Thursday, June 15, 2006

Airbus' giant A380 behind schedule, Airbus' strategy in shambles

Already beset with anemic sales, the giant Airbus A380 is in further difficulties. And that is costing investors buckets of cash.
[...] Shares in European Aeronautic Defense & Space, the parent company of Airbus, plummeted Wednesday, wiping €5.5 billion off its market value, as a fresh delay in the delivery of the new double-decker A380 airplane raised questions about the company's management and strategy.

EADS stock slid as much as a third after the French-German company - one of Europe's corporate icons - warned late Tuesday that a delay of six to seven months in the A380 delivery schedule would probably reduce operating profits by a total of €2 billion from 2007 to 2010. Several leading customers for the aircraft, including Singapore Airlines, Emirates and Qantas Airlines, suggested that they would seek compensation for the delay, adding momentum to the sell-off.
Airbus can't afford the bad publicity of disgruntled customers, so Airbus executives will offer their first borns in order to placate them.
"This is in our view very damaging, both to the credibility of EADS management, andalso to Airbus's reputation for program management," Sash Tusa, an analyst at Goldman Sachs, wrote in a note to investors.

Airbus is betting its future on the A380, but the world's largest passenger plane has been dogged by problems, ranging from engine noise to weight and fuel consumption. The latest delays compound concerns about the company's direction that had already been raised after it was forced to admit that it had erred in the design of another plane, the midsize A350, which it announced in 2004 to compete with Boeing's new Dreamliner 787. [...]

Over the longer term, analysts said, Airbus's troubles are likely to give a competitive lift to Boeing, which fell behind Airbus last year in terms of total aircraft orders but has been regaining ground as Airbus stumbles. "This sets up a scenario for further market share gains by Boeing with its 777 and 747," said Howard Rubel, an aerospace analyst at Jeffries & Co. in New York. "And when the 787 Dreamliner comes on line, Boeing will have a relatively modern and attractive product line."

On Wednesday, Singapore Airlines, unhappy that its A380 orders would be delayed, announced it would buy 20 Boeing Dreamliners worth $4.52 billion, and take options on another 20 planes. [...]
Ouch. If the decision truly cost A380 sales, Airbus is seriously hurt. Singapore Airlines was expected to be a good customer for the jumbo Airbus plane. Not only does Airbus lose billions in sale, but other customers may begin rethinking their orders.
How quickly Airbus can recover will depend to a large extent on how [co-Chairman of EADS] Forgeard manages the situation. Analysts say that will not be an easy task, because the latest delay has dealt a serious blow to his reputation. "It's hard not to put the blame on Forgeard," said Richard Aboulafia, an analyst at the Teal Group in Fairfax, Virginia. [...]

"There is a risk that things will get worse before they get better," said Aboulafia, noting that the company's focus on getting the A380 delivery schedule back on track was likely to drain engineering resources from the A350. [....]
Airbus is in a jam. Do they move resources to their flagship A380, knowing that that particular market is limited to around a couple hundred planes, or do they invest in an A350 upgrade, which will be more profitable? Or do they throw in the towel on the current upgrade of the A350 and massively redesign it, with new tail wings, etc.? This decision, which can't be put off, will dictate the future of Airbus.