PARIS --- The frustration recently expressed by Airbus Group CEO Tom Enders about government meddling in the EuroMALE unmanned vehicle program is but the latest of many signs of the company’s growing disenchantment with military programs.
“Enders has threatened to pull out of Europe’s plan to develop a surveillance drone should EU governments persist in placing burdensome political requirements on multinational military projects,” the Financial Times reported June 18.
The FT said Enders was “sick and tired” of industry taking the blame for problems with European projects that had been highly politicized. “Those projects when they run, they get into trouble time and again,” he added. The threat to pull out of EuroMALE is significant, as Enders has maneuvered for years to ensure his company was part of any European initiative in this sector.
Enders is aware that Airbus defense business is in dire need of an overhaul. He first thought to solve this problem by merging then-EADS with BAE Systems, but when this was vetoed by the German government he began selling off various small parts of the newly-reorganized Airbus Defence and Space that did not fit in with its core defense business.
Airbus Group strategy chief Marwan Lahoud says “we’ve defined our future core business within the segment [as] space (including launchers and satellites), military aircraft, missiles and related systems and services [while] other business areas are identified as divestment candidates.”
Enders is no fan of big government, and has consistently fought to reduce government interference. He clearly continues to believe that industry can and should manage programs, including military ones, on its own, despite the way the company spectacularly mismanaged the A400M airlifter.
An industrial catastrophe narrowly avoided
Managers of the company then known as EADS had convinced several European governments to let them develop and engineer the A400M airlifter on their own, using the same process that Airbus successfully used to develop and market civil airliners.
In theory, it sounded like a good idea, but as Airbus knew nothing of the complexity of military requirements and military programs, the A400M soon turned into a disaster, costing partner nations over €5 billion in additional costs and five or six years in delivery delays, while EADS itself had to write off over €3 billion of its own money.
But the A400M is not the only military program that if of concern to Airbus Group managers.
The company’s flagship military product is its 46% share of the four-nation Eurofighter, which is nearing the end of its production run. While it will continue to require support for a couple of decades, this part of the business will slowly peter out and so, even if revenues and margins are likely to remain attractive, it is a dead-end business.
And Eurofighter has also brought more management headaches, as Austrian and German prosecutors have tried more than once to nail the group for alleged irregularities regarding the sale of Eurofighter to Austria. Governments have not bought all of their planned production offtake, while also postponing for too long the additional developments that were required to keep it competitive on the international market.
Unmanned aircraft business remains uncertain
Airbus has not had a good run in the military unmanned vehicles business, either, despite having invested more than €1 billion of its own money over the years. And, despite this investment and the many UAVs it has designed and flown, it had to team with Textron Systems to find a credible competitor for the French Army’s SDT competition.
Its primary UAV program, the German air force’s EuroHawk, was suddenly canceled in late 2013, when the then-German minister of defense realized it would be unable to fly in national airspace. This decision cost Airbus about €500 million in lost production revenue, and several billion in lost support revenue.
Airbus is not a member of the Future Combat Air Systems program to develop an Anglo-French unmanned combat air vehicle (UCAV), and while it was finally able to win a place in the European MALE project, as Enders noted this is progressing slowly, and it is far from certain that it will lead to a production program.
Airbus has also lost two lucrative MALE programs in France and Germany. Both countries had contracted Airbus to provide and operate Israeli-made Heron UAVs for use in Afghanistan, but France is replacing its Herons (which it calls Harfang) with US-made Predators, of which it plans to order 12. Germany is also phasing out its Herons with the end of operations in Afghanistan, and will in all likelihood also buy Reapers.
So, unless there is a sudden upheaval, the unmanned aircraft sector does not hold much promise for Airbus.
Support aircraft offer slow, unexciting revenue
Light military transport aircraft, notably the C295 twin turboprop, and the Multi Role Tanker Transport (MRTT) version of the Airbus A330, are among Airbus’ most successful military products, and although sales are relatively slow they are likely to continue as these two products do not yet have direct competitors.
But lower-cost competition is not far off, in the shape of the Embraer KC-390 twin-turbojet tanker-transport, and new versions of capable yet inexpensive transports being brought to market by Antonov (An-178 and An-188).
Defense is only one-fifth of the business, but most of the aggravation
Given the prospects of its military business lines, it is impossible to imagine that Airbus Group management has not looked at the feasibility of pulling out of defense, which accounts for less than one-fifth of its revenue but for most of its aggravation.
In 2014, Airbus Group posted sales of €60.7 billion, of which it counted only €11 billion (or 18%) as defense revenue. But this proportion has been falling for years, and shows no sign of improving.
Since 2012, Airbus Group’s order book has grown by over 51%, while the defense share has dropped by 18%, from €49.6 billion in 2012 to €42.2 billion in 2014. More significantly, while in 2012 defense accounted for 9% of the order book, this share had dropped to less than 5% by 2014 (see graph).
The defense share of Airbus Group’s order book has declined since 2012, as has its defense revenue, in both absolute and relative terms. (Source: Airbus Group 2014 Annual Review)
And the trend is continuing, as civil orders continue to boom while defense orders continue to lag. By the end of the first quarter of 2015, the total order book had grown to €954 billion, while the defense share had dropped by another 5%, to €39.8 billion.
The continuing tussle with governments over A400M deliveries, and now the new flare-up over the MALE unmanned aircraft, have probably shown Airbus Group managers that they are unlikely to escape government meddling as long as they have government clients, who are generating an ever-smaller share of revenue.
So the solution is obvious: get out of the problem-plagued and declining defense business.
Can it be done?
Airbus Defence and Space also includes the Space business, which makes satellites, and which has been reinforced by M&A activity which has given Airbus a share of Europe’s world-beating Arianespace space launchers business as well as the Airbus-Safran Launcher company, which makes the Ariane family and which is finalizing contracts to develop the next-generation Ariane 6.
These can exist as a stand-alone business, and would lose little if it operated without the defense business.
Of course, governments do meddle in space, but since all European governments participate in space programs, they tend to neutralize each other, as was shown by how Airbus was able to overcome opposition by some nations to its entry into the launcher business.
From the frying pan into the fire?
Enders and other Airbus top managers are all for open competition and against government meddling, yet when the company attempted to merge with BAE Systems it found one of its greatest critics was BAE’s main shareholder -- Invesco, a private fund which then held a 13.3% stake in BAE.
Invesco on Oct 8, 2012 issued a statement saying it “does not understand the strategic logic for the proposed combination,” and also worried that a merged company wouldn’t generate as much cash for its shareholders, which pretty much killed the merger.
On the other hand, and as the A400M has clearly shown, governments are not really interested in financial performance, and have coughed up a lot of extra cash for the A400M program, even going as far as accepting sub-standard aircraft to ensure the program was on a good footing.
Given the complexity, cost and aggravation of the military market, where Airbus Group has a dwindling range of products and none in the pipeline, and where it is generating a fast-diminishing share of its revenue, exiting the defense market could well prove a prudent management decision.
Furthermore, the old rationale for staying in the military business – that it would compensate cyclical recessions in the commercial business – is no longer valid, now that governments have no money, no ambitions and – at least in Europe, the group’s home market – they have completed a long drawn-out renewal of their main defense systems.
So, how long will Airbus stick with defense?
-- July 6, 2015: Corrected date of publication and made minor editing changes.