BA builds bridges with Brussels

News Analysis: The pounds 5.5bn Airbus deal might seem to be a politica l fix, but it will create jobs in Europe

THE DECISION by British Airways to break its commitment to Boeing and place its first-ever contract with Airbus Industrie has left sceptics wondering whether there was a political fix.

BA chief executive Bob Ayling strongly rejected this last night. He said: "The only thing that concerned us was getting the cheapest aircraft we could. If you buy for political reasons, you go bust."

The appearance of Tony Blair, Prime Minister, at the signing ceremony in Toulouse only fuelled this speculation yesterday. The official line was that Mr Blair happened to be on holiday in France and just wanted to join in the celebration.

However, the airline and aerospace sectors are intensely political. In December Mr Blair joined Chancellor Kohl in calling for European aerospace co-operation and consolidation ahead of a wider deal on the defence sector.

The pounds 5.5 billion contract for 188 airliners from Airbus by BA helps provide the European aircraft manufacturer with a good platform for proposed restructuring.

BA also needs to rebuild some bridges in Brussels. The European transport commission has criticised BA for the dismissive way it supposedly treated regulators over its proposed alliance with American Airlines. The EC has given the formal go-ahead to the tie-up, but attached tough conditions which Mr Ayling says are too harsh.

The BA boss denied yesterday he was currying favour with the EC by placing the order with Airbus. "Life is not that simple," he insisted.

But the Airbus contract - helping to secure the future of 130,000 jobs at Airbus and its suppliers around Europe - should certainly help BA relations with the Commission.

One leading industry analyst said: "I am sure there was an element of politics in this. The fact that Tony Blair was at Airbus on the day certainly suggests this."

The coincidence that the Airbus contract was announced alongside a smaller deal for 16 Boeing 777 aircraft (with options on a further 16) also seemed to indicate a political eye was being kept on the US.

Up until now, Boeing has enjoyed a stranglehold on BA new orders. The decision to announce a smaller contract with the Seattle-based aircraft manufacturer looked like a face-saving device to many industry experts. The US is one of BA's vital markets.

Closer to home, Mr Ayling is said to enjoy good relations with the new Trade Secretary Peter Mandelson. Moreover, the Airbus contract will secure the jobs of 38,000 staff who work for British Aerospace, Rolls Royce, and 300 smaller suppliers in the UK.

British Aerospace not only holds a 20 per cent stake in Airbus itself, but also stands to gain as much as pounds 1.1bn in business via BA because it builds all the Airbus wings.

The BA contract with Airbus could create over pounds 500m worth of work for Rolls Royce.

The fact that the deal was won on the tightest of margins by Airbus in competition with Boeing was underlined by Mr Ayling. "We have ordered the right aircraft at the right time at the right price. This is a great investment in our future, made possible by the commercial success."

The first 21 aircraft will be used for intra-UK and European operations by BA Regional, which employs 1,000 staff based in Manchester, Birmingham and Scotland. The rest of the aircraft will be fly out of Gatwick, or operated by the French and German subsidiaries, Air Liberte and Deutsche BA.

New aircraft will replace older equipment and provide capacity for increased passenger volumes. The airline needs the new A319 and A320 aircraft to increase efficiency and cope with tougher EU environmental regulations.

The new aircraft are up to six times quieter than existing airliners. They are also smaller and more fuel efficient, helping BA to compete against low-cost competitors like EasyJet.

Mr Ayling said: "We need to reduce our capital expenditure at a time when we need also to increase our schedules in a deregulated market."

For Airbus the contract from BA underlines the enormous progress it has made since it first opened for business 25 years ago. In 1994 Airbus won more orders than Boeing for the first time.

Airbus has already won more contracts in the first half of this year after finishing 1997 with 45 per cent of the market to Boeing's 53 per cent. The remainder went to McDonnell Douglas, now part of Boeing.

Although BA owns 10 Airbus A320s, they were bought by British Caledonian before it was taken over by BA. The latest deal for 59 firm orders plus options for 129 others will build confidence at a vital time when Noel Forgeard, Airbus Industrie's chief executive, wants to move to a traditional company structure and ultimately bring Airbus to the stock market.

At present the Toulouse-based Airbus is termed a Groupement d'Interet Economique which publishes no accounts and makes no profits or losses in its own right. These accrue to its owners - Aerospatiale of France and Daimler-Benz Aerospace (Dasa) of Germany, which each own 37.9 per cent, and BAe (20 per cent) as well as Casa of Spain (4.2 per cent).

The BA contract also comes at a critical time for Boeing, having run up its first annual loss in 50 years. Last month it lost a lucrative contract on its home ground when US Airways placed a firm contract for seven wide-bodied A330 aircraft, took out options on a further seven and reserved delivery positions on 16 more.

A Boeing spokeswoman said last night that the company was "disappointed", but she brushed aside suggestions that the Airbus contract was a huge psychological blow.

"Market leadership is ultimately decided by long-term success. We will work hard to be lean and efficient to win the next contracts," she said.

The next test for Boeing will come later this year when Scandinavian Airline Services decides whether to choose Airbus or Boeing.