Mike Turner of 20% stockholder BAE Systems explains why the AIC move is vital

Chris Jasper/LONDON

For BAE Systems' chief operating officer Mike Turner, the Airbus Integrated Company (AIC) has not arrived a second too soon. Responsible for BAE's involvement in the European consortium for the past seven years, Turner has a deep affection for Airbus and admits he would have been more than happy to have seen BAE - rather than EADS - take a controlling stake in the airframer. Yet Turner concedes that Airbus could not have gone on in its GIE "economic grouping" structure without its archaic corporate structure affecting its ability to compete in the aircraft building market.


Turner is frank in his diagnosis of the mounting problems that finally forced the Airbus partners to embrace the AIC model. Like BAE, he had long been a proponent of change in the manufacturer's status - although he suggests it was only when the strain began to show that he and others finally carried the day.

Central to Turner's explanation of why Airbus needed to change is the size of its business. Having grown to a $15 billion-a-year operation over the past 30 years, Airbus is set to double in size again over the next decade, and Turner says that as a GIE, the impact on efficient decision-making would have been intolerable.

"France had this GIE structure which allowed for a partnership in sales and marketing and a share of profits and liabilities, and it worked well. But then Airbus became so large that it was just unmanageable, and that occurred to a few of us. You get to a stage where the structure is inefficient and the conflicts of interest between the shareholders as shareholders and shareholders as suppliers become really difficult - if not impossible - to manage."

Turner says the GIE supervisory board's ability to act in the best interests of Airbus was inevitably compromised by the self-interest of its members - himself included. "We had our loyalties to Airbus as an entity, but we also had our commitment to our company as British Aerospace or Aerospatiale or Dasa, and that was a responsibility above Airbus."

Turner cites the A320 family as an example of the kind of inter-partner sniping engendered by the GIE structure. "It took us many years - even though we had launched the A320 programme - to define how much the partners would get for what they had supplied into the GIE," he says. "It was always a question in each project of whether you were above partnership share or below partnership share as to which game you played. And the sums involved became so astronomical that a variation of half a percent could make a huge difference."

Such conflict was problematic for the A320 project, and could have been catastrophic with the launch of the A380 ultra-large airliner. "What brought it to a head was the A380," says Turner. "Can you have a $10 billion investment programme with a less than optimum structure, and could we really value it between partners without putting the assets in? What would be the value of the wing compared with that of the cockpit, for example?"

Turner says Airbus was also conscious of the renewed threat presented by a leaner Boeing - a threat more easily countered by a single company than a consortium. "Boeing has warmed up to the competition. They know they can't sit back, and they are reducing costs and improving productivity, and we in turn need to respond."

The only solution was to "put the assets in", he says, and to create an AIC in which the partner companies would be 'merely' shareholders, allowing Airbus executives to make decisions based on the airframer's interests alone.

He concedes that the process was eased greatly by the creation of EADS, reducing the four Airbus partners to two and making the negotiation of terms for the transition to an AIC far simpler. "Previously we could not agree between four on corporate governance - whether we had sufficient vetoes, for example - let alone the valuation of assets."

The final agreement was hammered out between Turner and Jean Louis Gergoran on behalf of EADS, who, says Turner, typified an important change in "the French mindset" that came when privately-owned Matra Hautes Technologies merged with Aerospatiale.

That change was important, given that several previous attempts at transforming Airbus foundered because of the cultural differences, business and otherwise, between the partners. Turner says the most recent of those bids failed in late 1998 because of French nervousness over the planned merger between BAe and Dasa. Turner claims that Aerospatiale president Yves Michot "said he was not prepared to play any more". Even with the coming of the "Matra boys", Turner says: "I don't think we would be where we are now if BAe-Dasa had gone ahead." Why? "Because of French pride," he adds, claiming that for BAE, pride was not an issue, just "control over corporate governance issues".

With the AIC in place, Turner says Airbus should deliver greater efficiencies from chief executive Noel Forgeard down - although he accepts there will be some compromise. "Though we say it's the best man for the job, you can't do that because they'd all be Brits," he says, tongue only partly in cheek.

Airbus expects to deliver €350 million ($308 million) in annual savings from the AIC by 2004, although Turner says there are few opportunities for eliminating obvious duplication. "The Airbus structure did not have a lot of duplication because we were centres of excellence, and it's not like Eurofighter, with a number of final assembly sites."

Turner nevertheless maintains that there are "a few nonsenses of allocation of work under the old system", citing widebody wing assembly as an example. "A320 family wing assemblies go to Toulouse or Hamburg from BAE fully equipped, but the A330/A340 wing goes to Bremen to be equipped. Only one of those solutions can be optimal, but we have got Hamburg and Toulouse so we have to make the best of it. And we can live with two assembly lines - we need them both, and we have to manage any downturn sensibly."

As a shareholder in the AIC, Turner - one of two BAE representatives on a board likely to be seven-strong - says he would like to see savings from the new structure turned into profits, but accepts that this will depend on how Boeing reacts. "They are more competitive now, but they are losing their monopoly position on 747. They therefore have a lot to make up, and hopefully they will not want another single-aisle price war."

Turner is happy with the 50% market share Airbus has carved out for itself. "In the early days, market share was a clear objective and a commercially sensible thing to go for because of the importance of building up residual values," he says. "But a few years ago we got to a situation where we were happy, and now we don't have to have 'strategic deals'. The last one we did was British Airways, which was the last big airline we had not penetrated, and it was worth offering them an attractive deal."

In the future, says Turner, the AIC's creation means that Airbus will also be more dynamic in embracing new strategies, such as service provision - including through-life support contracts, financing and possibly leasing. "Why can't Airbus do what the leasing companies do? It's not on the AIC agenda, but we will be raising it at a further stage."

Source: Flight International