Weekend Question 1: Why Do State-Run Enterprises Have Such a Poor Financial Track Record?

ANSWER: Because the government(s) that own them won’t leave them alone.

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The latest exhibit is Airbus, as described in a Thursday subscription-only editorial in the Wall Street Journal:

Airbus has never been just any company. It was formed as a joint venture of French, German, Spanish and British firms to compete in a market that had been dominated by American manufacturers. Its founders never judged its success solely on a commercial basis: Airbus versus Boeing (and, at the time, Lockheed and McDonnell Douglas) was a battle to prove that Europe’s “mixed capitalism,” in which the state plays a large role, was superior to America’s “cowboy capitalism.”

For a time, Airbus thrived. Taxpayer subsidies in the form of soft loans, known as “launch aid,” allowed Airbus to churn out new models more quickly than if it had had to finance them on its own. During the past decade it overtook Boeing as the leading maker of large civil aircraft.

As with any overbearing parent, though, the government’s good intentions soon became suffocating. Politicians pushed for the landmark A380, which has proven both technically difficult — wiring problems have been at the heart of all three production delays so far — and commercially disappointing. With only 159 orders so far, the world’s largest passenger plane remains far below its break-even point, believed to be between 250 and 400.

Since the A380 was designed chiefly to inflate European egos, its production work was divided between factories in Toulouse, France, and Hamburg, Germany. Now Mr. Streiff reportedly wants to consolidate all the work in Toulouse. Work on the successful A320 single-aisle family, also divided between the two cities, would be consolidated in Hamburg.

Sounds like a smart move. Too bad the same political forces that led to this unwieldy division of labor in the first place are still at work.

Chancellor Angela Merkel’s coaliltion government has already indicated that Berlin will “resist” the realignment, as an economic expert for the Christian Democrats told the Bild Zeitung newspaper. The Germans did, after all, spend about €750 million to improve the Hamburg plant specifically for the A380. Yet such economic logic doesn’t hold up; if anything, the A320 line appears to have a surer future than the A380 at this point. Even if protecting jobs were a valid reason for government meddling, preventing Airbus from taking the necessary steps to set things right will jeopardize more jobs in the long run than it will save in the short run.

….. The double whammy of government shareholdings and subsidies give European capitals far too much sway over Airbus’s decisions. No one can serve two masters. As long as Airbus is beholden to politicians instead of its customers and EADS shareholders, this “European champion” will continue to look beaten.

The challenge of running a profitable company is daunting enough without having to serve four masters (Britain, France, Germany, Spain) whose interests, unlike those of public-company stockholders, will never be solely profit-oriented. There is a limit to what even billions of dollars of government subsidies can accomplish. One hopes that other countries with unwieldy state-ownership ambitions are taking note of Airbus’s difficulties.

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UPDATE, Oct. 9: Christian Streiff, CEO of Airbus’s parent company, who was mentioned in an unexcerpted portion of the Journal editorial, resigned Monday –

Streiff drew up a cost-cutting turnaround plan for Airbus that enjoyed strong support from EADS directors, but he clashed repeatedly with the board over how the plan should be implemented and how much control he would personally exercise, according to three officials familiar with the discussions.

Streiff wanted to report to the parent company on a quarterly basis and have final say on Airbus appointments, while senior EADS executives including Enders demanded closer oversight, according to the officials, who asked not to be named because the discussions were confidential.

UPDATE 2, Oct. 10: From a subscription-only Wall Street Journal editorial –

Government meddling is the chief reason Airbus is in freefall from its spot as the world’s No. 1 maker of large civil aircraft. Years of making decisions based on political rather than business rationale have put the company in its current bind.

….. But the real upshot of his resignation — aside from being more bad news for a company that last week announced further embarrassing and costly delays in delivering its A380 superjumbo — is that Paris has regained control over Airbus.