STATE INVESTMENT

A bumpy ride with the Airbus

JOCK BRUCE-GARDYNE

Airbus, Europe's challenger to the intercontinental airways of the 1990s, is about to come under new management. Last week the four sponsor governments involved — Britain, France, Germany and Spain — agreed to streamline the top direction of this ambitious project. The 'supervisory board' is to be trimmed down to a five-man group consisting of the chairman of the participating companies -

British Aerospace, Aerospatiale, Messerschmidt-Balkow-Blohm (MBB), and Casa of Spain — with Germany's formidable Herr Franz-Josef Strauss to preside. Then there will be a seven-man executive board for Airbus Industrie, in- cluding a 'powerful new finance director', yet to be named. One does not envy him his task. For to Herr Strauss the Airbus is, and has always been, essentially a scheme to carry on the good work of the Common Agricultural Policy by other means, sus- taining his faithful voters in Bavaria in the style of life to which they are accustomed. It is not the most obvious recipe for commercial success.

We do not', remarked the Prime Minis- ter back in 1983, 'want another Concorde.' She was referring to the request, then sitting in her pending tray, for an invest- ment from the taxpayers to enable British Aerospace to join in the building of the Airbus A320. In due course the Treasury was prevailed upon to put up £250 million; and subsequently to make a further con- tribution of £450 million, on our behalf, towards the cost of BAe's participation in the construction of the long-haul Airbus A330 and A340.

Five years later it is clear that the A320, at any rate, is not 'another Concorde'. For the distinguishing feature of the Concorde was that, after the taxpayers of France and Britain had sunk upwards of £1,000 million in this pioneering venture, there were no commercial buyers to be found. True, Air France and British Airways were prevailed upon to take 16 Concordes into service, and now run them at a profit. But the entire cost of research and development had to be written off to experience. The A320, by contrast, has already won nearly 500 firm orders, and options to purchase, from airlines around the globe: and while 'firm options' have been known to melt away (as they did for Concorde) there is no reason to doubt that BAe is by now committed to help to build a sufficient number of A320s to be bound by its contract to repay our launch-aid. But if the Airbus is not in danger of turning into 'another Concorde', it could turn out to be another RB-211 instead. The RB-211, it may be recalled, was the wonder aero- engine which Mr Wedgwood Benn encour- aged Rolls-Royce to launch upon the US market, and which in the fullness of time drove its makers to the edge of bankrupt- cy, and obliged the Heath Government to take them into public ownership.

The builders of the Airbus have three problems to contend with. The first is that Boeing has what by our rules would be deemed a monopoly share of the world market for aircraft to carry scheduled airline passengers. The second is that civil aircraft are sold for dollars. And the third is that Airbus Industrie, the consortium which markets the Airbus, is a genetic freak. As if that were not enough to be going on with, there is the added complica- tion that the manufacture of civil aircraft has been, ever since the second world war, a loss-leader business. Of all the civilian aircraft produced in this country over the past 40 years, only one repaid the British taxpayer's investment: the Viscount. Worldwide, only one has produced a genuine commercial return to its investors: the Boeing 727. Boeing currently supplies about three out of every five scheduled carriers purch- ased by the airlines of the non-communist world. In the case of long-range carriers it is the lone supplier. It is not going to surrender that position without a fight. It complains that Airbus Industrie does not produce accounts, and that its four partici- pants receive undisclosed subsidies from their host governments. It complains that this is against Gatt rules, and the American government supports its complaint, and threatens retaliation, which would not necessarily be confined to the aircraft industry.

The Airbus partners — and their govern- ments — respond that Boeing enjoys sub- sidisation through its work for the US Defense Department, compared with which the taxpayer subsidies to Airbus are peanuts; and that Boeing, in addition, cross-subsidises its short and medium- range carriers from the monopoly profits on its long-haul aircraft. There is no reason to doubt that the complaints on both sides are justified: and that both contestants go to grotesque lengths to buy orders from the airlines at each others' expense.

Boeing, however, currently enjoys an advantage indisputably denied to Airbus: the fact that everyone sells in dollars. When the A320 was launched, back in 1984, the dollar stood at 1.40 to the pound, and this exchange rate gave it an edge over the Boeing competition. At $1.50 it was reckoned that the Airbus partners could still make a profit on their sales. At $1.85 it becomes a vastly different matter.

