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Airbus & A3XX Funding Problems

Tue Mar 28, 2000 3:27 am

The agreement concluded last week indicates that the British Treasury will provide up to 530 million pounds ($837.4 million) in low-interest "repayable launch investment" to fund 33% of BAE's 20% share in the program.

"The British decision is a great sign of confidence in the A3XX," an Airbus official stressed. He added that the agreement strictly complies with the July 1992 U.S.-European Union accord covering 100-seat-plus commercial transports.

The transatlantic accord specifies that state aid, which must be fully reimbursed within 17 years, is limited to 33% of an aircraft's overall development costs. Such funding can cover only research and development-related investment and additional nonrecurring costs, and is authorized on the condition that the programs prove to be commercially viable.

The European Commission's competition directorate is expected to approve the U.K. government/BAE Systems funding arrangement soon, after completing a review verifying that the loan is not a "subsidy." The EC, however, could not readily determine--at such an early stage and in the absence of launch customers--that the A3XX is a viable program.

Although the U.S. and the Europeans do not intend to forgo or renegotiate the 1992 accord, the dormant controversy on state aid, subsidies and low-interest loans could catch fire in the next few months, as the A3XX approaches go-ahead. The U.S. Trade Dept. recently expressed "serious concerns," and Boeing executives disputed the continuing need of government-funded loans to support Airbus' partners, asserting that the Europeans have now established a comprehensive product range.

"The Airbus partners are all very big defense contractors, they receive large research and development contracts, many of them in the form of outright grants," a Boeing official claimed. "Certainly, if we are getting those kinds of benefits--indirect subsidies--Airbus partners do too. If you add up all of their defense businesses, they actually have more than Boeing. They derive a greater percentage of their revenues from defense sales than Boeing," he added.

Boeing firmly disputes the Europeans' "direct subsidies" policy. "The [U.S.-EU] 1992 agreement includes conditions, such as projects receiving subsidies are supposed to be commercially viable, so the money will be paid back. The U.S. government has asked data on the A340-500/600 [viability] and never received it. And we certainly don't see the A3XX as commercially viable," the Boeing official stressed. He added that the Europeans would raise money from the commercial sector, as Boeing did for the 777, if the A3XX were viable.

Boeing questions the validity of Airbus' optimistic market forecast that foresees a demand of 1,400 400-seat-plus aircraft in the next 20 years. "The market is fragmenting in an 'open skies' driven deregulated environment. The A3XX [launch] would not change our approach to the market," Gordon A. McHenry, Jr., said. McHenry, who recently visited France, is Boeing Commercial Airplane Group's director of market development.

If a U.S. counterattack materializes against the EU, or by filing a complaint with the World Trade Organization, the Europeans would fiercely denounce the massive "indirect state aid" injected into the U.S. aerospace industry by the Defense Dept. and NASA, a French industry executive said.

In 1999, Airbus achieved a 55% share of the commercial transport market, and its 1,450-aircraft firm backlog nearly equals Boeing's. Recently, Airbus' robust sales and healthy production rate significantly accelerated the reimbursement of earlier government-funded loans. For example, after repaying the U.K. government's $395-million funding for the 150-seat A320 twinjet, BAE Systems returned nearly twice the government's investment in the program and continues to pay a royalty on each A320 delivered, company officials pointed out. The British manufacturer develops and produces the European commercial transports' wings.

BAE Systems Airbus, a subsidiary of the British group, has a 20% stake in the European consortium and will hold the same share in the Airbus Integrated Co. (AIC) that is scheduled to be formed by year-end.

For the first time, information on the U.K.'s planned investment in the A3XX program enables experts to cross-check earlier figures related to the aircraft's development costs and brings the bill to $12.5 billion.

In recent months, Airbus executives said repeatedly that investment needed for the A3XX would be in the $10-12-billion range. "Such a relatively broad range in investment numbers results from the [yet undetermined] time frame to develop additional versions of the aircraft," said Jean-Francois Bigay, whoheads Aerospatiale Matra's Aeronautics Div. He added that current estimates also include provisions for expenses resulting from "unforeseen difficulties."

"The A3XX's development costs have been clearly determined. But estimates nevertheless can vary, depending on which exchange rates are being used," an Airbus official pointed out. According to financial rules governing the consortium, the four industrial partners retain their own cost structure, in local currency, but aircraft prices are established in U.S. dollars.

In contrast with the U.K., France, Germany and Spain do not plan to conclude multiyear funding arrangements with Aerospatiale Matra, DaimlerChrysler Aerospace (DASA) and Construcciones Aeronauticas (CASA). But they do plan to partly fund each of the three companies' shares in A3XX development costs.

The Aerospatiale Matra/DASA/CASA merger--which is set to lead to the European Aeronautic Defense and Space Co. by midyear--is not expected to alter the A3XX funding plan. The cross-border EADS will comprise branches in France, Germany and Spain, and each of the formerly independent companies will negotiate separate arrangements with its national authority.

For example, French Prime Minister Lionel Jospin and Transport Minister Jean-Claude Gayssot recently confirmed that France would "contribute to the funding of Airbus' expanding product range." Today, Aerospatiale Matra is believed to pay $200 million a year in loan reimbursements and royalties to the French treasury.

Risk-sharing partners, including mid-size companies such as Latecoere and Hurel-Dubois, recently signed agreements to secure a share in the A3XX. They will contribute to program funding and significantly reduce the consortium partners' investment, an Airbus official pointed out. Although long negotiations have not been completed yet, Italy's Finmeccanica/Alenia Aerospazio still seeks a 10-15% share in the A3XX. Up to 40% of the program could be funded by the additional partners, according to consortium officials. Exploratory talks are believed to continue with major U.S. companies.

Late last year, Airbus' supervisory board failed to authorize binding commercial proposals to potential A3XX launch customers. But it nevertheless approved in-depth discussions with key airlines in an attempt to gain clear signals about their commitment to the huge aircraft (AW&ST Dec. 13, 1999, p. 46). Such talks should be completed next month and could lead to an authorization to make offers to potential customers by midyear

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