BERLIN -- The good citizens of Seattle can't be very happy. First, the U.S. government decides to hack up their New Economy powerhouse
, and now the competition seems to be turning up the heat on their Old Economy stalwart
On Friday, Boeing's European arch-rival
announced it would officially go ahead with plans to build its A3XX super jumbo airliner, in an attempt to break the decades-long monopoly held by Boeing's 747.
Perhaps more troubling for Boeing, the U.K.'s
(BAESY:Nasdaq ADR) and the newly formed
European Aeronautic Defense & Space Co.
(EADS) announced their Airbus consortium would be turned into a more-efficient corporation, to be called
Airbus Integrated Co.
EADS, the world's third-largest aerospace firm, is composed of
Aerospatiale Matra SA
, the aerospace unit of Germany's
; and Spain's
Construcciones Aeronauticas SA
Concerns, however, over the cost and feasibility of the 555-seat A3XX and Airbus' unwieldy corporate structure won't be dispelled overnight. How much investors believe in the super jumbo concept and the future of the European aerospace juggernaut will be gauged in the coming week, when book-building for an EADS public offering of about 160 million shares begins in earnest.
The shares will be priced July 8 and are expected to cost close to what Aerospatiale Matra stock does; they will begin trading July 10 in Frankfurt, Madrid and Paris. On Friday, Aerospatiale Matra closed down 0.49 euros, or 2.1%, at 23 ($21.55). The company's shareholders will receive a one-for-one swap for EADS stock.
Some observers feel the offering of a stodgy industrial company easily could get lost amid the plethora of flashier technology or telecom issues currently available in Europe. In order to entice individual investors, EADS is offering a one-euro discount for those who order shares early. But the volatile nature of the aerospace industry may give potential shareholders pause. "People aren't exactly bubbling over with interest," says one German fund manager.
Although Airbus apparently has garnered interest in the super jumbo from the likes of
and some of Asia's airlines, there are concerns the A3XX will be too expensive to produce over the long term, especially if Boeing, as expected, retains some market share with an updated version of its 747.
Effectively restructuring Airbus into a more cost-effective and competitive corporation also could prove to be difficult. The consortium partners have a long history of wrangling over where aircraft should be produced, and the A3XX is no exception. Also, the new company likely will have to adjust more to the whims of market.
"Boeing always claimed the old Airbus structure allowed it to be uneconomical. They used to say they would be better off if everybody had to play by the same rules," says Joseph Campbell, a
analyst in New York. Lehman does not have an investment banking relationship with EADS.
Negotiating with BAE Systems also proved difficult, as the British will own only 20% of Airbus to EADS' 80%, even though BAE lays claim to a bigger chunk of the business. Last year, BAE spurned merger advances from Dasa, leading the German company to link up with Aerospatiale and eventually lead to the creation of EADS.
Now that union finally could begin proving its worth. Aerospatiale has estimated the potential savings of switching from consortium to corporation at hundreds of millions of dollars per year. "The new structure should allow Airbus to become more efficient, which clearly couldn't be considered good for Boeing," says Campbell.
And a more-efficient and cost-effective competitor is probably what Boeing fears the most. If Airbus can eventually compete toe-to-toe not only in the super jumbo market, but in other parts of the air market as well, the people of Seattle soon may dislike EADS as much as they dislike the government and the judiciary trying to break up Microsoft.