March 16, 2007
Politics in Command at AirbusBy Thomas Lifson
When politics takes over from business in the operation of a world scale company, the consequences are often profound and unpredictable in the long run. With open talk of French government money to recapitalize Airbus so it won't "fail" (the word used by presidential front runner Nicolas Sarkozy), and visible tensions between the French and German governments, politics is openly dominating business concerns at the company which shares the world's large airliner business with Boeing.
Airbus received what looks at first glance to be very good news yesterday with two huge orders for the XWB model, which had been languishing compared to the massive order book enjoyed by Boeing's rival 787 Dreamliner. But both of these orders likely have political strings attached, related to the looming question of the need for more capital.
Qatar Airways has announced its intention to order 80 A350XWB aircraft. By any standard this is massive order, out of proportion to the size of the airline, which currently has a fleet of only 50 aircraft, most of them smaller than the XWB. Qatar Airways was only founded in 1994, "when the reigning family wanted an own [sic] national airline for the emirate of Qatar," according to the Planespotters.net website.
Such a huge order begs to be understood in the context of the previously-reported interest of the Qatari Investment Authority (QIA) in buying up to a 10% stake in EADS, the parent of Airbus. Just this week Qatar and QIA indicated continuing interest:
Obviously, an order of this magnitude gives Qatar enormous leverage over Airbus. As a very rough estimate, assume a list price of $150 million per aircraft (no pricing has been formally disclosed, but this figure is the midrange of the competitor B787 family list prices), and the order would total $12 billion. One journalistic source reported the value at $17.2 billion. These sums compare to a current market valuation for all of EADS of about $25 billion. A 10% stake in EADS would be of a smaller financial magnitude than a customary discount given to launch customers as a reward for enabling the manufacturer to start production with a healthy order book on an order of this size. That's a much bigger deal than the customary free floor mats or rustproofing a car salesman might throw in to clinch a deal.
Why would Qatar be interested in owning a sizable stake in EADS? It might be simply a desire to buy in at a point when the stock price is cheap. But one has to suspect larger diplomatic and strategic goals are also in play, cementing France and the EU to the Arab world, and gaining access to advanced military technologies.
The second large order for the XWB came from Russia. AP reports:
The Aeroflot order is doubly sweet for Airbus because Aeroflot had previously had a letter of intent for Boeing 787, reserving coveted delivery positions for the aircraft which is sold out for years to come. In the wake of increasing political tensions with the United States, Russia defaulted on that commitment last November.
Russia's Vneshtorgbank (VTB) laid out about a billion dollars half a year ago for just under 5% of EADS, buying the shares on the market, rather than injecting new funds into the company through an issue of new shares. Only via the issue of new shares would Airbus be able to receive new cash.
There are many reasons why Russia might find a larger stake in Airbus attractive. It has a civil airliner industry which has languished thanks to outmoded technology and inferior products, with the exception of a few niche airplanes. Outsourcing part of the production chain to low cost suppliers is on the horizon for Airbus under the Power8 restructuring, and Russia would very much like to upgrade its industry with new technology and new markets.
But the existing shareholder agreement between France and Germany means that new shares probably cannot be issued without German acquiescence. And Russia taking a major role in the company would affect Airbus' profitable military business, including current and hoped for contracts to supply the United States. Germany, with its memories of Soviet occupation and NATO ties, may be hesitant, to say the least, not to mention worries about losing its sway over Airbus decisions.
Qatar may be less controversial, but it too raises issues of balance between France and Germany, especially given France's deeper ties to the Arab world. QIA already holds 7% of the stock of French media company Lagardere, which in turn owns 15% of EADS. The co-chairman of EADS is Arnaud Lagardere, who simultaneously is CEO of the company which bears his name. M. Legardere is on the record
Although the Germans may chafe at such statements, given the huge leverage represented by an order for 80 XWBs, they are obviously caught in a squeeze play. Qatar is unlikely to proceed with the huge order unless Qatar is able to obtain its stake in EADS. This is likely part of what QIA Chairman/Qatar Foreign Minister means by "...the right conditions at the right price,"
Interestingly, after announcement of the huge Qatar order, stock in EADS rose, but later fell back to a comparatively small gain for the day of about 2.5%.
If Qatar were to abandon its stated interest to purchase the XWBs, it would be a heavy blow to the program and to Airbus and EADS. But if both the equity and aircraft deals go through, Airbus would receive an equity infusion, a substantial deposit upon signing of the formal order, and eventually payment of several billion dollars. Such an infusion could do much to ameliorate the cash flow raising the specter that Airbus might "fail.".
One more political situation affecting the Airbus order book is the status of the already-announced order from China for 150 A320 single aisle airplanes, to be built in Tianjin, China. Even though added to Airbus' list of firm orders last year, the contract has not been finalized. Germany has to be very nervous that if 320 production is transferred to Hamburg in return for concentrating wide body production in Toulouse, once the Chinese have built their own 150 copies, their costs will be far below the high wages earned by Germans, and all Airbus narrow body production could be moved to China. That is believed to be one reason why Germany has been resisting concentrating XWB production in Toulouse, France.
The French, in their desperation, appear ready to transfer strategic technologies to Russia and China, countries where the rule of law is not secure, and which could well become serious competitors, something which the most influential actor in the world's airliner markets recently warned of . France has for centuries been renowned for wily diplomacy. This strength may serve it well in finessing some of the major problems Airbus faces. But winning the battle of diplomacy could be a hollow victory, for real success is likely to elude a politicized Airbus in the long run.
Oton Tisch helped in the research for this article.
Thomas Lifson is the editor and publisher of American Thinker.