Agonies at Airbus

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Magazine Article, Source : The Manufacturer
Published : August 2006

What went wrong at Airbus, and can the company turn the current living nightmare into just a bad dream, asks Colin Chinery

With executive flight deck fall out, credibility turbulence, and an excess payload of problems, Airbus was always going to be the VIP of last month’s Farnborough Air Show.

It arrived on the defensive with its reputation mauled by costly production delays to the A380 superjumbo, near-universal scepticism over the launch of a new mid-haul A350, and reeling from the exit of key executives.

But with orders in numbers – chiefly the single-aisle A320 – if not value, nosing those of its transatlantic arch rival, Airbus flew off after a better than expected display. And with 13,000 British jobs looking more secure after Trade and Industry Secretary Alistair Darling struck a deal with Airbus Franco-German parent EADS, the clouds seemed to be rolling back.

But it was blue skies for Airbus a year ago, when the A380 made its long-awaited debut and Chancellor Gordon Brown was enthusing that the double-decker giant would “go from strength to strength.” But in June, with the Farnborough Show only weeks away, Airbus announced it had hit production problems and customers would have to add 12 months to scheduled delivery times.

And as chief operating officer John Leahy was putting the cost at hundreds of millions in penalties, it emerged that weeks before the announcement and a £1.4 billion profits warning, some EADS executives had cashed stock options, among them co-chief executive Noël Forgeard. Forgeard resigned – he is said to be under investigation by the French authorities – though not before Airbus’s reputation was following the crashed EADS share price.

But it was not only the A380’s production issues – blamed officially on wiring installation problems in the complex in-flight customising – that were drawing fire. Airbus’s plans to launch a new extra wide body, mid-haul A350 (now known as the A350 XWB, for extra wide-body) were being subjected to ‘what and when’ doubt and even ridicule. The contrast with the confidence and orders placed in its Boeing competitor, the B787 Dreamliner was stark.

Such was the scenario as Airbus took off for Farnborough on a management and product reputation recovery mission. And new chief Christian Streiff had some positive news: a total facelift for the A350, with a bigger development budget, a cost-cutting drive, and stiff targets for both the A350 and the A380. We are in a serious crisis said Streiff, with “no overnight miracles.”

But it will take at least another two months for the go-ahead and longer for a sensitive aid agreement with the British, German, French and Spanish governments. Britain has already promised £379 million for the original A350, and will be asked to confirm its commitment for the doubled development budget.

It is a request unlikely to be refused. The Government, anxious to protect jobs, investment, and the specialist wing technology developed at Broughton, north Wales, and Filton near Bristol, has agreed a package to ensure continued Airbus investment here. This became a priority when BAE Systems decided to sell its 20 per cent stake – value still unresolved – in the plane maker to concentrate on the lucrative US military sector.

The deal gives EADS favourable treatment in tendering for British aerospace and development work, and in return EADS will set up a major research centre in Britain and guarantee the 16 per cent Airbus workload for UK plants.

But feathers were getting ruffled. The deal had no sooner been announced than Spanish industry minister Jose Montilla interjected that Spain wants more business steered towards its plants competing with Broughton and Filton. Then Airbus senior vice president Tom Williams cut in warning that Broughton and Filton have no “God-given right” for the business.

So where are we in the story? Airbus headlines looked rather better post then pre-Farnborough, but industry analysts are unimpressed. “Such is the credibility problem with Airbus,” says leading analyst Doug McVitie, managing director of Arran Aerospace, “that no one believes them any more.

“Basically what Farnborough has confirmed is (a) that Airbus still hasn’t got to the bottom of the A380 problems and are still trouble-shooting them, and (b) that the new A350 is an expensive compromise between old and new technologies which is too small to compete with the B777 and too close to the B787 to stand out.”

Kieran Daly, group editor of Flight International agrees. “At the moment the A380 is seen as the immediate crisis, but in the long-run it may well be that difficulties with the A350 will turn out to be more important.

