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Airbus competes on wings of government subsidies

(Page 2 of 2)

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.

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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