Jacques Chirac hit the nail on the head in 2002 when he opened a factory making components for the Airbus A380. The aircraft was, he said, ‘A symbol of what Europe can achieve.’ I could not put it better myself. As the vast 550-seat superjumbo wowed the crowd at Farnborough Air Show this week, there was no mistaking its significance. Conceived by French and German politicians; bureaucratic, expensive and dogged by scandal — the A380 is indeed a wonderful monument to the European Union.
In fact, so short is this engineering marvel on market logic that there is a small but distinct risk that it could bring down not only Airbus and its Franco–German parent company EADS, but the struggling premiership of the bouffant-haired Dominique de Villepin. There have already been some nasty scenes in the French parliament. And if that is not enough, Airbus could even ignite a vicious transatlantic trade war.
How appropriate, then, that Labour has got its fingerprints all over this Dome-with-wings. The DTI has spent the past four years trumpeting the government’s involvement, not least the provision of £780 million of launch aid to Airbus and engine-maker Rolls-Royce, in the form of ‘soft’ loans at below-market interest rates. Airbus is also the biggest customer of the Export Credits Guarantee Department, a quango which underwrites export orders. Last year it underwrote orders for 50 aircraft, a third of all its business. Airlines often go bust, which means the ECGD can suddenly find itself in possession of aircraft: according to its latest report and accounts it is now looking for buyers for 10 planes, though it does not reveal how many are Airbuses. Not content with that, Alistair Darling, the Trade and Industry Secretary, plans to appoint a director to the EADS board to ‘safeguard’ Britain’s interests. That, of course, is another characteristic of a Euro-project: the desire of successive British governments to jump on the careering bandwagon.
At Farnborough the punters were optimistic that Airbus would survive. Most of them agreed with the arch-optimist Tony Blair, who said at the unveiling of the A380 last year, ‘This is the most exciting new aircraft in the world, a symbol of economic strength and technical innovation. Above all, it is a symbol of confidence that we can compete and win in the global market.’ The show is attended by aircraft nuts who regard an overspend or delay in a project as par for the course. They have learnt through long experience that aerospace companies are inherently political and they remember that only a short time ago Boeing was mired in corruption and a bonking scandal. For them, there is something romantic about the A380 and the bold vision it represents.
But things look pretty dire. Two months ago BAE Systems, the company still known as British Aerospace to most people, announced it was going to sell its 20 per cent stake in Airbus. The rest of Airbus is owned by EADS, a company quoted in Paris and Frankfurt but part-owned by the French government. I remember thinking at the time, ‘Hello, what does Mike Turner [BAE’s feisty chief executive] know?’
For a moment, I thought it might have something to do with the Clearstream affair in France. An Airbus executive had been arrested for spreading a rumour that various public figures, including Nicolas Sarkozy, the interior minister, had taken kickbacks on a defence deal. Sarkozy was cleared. There was no connection with BAE’s decision to sell. Silly me, that was just a sideshow.
The more likely reason emerged a few weeks later, when EADS announced that the aircraft on which Airbus had bet the farm, the A380, would be delayed by six months due to problems with its electrics. EADS shares plunged by a third. Poor old BAE looked as if it would receive less for its stake than the £2.5 billion the City expected. This was confirmed a few weeks later when N.M. Rothschild, the merchant bank, independently assessed the stake to be worth less than £2 billion.
Ever since then, everyone has been speculating about what N.M. Rothschild found. Its report is confidential, but the best guess is that it discovered Airbus’s figures to have been flattered by hedging contracts taken out to protect the company against currency swings, and by advances taken from customers for planes not yet delivered.
Events have since moved rapidly. It emerged that Noel Forgeard, one of the co-chief executives of EADS (under its charter one chief is French, the other German) had sold millions of euros worth of shares before the announcement of the A 380 delay. Forgeard, a former aide to Chirac, has now resigned — with three years’ salary, worth E6 million, in his pocket — and is being investigated. He has been replaced by Louis Gallois, head of France’s railways. And a law suit has been filed by French investors claiming that 150 other Airbus executives sold EADS shares just before the delays were revealed to the market.
But the politically significant, super-jumbo of a question is: what happens now? Not only is the A380 late, but orders for Airbus’s other aircraft have collapsed to half the level of Boeing’s. The real runaway success of the airline market is the Boeing 787 Dreamliner, which is much smaller than the A380 and, critically, more fuel-efficient. For the gas-guzzling A380 was conceived when oil was cheap and green politics was not even a twinkle in David Cameron’s eye. Furthermore, the A380 is so enormous that huge upgrades to airport terminals and baggage-handling areas are required to accommodate it. One tenth of the cost of Terminal Five at Heathrow has gone on modifications for the Airbus behemoth. Boeing reckons that, because of these costs imposed on airport operators, there simply is not a big market for such an aircraft.
So how could Airbus make such a strategic error? The answer is that it is, as the man said, a classic Euro-scheme. No ordinary company, responsible to ordinary shareholders, would hazard its capital on such a risky project as the A380. But this is no ordinary company. According to the US trade representative, Susan Schwab, Airbus has been subsidised to the tune of $40 billion of ‘launch aid’ since it was formed in 1967. Two years ago, the US complained to the World Trade Organisation about state loans to Airbus. Airbus counter-claimed, saying Boeing was effectively subsidised by military and Nasa contracts and grants from its home state, Washington. That row is still bubbling away.
The A380 was the sort of project Labour could not resist. More than 10,000 people work in Airbus factories making wings at Broughton in North Wales and Filton near Bristol. And a small grant from the Welsh Assembly last year triggered a second complaint from the Americans to the WTO.
But Airbus desperately needs more ‘launch aid’ to save the company and to take on the Boeing Dreamliner with a modernised version of the A350 that was being puffed at Farnborough. It is also working on the A400M, a huge transport aircraft for those European air forces that don’t like American planes. Airbus faces development costs of billions (it could sink as much as £6 billion into the A350) and will be hard pressed to raise the funds in the capital markets, given the A380 fiasco. This means it must again go cap in hand to the treasuries of Berlin, Paris, London and even Madrid.
What do the Americans think of that? A spokesman for the US trade representative’s office says, ‘The USA has made it clear for over two years now that launch aid is unacceptable. We will litigate our case with the WTO if necessary.’ Without launch aid, Airbus will be crushed by Boeing; with launch aid, Airbus faces a shock-and-awe offensive by the Americans at the WTO. What a fine Euro-mess indeed!