I'd thought that Airbus and it's parent company EADS were slowly hacking their way out of the woods they'd stumbled into during their pursuit of the A380 superjumbo snipe. Silly me, I'd forgotten the political angle--a terrible mistake given the political importance of Airbus to Europe's leaders.
Well, The Economist put me right
with a lengthy article containing the most pessimistic conclusion I've yet read on Airbus' future.
But first allow me to unlimber a brief rant:
Airbus was a good idea when it began some 35 years ago. Boeing was fat and lazy, and ready to be plucked. Europe had excellent engineers, a well educated workforce, a political establishment willing to advance Airbus' interests, and a growing world market for its products. Should have been a recipe for success. Instead the A380 superjumbo increasingly looks to be a disaster, while the A350 XWB competitor to Boeing's 787 will arrive too late on the scene to make much impact.
What went wrong? While some degree of business setbacks is inevitable, in the end it is the politicians who are the root cause of Airbus' problems. Turning Airbus into a European manufacturing icon became the goal; Airbus has long been exempt from being responsible for the bottom line. It was to be a symbol of European unity and technological ability. In return for political and financial support, Airbus was forced to bend several business principles. Production was parcelled out to several nations without regard to efficiancy, while expensive manufacturing jobs stayed within Europe rather than being transferred overseas.
PRIME MINISTERS and heads of state from France, Germany, Britain and Spain were all there to claim credit for a European triumph when the A380 passenger jet was unveiled in January 2005 in a grand ceremony in Toulouse, at the factory where the final assembly of pieces from all over Europe takes place. Barely six months later, while everyone was admiring the plane's first flight, Airbus slipped out news of a six-month delay in deliveries. Then last June it announced a further six-month delay and said it would deliver a mere nine planes in 2007, rather than 25. Heads rolled, both at Airbus and its parent company, EADS: two Frenchmen and the German boss of Airbus lost their jobs.
But new aircraft are often overdue. The first Boeing 747s were two years late in 1969. That delay nearly bankrupted Boeing, however. And this week EADS confirmed rumours that the delay to the A380 had increased to two years and spelled out the financial consequences. Only one aircraft will now be delivered next year. The delay will knock a further €4.8 billion ($6 billion) off profits and €6.3 billion off revenues at EADS between 2006 and 2010.
The bill could yet prove even higher. No one expects the big early customers such as Emirates or Singapore to cancel all their orders, but threatening noises this week from Emirates' boss Tim Clark about “considering all his options” suggest that large-scale compensation and even partial reductions in orders could be in the offing. These airlines and other early customers, such as Qantas, Lufthansa and Virgin Atlantic, have built their growth plans around having large numbers of extra seats available on an aircraft that promises cost-per-seat reductions of 15-20%. They will want Airbus to pay for the leasing of smaller Boeings or Airbuses to plug that gap. All this comes as orders for the new airliner have stuck at around 160: each delay pushes up the number needed for break-even from the original figure of 250.
The immediate cause of the disaster was a breakdown in the snap-together final assembly process in Toulouse that has served the company well for over 30 years. Rear fuselages made in Hamburg were supposed to arrive in Toulouse with all their wiring ready to plug into the forward parts coming in from factories in north and west France. But the 500km of wiring in the two halves did not match up, causing huge problems. Failure to use the latest three-dimensional modelling software meant nobody anticipated the effect of using lightweight aluminium wiring rather than copper, which is to make bends in the wiring looms bulkier. Worse, the engineers scrambling to fix the problem did so in different ways. So the early aircraft all have their own one-of-a-kind wiring systems. It will take all of next year to introduce a proper standardised process.
None of this would have mattered so much if the airliner's fuselage had all been built in France. But Germany lobbied hard to land a big chunk of the A380, to add to the final assembly of some derivatives of the A320 family. Now the greater complexity of the super-jumbo has shown up the inherent weaknesses in Airbus's production system, just as it faces a revitalised Boeing and a weaker dollar. Most of Airbus's costs are in euros, but sales are in dollars. So Airbus's new boss, Christian Streiff, must slash costs.
Yet all that emerged this week was the vaguest of outlines of a plan called “Power8” to trim head-office costs and other overheads by 30% and to aim for a 20% improvement in productivity over the next four years, without mass firings. EADS hopes this will save some €5 billion, to plug the cash hole caused by the delays.
That does not go far enough. As Mr Streiff pointed out this week, Airbus must also catch up with Boeing in product development, cutting its lead-time for new aircraft from seven to five years. Boeing is enjoying record sales of its 787 Dreamliner, but Airbus had to go back to the drawing board to redesign its riposte, the A350. EADS has not yet said how much the delayed development of the A350 will cost, but Sash Tusa, an analyst at Goldman Sachs, an investment bank, estimates that it could be more than €2 billion.
For a real solution to its problems, Airbus must take more drastic action, such as doing away with the politically motivated division of labour between German, French, Spanish and British production sites. Mr Tusa says that Airbus, with 16 sites, has seven too many. Two factories in France, four in Germany, and one in Spain could be sold or closed down. And it would make most sense to build all of the A380 in France and all of the A320 in Germany. But both countries want to keep production of the prestigious new jet.
Airbus's relationships with its suppliers is another thorny issue. Boeing has benefited enormously by outsourcing production, but that is a no-go area for Airbus. Yet the combination of Europe's high wages and strong currency means that some of Airbus's production will have to move into countries where the currency is linked to the dollar. Mr Streiff promises to rethink such taboos and present the results of his inquiry early next year. If Airbus does nothing, says Scott Babka, an analyst at Morgan Stanley, an investment bank, its profit margin will be some 4% and it will be destroying capital. The outfit will be competitive only with a margin of around 10%. More alarmist analysts think that doing nothing would kill the company and make Boeing a monopoly producer.
But Mr Streiff's room for manoeuvre is constrained by politics. German politicians are up in arms about rumours that all A380 production will be moved to France; Dominique Strauss-Kahn, a Socialist candidate for the French presidency, has said that rather than slashing costs, Mr Streiff should hire more workers in order to make up for the delays. He regards talk of job cuts as a symptom of rampant capitalism.
To further complicate matters, the German government has not denied that it has plans to buy a stake in EADS when DaimlerChrysler reduces its stake from 22.5% to 15%, as the carmaker plans to do. Rather than engaging in such power struggles, however, the German government should be helping Mr Streiff with his restructuring. French politicians, in the run-up to the presidential election next year, are unlikely to have anything useful to contribute. The fate of Airbus now depends as much on political courage as on managerial expertise.
On top of Airbus' economic problems, it seems very likely that the man (Christian Streiff) hired to focus on the A380 production snafu is being kept on an understandably short leash by his bosses at EADS and may soon resign.
UPDATE: That was fast. Mr Streiff is out
. The solution, making one of his ex-bosses (Gallois) resonsible for Airbus as well, is political. It may work though. Previously Mr Streiff reported to the other Co-chief of EADS, leaving Mr Gallois out of the loop. This will streamline things so long as France doesn't seek to overly influence things through Mr Gallois (tensions are reportedly quite high at EADS headquarters).