G.I.E. Airbus Industrie - Company Profile, Information, Business Description, History, Background Information on G.I.E. Airbus Industrie

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History of G.I.E. Airbus Industrie

G.I.E. Airbus Industrie is a consortium of European aircraft manufacturers formed in 1970. In a relatively short period of time and against formidable odds, Airbus grew to become the world's second-largest producer of commercial airliners, capturing about one-third of the global market in the process. Although Airbus does not publish financial statistics, it proudly reported its first-ever operating surplus in 1990. As the turn of the twenty-first century approached, the consortium set its sights on capturing 50 percent of the market for aircraft and parts. In 1994, for the first time in its history, Airbus had more new firm orders--125--than its competitor Boeing Company.

The impetus for Airbus Industrie's formation came in the post-World War II era, when the Boeing Company, McDonnell Douglas Corporation, and Lockheed Corporation, all American manufacturers, gained hegemony over the global market for commercial passenger aircraft. The last European jetliners to be produced in significant quantities were the French Caravelle and the BAC-111. When the production runs for these airplanes came to an end during the 1960s, France and Britain were faced with potentially high layoffs. European aerospace companies too small to shoulder the high investment costs of developing a new jetliner looked to pool their resources. British and French manufacturers attempted a mid-1960s merger, but political disagreements squashed their negotiations.

In May of 1969, however, the governments of France and West Germany concluded an agreement which cleared the way for the December 1970 formation of G.I.E. Airbus Industrie, a consortium headquartered and incorporated in France. The organization was characterized as a groupement d'intérêt économique (G.I.E., grouping of economic interests), a form of unlimited partnership commonly used by vinters and construction projects which involve several contractors. This uniquely French style of industrial organization made success possible for Airbus Industrie because, as one official put it, "On other cooperative projects, like the Concorde, nothing could be done without unanimous agreement of all the partners. With the Airbus, they all had to be unanimous to stop us."

The founding consortium members were Aérospatiale of France and Deutsche Airbus (later renamed Daimler-Benz Aerospace Airbus, with 65 percent Messerschmitt-BölkowBlohm and 35 percent VFW-Fokker) of West Germany. Construcciones Aeronauticas S.A. (CASA) of Spain joined in 1971. As the catalyst of the group, Airbus Industrie provided research, development, and design as well as marketing and product support to its affiliates. Member companies, in turn, would procure, manufacture, and assemble components. For example, Deutsche Airbus manufactured most of the fuselages and vertical tails, CASA contributed horizontal tails, and Britain's Hawker-Siddeley (a subcontractor until 1979) made the wings. These parts were transported to Aérospatiale's assembly facilities in Toulouse where they were assembled with cockpits and center fuselages manufactured there.

At the time, the most popular medium-size American jetliners, the Boeing 727 and McDonnell-Douglas DC-9, were fitted with inefficient engines which consumed large quantities of fuel. The Airbus A300 was designed to compete with these jetliners by incorporating the latest avionic technology and the most efficient engines available. Britain's Rolls-Royce plc was selected to manufacture the A300's jet engines, but had to withdraw from the program when work on its RB.207 engine fell behind schedule. Airbus then turned to America's General Electric Company to supply an alternative engine, the CF6-50, which was built for use on McDonnell Douglas's DC-10. The choice of a new engine power plant forced a design change in the A300 which reduced its passenger capacity from 300 to 250. Although unplanned, it was a fortunate turn of events for Airbus: at that time many airline companies were struggling to avoid overcapacity caused by excessively large airplanes. Rather unexpectedly, the A300 had gained several competitive advantages.

The A300 made its maiden flight on October 28, 1972 (ahead of schedule) and entered regular service with Airbus's first customer, Air France, in May of 1974. Interest in the fuel-efficient A300 increased when the 1973 world oil crisis caused fuel prices to rise dramatically. By 1975 over 40 of these airplanes had been ordered.

