in Britain and Germany. Together they agreed to build such a plane, calling it the Airbus A-300.

The president of France, Charles de Gaulle, resented US domination of commercial aviation and was eager to build a French or European airliner that could compete with American designs. To stir interest within the United States, Airbus leaders selected an American engine, built by General Electric. This did not suit the British, who withdrew from the venture. However, British expertise soon proved essential in crafting wings for the A-300, That country's firm of Hawker Siddeley was Europe's strongest company in this area, and soon joined the program.

Airbus Industrie took shape formally late in 1970. It was a consortium, an association of corporations, working under French laws governing multinational cooperative programs that relied on government financing. The A-300 first flew in October 1972. However, during the next five years it racked up only 38 orders. In Toulouse, home of Sud, 16 unsold aircraft sat along a fence outside the plant, their tails painted white and showing no airline insignia. The A-300 won new luster during 1979, the year of an oil crisis that sharply raised the price of jet fuel. As a twinjet, it was lighter in weight and used less fuel than the tri-jet L-1011 and DC-10. Having one less engine, the A-300 also was easier to maintain and less costly to purchase.

In 1986, Airbus took a further leap with another new program, the A-330/340. This took shape as a single airplane that could accommodate either two or four engines. The A-330 was the twinjet version; it was larger than the A-300 and the Boeing 767. The A-340 was the four-engine version. Built for long range, it served transoceanic routes that covered world-spanning distances but attracted too few travelers.

Announced in 1967 by the French, German, and British governments as a consortium of national aerospace companies, Airbus was designed to strengthen European cooperation and challenge US aviation dominance. In an effort to streamline decisionmaking, the Airbus consortium reorganized itself into a single integrated company in 2001. Incorporated under French law, the four national entities -- France, Germany, Spain and the UK -- transferred their assets to, and became shareholders of Airbus while retaining separate legal structures. Headquartered in Toulouse, France, manufacturing, production and sub-assembly of parts for Airbus aircraft are distributed around 16 sites in Europe, with final assembly in Toulouse and Hamburg.

By 2008 Airbus, a division of the European Aeronautic Defense and Space Company (EADS), continued to face growing pains as it evolves from a business cobbled together from national champion aviation companies in France, Germany, Spain, and the UK into a fully integrated multinational. Seven years after this merger, remnants of the original fractured organization and its accompanying corporate culture still hamper efficient operation. To address organizational weaknesses revealed by the ambitious A380 program and significant financial difficulties, the company's management launched a reform program that should place Airbus on the long and bumpy road to becoming a true multinational corporation as long as national governments stay on the sidelines.

A single, publicly-traded European corporation, national interests remain apparent at Airbus and its parent company, the European Aeronautic Defense and Space Company (EADS). (The latter was formed in July 2000 by a merger of DaimlerChrysler Aerospace of Germany, Arospatiale-Matra of France, and Construcciones Aeronuticas SA (CASA) of Spain.) Governments have helped finance the development of Airbus aircraft through low interest loans repayable once a plane achieves profitability (i.e. launch aid).

To defend their national concerns, France and Germany insisted on a complicated, nationality-based management structure in which EADS had French and German co-Chief Executive Officers, with Airbus oversight accorded to the CEO whose nationality differed to that of the Airbus President. The 2007 end to this system required the involvement of the German Chancellor and French President. Under this new cross-reporting agreement, EADS was headed by Louis Gallois, a widely-respected and well-connected French industrial manager, to whom Airbus German President -- and former EADS co-CEO -- Tom Enders reports.

Airbus' A380 program -- the first aircraft fully developed since the merger -- was expected to prove European transnationalism at its best. At the plane's unveiling ceremony in 2005, the British, French, German, and Spanish heads of state all highlighted it as a triumph of the European "dream." In reality, the A380 demonstrated Airbus' overall lack of unity and the weakness of the management structure. As short-lived Airbus CEO Christian Streiff said after a 2006 review, "Airbus is not yet an integrated company. Airbus doesn't yet have a simple and clear organization. There are shadow hierarchies -- leftovers from the never-finished integration."

Although it claimed to be multinational, by 2008 national rivalries persisted at every level of Airbus. When the long-time German Chief Operating Officer (COO), Gustav Humbert, succeeded Frenchman Noel Forgeard as Airbus President in 2005, employees joined the French public in expressing concern that France would be slighted in Airbus decision-making. Airbus employees also have told Consul that some claim the highest ranking American employee, COO Customers John Leahy, is a spy. Therefore, even though he is highly respected, no one could imagine him as the company's President. By the same token, most cannot imagine a scenario in which a British or Spanish citizen -- both integral parts of Airbus -- would become the President.

Many experts believed the confused management reporting and strongly nationalistic culture contributed to the significant delays in the A380 program. The refusal of French and German engineers to use the same software in developing the A380 -- and the failure of Airbus senior management to compel them to do so -- clearly illustrated Airbus' challenges. Due to this lack of technological communication, a five centimeter shortfall in 530 kilometers of wiring became apparent on the final assembly line. The inability to connect cabling between A380 sections led to a two-year delay in the program and the need to send 1300 German mechanics to Toulouse -- local French workers could not undertake the job since Germany was responsible for this part of the plane -- to painstakingly re-wire every aircraft at the final assembly line.

