Airbus probe set to change Boeing rivalry

Investigation by UK anti-fraud agency could lead to a reduction in use of middlemen to win contracts

An Airbus A320 takes off on April 30, 2010 from the Airbus headquarters in Toulouse, southwestern France, as unions at planemaker's French sites called on workers to end their strikes today after management offered to reopen pay talks. Since April 26, unions at three Airbus plants organised rotating strikes on assembly lines to press demands for higher pay and oppose moves to shift some production to Germany. AFP PHOTO / PASCAL PAVANI (Photo credit should read PASCAL PAVANI/AFP/Getty Images)©AFP

Airbus, maker of the A320 narrow-body passenger jet, is under investigation by the UK’s Serious Fraud Office

It is among the most intense rivalries in world industry.

Airbus and Boeing, the two companies that dominate the manufacturing of passenger jets, engage in frantic battles to win eye-catching deals in the run-up to industry air shows. The contracts with airlines and leasing companies are then announced with much fanfare at Farnborough in the UK, at Paris or Dubai.

Chart: Airbus data

However, the disclosure that the UK’s Serious Fraud Office is investigating Airbus’s use of third-party agents in securing certain contracts has put the spotlight on how some deals may have been won. The contracts under investigation look likely to have been predominantly obtained in emerging markets, whose growth was a particular boon to the civil aviation market over the past decade, according to analysts.

Airbus said on Sunday the SFO had informed it the agency had opened a criminal investigation into allegations of “fraud, bribery and corruption” in its civil aviation business relating to “irregularities concerning third-party consultants”.

The probe could prompt long-term changes in how Airbus, where the French and German governments are key shareholders, competes with Boeing, a US company with no state investors, say analysts. Airbus’s greater willingness to sign up third-party agents to win deals in developing countries has long been a source of frustration for Boeing, which felt restricted by the US’s draconian Foreign Corrupt Practices Act, add the analysts.

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Richard Aboulafia, analyst for the Virginia-based Teal Group, says US aerospace companies always looked on with envy at the relative laxity of the controls on their European rivals’ relationships with middlemen.

“The joke in the US defence industry used to be, ‘Here it’s illegal; there it’s tax-deductible’,” says Mr Aboulafia, referring to the practice of paying fees to third-party agents. “That might not be quite true any more but that’s been the US viewpoint.”

The UK government’s Bribery Act, passed in 2010, is one of a number of signs that European rules are tightening. In 2012, the SFO launched a probe into alleged corruption by GPT Special Project Management, an Airbus unit, and how it won a £2bn contract to supply communication systems to Saudi Arabia’s national guard.

Katherine Dixon, director of defence and security for Transparency International, the campaign group, says the use of third-party agents in civil and military aerospace deals is a particularly high-risk area for corruption.

“We would be strongly in favour of more rigorous controls over the transparency of agents,” she adds.

Against this backdrop of concern, the SFO investigation also appears to reflect one of the biggest changes to have swept the aerospace industry in the past two decades.

Airbus and Boeing can no longer count on support from their home governments when trying to win deals with customers, because such arrangements have been barred by World Trade Organisation rules.

This has left the manufacturers negotiating in many emerging markets with governments, and airlines still closely associated with the state. Airbus and Boeing have often been expected to hire intermediaries to undertake talks.

The changes have coincided with a surge in economic growth that has made emerging markets far more important sources of aircraft orders, says Mr Aboulalfia.

“You have a much greater level of emerging market involvement in the market, with a lot of uncertainty, complete with a pullback by governments in sales,” he adds. “It means you’re going to use local agents to a far greater extent.”

Ms Dixon says the nature of many developing countries has not altered, in spite of the wider economic changes. “They are very difficult markets to operate in,” she adds.

Chart: Airbus data

Industry insiders portray US aerospace companies as hidebound by arcane rules restricting them from offering even the smallest favour to local partners.

One US analyst, who asks not to be named, says US companies’ processes for reviewing new aircraft orders are “remarkably stringent”. “You probably have more lawyers than salesmen involved,” he adds.

Airbus, meanwhile, is perceived by some to have typically taken a more freewheeling approach. “Airbus’s sales organisation operates with greater autonomy than Boeing’s sales organisation,” says the analyst. “Airbus has been both creative and abrasive, Boeing a little more deliberate.”

Airbus’s press release announcing the SFO investigation on Sunday made clear that the company itself had reported the issue: a sign that it appreciated the changes in governments’ expectations.

Back in April, Airbus said it was in discussions with the SFO after admitting that it had failed to notify authorities about the use of third-party agents in deals it was asking the UK government to cover with financing guarantees.

It also said some export credit support from European governments had been suspended. But neither Airbus nor Boeing currently depends heavily on state-organised export credit because low interest rates mean good commercial terms are available.

Chart: Airbus data

The ultimate effect of the SFO investigation into Airbus may be to shift governments’ policies, according to Ms Dixon.

She highlights how the UK government passed its bribery legislation at the same time as encouraging British defence companies to forge links with emerging markets with significant corruption problems. The result has been a steady stream of scandals. “It’s a little bit contradictory,” says Ms Dixon.

Additional reporting by Catherine Belton in London

Rolls-Royce also under scrutiny over use of intermediaries
 

The UK Serious Fraud Office’s investigation of Airbus echoes a long-running and ongoing probe of Rolls-Royce over allegations of bribery and corruption.

In 2012, the British jet engine maker handed to the SFO the findings of an internal inquiry launched after questions were raised by a whistleblower. A year later, the SFO launched a criminal investigation into allegations of bribery and corruption at Rolls-Royce.

In common with the Airbus case, some of the claims against Rolls-Royce focus on its use of intermediaries, or middlemen, to clinch contracts.

Rolls-Royce said in December 2012 that it had passed information to the SFO “relating to concerns about bribery and corruption involving intermediaries in overseas markets”, following a request from the agency about “allegations of malpractice in Indonesia and China”. Matters of concern were also identified in other overseas markets, added the company.

One widely reported allegation was that Rolls-Royce had given Tommy Suharto, son of Indonesia’s former president, a blue Rolls-Royce car and $ 20m in the hope Garuda, the country’s main airline, would buy its Trent 700 jet engine in the early 1990s. Lawyers for Mr Suharto have said the allegation was false.

In May the Financial Times reported the SFO probe, understood to be the largest international investigation the agency has conducted, had expanded to Nigeria.

Warren East, Rolls-Royce chief executive since July 2015, has said unethical behaviour will not be tolerated and the company has cut its use of third-party agents significantly.

Rolls-Royce declined to comment on ongoing investigations but said the company was co-operating with the SFO and other authorities. It added: “Concerns about bribery and corruption involving intermediaries in a number of overseas markets remain subject to examination by the [SFO] and other authorities . . . We have made it clear that Rolls-Royce will not tolerate business misconduct of any kind.”

Michael Pooler and Catherine Belton in London

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