At this time Henri Ziegler retired as the head of Airbus. He was succeeded by Bernard Lathière, who had previously served with the French Civil Aviation Authority. Lathière, known to airline executives around the world as "Monsieur Airbus," made aircraft sales his primary concern. The engineering and production coordination was largely handled by general manager Roger Béteille from his office at Airbus's final assembly plant in Toulouse. While Lathière was president of the consortium and maintained a high public profile, it was Roger Béteille who worked behind the scenes.

Lathière appointed George Warde, the former president of American Airlines, to promote Airbus sales in the United States. The American aircraft manufacturers (Boeing in particular) worked very hard to prevent Airbus from entering the American aircraft market. Warde was able, however, to reach an agreement with Eastern Airlines whereby Eastern would operate four A300s on a six-month trial basis and fund the $7 million crew training and maintenance costs. It was a risky and potentially costly gamble which paid off in 1978 when both Eastern and Pan American World Airways, Inc. decided to purchase the A300.

That July, Airbus Industrie announced the development of a new jetliner called the A310. This smaller and more efficient version of the A300 incorporated a unique fuel-saving feature. When the A310 is in flight, fuel is pumped from an aft tank into the main wing tanks to help maintain the airliner's center of gravity. On other aircraft a device called a "trim control" automatically adjusts the tail elevators in order to maintain level flight. However, excessive reliance on the trim control causes aerodynamic drag which wastes fuel. The A310s fuel pumping scheme has since been duplicated by other aircraft manufacturers and has become a regular feature of most modern aircraft designs. In addition, the A310s wings were redesigned to make it more efficient at distances of less than 1500 miles. This became a major selling point for Airbus, since three-quarters of all airline routes are distances of less than 1500 miles. The A310 made its inaugural flight in April of 1982 and entered service with Lufthansa a year later.

Britain became an official member of the Airbus consortium when, in January of 1979, Hawker-Siddeley became a part of the state-owned British Aerospace. The addition of British Aerospace established Airbus's capitalization ratio at 37.9 percent each for Aérospatiale and Deutsche Airbus, 20 percent for British Aerospace, and 4.2 percent for CASA of Spain. That May, Belairbus of Belgium and Fokker-VFW of the Netherlands joined as associate production affiliates. Fokker, which had become a subsidiary of West Germany's Vereinigte Flugtechnische Werke (VFW) in 1969, was sold back to public investors in 1980. VFW was subsequently acquired by Messerschmitt-Bölkow-Blohm, but Fokker continued to be associated with Airbus as a subcontractor.

Although Airbus had surpassed both McDonnell Douglas and Lockheed to rank second only to Boeing by 1980, it remained unable to achieve profitability, even with heavy government "launch-aid" or repayable loans. Upon his 1985 retirement, Lathière ended the tradition of having Frenchmen dominate all the highest managerial positions at Airbus by appointing a multinational troika. Jean Pierson, a Frenchman, was named chief executive officer; Johann Schaeffler, a German, was made responsible for production; and Robert Whitfield, a Briton, was placed in charge of managing the consortium's finances.

Roger Béteille, who had come to be known as "the father of Airbus," resigned his post due to ill health in March of 1984, just as many of his technological initiatives were coming to fruition. Just a year before, Airbus had developed altered versions of its two jetliners, the A300-600 and A310-300, with extended flight range. But the company's biggest coup came with the 1984 introduction of the A320, a twin-engine, medium-range craft that seated 150 and was designed to compete with Boeing's 737-300 and McDonnell Douglas's MD-80 for short-haul passenger markets. The new model featured "fly-by-wire" technology, an electronic signaling and control system that had been previously used on the Anglo-French Concorde supersonic airliner. Called "the most significant advance in the aviation industry" in a 1990 edition of the Far Eastern Economic Review, fly-by-wire is a computerized automatic flight-control system (AFCS) that electronically executes the crew's commands to wing flaps, rudders, and elevators, thereby eliminating a number of formerly mechanical (and weighty) controls, including the pilot's control column and steering wheel. The weight loss helped make the A320 30 percent less expensive to operate than its competition. Although the absence of direct mechanical controls (the pilot uses a side-stick controller to input information to the AFCS) made many potential customers leery of the A320, Airbus claimed that it offered increased safety and improved maneuverability. The plane and its revolutionary guidance system soon made aviation history.

