Airbus competes on wings of government subsidies

In a quiet hangar outside this sunny French city, teams of German, British, French, and Spanish engineers are busy with the final assembly of half a dozen giant Airbus A320s - slowly fleshing them out for flight. ``Here you see Europe at work,'' says strategic planner Adam Brown, who joined Airbus Industrie in 1973, three years after the operation was launched. ``Sometimes even we forget that it has that magic.''

An ungainly transport plane known as the ``Super Guppy'' lugs wings in from Britain, fuselages from West Germany, cockpits from France, tail sections from Spain, and flaps from the Netherlands. Engines and other parts come from the United States.

The result, pieced together in Toulouse, are jetliners that have been competing strongly against dominant Boeing and No. 2 McDonnell Douglas. The technologically sophisticated A320, a narrow-body 150-seat jet with fuel-saving features, has been the hottest-selling aircraft in commercial aviation history.

``C'est noveau, c'est Europe,'' reads a sign near the A320 assembly line.

But there is something rather old and European at Airbus as well - government subsidies and red ink.

``Subsidies are integral to Airbus,'' says Paul Nisbet, senior aerospace analyst with Prudential-Bache Securities. ``Airbus is still clinging to the governments with which it is involved.''

Of more immediate concern: the June 26 crash of an A320 during a demonstration flight in eastern France. Airbus officials say early indications are that the plane was not at fault. But the pilot and the pilots' union have disagreed. An investigation is in progress.

One of the big attractions of the A320 is ``fly by wire.'' Instead of long linkages of cables to manipulate flaps, ailerons, and elevators, the pilot's control stick sends signals to on-board computers that then guide the plane. Without all that cable, planes are lighter and can save fuel. Computerization also can keep a pilot from overcompensating in an emergency.

The strong dollar and slim profits were making Airbus's life difficult even before the A320 problems, however. And US trade officials have been highly critical of the government subsidies that keep Airbus solvent.

Despite all the flak, sales of the Airbus A320 remain brisk. In fact last Wednesday, with the A320 crash still in the newspages, the giant GATX Air aircraft leasing corporation announced the purchase of 10 of the jetliners. British Air, Air France, and Air Inter, a French domestic carrier, all absolved their A320s and kept them in service.

``Airline managers take their time making decisions,'' notes David Venz of Airbus's North American operation. ``They don't jump to conclusions. They'll come through.''

An important breakthrough for Airbus came last month, when it won clearance from the Coordinating Committee for Multinational Export Control and then sold three of its A310 planes to Interflug, the East German airline. Mr. Venz thinks this could ``open up other opportunities in Eastern Europe.''

There should be other big markets as well. An Airbus survey estimates that the number of air travelers around the world will grow at 5.5 percent per year, tripling by the turn of the century. Demand for commercial jetliners in the next 20 years, Airbus says, will grow to 8,158, with a total value of more than $400 billion. The size of the planes will have to grow, too, seating up to 600 passengers.

``With the crowded skies,'' says Airbus spokeswoman Barbara Kracht, ``it's logical that aircraft will grow in size, because the number of airport [landing and takeoff] slots won't increase. We believe the real time for the wide-bodied twins will come in the 1990s.''

Airbus wants a big chunk of this booming aircraft market and is gearing up its facilities to meet demand.

The demand boom, the potential of Eastern European sales, and strong interest in the A320 should add up to big profits. But orders for Airbus's older A300s and 310s have been lagging and the cheap dollar (plane sales are denominated in dollars) has given Boeing and McDonnell Douglas an edge over Airbus in new sales.

Airbus doesn't record profits or losses since it was set up under French law to be ``transparent,'' dispatching all its revenue to its owners - or, as today, going to them with its hands out. Its individual owners have had to swallow billions in Airbus-related losses.

The only hope, says Mr. Nisbet of Prudential-Bache, would be price increases. He says heavy current demand would support higher plane prices, bringing Airbus closer to break-even (and making Boeing and McDonnell even more profitable).

A'erospatiale of France and Messerschmitt-B"olkow-Blohm (MBB) of West Germany each own 37.9 percent of Airbus. British Aerospace has 20 percent, and CASA of Spain has 4.2 percent. Production is shared among these companies and Fokker of the Netherlands and Belairbus of Belgium. But since national governments have big stakes or controlling interests in these European aerospace companies, taxpayers foot the bill for Airbus.

British Aerospace recently wrote off half a billion dollars in losses, two-thirds of which were related to Airbus. Daimler-Benz, which the German government has been encouraging to take a 30 percent stake in ailing MBB, has been so concerned about Airbus-related losses that it recently turned down a package that included a huge financial guarantee from Bonn.

Having four masters also means competing interests and cumbersome decisionmaking. A recent reorganization slimmed down the number of board members, and Airbus employees say they hope the company will evolve toward more centralized control and autonomy.

``If all the recommended changes are implemented,'' says Mr. Brown, the strategic planner, ``there would be a considerable improvement in Airbus decisionmaking and clearer accountability.''

That might also dampen foreign criticism. US trade officials say blurred finances and accountability allow Airbus to hide government subsidies and thus compete unfairly. Airbus's subsidies since its inception in 1970 are estimated at $10 billion to $12 billion.

Airbus argues, however, that the financial barriers to the aircraft market are so large that ``government support is mandatory.'' Without such support, it says, ``the world would now be faced with a US monopoly.''

Normalizing Airbus's business operations, however, could make it more attractive as a future partner with McDonnell Douglas in a team-up against No. 1 Boeing. Airbus has held talks with McDonnell and Lockheed on development of future aircraft.

Although there is no sign of an imminent move toward merger or joint ventures, one Airbus official privately says by the turn of the century he thinks there might be just two commercial aircraftmakers in the noncommunist world - Boeing and an Airbus-McDonnell Douglas combination.

``That's reasonable,'' agrees Nisbet. But, he adds, because of Airbus's reliance on government subsidies, it ``has a long way to go to be compatible enough with McDonnell Douglas.''

Gary Reich of Shearson-Lehman-Hutton considers Airbus ``very viable'' today, largely because ``they're selling planes, and their major partners will continue to take care of them.'' He figures the number of aircraftmakers in the year 2000 might still be three - Boeing, Airbus, and perhaps an eventual effort by the Japanese.

``In 19 years as a company, Airbus has demonstrated many things,'' says Ms. Kracht, the Airbus spokeswoman. ``We can cooperate and be competitive - and we are not just building camels.'' Airbus says computerized `fly by wire' allows: Lower fuel consumption Lower maintenance costs Fewer mechanical parts Built-in testing equipment Simpler automatic flight system Better handling Safer flight envelope