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LQD: Power 8

by nanne Fri Jan 16th, 2009 at 07:33:33 PM EST

SPIEGEL ONLINE has posted a very intriguing article on Airbus that, on the surface, seems like superficial pro-corporate fluff. But it's either unintentionally revealing, or there's more to it. The relevant part:

Calm Skies: Airbus Flies in the Face of Recession Winds - SPIEGEL ONLINE - News - International

Airbus is counting on European export credit agencies -- quasi-governmental banks that help finance export deals -- to provide financing for about half of Airbus deliveries this year, twice the normal level.

At the same time, Airbus executives say that a two-year-old cost-cutting program, known as Power 8, has yielded benefits that make layoffs unlikely. The company has slashed annual operating costs by more than $1.7 billion and is on track for more than $2.5 billion in additional savings by 2012, Chief Operating Officer Fabrice Brégier said on Jan. 15. Already, the company's full-time workforce has been cut from 54,000 to 47,600, with some of those positions shifted to temporary workers or subcontractors.


Continued below the jump.


That's likely to help the company, whose competitiveness has been badly dented by the euro currency's strength against the dollar. Airbus also plans to outsource a record 50 percent of major work on its next planned aircraft, the A350, including substantial work in lower-cost venues such as China, Russia, and North Africa.


Airbus will seek launch aid for this aircraft. In addition to relying on the state-funded quangos of France and Germany to facilitate the financing of most of their sales.

And if that isn't enough, the top link from SPIEGEL partner BusinessWeek (shown on the same page in an odd case of synchronicity) brings some news from the far side of the United States:

Boeing to Rein in Dreamliner Outsourcing - BusinessWeek

Boeing (BA), beset by repeated snarls that have delayed commercial deliveries of its 787 Dreamliner into early 2010, is rethinking the global outsourcing model that critics say has caused much of the nearly two-year holdup. The company is making plans to bring more work back in-house.

To be brief: the dots to connect here are obvious. The only question is, when are Sarkozy and Merkel going to step in?

Display:
Airbus is certainly engaged in an outsourcing programme with Power8. Saying it makes "layoffs unlikely" is weasel language, since the Power8 plan includes (from 2007 to 2012) an overall workforce reduction of 10,000, with a 3,300-job downsizing under way at Airbus Toulouse.

Airbus CEO Louis Gallois:
Power8 prepares way for "New Airbus"

"We cannot continue to produce at our current Euro costs and sell at Boeing's dollar prices,"

so (same document):

A large part of the cost savings will be achieved through reducing the total Airbus overhead workforce (including temporary and on-site supplier workforce) by 10,000.

Subcontractors are also being substantially reduced. That's happening in a fairly complicated way I haven't got a handle on. But production is being outsourced to dollar zone and low-labour-cost countries.

So "layoffs" are "unlikely" essentially because they've already been made.

(It would be interesting to see what Melanchthon has to say, he may know more about this than I do. Also our much-regretted friend Elco B, where are you, Elco?)

As to EU or government attitudes, they've always been broadly supportive of Power8 afaik. Only if the crisis really began causing a lot more trouble would I expect Sarkozy to step in, and more likely on his hobby horse of "the euro is too dear". In other words, not in favour of good French-German coordination on this...

by afew (afew(a in a circle)eurotrib_dot_com) on Sat Jan 17th, 2009 at 02:46:01 AM EST
Indeed, Merkel and Sarkozy were last seen agreeing that EADS had to be a 'normal company'.
Merkel, Sarkozy to Tackle Airbus Issues at Toulouse Summit | Europe | Deutsche Welle | 16.07.2007

"EADS has to become a normal company," President Sarkozy said at the Paris Air Show last month, underlining complications caused by the group's unusual management and shareholder structure.

"We agree with the view that a company like EADS can only exist if it has efficient structures," said Merkel at the end of May after a meeting with the French Prime Minister Francois Fillon.
Which is all fine but doesn't explain why we should be subsidising jobs in China and Russia, plus the bootstrapping of the Chinese and Russian airspace industry, at a time when even Boeing has gotten the memo that global sourcing has gone too far.