“They have let Boeing get a worryingly long way ahead in that class of aircraft, and so far the B787 programme appears to be proceeding pretty much on schedule, though there have been the first glimmerings of difficulties. There is some serious doubt as to whether Airbus can ever catch up in that market segment.”

But Daly adds a more hopeful rider. “Aerospace is a notoriously long-term game and even though they will now be several years behind, given the sheer vast size of this rapidly growing passenger market, it’s not out of the question that Airbus can get a substantial market share. But clearly they have lost significant sales to Boeing which they are not going to get back.” Doug McVitie’s guess is that Airbus will keep 80 to 90 per cent of its A350 order book. “It’s not in airlines’ interests to see Airbus (or Boeing) go under or exit a market. That way lies a monopoly and therefore no price lever.”

Another leading global aero analyst, Richard Aboulafia, vice president of the US Teal Corporation concurs. “I tend to think the A350 will happen because it absolutely needs to happen. Airbus and Europe will find a way to avoid jetliner industry marginalisation. The new plans will arrive around the second half of 2013, which means that between 2008 and 2013 Airbus will have nothing between 200 and 500 seats. This will hurt but it’s not the end of the world.”

For McVitie the A350 has been “a disaster – and a further, more serious example than the A380 debacle – of management failure. Airbus misread the entire market, and then took its eye off the ball completely to concentrate on personal careers on the one hand, and the A380 on the other.”

The market will be settled by the answer to the question: “How will you want to do your flying?” With its unrivalled passenger capacity, the A380 is relying on a demand to fly large numbers of people from hub airport to hub airport (with sales forecasts based on oil at $45 a barrel against current prices of almost $75 per barrel).

Boeing’s Dreamliner on the other hand posits the future in terms of flying smaller payloads point-to-point without necessarily going through the large hub airports.

“Our view,” says Boeing’s new chief executive Jim McNerney, “is two engines, point-to-point, productivity for the airlines and point-to-point service for the passengers. That was the difference of opinion between us and Airbus... So far we look a little more right than Airbus does on the A380.”

So Airbus versus Boeing? “Boeing is back in the driving seat and Airbus is consigned to be number two for at least another 25 years if not perpetually, in terms of sales, and soon once again, production,” says McVitie. “There is a huge hole in Airbus product line – they now have no credible widebodies – and the earliest they can deliver the new A350 will be 20012/13. Boeing has more than 400 sales and commitments for the B787 already, of which there will be four variants. It’s no competition.”

As for the A380, it’s a problem in search of a solution. “There is a wiring/connection/bundling problem, but it’s only one of many (excess weight being at the top) and Airbus is greatly exaggerating it in order to draw attention away from the real issues – which of course they won’t disclose.”

The A380 delays, says McVitie, may have made it easier for Rolls-Royce to commit to an A350 powerplant without over-stretching itself, and the A380 was never going to be a high volume programme so it’s more a question of a much slower ramp-up than a big fall off. “Broughton is in the front line for obvious reasons, but BAE Systems hasn’t in any way contributed to the current problems.”

“I’ve always thought the A380 would be a market failure, but we might be witnessing an unusual dual market and technical failure,” says Aboulafia. Airbus he says, must undertake a critical in-house appraisal of key issues including the real costs of bringing it to market, operating economics, the resources needed to attack the 200/400 seat market, and whether delaying the A350 due to A380 requirements might jeopardise the narrowbody business if Boeing launches a new 737 replacement.

McVitie remains hopeful that if Airbus can ‘keep its cool’ and get the A380 programme back on track within the next five to seven years, “it has a chance of turning today’s living nightmare into just a bad dream.

“But it’s unlikely the A380 will ever break even unless Airbus can sell 600-plus within 25 years or so without expensive mid-programme retrofits or redesigns, and assuming all other factors such as oil prices and international hostilities remain equal.”

Airbus “needs to stop navel-gazing and start taking the market seriously. Once you start to believe your own publicity,” says McVitie, “you’re in real trouble. Now Airbus has to hurry, but can’t rush. And that’s a totally unenviable position.”

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