:: July 2007 Letter ::


Dear Fellow Ethnic Food Fans,

Which is a more widespread idea, fear of foreigners, or love of foreigners? I did some scientific in-depth research that produced sad results. Google “xenophobia” and you get exactly 3.6 million hits; Google the less well known “xenophilia” and you get just 115,000 hits. Worse, many of the latter sites concern romantic encounters with space aliens, which isn’t really what I had in mind. Fear of foreigners is clearly still a pressing issue, even though we’re all foreigners to most other people in the world.

The need for foreign collaboration couldn't be better demonstrated than the business model for Boeing's 787 and (hopefully) Airbus's A350. In fact, my hopes for a better, more connected Tom Friedman-esque global economy got a boost this month. I was a guest at the 787 rollout. The numerous festivities clearly demonstrated the ways foreigners enrich our lives: they prepare really tasty food, their flight attendants wear neat outfits, and they play fascinating, if at times highly impractical musical instruments. Yep, there’s much to love about foreigners. And on a few serious notes:

1. Foreigners buy planes. US carriers comprise well under 10% of the 787 order book. The 787 wouldn’t have been launched without foreign customers. Given the dollar’s chronic wasting disease, manufactured exports are suddenly the US economy’s best hope.

2. Foreigners provide cash. The 787 costs a lot to develop. By getting foreign (and US) companies and banks to chip in, Boeing was able to launch the riskiest and most promising jetliner in decades. They got other people to do the heavy lifting, and leveraged those outside resources. That means potentially great return on investment.

3. Foreigners share risk. Closely related to the second point. Remember that “they’re betting the company” cliché? Not any more. If the 787’s Carbon Fiber Reinforced Plastic (CFRP) design turns out to be Carbon Reinforced Advanced Plastic (CRAP), Boeing takes a hit, but the other guys take a hit too, insulating Boeing from a fatal blow.

Globalization has many nay-sayers. Are there legitimate concerns about free trade? Certainly. Do some countries play unfairly, with subsidies, trade barriers, and manipulated national currencies? You bet. But the 787 shows what happens when you embrace globalization, rather than merely react to it. The 787 production plan even turns subsidies on their head—Italian and Japanese public money is being used to support a Boeing-led project (strangely, that’s not part of the EU’s counter-complaint to the WTO). The 787 also illustrates the sheer intellectual poverty of the Lou Dobbs/Duncan Hunter crowd. Notable fact: 99% of the outsourced 787 components come from high cost/high skill countries—France, Italy, Japan, the UK, etc. “Giant sucking sound” indeed.

Turning back the clock and closing borders is a strategy for industrial and economic defeat. In fact, Airbus provides a good illustration of the alternative. Airbus planes use the same global components as Boeing’s, but Airbus airframe risk-sharing partners are generally all European, and only a few percent of each plane’s structure is built outside the Airbus partners. So, when a program does poorly, like the A340-500/600 or A380, Airbus takes a body blow. Worse, under current production arrangements, when Airbus needs to find cash for new product development, it needs to generate this cash from within, or from the supporting governments. The 787 shows how to get that cash from external sources.

The 787 manufacturing plan also provides a great template for an Airbus recovery. Building the A350 XWB with a network of global partners is exactly what’s needed. Airbus needs to work with global aerostructures companies and the private equity people. Both will bring badly needed investment money for the A350.

However, Airbus also needs to work with unions and the European politicians who love them. This complicates the logical and straightforward solution—selling Airbus factories to the most qualified and highest bidders. The compromise that emerged at Le Bourget: Airbus factory sales to national aerostructures companies. French factories go to Latecoére. UK factories go to GKN, and so on. In other words, foreigners need not apply, which is dumb. But this would be a start—it would establish the precedent of moving Airbus work to outside companies, with their own funding sources. The next step: letting foreigners join in.

When the A380 was rolled out, the European politicians attending the show called it a “European success story.” If any US politicians at the 787 rollout had called the 787 a “US success story,” they would have been laughed at. After all, this was clearly a global business enterprise. Foreign companies saw the value and invested accordingly. When Airbus rolls out the A350, European politicians will hopefully have gotten the message. After all, calling the A350 XWB a European success would be disrespectful to the global industrial partners who help make the new plane a reality. European pride may be better than a collection of petty nationalisms and petty national aircraft programs, but it isn’t the same as thinking globally.

Back to the rollout. I was part of a small chorus of like-minded analysts (“Great market. The flight test schedule looks ambitious, but the real concern is with the production ramp-up,” we all sang in unison). The canapés were tasty, and many crustaceans gave their lives for a good cause. As for the plane, it looked great. If the 787 performs as advertised, airlines won’t have a choice. If an airline doesn’t have a 787 and they compete on a route with an airline that has 787s, the latter carrier can under-price and out-profit them at the same time. This is why Airbus needs to get the A350 right, and why it needs to get it to market before the 787 seizes much of the up-front demand.

Lastly, we need to love our foreign pals, even when they’re just kind of winging it in the national airline department. At the rollout Qatar Airways obliquely announced a 787 order (the plane rolled out with Qatar’s insignia painted amongst the others). This came right after Qatar’s A350 XWB-800/900/1000 order at Paris, so Qatar wins the annual Vijay Mallya Award for Dubious Fleet Planning.

This month, we’ve updated the A350, with our same forecasted 2014 in-service date. We’d move it to 2013 with more foreign help. Or back to 2015 if this project stays purely European. Other Teal updates include the 747, 767, C-27J, ERJ 170/190, UH-1, F-4, F-5, Learjet, Hawker 800/4000, SH-2, and EC 120. Have a great month.

Yours, Until Those Pesky Borders Go Away,
Richard Aboulafia


© Richard Aboulafia 1997-2006, All rights reserved.
  ~  Last updated on January 08, 2006