It’s Sweet Home Alabama for Europe’s Airbus

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 US 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 US aircraft and defense deals. The project, announced last week, 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 US 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 US 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 US 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.

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.

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.

And back home, Airbus is also playing with fire as its own unions have called for guarantees over European jobs. Indeed, once the US 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 US 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 US would unlikely have gone ahead without his government's approval since the state owns 15 per cent 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 US 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.

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 US 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 US 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 US airlines - while it had 53 per cent global market share for the popular 150-seat jet category in 2011, its US 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 US 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 per cent 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.”

While Mobile may be a US 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 American manufacturing's long decline may be coming to an end say that American labor costs are no longer as prohibitively expensive, given depressed U.S. wages and rising costs in places like China, and recent developments in robotic production lines. Labor costs in Europe are more than 30 per cent higher than in the US.

"We are seeing more and more companies that view the US as a lower-cost platform for serving the US market and for export from here,” said Harold Sirkin, a senior partner atBoston 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.”

Copyright @ Thomson Reuters 2012