European Affairs


Its current ups and downs have been in the headlines. After a decade when Airbus seemed to be overtaking Boeing, the European consortium hit such turbulence that CEO Louis Gallois said in March that “the last year has been the worst in the company’s history.” It is the latest twist in a long-running, often confusing saga for those who have to follow the plot via spotty reporting in the media. Still, no one is likely to be so dumb as to miss the importance of this high-stakes game of technological and marketing gambles—involving one of the leading U.S. exporters and the EU poster company for transnational champions. On the European side, national and governmental pressures and rivalries impede the commercial decision-making and competitiveness of a company with owners (and plants) in several different countries. On the U.S. side, governments seem to be looking the other way while company executives pursue short-term profit goals that may impair the important public interests imbued in their enterprise.

But most of us need a guide, with insider access, to understand the significance of the twists and turns on the playing field. In this book—his second, after This Sporty Game, on the high-stakes dog-fight between the two companies that manufacture and sell the world’s main big commercial passenger and cargo jets—John Newhouse serves as an able escort and commentator in this complex industry.

Newhouse seems to know everyone in the business who has something to say, and they trust him enough to say it to him. His book contains a lot of “inside baseball” reporting, based on dozens of careful interviews. It will be fascinating to the insiders. Even if more detailed in places than some of us might want, this slice of contemporary history will persuade us that, by George, the game really is important, and we can’t but admire the people who play in it.

Non-insiders who stay with the story —and that’s not too hard in this readable and short book—will be rewarded. Most of the tales about executive rivalries, merger negotiations, airline financial crises, and government procurement scandals play out in the context of some really big policy issues. There is also some rich case material for students of business management—notably corporate culture among the American companies that have been merged to create the contemporary Boeing and trans-national frictions in European conglomerates. Here are a few topics that will stimulate non-insiders to stay with the book —and want to learn more:

• When the old and revered Boeing company merged in the early ’90s with McDonnell Douglas, there was a colossal culture clash. Boeing was forced to learn cost-control, but it seems to have suffered an erosion of integrity, with the result that a top level executive went to prison for corrupting Pentagon contracting officials and the company was indicted for stealing a competitor’s documents in a rocket-contract proposal. Some aircraft company executives, it seems, are dedicated to the long term interests of their company and their industry—as called for by the nature of the industry. Others are dedicated to their own advancement and the near-term payoff on their stock options. Lessons in the vital role of corporate culture are frequent and vivid.

• What resources—financial, human, and political—does a company need to survive in an industry where designing and launching a new airplane requires a bet of billions of dollars that may not be recovered (and maybe a profit earned) for ten or twenty years, if at all? Newhouse introduces his readers to the interactions among aircraft designers, financiers, engine makers, labor unions, airline operators, airline customers (with their changing habits), airport operators (who must invest billions to have runways and terminals suitable for new aircraft models), and the politicians, who can’t resist intervening to gain or protect factory jobs, airport hubs, export earnings and other rich stakes on the table in this industry.

• The author delves (sometimes at greater length than seems necessary) into the inside workings of the shifting array of airline companies whom the airplane-makers must rely on as customers. What manufacturer would relish having to deal with these chronically under financed and often dysfunctional operations, that go from one “cycle of misery” to another, with myriad labor problems, high capital costs and intense competition? We are treated to a 1996 comment by the executive vice president of Northwest Airlines:

“I think historically, the airline business has not been run as a real business. That is, a business designed to achieve a return on capital that is then passed on to the shareholders. It has… been run as an extremely elaborate version of a model railroad, that is, one in which you try to make enough money to buy more equipment.”

• The most important and least examined question affecting this industry is the role of governments. Newhouse presents a lot of interesting and tantalizing information.

First, there is the issue of government subsidies. Beginning with World War II, Boeing has developed advanced aircraft technology through its work on airplanes and space products for the Pentagon, NASA and others agencies. Often, as Newhouse recounts, it has been able to transfer this technology to its civilian airliners. Its very promising new 787 Dreamliner (the production run is sold out through 2010) will have a radically new, lightweight fuselage, frame and key wing sections made with carbon- fiber reinforced plastic—sophisticated composites that Boeing developed extensively during its experience with the B-2 stealth bomber program.

