Airbus Learning the Hard Way about the Strings Attached to Government Money

Three years ago we met with executives and lobbyists for Boeing urging us to endorse a plan to have government subsidize -- albeit mostly indirectly -- their company in its competition with the European company Airbus in the commercial airliner market.

Things did look pretty grim for the Americans back then. Airbus, which had made some decent planes, drove McDonnell Douglas out of commercial aviation. Boeing was in the process of scrapping a plan to develop a new supersonic transport. Top management subsequently went through a period of turmoil, stemming from a variety of causes.

And there was Airbus, subsidized in the billions by a consortium of European governments, cleaning the Americans' clock. It just didn't seem fair to ask U.S. companies to compete against such a heavily subsidized giant without a few sweetheart deals from our own government.

Nonetheless, we demurred at compromising our free-enterprise principles to endorse such subsidies or special treatment. When you compete abroad you have to understand that companies in different countries operate under different government policies, but it's important not to draw our government into putting its thumb on the competitive scale at taxpayers' expense.

Three years later. Airbus began its $10 billion project to develop the A380 superjumbo jet. Now it's $2 billion over budget and two years behind schedule. The project has exposed inefficiencies in the Airbus design project that have not been dealt with despite several top executives recently being canned.

As Steven Pearlstein recently wrote in the Washington Post, this isn't the usual "European issues of excessive taxes, restrictive work rules and 35-hour work weeks. Rather, it's about the pigheadedness of French and German partners who care less about how many planes Airbus sells than how the work is divided between countries."

Funny. When you have political entities paying the piper you have decisions made on political, rather than economic, grounds. The A380's wings are made in Britain, the tail in Spain, the rear fuselage in Germany and the nose and front sections in France. Not only do these entities all have separate overhead costs, but sometimes those parts don't fit together without major re-engineering.

When Christian Streiff, an experienced manufacturing executive, was brought in three months ago and proposed to streamline this cumbersome process, politicians in every country complained, and he quickly got his walking papers.

Meanwhile, left to the merciless maw of the marketplace, Boeing floundered for a while but eventually came through with its 787, a plane designed to meet customer needs rather than visionaries' dreams, and Airbus has no answer.

The fundamental lesson here is that subsidies and favors from government always come with political strings attached and lead to more and more decisions being made on political grounds, not on economics. Divorce enough decisions from economic reality, and you have a fiasco. U.S. companies will do better when they actually compete rather than being subsidized or shielded from competition.

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