In total, Airbus' difficulties in the industrialization of the A380 cost EADS around USD 6.6 billion. At the same time, Airbus was grappling with its first military program, the A400M, and embarking on its A350 program. The market for the latter represents the industry's future with Boeing having sold over 900 of the 787 and Airbus sales of the competing A350 at over 300. Late to the market after several unsuccessful, cheaper versions, the A350 program required an investment of approximately 12 billion euros. Furthermore, the falling dollar led to record losses given Airbus sells in dollars but has significant Euro-dominated costs. In 2007, the company recorded an operating loss of 881 million Euros (i.e. approximately 1.35 billion USD), up from 572 million Euros (i.e. 879 million USD) in 2006.

In an attempt to cope with this financial situation and address its structural weaknesses, Airbus embarked in 2006 on a reform program entitled Power8. Intended to be more internally focused than previous projects, which primarily sought to pressure suppliers to lower prices, Power8 aims to significantly restructure the company. An eight point project, it seeks to radically cut Airbus' internal and external costs through a hiring freeze and renegotiating procurement contracts, speed up development by bringing suppliers into the process earlier, and streamline the production process through a rationalization of manufacturing sites.

Viewed by suppliers, Power8 does not depart significantly from previous programs, such as Route 06, even though Airbus' COO argued that two-thirds of savings have come from internal changes. Under the guise of Power8, Airbus procurement is pressing for development cost sharing (i.e. suppliers' seconding engineers for product definition and defraying charges for product testing and certification), along with the usual significant price reductions. Given exchange rates and the strength of the U.S. aviation industry, Power8's increased emphasis on a global supply chain should be a golden opportunity for U.S. suppliers. In reality, US executives must seriously evaluate each work package's business case and sometimes choose to not bid due to stringent profitability conditions imposed by their own boards and stockholders. Although this situation is bleaker for French companies given that Airbus required bids in dollars, U.S. business contacts have complained that their competitors can accept less favorable conditions, because the French government will subsidize them if losses become too great.

For Power8's desired risk sharing to succeed, Airbus must overcome an insular, balkanized corporate culture found at all levels. Its goal to integrate large, often American, suppliers into the early stages of product development would fail if Airbus engineers refuse to truly cooperate due to fears of losing control of the process, according to industry sources. U.S. suppliers often complain that Airbus' working level -- both arrogant and afraid of downsizing -- kept tight control of information, imposes changes, and rejects input. Recognizing this situation, the company's management recently emphasized at a large suppliers' conference that any supplier with a previously-rejected, cost-reducing proposal should re-submit it. A high-level supplier summarized its role in Airbus' reform as "We are the change agent," meaning Airbus management is relying on outside partners to stimulate new operating practices since it is unable to force change from above.

The plan to manage costs by awarding larger work packages to fewer suppliers -- the upcoming A350 will have around 70 aircraft systems contracts as compared to approximately 160 for the A380 -- also would stumble if Airbus succumbed to significant political pressure to continue to buy directly from local small and medium-sized enterprises. Airbus devoted significant resources to explaining its new procurement concept (i.e. reduce the overall number of Tier 1 suppliers from more than 3000 to less than 500 with the expectation that the latter will employ the former as Tier 2 suppliers) to the relevant French authorities, including government agencies, the French aerospace industry association.

Even more sensitive than procurement reform is the sale of plants in France, Germany, and the UK (internally titled Zephyr). Intense political pressure, especially in France and Germany, to balance the divestitures influenced the choice of factories and time lines. A theoretically open process, Airbus ended up choosing companies from the country in which the sites are located as preferred bidders (i.e. choosing the French Latecoere for two French factories, British GKN for the one in England, and German OHB/MT Aerospace for three in Germany).

Suppliers and Airbus contacts stated their expectation that the reconstituted businesses will seek government funding after the sales. Airbus thus would benefit by not only removing employees from its payroll but also obtaining more state support -- though indirect -- than under the old system, which always required a careful balance of competing German and French interests. They used their comparative appeal to French unions as a French company during negotiations. Playing off fears of American business practices, they highlighted that labor leaders would accept them more easily.

In March 2008, Airbus and OHB/MT Aerospace ended talks without an agreement, and EADS has announced that it would proceed by creating a holding company for the three German plants. This development may put the entire process in jeopardy if political forces interfere. Local industry sources have told Consul that the governments wanted Airbus to divest in France and Germany at the same time to ensure that one country does not have more Airbus production. French unions once again called for strikes in response to the perceived preferential situation in Germany.

Any revival of national tensions could create larger problems for Airbus, which is still struggling with the modernization of its peculiar governance structure. The Franco-German shareholders' pact, which officially delineates government influence over EADS, remains complicated. The agreement created an imbroglio between political interests and market participants that has proved difficult to unravel, vesting representation of national interests in private shareholders (the French firm Lagardere and German Daimler-Benz), both of which are in the process of exiting the business.

