Cost Pressures Force European Aerospace to Look Outside Europe
EADS Airbus’ politically controversial “Power 8” restructuring plan is already planning to shift future production out of Europe, and a recent EADS announcement intensified that pressure with more downward pressure on earnings. Worse, Airbus’ customers insist on pricing their contracts in dollars, while its costs are mostly denominated in Euros. EADS CEO has complained that every time the US dollar falls by 10 cents, Airbus loses $1 billion dollars – even as the Euro has risen from $1.20 to almost $1.50 over the last few years. Some analysts think this is a dodge (financial hedging strategies exist), but CEO Louis Gallois has apparently decided that if you can’t beat ’em, you had better join ’em. Deutsche Welle:
“We don’t have a choice,” Louis Gallois, chief executive of EADS, told Europe 1 radio Monday. Gallois said the only way to “prepare the company for a dollar that no one can control is — unfortunately — to set up shop in a dollar zone.”
The French government is reportedly less than happy about this, and has fired a shot across EADS’ bow in return…
EADS is reportedly scouting complementary acquisitions, but the most likely location for expansion is EADS nascent facility in Mobile, Alabama, which is a big part of its KC-30 bid for the USA’s $30+ billion KC-X aerial tanker contract due to be awarded in February 2008.
A level of American A330 production that rises above the previously-proposed 50% for global bottom line reasons can only help Airbus’ bid.
On the other hand, opposition from French politicians may kill any move before it even begins. French finance minister Christine Lagarde responded that:
“At a time we are increasing our [EUR 1.5 billion worth of] tax credits for research, it goes without saying that our industrial partners must also participate in French industrial policy.”
Meanwhile, EADS is not alone. According to Deutsche Welle, Dassault Aviaiton CEO Charles Edelstenne told Le Monde said that apart from final assembly and some R&D work work, “everything can be relocated.” He also plans to relocate production to unspecified destinations.
One interesting possibility: India is already becoming a prime location for aerospace outsourcing. Depending on Dassault’s choices, and India’s procurement timing, Dassault’s outsourcing drive could dovetail with its Rafale fighter’s bid for India’s 126-190 plane MMRCA fighter project, and India’s insistence on significant industrial offsets.
Jan 14/08: Airbus announces that it will establish an A330 Freighter aircraft final assembly line (FAL) in Mobile, AL if its KC-30 team wins. The A330F currently has an order book of over 66 aircraft, and production capacity would be increased to 4 aircraft per month in order to handle civilian construction as well. By proposing the less popular A330F instead of the A330 passenger variants, Airbus takes advantage of the dollar, offers added civilian work that helps it close the American jobs gap with Boeing’s KC-767, and hopes to provoke less reaction in Europe. EADS CEO Thomas Enders was careful to make the offer conditional on a KC-X win, however, claiming that:
“The Dollar-Euro exchange rate makes it advantageous for us to expand our operations in the United States. While it would be difficult to overcome the cost of building a final assembly line in the U.S. strictly for commercial aircraft, it would make good economic sense to invest the incremental cost of expanding the facility that would already exist for assembling tanker aircraft.”
That rationale may or may not be exactly true, given current exchange rate costs. New commercial aircraft assembly facilities are not a common occurrence for the industry, however, and this would be the first Airbus manufacturing facility in the U.S. Aircraft sections would be delivered to Mobile from their respective Airbus production facilities elsewhere in the world, assembled into the final freighter aircraft, and delivered to customers from Mobile. earlier version of the EADS release at Defence Aerospace.