11/24/2007

And I Thought We Had Problems

In a New York Times article, Airbus is trying to cut more costs as it is feeling a great pinch with the weakening U.S. dollar. Why is their situation any different than anyone else? They build their planes by purchasing with the Euro but sell their planes using the dollar. The Euros value is increasing while the dollar is diminishing meaning there sales are lower and their expenses higher, all because of currency values. This is creating a real problem for Airbus.

8 comments:

Logan said...

This is an interesting dilemma, but perhaps it is a time to alter their business approach. Instead, maybe they should look to cut costs by building the planes in countries with a more stable currency. Another opportunity would be to sell their planes in a country with a higher monetary value instead of the U.S.

The beautiful thing about the free market is that every alteration closes some doors and opens others, meaning an economic downturn for one group is an positive opportunity for another. It is all a matter of placement, resources, and timing.

peyton said...

For years I presume that Airbus was on the other side making money when the dollar was high and the Euro was low.

Dr. Tufte said...

There's a good lesson here for applying economics to the broader world after you leave my class.

This is, that the legacy media place too much emphasis on labeling price changes as good, or more usually, bad.

The problem with this is that price changes are always good for someone and bad for someone else. So, focusing on one side of that is misleading at best, and akin to muckraking.

In this case, Airbus is hurting because of the appreciation of the Euro.

But ... the reporter didn't go and ask the Airbus employees how they feel about the fact that their paychecks can now buy more imported goods.

It gets worse when you realize that Airbus doesn't really deserve an opinion. Its stakeholders do, but the firm doesn't. And those stakeholders are both helped and hurt.

Trinity said...

I think it is important to note that Airbus is controlled somewhat by the French government and are subject to regulations that its main competitor, Boeing, is not. So the company may not be able to change certain things to increase its ability to compete. Also, Boeing is paying its workers in US dollars which cost less than the Euro that Airbus is paying its employee. This disparity in exchange causes some huge effects in an industry where labor is a driving cost.

Gavin said...

Extra Credit - Dr. Tufte
Dr. Tufte is Airbus really being honest with the shareholders? I don't see any reason not to purchase currency hedges for these transactions. Airbus should buy the appropriate currency futures so that they are unaffected by the appreciation of the euro.

William said...

Dr. Tufte,
I agree with your comment and believe that many times we look too heavily on one side. With the US dollar getting weaker it helps exports becoming stronger and as the Euro gets stronger it helps imports become cheaper. There are always two sides to a coin and it depends on which side you look at. Obviously with the current situation Airbus is feeling the effects. But, I think that Airbus should someway be able to combat this through investing in other countries that are not as affected to the dollar. We learned this concept in Investments: the wider your investments are, the less likely you are affected by a weakening currency.

Reagan said...

Dr. Tufte-Extra Credit

I agree that the media often forgets to mention the other side of the story. One example of how the appreciation of the Euro has helped Europeans and some Americans is that export products from the United States to Europe are doing extremely well right now. I have a past business associate that oversees his companies exports to Western Europe and he has never been busier since he started working there 3 years ago. Their US sales are struggling but their European sales gave them a record year in 2007. I have also been researching Caterpillar for a class project in another class. Caterpillar did not have a good year in the US because of the housing market and a decrease in money going into the US infrastructure. However, because of their international business 2007 was the best year they ever had. With the appreciation of the Euro many Europeans have been very happy because they can buy more American goods, which they love to do, and their money goes further when the travel to the US, which they also love to do. We must keep in mind that with many negatives there is a positive and vise versa.

Dr. Tufte said...

-1 on William for a grammatical mistake.