The Financial Times reported in March 2008 that France and Germany were near agreement on a proposal to give each country a "golden share" with veto power over sales to new shareholders of more than 15 percent of the company's stock. The EU Commission opposed this scheme, but France and Germany argued that aeronautics is a "strategic" industry or could ask shareholders to adopt a poison-pill defense that has been used successfully by other Netherlands-registered companies.

For its part, Airbus appeared to realize that government involvement can be detrimental to the company. Although it sought and received launch aid commitments for the A350 from the governments of France, Germany, Spain, and the UK, it has not yet drawn this money. Instead, in light of the continuing weakening of the dollar, Airbus has begun "Power8 plus," with a strong emphasis on low cost country/dollar sourcing. With Airbus currently claiming it spends 46 percent of its procurement budget for "flying parts" in the U.S., it especially was pushing suppliers in this direction.

Airbus primarily will focus efforts on decreasing significantly the percentage of its employees based in Europe. Airbus aimed to reduce in the next ten years []2008-2018 its European workforce from 97 percent of total employees to between 70 and 80 percent. Plans to open final assembly lines -- the company's strongest symbol -- in China and Alabama will assist this goal. Airbus had mastered the communication related to this controversial move, suffering little political or union backlash. However, if the French begin sensing a loss of Airbus jobs and equilibrium with the Germans, this calm could quickly end.

Airbus' reform program showed that its upper management recognizes the necessity of becoming a more integrated, global company in order to succeed, especially in light of the falling dollar and efforts to forego launch aid. However, such a transformation will not occur quickly or smoothly because of the rival vision of relevant governments and parts of Airbus itself. They still view the corporation as a collection of national champion companies, which primarily exist to advance national pride and create well-paid employment.

As long as aircraft sales continued at their current extraordinary rate, allowing globalization to occur without threatening European jobs, Airbus should manage to slowly implement its vision. Any number of factors -- a further depreciation of the dollar, significant tariffs on planes due to a negative WTO outcome, the rise of an aircraft manufacturer in China or Russia, a French government decision to use Airbus as a last stand against globalization -- could upset this precarious balance.

Over its 35-year history, Airbus benefited from massive amounts of EU member State and EC subsidies that enabled the company to create a full product line of aircraft and gain more than a 50 percent share of large civil aircraft sales. Every major Airbus aircraft model was financed, in whole or in part, with government subsidies taking the form of "launch aid" - that is, financing with no or low rates of interest, and repayment tied to, and entirely dependent on, sales of the financed aircraft. Moreover, if a particular model does not sell well, Airbus does not have to repay the financing.

Airbus draws together the skills and expertise of 16 sites in France, Germany, Spain and the UK. Each site produces a complete section of the aircraft, which is then transported to the Airbus final assembly lines in Toulouse or Hamburg. Airbus' industrial network has been expanded to include a regional design office in North America, a joint venture engineering center in Russia and further engineering centres in the People's Republic of China and India. Work on the construction of the Airbus A320 Family Final Assembly Line in Tianjin has reached completion.

Airbus' modern and comprehensive product line comprises highly successful families of aircraft ranging from 107 to 525 seats: the single-aisle A320 Family (A318/A319/A320/A321), the widebody long-range A330/A340 and the all-new next generation A350 XWB Family, and the ultra long-range, double-decker A380 Family. Across all its fly-by-wire aircraft families Airbus' unique approach ensures that aircraft share the highest possible degree of commonality in airframes, on-board systems, cockpits and handling characteristics, which reduces significantly operating costs for airlines.

Furthermore, in anticipation of market growth, Airbus is extending its portfolio of freighter aircraft that will set new standards in the general and express freight market sectors. Airbus' latest addition to its family of freighter aircraft is the A330-200F - a mid-size, long-haul cargo aircraft that benefits from the excellent economics and fly-by-wire technology of the popular A330-200 airliner. In addition to new-build-freighters, Airbus has also launched the A320/A321 Family passenger-to-freighter conversion programme aimed at replacing the many ageing small freighters in service today. As well as bringing new levels of efficiency to freight operations, it will extend the service life of the A320 Family even further, and boost the fleet's residual value.

By the end of 2008 Airbus had sold over 9,100 aircraft to more than 380 customers/operators and has delivered over 5,300 aircraft since it first entered service in 1974. Dedicated to helping airlines enhance the profitability of their fleets, Airbus also delivers a wide range of customer services in all areas of support, tailored to the needs of individual operators all over the world.

Sensitive to its position as an industry leader, Airbus strives to be a truly eco-efficient enterprise. To that end Airbus is the first aeronautics company in the world to have earned the ISO 14001 environmental certification for all production sites and products for the entire life cycle. Airbus seeks to ensure that air transport continues to be an eco-efficient means of transport, delivering economic value while minimizing its environmental impact.

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