Unhappy with the dominance of American aerospace companies, the smaller European companies and their governments formed a conglomerate of their own in 1970, Airbus Industrie, and they have subsidized it for decades through capital infusions, grants and loans. Without such subsidies, it is unlikely that there could have been any foreign competition for Boeing. Both Boeing and Airbus also receive financial support from state and local governments where they operate. The Japanese government is also subsidizing, apparently heavily, a significant part of the 787 being produced in Japan.

In a chapter ably titled “Folly and Hypocrisy,” Newhouse summarizes the subsidies practices and the quixotic effort to regulate them through a decision of the World Trade Organization’s Dispute Settlement Body. (There’s ample material for another book on that topic.)

Next, there is government-controlled purchasing. In China, perhaps the biggest future market for civil aircraft, the central government decides whether an airline buys from Airbus or from Boeing. “China always places political concerns first when making big orders for aircraft,” an Air China official states. This reality draws the U.S. and European governments into the business of seeking to influence what should be a commercial decision on which future airliner to buy. And this massive purchasing power puts the Chinese government in a position to demand that the airplane companies give Chinese companies a piece of the action in aircraft production.

Then there is the question of national security. The U.S. government regards the aircraft industry, and Boeing specifically, as an important resource for military and space technology and equipment. Does it care that Boeing is transferring some of the latest, government- sponsored, technology to three major Japanese companies who will make some of the most crucial parts? That 70 percent of the new airplane will be made abroad and simply “snapped together” in Seattle in three days? Or that, as a Boeing engineer points out, “over time, institutional learning and forgetting will put the suppliers in control of the critical body of knowledge, and Boeing will steadily lose touch with key technical expertise?”

The military security question merges with that of economic security. Boeing is America’s largest exporter, a very large employer, purchaser of tens of thousands of components and developer of technology that is fed into the whole supply chain. Yet its executives, especially when spurred by stock options to improve the earnings and the stock price, have chosen to relocate the business— or much of it—abroad. They could have financed the 787 through U.S. capital markets, but Japanese government financing made it cheaper to put much of the key production offshore, so they took that course. The book quotes a senior executive with a major Boeing supplier commenting on the new generation of Boeing executives:

“There’s no passion. They would be just as much at home with Procter & Gamble making soap.”

These executives took advantage of the drop in airline traffic following 9/11 to slash 30,000 Boeing employees, so that, as Business Week commented, “[with] the window of opportunity opened by the layoffs, Boeing could be transformed into a global enterprise that’s much less dependent on the U.S. for both brawn and brains.”

Should the U.S. government be indifferent to whether large aircraft production remains a major U.S. industry? The Europeans clearly care about having a major domestic manufacturer supplier and have made Airbus their national champion. The Japanese government is supporting its heavy industrial companies to become important players and views aircraft production with special interest because of the number of technologies it spawns. U.S. officials are unable to acknowledge that they have an industrial policy, though they more or less carry one out de facto through military and space contracts. They probably would not put up with Boeing moving its whole production line abroad, but they apparently are not reacting to the outsourcing of core competencies to accomplished global competitors in Japan. In the rush to compete, even Airbus may follow suit. Industry experts speculate about a future large aircraft industry based in Asia, with participation by Korea, China and Japan.

Different governments have different notions of what they should be doing to influence the civil aircraft industry. The U.S. seems to feel it should keep its hands off; but that does not mean it should keep its eyes closed. European officials sometimes put their heavy hands on, for the wrong reasons. Japanese officials have a more nuanced, long term approach. They are “widely thought to put aerospace at the top of the industrial pyramid—ahead of electronics and automobiles—because it is judged to have the largest potential for benefiting other industries.” Newhouse’s extensive interviews regrettably do not include discussions with government officials here or abroad about what their role is and what they think it should be. Perhaps this is a job for a more policy- oriented author. In the meantime, Boeing versus Airbus serves as an elegant job of reporting by the trusted pro who knows this industry best.

Robert Herzstein, a former U.S. Under-Secretary for Trade in the Commerce Department, wrote about Airbus and Boeing in European Affairs last year, in issue no. 1 & 2, volume 7.


This article was published in European Affairs: Volume number 8, Issue number 1 in the Spring of 2007.