Then there is the nature of the Airbus consortium. It is a very strange animal. The four partners claim a price for the bits and pieces each deliver (in the case of British Aerospace, the wings). They bar- gain vis-à-vis each other, and eventually arrive at a schedule of relative prices, adding up to a target for each completed aircraft which Airbus Industrie is supposed to obtain. But it can't. Instead it negotiates a price with the customer, and then goes back to the partners to get them to agree to proportionate reductions in their receipts to enable the order to proceed.

Now whereas Aerospatiale, MBB and Casa are state-owned, British Aerospace has been privatised. And the Treasury struck a hard bargain for the cash it put up on our behalf. Starting in the early 1990s BAe has to repay £50 million of the £250 million launch aid we provided for its participation in the A320 regardless of aircraft sales. There have been suggestions that this £50 million payment on account has now been waived, as part of the deal by which BAe has volunteered to take Austin Rover off the Government's hands. Lord Beaverbrook assured me in the House of Lords last month that this was not the case. Certainly, any such arrangements would add to the difficulties the Government will have in persuading the Brussels Commis- sion to approve the BAe-Rover deal.

That apart, the repayment terms for Airbus launch aid are described as 'com- mercially confidential'. But the best evi- dence is that over and above the £50 million down-payment, BAe has no liabil- ity to the Treasury for the first 75 A320s. Thereafter royalties rise steeply, to £1 million per aircraft delivered. After BAe has delivered the wings for 600 aircraft, royalty payments drop to £250,000 per aircraft. Airbus reckons that this would make the A320 the best civil aviation investment for the British taxpayer bar none.

Which, no doubt, it would. But where is the money to come from? In the year to March BAe announced a loss of £160 million, reflecting a special provision of £320 million to cover exchange rate losses on civil aircraft sales in the pipeline. £180 million of this provision was attributed to Airbus; and it was said to be calculated on the basis that the dollar would 'strengthen moderately' over the next three years, as BAe delivers wings for the aircraft, from the $1.80 prevailing when the report was written.

It had better. For if by any chance it did not, it is not exactly obvious how BAe could meet its obligations to the Treasury in the early 1990s, particularly since it will by then be embarking on deliveries for the long-haul A330 and A340s. These aircraft are, it seems, primarily designed to assault Boeing's ability to use excessive profits from its 747 monopoly to underprice Air- bus in the short-haul market. This may be rotten for Boeing. But will it be wonderful for Airbus? So far the jury is out. Plenty of potential customers for the A330 and A340 are taking options. Hard orders are in short supply.

Politicians, it may be said, should not second-guess the hard-nosed businessmen who stake their shareholders' money on these great adventures. Indeed they should not. But BAe's partners are not playing with private shareholders' money. Furth- ermore, Airbus Industrie treats the length of its order-book as sufficient proof of its achievement: the fact that, at current exchange rates, every order won appears to constitute an extra loss for the makers of the aircraft is of no concern to Airbus. There is also a sinister sentence in BAe's latest Chairman's report which we should

ponder. 'The implications of decisions taken in earlier years by the Company', writes Professor Smith,' with the support of HMG [my italics] in the development of the Airbus consortium, are now coming through in the Company's accounts.' Now I am not privy to Professor Smith's thoughts. But I think that if I were Lord Young I'd be a little worried lest Professor Smith were going to turn round one day and say: 'You got us into this mess: now you'd better get us out of it.'

Airbus enthusiasts tell us that it is a highly competitive product, which, assuredly, it is. They also argue that, without the Airbus challenge, Boeing would abuse its monopoly position to take the world's air travellers to the cleaners. As, indeed, they might. But we are also assured that the Airbus consortium would proceed with its challenge to Boeing whether BAe shared in the venture or not. Hence there might be, on the face of it, something to be said for lying back and enjoying the struggle to supply us custom- ers. But that option is not open to us. We have committed £700 million to the Air- bus, willy-nilly. It would — to put it mildly — be a pity if BAe, like Rolls-Royce in the early 1970s, had to be rescued back into the public sector because it had been encouraged to embark on a foolhardy venture through the availability of initial funding from the taxpayers.