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Power8 or PowerOut?

The plan is elegant. As a key element in its Power8 cost-cutting programme, Airbus intends to sell manufacturing sites in Germany, France and the UK to supplier partners, who will run the sites to help develop, and supply, key aerostructures to the A350 XWB twinjet. The sites sale would provide Airbus with a cash injection, allow it to make more efficient use of its capital assets and reduce its financial risk in developing the A350.

But now, for the second time in little more than a month, site sale talks have broken down. In late March, talks with a MT Aerospace were abandoned, leaving Airbus holding sites at Augsburg, Nordenham and Varel, Germany. Then, last week, negotiations with French aerostructures maker Latécoère were similarly cut off to end, for now at least, hopes of divesting sites at Meaulte and Saint Nazaire Ville.

A350 XWB
 © Airbus

The divestments drive has not completely run out of steam. Talks continue with GKN over its proposed acquisition of a wings production site in Filton, UK, and both sides expect a deal to be reached in a matter of weeks. But, failure to close deals with MT and Latécoère raises the question of whether Airbus can realise this major shift in its risk and supply structure, and indeed whether it can realise its Power8 targets of cutting costs by e2.1 billion ($3.2 billion) a year.

It's The Economy

In some regards, the failures of the French and German divestments are not hard to explain. Since negotiations began, and since December when MT and Latécoère were selected as preferred bidders, economic prospects have dimmed and the US dollar has fallen dramatically against the euro. As MT chief executive Hans Steininger puts it: "There were different reasons but the key reason was that with the exchange rate development over the last months the risk was, at least for us, too high to proceed."

Steininger adds: "It looked like reaching agreement on the plants would have taken until the summer and that was not compatible with the A350 process...[Airbus] can focus now on the A350. From an outside perspective that is probably the right thing to do at the moment."

Latécoère president François Junca also points to the gloomy economic climate brought on by the US financial crisis and ensuing pressure on euro-dollar exchange rates as driving the collapse, and Airbus, too, cites "the current difficult financial environment".

Junca also lays some blame on Airbus's desire to find similar solutions in Germany and France, and on the failure of the MT talks in Germany.

But while price may well have been a sticking point, unease in financial markets may not have been a significant factor. Junca says Latécoère had managed to virtually round up the finance for its planned €300 million capital increase to support the deal.

So what has gone wrong? MT's Steininger thinks Airbus executives may have looked at the trouble Boeing has had in outsourcing its 787 supply chain and decided to end a divestment process that was drawing out and simply focus on bringing the A350 to market. "They learned that the steps Boeing was taking were probably too aggressive - to reduce the value chain significantly and change technology," he says.

Airbus may be learning from a rival's bitter experience. But what should really alarm Airbus - and its stakeholders - is the possibility that the site divestment failed due to the French-German rivalry that has dogged Airbus since its creation in the 1960s. London analyst Howard Wheeldon, chief strategist at BCG Partners, sees the "hand of politics" - and French trade union power - behind the Latécoère talks collapse: "It comes down to French nationalism." The Germans, he adds, are also driven by national pride, and worries "that the French beast might drive them out".

In the UK, he adds, Airbus management is likely to succeed in selling Filton to GKN because the government, unlike its French and German counterparts, has no stake in Airbus or its parent company EADS.

To Wheeldon, Power8 is not actually dead because some jobs and costs are being cut. But the French and German site divestment plan is unlikely to ever come off, thanks to ongoing French-German political interference in the company.

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