Or: we've seen that close coordination between Germany and France on a major industrial project (building a new airplane) was difficult. So now we're going to draw in many more partners!

It's a short term strategy that will come to bite Airbus in the back.

by nanne (zwaerdenmaecker@gmail.com) on Sat Jan 17th, 2009 at 04:11:39 AM EST
[ Parent ]
Isn't the pretence that Airbus subsidy will be reduced?
by Metatone (metatone [a|t] gmail (dot) com) on Sat Jan 17th, 2009 at 04:22:13 AM EST
[ Parent ]
The only support they have gotten is 'launch aid', which I believe they will ask again. The latest on that:

The Associated Press: Airbus A350 development on track

Bregier gave few details on how Airbus plans to finance the euro10 billion ($13.26 billion) A350 program. He said the development costs have so far been funded by Airbus and some of its suppliers in a risk-sharing program.

"We are not in a hurry to find other ways despite the difficulties we know our customers will face in 2009," he said.

Airbus may also seek government aid to create a "level playing field" with Boeing's 787, which he said "got a lot of subsidies."

by nanne (zwaerdenmaecker@gmail.com) on Sat Jan 17th, 2009 at 04:36:35 AM EST
[ Parent ]
Is that what you meant by this:

nanne:

Which is all fine but doesn't explain why we should be subsidising jobs in China and Russia, plus the bootstrapping of the Chinese and Russian airspace industry, at a time when even Boeing has gotten the memo that global sourcing has gone too far.
by Metatone (metatone [a|t] gmail (dot) com) on Sat Jan 17th, 2009 at 05:41:31 AM EST
[ Parent ]
If we are to give aid for this, it shouldn't go to outsourcing outside of the EU. Launch aid is otherwise a good idea. It consists of the state taking over risk, e.g. the state provides financing which is only repayable if the project is successful. So far Airbus projects have delivered, so they're paying back the aid.

Otherwise the entire pretense that EADS is a 'normal' company is no longer relevant in a time when governments are bailing out much more normal companies throughout the economy. Sure, there needs to be some restriction on government interventions. But in this case it is clear that Airbus' strategy has some elements that are not in its own long-term interest.

by nanne (zwaerdenmaecker@gmail.com) on Sat Jan 17th, 2009 at 06:16:38 AM EST
[ Parent ]
great points, linca.

i'm also concerned about chinese quality control, bolts shearing etc.

they're not ready yet...

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Wed Jan 21st, 2009 at 12:47:35 PM EST
[ Parent ]
so sorry, i said 'linca' but meant 'nanne'.

must. slow. down.

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Wed Jan 21st, 2009 at 12:50:04 PM EST
[ Parent ]
LOL

Thanks, melo. I take no offense for being exchanged for linca.

by nanne (zwaerdenmaecker@gmail.com) on Wed Jan 21st, 2009 at 01:30:41 PM EST
[ Parent ]
Me neither !

Un roi sans divertissement est un homme plein de misères
by linca (antonin POINT lucas AROBASE gmail.com) on Wed Jan 21st, 2009 at 05:51:58 PM EST
[ Parent ]
humph, sounds like i should do it more often!

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty
by melo (melometa4(at)gmail.com) on Thu Jan 22nd, 2009 at 01:34:03 AM EST
[ Parent ]
To some degree, Gallois points to a real problem. The international air business runs in dollars and when each individual sale is the size of an A380, that's an awful lot of exchange rate variation.

Of course the other thing that Power8 highlights is that the imagined economic model where workers in Europe "move up the value chain" into "hi-tech manufacturing" is just a bust.

  1. RoW is increasingly capable of hi-tech activities.

  2. There's just not that many jobs further up the value chain. Mass employment hinges in large scale production. Building a small amount of "special widgets" to go in that mass production does not lead to mass employment.
by Metatone (metatone [a|t] gmail (dot) com) on Sat Jan 17th, 2009 at 04:13:32 AM EST
[ Parent ]
It's a loan provided by State banks, at commercial conditions - or more precisely at conditions that have been agreed at OECD level in order not to generate a race-to-the-bottom.