Even before its maiden commercial flight, Airbus received over 400 purchase commitments for the A320, making important inroads in the North American market in the process. Pan Am ordered 16 A320s in 1985, and the following year NWA, the holding company for Northwest Airlines, announced that it had ordered 10 A320s with an option to purchase an additional 90. Northwest's over $3 billion order made it Airbus's most important customer. This high demand soon made the plane the fastest-selling jetliner in history. By the end of the decade, fly-by-wire had become the standard for aviation controls.

Airbus's incursion on the North American market drew intensifying criticism from Boeing and McDonnell Douglas, who complained that the consortium's high level of subsidization gave it unfair technological and competitive advantages. Although both vowed that the A320 would not survive "more than four years in the market," neither had comparable innovations to unveil. Both met the Airbus challenge by developing a new generation of airliners which had the potential to be as much as 40 percent more efficient than the A320. These new aircraft, the 7J7 and MD-91, purported to use a revolutionary new engine called a "propfan" which combined the thrust of a jet engine with the efficiency of a high-speed propeller.

The proceeds of large orders for the A320 went a long way toward defraying Airbus's record of accrued losses, which were believed to amount to between $7 billion and $10 billion by the late 1980s. Financial statistics for Airbus are virtually impossible to find. Because of the nature of its industrial organization, Airbus Industrie is not required to publish an annual report. Different accounting methods and degrees of government involvement among the individual consortium members preclude the option of assembling data. A Boeing executive has said, "The Airbus partners aren't just hiding numbers; they don't know them."

If the consortium was a typical nationalized industry, its finances would be a matter of public record. But disclosure of Airbus's financial information has the potential to cause a great deal of opposition to the consortium in European political circles. The Airbus partners' member governments would like to prevent the consortium's economic performance from becoming a political issue; its becoming one might lead to its dissolution. Airbus is, after all, the European Community's only technically successful non-military industrial enterprise.

Stung by Airbus's encroachment on its largest industrial export category, the United States government joined the debate in the late 1980s. Trade officials voiced their concern that the extensive subsidies Airbus received from its member governments violated the principles of the General Agreements on Tariffs and Trade. A 1990 study by Gellman Research Associates, on behalf of the U.S. Commerce Department, cited in a 1991 Aviation Week & Space Technology article pegged previous and planned government contributions to Airbus at $12.5 billion, an amount that rivaled the initial cost of launching the consortium and exceeded the net worth of McDonnell Douglas and Boeing combined. Officials at Airbus countered that the American aircraft manufacturers benefit substantially and unfairly from government-funded aeronautic research, and that they had long enjoyed an effective monopoly over civil airline supply. In particular, they have complained that the Boeing Company subsidizes the development of new commercial airliners with proceeds from its profitable 747 program and lucrative defense contracts.

External criticism of Airbus was exacerbated by internal disagreements in the latter years of the decade. After losing nearly $300 million on its contracts with the consortium, member British Aerospace called for a reorganization of Airbus's financial and managerial structure. Spurred in part by an independent evaluation of Airbus's highly (and predictably) bureaucratic corporate operations, management was reorganized in 1988 through the trimming of the firm's supervisory board, the establishment of the positions of chief executive and finance director, and the creation of an executive board. Then, in 1989, a five-month strike at British Aerospace cost Airbus $250 million in lost production time.

In spite of these labor, organizational, and political dilemmas, Airbus continued to capture a growing share of the commercial aircraft market, winning contracts with Canadian Airlines International and Air Canada in the late 1980s. Airbus raised the competitive ante with the 1988 announcement that it would endeavor to build a complete line of commercial aircraft, from the small, short-range models it had traditionally manufactured to the medium and long-range jetliners that had been dominated by Boeing. The move up was well-timed: to combat high levels of air traffic, airlines were increasingly purchasing larger-capacity planes.

