INSIGHT - Oohlalabama! Airbus finally goes American

AIRBUS-ALABAMA-STRATEGY:INSIGHT - Oohlalabama! Airbus finally goes American

Airbus is about to get a Green Card.

Plans to build a $600 million plant in Mobile, Alabama to produce A320 passenger planes will give Europe's jet maker a strategic foothold on U.S. soil while breathing life into American manufacturing.

By retracing the footsteps of French settlers who founded Mobile as the first capital of then French Louisiana in 1702, the Toulouse-based company hopes to strike directly at rival Boeing on its home turf and create a springboard for future bids to win U.S. aircraft and defense deals. Monday's expected announcement is the fruit of several years of efforts by parent EADS , Europe's largest aerospace group, to acquire an American identity.

It is a reversal of fortune for Alabama's oldest city and its only port, coming only 16 months after Airbus lost a bitterly fought $35 billion contest against Boeing to build U.S. Air Force tankers that would have been put together in Mobile, and almost seven years after the city was among the places ravaged by Hurricane Katrina.

"It is a long-term strategic move, and anything that allows Airbus to make planes cheaper means they sell them cheaper ... putting more pressure on Boeing," said Alex Hamilton, managing director with EarlyBirdCapital, a boutique investment bank.

The new plans, which include the creation of a plant that will generate up to 1,000 jobs, are seen by some experts as one early sign of a possible renaissance in U.S. manufacturing, which has been in decline for many years.

But by placing the plant in the southeast with its lower wage rates and laws that are less friendly to labor unions, Airbus' plan may not sit well with the unions who have traditionally ruled U.S. airplane manufacturing, and particularly at Boeing's main hub in Seattle. They had already fiercely opposed Boeing's move to set up a plant in South Carolina, saying it was retaliating against the unionised workers in Seattle.

And back home, Airbus is also playing with fire as its own unions weighed in on Sunday, calling for guarantees over European jobs. Indeed, once the U.S. plant is built, Airbus may have more bargaining power with its workers in Europe.

Boeing itself slammed the Airbus plan on Friday, saying the real issue was that Airbus had been found by the World Trade Organization to have been unfairly subsidised by European governments.

FALABAMA

The sensitivity of the deal in both the U.S. and Europe is reflected in the way it came together.

For the best part of nine months, Airbus and state officials were sworn to secrecy and had meetings in locations away from Mobile, such as in New Orleans, to pore over a blueprint known, according to the local newspaper, the Press-Register, as "The Project".

Inside the aerospace firm, the project had another code name: it was not exactly cryptic but it included a pun on the acronym for Final Assembly Line and so it stuck: Falabama.

The confidentiality of the discussions was almost blown apart, though, when Alabama Governor Robert Bentley told local Mobile TV station WPMI-TV four months ago that Alabama was in constant touch with Airbus about building a plant.

For a few hours the project looked in danger of slipping into dangerous waters as participants worried whether it would inflame protectionist rhetoric in French politics - just as the presidential election campaign was heating up. Leaders of both French mainstream parties on left and right had promised to crack down on industrial offshoring amid fears of a wave of lay-offs triggered by Europe's debt crisis.

Bentley told the Press-Register, "there is no contract, there is nothing on the table and there are no negotiations on any kind of deal," and to the relief of both sides the TV report failed to get widely noticed.

And now that France has a new president, the Socialist Party's Francois Hollande, who has pledged to penalise companies for moving jobs offshore, the Airbus move into the U.S. would unlikely have gone ahead without his government's approval since the state owns 15 percent of Airbus parent EADS.

Airbus is a key European project, now based on the creation 12 years ago of its parent EADS, and held together by a delicate Franco-German power-sharing pact and a mixture of public and private shareholdings that frequently marry business and politics.

Such considerations led EADS's former chief executive Louis Gallois to take a cautious stance on the U.S. assembly proposal, according to several people familiar with the matter.

Gallois' successor, ex-German paratrooper Tom Enders, has ambitious plans to expand the company in the United States as well as India and China. He has also made clear his lack of patience towards European political meddling.

Enders sparked a clash with the German government even before taking office last month by effectively rebasing EADS' headquarters in Toulouse alongside subsidiary Airbus. Out went a political fudge that had seen it split between Paris and Munich.

The move outraged some German politicians and drew a threat to cut off development loans for the next Airbus project and even to reconsider crucial export financing, according to people familiar with the contents of a letter from a Berlin official.

Enders, though, managed to smooth over the row. And by delivering the HQ of one of Europe's biggest industrial jewels to France, he may have insulated EADS against a backlash in France over the Alabama plan.

EYES ON PENTAGON

EADS is keen to expand in the United States to help shift more of its cost into dollars, reducing its currency risk on products sold in the U.S. currency, and to seek to tap into the Pentagon's massive budget at a time of increasingly meager defense spending in Europe.

"Our vision is to be leading prime contractor within 10 years and expand our U.S. citizenship," EADS North America Chief Executive Sean O'Keefe told reporters at last year's Paris Air Show.

Its Eurocopter unit, the world's largest civil helicopter maker, has already established itself as a key Pentagon supplier with assembly operations in Columbus, Mississippi.

