Eu And Airbus

WHY THE EUROPEAN UNION SHOULD NOT STOP SUPPORTING AIRBUS

Summary:

1) Introduction

2) Profitability

3) Competitiveness

4) Reliability

5) Fairness

1) Introduction

Airbus S.A.S., born in the late '60s (the mission statement was made jointly on July 25, 1967 by the governments of France, Germany and England), is a civil aircraft manufactory that has been competing against the American companies in the industry, in the last years especially Boeing. Today, Airbus produces around half of the world's jet airliners.

Initially a consortium of manufacturers, Airbus is now a subsidiary of EADS (European Aeronautic Defence and Space Company), a European aerospace corporation. formed by the merger on July 10, 2000 of DaimlerChrysler Aerospace AG of Germany, Aйrospatiale-Matra of France, and Construcciones Aeronбuticas of Spain.

After a difficult beginning, Airbus started eroding shares of the market from the previously established companies, eventually becoming one of the most prominent players in the aircraft market. This was also due to a growing backing up from the European Community, which foresaw the threats foreign companies (especially after the so-called "mega-mergers" of the '90s, such as the Boeing-McDonnell Douglas one) were posing to such a vital industry.

Airbus faced, indeed, many controversies in recent times: from a growing criticism derived from the huge investments in the company, to the World Trade Organization lawsuit about subsidies receive, not to mention the seemingly never-ending delays of eagerly waited new model A380.

However, it is our opinion that the European Union should not, by all means, stop supporting Airbus in any way. Beyond the simply logical reason one could think about (stopping now would mean throw away years of research, commitment and huge funds; it would deprive Europe of one of incalculable opportunities in a still growing, multi-billion business; and so on), our arguments are going to be based on four main, strong points: profitability issues, competitiveness issues, reliability issues and finally fairness issues.

All the four sides of our analysis aren't but different aspects of the same subject, as they all contribute to explain why it is much more sensed to continue investing in Airbus as an economic company, as a likely future financial success, and as a symbol of European unity and strength in the global market.

It is vital the Europe follow the path it took forty years ago, as some slowing down of the airlines in recent years cannot, and should not, be taken as a sign of a whole industry breakdown. Now more than ever, with the new state-of the-art A380 just hitting the market, and analysts predicting for it a bright future, Airbus needs the help of the Union to go on in its task of becoming number one in the field, sitting on the throne that has been of Boeing for many years.

And when you understand that backing Airbus is, in our words, highly profitable, help competition, proved reliable, and is from all points of view fair, we believe that few could advocate for a stop in the subsidies.

2) Profitability

Another reason why the European Union should not stop supporting the Airbus is its profitability. Despite the fact that there is a high cost in research and development, a successful development of a new aircraft bring long lasting, stable profit for aircraft industry like Airbus and Boeing. For example, Boeing's Jumbo Jet 747 has been sold in the market for more than 30 years. As a result Boeing was able to gain a huge profit after a large amount of research and development cost. Despite the fact that the new A380 from Airbus cost $18 billion dollars in research and development, the price per plane is approximately $380 million dollars. Within a few years Airbus is projecting a stable profit from the A380.

As a matter of fact, there are arguments that if the aircraft industry is such a profitable industry, why the Airbus needs the European Union's support. However, support is crucial for aircraft industry. Entering the industry is extremely costly. In order to create a profit, the company should be able to produce aircraft units without financial difficulties. By definition, fixed costs remain the same no matter how many units of airplanes are produced, so the fixed cost of producing one aircraft will gradually reduced when more units are produced. This static economies of scale can only happen when an environment that can produce a certain number of aircraft. Also, the industry's profit curve is affected by dynamic economies of scale where there is a result of strong learning effects in the assembly of an aircraft. The commercial aircraft industry has a learning elasticity of 0.2. This means that for every doubling of output, the production costs can be reduced by 20 percent. Furthermore, an economy of scope is applied to this industry where the processes used to build one aircraft model can be applied to the production of other products.

As a result, it is clear that in order for the aircraft industry like Airbus to be profitable, financial support is crucial. It may sound ironical that a company that is able to create profit on its own should be supported but, if we consider the factors such as static economies of scale, dynamic economies of scale, economies of scope being applied to this industry before it can generate profit, the support is inevitable. Also, since the Airbus can generate profit that is more than what they have received from the European Union and by returning what the company have received plus interest, the support should be treated as a investment.

3) Competitiveness

If we look back to 1993, the civil aircraft market was almost a monopoly. Airbus was struggling to achieve 15% of the market and Boeing had a solid 85%. As the decade progressed this picture changed, and changed a lot. If we look back to year 2000, Boeing was not a monopolist anymore, they had 52% of the market, but the big surprise was Airbus with 45% and if we continue to look back we can see what happened in 2001. Airbus actually achieved a higher market share than Boeing for the first time in history, with 51% they kept the growth in the following years, achieving almost 60% in 2004. The explanation behind this star growth of Airbus has a name: Subsidies. But first it's important to notice that this is a very particular industry, where the barriers to entry are enormous