In other words, COFACE is obliged to lend at the exact same conditions to Airbus as USEXIM can lend to Boeing for export of planes to a given country.

Also, export credit is only authorised for exports to non-OECD markets (offshore wind is the one exception, as far as I know: my first offshore deal was with the Danish ECA for export to the Netherlands...).

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sat Jan 17th, 2009 at 05:05:11 AM EST
is that if the buyer defaults, in particular for political reasons (government decision) then it becomes a diplomaric issue: so you don't just piss off the seller, but also its home country.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sat Jan 17th, 2009 at 05:06:15 AM EST
[ Parent ]
Thanks for the explanation. Although this is indeed no subsidy, it does show the close interrelation between the state and the market and the degree of reliance of Airbus on the instruments of the state.

I'd think that the increase is caused by Airbus having made many sales outside of the OECD (Middle East, China, India, Singapore), then, and the airlines there no longer being able to finance these as easily.

by nanne (zwaerdenmaecker@gmail.com) on Sat Jan 17th, 2009 at 05:25:38 AM EST
[ Parent ]
Areva and Siemens get Coface support for the EPR in Finland.

Rien n'est gratuit en ce bas monde. Tout s'expie, le bien comme le mal, se paie tot ou tard. Le bien c'est beaucoup plus cher, forcement. Celine
by UnEstranAvecVueSurMer (holopherne ahem gmail) on Wed Jan 21st, 2009 at 09:56:28 PM EST
[ Parent ]
nanne:
"EADS has to become a normal company," President Sarkozy said at the Paris Air Show last month, underlining complications caused by the group's unusual management and shareholder structure.

nanne:

Bregier gave few details on how Airbus plans to finance the euro10 billion ($13.26 billion) A350 program. He said the development costs have so far been funded by Airbus and some of its suppliers in a risk-sharing program.

Well, IMHO, the answer is to formalise a risk and revenue sharing programme within a cross-border EADS Partnership framework.

The existing companies get to become John Lewis style staff-owned companies, with all the shares held in trust. That should interest the Unions, I would have thought, melancthon?

They would then become "Managing Members" (or capital users, if you like) of the EADS Partnership.

Governments (insofar as suppliers are unable or unwilling) would invest development capital into each project in return for a proportional "Equity Share" of the revenues from the planes once developed.

They may then sell out their proportional Equity Share "Units" (eg billionths of EADS gross revenues) to more risk averse investors interested in the long term revenue stream from the planes developed.

Such an Islamically sound "Capital Partnership" structure would probably appeal to the likes of Emirates, Etihad, Qatar Airways and so on who are all building massive fleets as strategic investments and have the advantage over most other airlines that they actually have their jet fuel supply locked up.

It's possible to see the evolution of global long term strategic partnerships here where EADS would cease to sell planes, but lease them directly (making more money in servicing than they do in building them, as likely as not) with strategic energy partners; a consortium of service provider partners (airline staff cooperatives) operating the planes; and the proposition for Investors of long term direct participation in revenue streams from air travel.

So the money paid by travellers on EADS planes would simply be shared in agreed proportions by EADS; an Energy Partner; and to the consortium of Worker Cooperatives (Human Capital) who make the whole lot work.

No transactions; no middlemen; Peer to Peer air transport - or maybe Pier to Pier... ;-)

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sat Jan 17th, 2009 at 07:46:52 AM EST
Such an Islamically sound "Capital Partnership" structure would probably appeal to the likes of Emirates, Etihad, Qatar Airways and so on who are all building massive fleets as strategic investments and have the advantage over most other airlines that they actually have their jet fuel supply locked up.
(My bold.)  How does this work for flights to the USA?  Do they ship refined jet fuel or do they contract with a refinery so that a portion of their crude will be paid for in kind with refined jet fuel delivered to airports in the area?  How does it work for Europe?  

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Jan 20th, 2009 at 09:39:03 PM EST
[ Parent ]


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