But EADS appears to be gambling that the assembly of Airbus jetliners could be a more visible platform and gradually dilute Boeing's support in Congress, just as the arrival of foreign car "transplants" in the South and elsewhere over the past 30 years has weakened the lobbying power of Detroit.

"Strategically in the long term, this will help EADS make a good solid industrial argument to the Pentagon and it will be stronger with an established footprint than the promise of a footprint," said independent U.S. aerospace analyst Scott Hamilton.

Airbus is meanwhile betting on securing a tactical advantage against Boeing in the $100 billion annual global jet market. It has plenty of room for growth with U.S. airlines - while it had 53 percent global market share for the popular 150-seat jet category in 2011, its U.S. share is less than half that.

The simple fact that the aircraft are Made in the USA is unlikely to hold sway with hard-nosed airline executives, who care more about whether a jet is efficient, safe and reliable, but having a flexible plant on their doorstep that could produce the right jet at the right time could be a different matter.

Despite warnings of an asset bubble, aircraft demand is continuing to rise for now because U.S. airlines are being forced by high oil prices to modernize ageing fleets and emerging market carriers are growing to keep pace with economic growth.

Equipped with engines saving 15 percent on fuel, the revamped version called the A320neo is more or less sold out until the end of the decade.

After ripping up an alternative strategy, Boeing followed Airbus in deciding to "re-engine" its competing 737 as the 737 MAX but has run into delays in fine-tuning the design, giving Airbus a two-year lead.

"It is a brilliant strategic and technical move and there is little Boeing can do about it because their MAX can't come forward," Scott Hamilton said. "Even a point or two of market share is worth billions and could lock you in for decades".

MAY BE TOO LATE

Still, not everyone is convinced Europe's new aerospace enclave will shift the balance of power in the world's largest market, especially given recent weakness in the euro against the dollar.

"This looks like something that might have been a great idea a few years ago and is now merely going ahead on autopilot," said Richard Aboulafia, analyst at Virginia-based Teal Group.

"Back when the tanker competition was up for grabs and the euro was all-powerful, a line in Alabama was a fantastic idea. Now it's merely an expensive move which may or may not pay off in the long run," he added. "It puts pressure on labor unions and politicians back home, which could help keep costs down. It helps EADS build a defense constituency over here, but that's with exactly the same politicians who are already on their side."

EADS may be calculating that creating jobs in the U.S. will help defang Boeing's arguments in the World Trade Organization and in Washington that European subsidies to Airbus have harmed the U.S. aerospace industry, analysts said.

Boeing moved swiftly to pre-empt any such thoughts, saying thousands more U.S. jobs had been destroyed by its rival. EADS responded that the WTO had decided Boeing's own management actions had hurt jobs.

INCENTIVES

The way the Alabama project is structured is unlikely to make the row go away.

At least one source with knowledge of the deal to bring Airbus to Alabama estimated it would benefit from a tax break and incentive package worth more than $100 million.

Tax breaks for Boeing were among the items criticized by Airbus in a European countersuit to U.S. claims at the WTO.

While Mobile may be a U.S. bridgehead for Airbus, officials in the region hope the European company's arrival will be a magnet for others in the aerospace industry.

Those who are hopeful that the Airbus announcement is another sign that American manufacturing's long decline may be coming to an end say that American labor costs are no longer as prohibitively expensive as they once were given depressed U.S. wages and rising costs in places like China, and given the developments in robotic production lines in recent years.

"We are seeing more and more companies that view the U.S. as a lower-cost platform for serving the U.S. market and for export from here," said Harold Sirkin, a senior partner at Boston Consulting Group, which has produced studies in recent years predicting a recovery in U.S. manufacturing. "Companies such as Airbus are at the front of the wave."

Labor costs in Europe are more than 30 percent higher than in the U.S. In addition to Airbus, European manufacturing giants Rolls Royce and Siemens have recently opened plants, respectively in Virginia and Georgia. They are driven not only by lower per-hour wages than in Europe but by a more favorable legal structure for handling their workforces, whether union contracts or the right to reduce a labor force quickly when times are hard, according to Sirkin.

Airbus already employs about 200 at its engineering center at the 1,700-acre Brookley complex in Mobile, and the Mobile Regional Airport houses an Airbus service center for military aircraft.

Wooing Airbus to Mobile will be popular locally and be seen as no small feat for a region hit badly by Hurricane Katrina in 2005, the BP oil spill in 2010, and last year's loss of the tanker contract to Boeing, all on top of the housing bust, financial crisis and recession.

The U.S. Southeast has had a string of success stories in luring foreign manufacturing companies, particularly the foreign automakers such as Toyota, Honda, Hyundai, Volkswagen and BMW, to built plants over the past 20 years.

Many of these facilities are in states where labor unions don't have much clout and wages are lower than in the north. They also tend to be so-called "right to work" states, where workers in labor union-organized plants can't be forced to join or pay dues to a union.

George Freeland, executive director of the Jackson County Economic Development Foundation in Mississippi, said the plant would have a trickle-down effect helping southern Mississippi and the Florida Panhandle as other investments come in.

"It certainly validates what we've said for many, many years, which is that this region is well-positioned for a number of reasons to attract and recruit and establish an aerospace corridor," Freeland said.

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