Airbus – getting real on costs?

Posted on 13 Jan 2010 by The Manufacturer

Howard Wheeldon on the problems facing the A400 and A380 projects

Last year Airbus delivered more planes than Boeing and probably received a handful more net orders as well. But take a look at what really matters for Airbus’ parent company, EADS – the bottom line. Having managed to crawl back into profit in Q3 2008, EADS profits slipped to a mere EUR87m in the third quarter of 2009, with the company once again blaming problems associated with the A380 and A400M projects. Quite rightly this time around, as it confirms the final number of aircraft delivered in 2009 and the level of orders received, EADS management is reminding us that it is also being seriously disadvantaged on currencies. Indeed, the company reckons that this will be to the to the tune of EUR1bn in the coming year alone as the dollar slips further down and the Euro remains at a seemingly ridiculously high level in relation to the overall Euro economy. The message? Despite working hard to reduce manufacturing costs across the whole European production network Airbus must buy far more of the components it needs from outside Europe. Airbus and EADS management confirmed yesterday that given the current situation this is now an absolute necessity.

Such statements go against the very grain of a company like Airbus. Since its original partnership foundations were laid back in 1965, it was intended to be about building and buying as much material and components as possible in Europe. This turn up will therefore be hard to swallow for some but in the so-called globalised world we live in today Airbus must now bow to the inevitable.

Meanwhile, EADS has said that January 31 will be the deadline for intra government A400M partners to conclude a deal on numbers and price for the manufacturing phase of the programme to begin. Nevertheless, while Airbus’ management have again threatened to pull out of the A400M project completely if the revised agreement with the governments is not sown up quickly, I doubt that this is anything more than sabre rattling aimed at speeding the process up. Chivvying up governments to make the final commitment ahead of a new round of talks due to begin in London today is no bad thing of course and if the pressure works it will have been worth it. Would Airbus Military be better to abandon the project? Given the prospect of needing to take maybe another EUR3.5bn on the chin on top of around EUR2.5bn already, I believe the best position for Airbus Military, EADS shareholders and the government partners involved (which we should not forget have been badly let down as well) is that the A400M furrow continues to be ploughed. In short, pulling out now would cost far too much money. It is true, as I said in my separate A400M piece last week, that Airbus won’t be taking a cent of profit on the aircraft even if it is still being manufactured twenty years from now for domestic Europe or export. Nevertheless, one notes from remarks made yesterday that Airbus doesn’t agree that the prospects are as grim for the A380.

Meanwhile, given the reasonably positive if somewhat blunt attitude of management to forward commercial market outlook, the trading statement may be best summed up as an honest approach to the future. Indeed, unlike too many previous statements from this particular company that had so often been filled to the brim with arrogance, we now see in ‘new Airbus’ that they are prepared to come clean on the bad news too. OK, so having been the thorn in the side (the devil, if you like) of the A400M for so long now – virtually ever since the idea of a European designed and built military airlifter was suggested back in the early nineties – you may well be surprised to learn that my view is that governments should quickly agree a final revised price and that the program should be allowed to move ahead to production as soon as the final development phase is complete. Scrapping A400M now will be seen as a defeat too far for Airbus and EADS.

Back at the ranch slow progress on building up A380 production remains a big concern as does, bar less than a handful, the lack of any new orders for the plane of late. Nevertheless, the additional production problems on A380 couldn’t have come at a better time within the current down cycle – something that I can probably say and write as an independent but that you would never hear said by the company. We move on, and assuming that A380 costs don’t further rocket and that the currency situation can at least be contained by having a consistent and honest policy of buying more from the none Euro area, the next problem is to ensure that all the lessons that have been learned from the A380 and A400M programs are in turn learned by those engaged in the design and development of the all important A350 XWB project. For now, given the signals evident from the CEO Tom Enders yesterday, we can at least believe without doubt that the A350 project is moving ahead well. Indeed, that new found consistency and honesty has in recent years been belatedly found at Airbus since the current management took over a few years ago is one of the most important and welcome changes that has been seen in this company in a generation. Now it [parent company EADS] needs to move forward with the new found transparency that translates to also doing whatever it can to reward shareholders.

In the following short paper I will make no comment on vexing matters such as the long running disputes between Boeing and the US government against Airbus and the EU and vica versa relating to alleged subsidies, which remain, at various stages, in the hands of the WTO. Together with the other vexing issue for Airbus – that of its ability to compete with its partner Northrop Grumman on a level playing field basis – to compete fairly and squarely on an equal basis with Boeing in the vast and again revised US tanker program, these are two very separate issues that demand separate papers that will follow.

Click here to read Howard’s short essay, ‘A400M – Time for Governments to Say Yes!’.

Howard Wheeldon, BGC Partners Senior Strategist