By 1990, Airbus's 800-aircraft backlog positioned it with about one-third of the $40 billion global market for jet aircraft and gave it its first operating surplus. In 1991, the consortium demonstrated its growing liberation from launch aid with the flotation of its first international bond issue, the proceeds of which were used to finance development of a new "stretched" version of the highly successful A320. Governmental involvement was further lessened in 1992, when the German government gave automaker Daimler-Benz A.G. complete control of Deutsche Airbus with the sale of its 20 percent interest.

The introduction of the A330 and A340 planes helped fill out Airbus's product line. These modular aircraft shared the same basic fuselage, wing, and cockpit specifications, making possible time- and money-saving concurrent production. These large-capacity models also appealed to customers in the emerging Asian and Pacific Rim markets. In 1991, for example, Singapore Airlines canceled an order with McDonnell Douglas in favor of the new Airbus models, and in 1995 Gulf Air cancelled its Boeing 777 orders for the A340.

The expanded line won Airbus lucrative contracts with Northwest Airlines, Federal Express, American Airlines, and, in mid1992, its biggest coup to date: a pivotal deal with United Airlines Inc. United, called "Boeing's best and oldest customer" in an Aviation Week & Space Technology article published that year, had previously designated Boeing as its exclusive supplier. The contract with Airbus capped a concerted North American marketing campaign that included product and technical support as well as innovative leasing programs. By 1992, practically every major U.S. airline was a customer of Airbus.

Having consistently held a 30 percent share of commercial aircraft over 100 seats throughout the early 1990s, Airbus confidently set its sights on capturing a leading share of the entire industry. Plans for the A3XX-100, a "mega-jumbo" jet capable of carrying 600 to 800 passengers, were expected to come to fruition after the turn of the century and firm up Airbus's strong position in the Far Eastern markets considered key to future growth.

Airbus's 125 orders in 1994 gave it over half of the market and the potential to become the world's largest manufacturer of commercial aircraft. But some analysts cautioned that Airbus faced several continuing challenges in the years to come. Rancor over trade issues, especially as they applied to GATT and relations between the United States and Europe, only intensified as Airbus chalked up success after success. Global recession, the after-effects of the Persian Gulf War, and ongoing price wars forced airlines to delay or even cancel many orders placed in the late 1980s and early 1990s. In 1992, for example, Northwest Airlines canceled its orders for over 70 Airbus planes and postponed delivery of another 44 craft.

Principal Subsidiaries: Airbus Industrie of North America, Inc.; Airbus Service Company.

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Further Reference

Banks, Howard, "Airbus Comes of Age," Forbes, February 23, 1987, pp. 36-37.Bond, David F., "Airbus Subsidy Dispute Highlights Clash of U.S.-EC Industrial Cultures," Aviation Week & Space Technology, June 17, 1991, pp. 155-156.Caplen, Brian, "Battle Is on Asia's Skies," Asian Business, January 1995, pp. 6-7.Guttman, Robert J., "Aircraft Builders of the Future: Boeing & Airbus Go Head to Head," Europe, May 1993, pp. 9-13.Lorrell, Mark A., Multinational Development of Large Aircraft: The European Experience, Santa Monica, Calif.: Rand Corporation: 1980.McKenna, James T., "Northwest Cuts Airbus Orders in Survival Bid," Aviation Week & Space Technology, December 14/21, 1992, pp. 26-27.Newhouse, John, The Sporty Game, New York: Knopf, 1982.Ott, James, "Airbus Wins United A320 Order, Boosting U.S. Presence," Aviation Week & Space Technology, July 13, 1992, pp. 22-23."Plane Wars: A Paper Dart Against Boeing," Economist, June 11, 1994, p. 61.Selwyn, Michael, "Airbus Industrie: Mega-Jumbo Plan for Asia," Asian Business, November 1991, p. 10.Toy, Steward, "Zoom! Airbus Comes on Strong," Business Week, April 22, 1991, pp. 48-50.Westlake, Michael, "Flying With No Pilot," Far Eastern Economic Review, July 5, 1990, p. 66.

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