Farnborough Air Show

EADS undeterred by failure to divest Airbus plants

 - July 2, 2008, 11:56 AM

EADS’s failure to divest itself of major Airbus production sites in both France and Germany as part of its Power8 restructuring plan hasn’t threatened a delay in the development schedule for the A350XWB, according to the European group’s CEO Louis Gallois. However, in the build-up to this week’s Farnborough airshow, questions remained over how long the company could wait before the program begins to lose its development rhythm.

The company continues to claim its relatively strong cash position won’t force it into any rash decisions. However, to maintain the A350’s progress, the sites in question will need more than $1.5 billion in technology upgrades–investments that EADS and Airbus had hoped to leave to the eventual new owners.

One of those potential new owners, France’s Latécoère, hasn’t hid its disappointment over the breakdown of talks, and seemed to lay some of the blame on EADS and Airbus for the failure. Among the main reasons for the end of the negotiations, Latécoère supervisory board chairman François Junca listed “the desire repeatedly expressed by Airbus to proceed in a similar fashion in Germany and in France, and the failure to find a solution in Germany,” as well as the financial crisis in the U.S. and the currency exchange rate imbalance between the euro and the U.S. dollar.

Airbus cited market volatility and the slide of the dollar as the reasons for breaking off talks with both Latécoère and MT Aerospace, the previously designated preferred buyer for German factories in Nordenham, Varel and Augsburg. OHB Technology also pulled out of bidding for the German plants, citing difficulties in raising the necessary funds in today’s constrained capital market.

Junca, however, suggested the sides could have avoided a collapse in negotiations for the French sites of Méaulte and St. Nazaire Ville, and characterized Airbus’s unwillingness to proceed as a blow to the French economy. In fact, he said, Latécoère had found a pool of investors willing to commit the funds for a needed ?300 million ($462 million) capital increase. Toulouse-based Latécoère stood to become the largest maker of nose sections in Europe, and expected to double its annual income with the investment.

Unfortunately for Junca, his appeals to consider the well-being of the French economy proved not convincing enough to a company whose stated goal to “go global” appears to run directly counter to any calls for French or European solidarity. EADS’s top management has repeatedly called for the group to become “less European” as well as less dependent on Airbus and its platforms.

During May’s annual Technical Press Briefing at Airbus headquarters in Toulouse, the airframer’s CEO, Thomas Enders, lamented the shortage of skilled workers in Europe as perhaps the biggest reason for the latest delays to the A380. The company’s Vision 2020 plan calls for a decrease in its proportion of employees based in Europe from 97 percent to 80 percent over the next 12 years.

Since talks broke down, Latécoère has ruled out becoming a risk-sharing partner in the A350, although Airbus insists its compatriot from Toulouse will continue to serve a vital role in the program as a supplier. Gallois told investors in May that the company had already awarded 70- to 80 percent of the program’s total work packages, and cited the end of the year as the target for awarding the remainder.

Airbus also insists the divestment strategy as a whole remains in place. It said it would establish a separate business entity composed of the five units it failed to sell and divest itself of them at a later stage when market conditions improve. Meanwhile, according to Airbus, Power8 had already saved the company ?500 million ($770 million) last year, and it continued to reap efficiency gains despite the failure to sell the plants.

Business Plan
“The focus of Power8 is not selling sites or cutting headcount,” insisted Enders. “The focus is on improving efficiency, reducing costs throughout Airbus and its supplier base, and positioning us for the A350, the new single-aisle and beyond.”

Over the past five years, explained Enders, the company has increased its total delivery rates by 50 percent while adding only 24 percent more workers
to its payroll. Enders attributed to the improvement leaner manufacturing techniques and streamlined processes, as well as integrating tools and standardizing reporting systems. “That work may not have been grabbing headlines in the way divesting sites or reducing headcount have, but it is at least, if not more, critical in terms of our future success,” said Enders. “For example, it has already let us make reductions in areas where less resources are now required thanks to efficiency gains, while increasing them where they are most needed–notably on the production ramp-up and the A380 program in particular.”

Anticipating questions about why, then, the need for the divestments, the German executive cited a shortage of skilled workers across the industry, rapidly growing demand for deliveries in the coming decades, new or future competition and a weakening dollar “that could stay weak for long or swing back just as wildly in the future.

“I would like to say this: we are changing rapidly but not as much as the world around us,” said Enders.

So Airbus’s divestment efforts continue, and on May 30 the company announced that it had selected a team consisting of Germany’s Diehl and France’s Thales as the preferred bidder for another Airbus site in Germany, this time in Laupheim. The companies already serve as strategic partners in avionics supply and integration under the Diehl Aerospace joint venture, of which Diehl owns 51 percent and Thales 49 percent. The partners would maintain those same ownership stakes in the Laupheim factory, which employs 1,100 in the production of cabin linings, compartments and air ducts for all Airbus civil aircraft. Under the terms of the deal, Diehl and Thales would inherit cabin work packages for the A350XWB.

Meanwhile, ahead of the Farnborough show, talks with GKN over the sale of Airbus’ plant in Filton, UK, remained on track as the companies aimed to settle on all terms before the event. The contract includes “significant” composite work packages for the A350XWB wing.

As Airbus UK’s headquarters, Filton employs more than 4,500 in the design office, manufacturing areas and in business support roles such as procurement, finance and customer services. The design office at Filton–one of six within Airbus–manages the design of all wings for every Airbus aircraft. It also carries responsibility for the design integration of landing gear and fuel systems.