October 30, 2006
Airbus: Good News and Bad NewsBy Thomas Lifson
It's no joke, but there is good news and bad news for Airbus, manufacturer of the thrice—delayed (for a total of two years) A 380 ultra—jumbo airliner, Moby Jet, as I like to term it. First, the good news.
The bad news
— Virgin Atlantic, whose flamboyant founder Richard Branson has Singapore Airlines as a 49% barely minority shareholder, announced it was postponing its order for six of the Big Birds, freeing up 75% of the aircraft promised a few days later to Qantas.
— Emirates Airlines of Dubai, which holds the largest order for A 380s, accounting for about 30% of total sales, announced that it is cancelling an order for 20 A 340 four engine long range jetliners. The A 340 has been losing popularity among airlines because its four engines use more fuel than alternative two engine aircraft such as the Boeing 777. Interestingly enough, as this article is published, Airbus will not confirm the cancellation.
— Emirates also has announced that it is sending in a team of 'auditors' to inspect Airbus' schedule for delivery of A 380s. There is no mistaking the skepticism toward Airbus' public pronouncements and the not—so—veiled threat inherent in this plan.
So how is Airbus doing?
As is usually the case in this high stakes, highly—politicized industry, the underlying competitive situation is both fierce and somewhat murky. The business is fascinating because the publicly—visible moves of the major actors are only one indicator of the underlying realities, which are complex and ever—shifting.
Airbus has demonstrated itself to be in serious trouble, with the departure of Christian Streiff, the executive brought in to shake—up and reform the troubled manufacturing system of Airbus, divided as it is among formerly separate companies in France, Germany, Spain, the UK, and elsewhere in Europe. The strong influence of the French and German states, and their interest in maintaining employment above commercial success, is an underlying structural issue, one which looks like it will not be solved any time soon. Streiff was replaced by Louis Gallois, a prototypical elite French bureaucrat, formerly employed at SNCF, the state—owned railway of France.
Every airline in the world understands that a catastrophe at Airbus would leave them dependent on the not so tender mercies of Boeing, whose pricing and other competitive pressures would diminish as Airbus receded in marketplace presence. So customers want Airbus to remain a viable competitor. They may want to squeeze it, but they do not want to kill it. State backing and an interest in employment over profit make this all the easier, of course.
Yet, at the same time, there is no doubt considerable anger and frustration on the part of customers who have invested huge sums in ground facilities, training, maintenance facilities, and other special expenditures keyed to the arrival of the 380 on schedule. Additionally, extra 'lift' must be found for the passengers which were to be carried on A 380s. Suddenly, there is a shortage of fuel—efficient long—range aircraft able to replace the lost capacity. It is not simply a matter of substituting planes, either. Crews need specialized training for different aircraft, and if two A 330s replace one A 380, for instance, additional pilots and co—pilots must be found somewhere for at least the interim period.
All of this costs a lot of money and creates huge hassles for airline management. They don't like it one bit. Neither, for that matter, do Airbus' suppliers, who have spent enormous sums on production of components for the airplane. They will not be able to deliver them on time, and will not be paid on time either. Some face financial difficulties, and workers fear for their jobs. These companies are vital to the future success of Airbus in developing new aircradt like the A 350XWB, and the eventual replacement for the A 320.
Beneath the veneer of bland or supportive public statements, a vicious game of hardball is being played.
There is a huge amount of speculation about the price that Qantas paid for its additional 8 copies of the A 380. Nobody expects anything close to list price. Qantas CEO Dixon merely called it 'extremely attractive.'
Given the desperation of Airbus for good news, the price could be quite affordable indeed. Anything to stanch the bleeding that started with Virgin Atlantic, and to counter the threat inherent in the tough stance taken by Emirates. I only wish I could swing as a good a deal on the next car I am planning to purchase.
Qantas has the reputation of being an exacting customer, and for writing lengthy and detailed contracts protecting its interests in the face of any contingencies. And Airbus is hardly in strong bargaining position, so the lawyers in Sydney must have had a merry old time drafting that new deal.
China, for its part, is most anxious to develop a local aerospace industry. Years ago it signed a similar deal with McDonnell Douglas (prior to its merger with Boeing) for local production of MD—80 series airliners, but few planes were produced, and the deal wound down without great success, though China received some technology transfers in the process. Presumably, the A 320 package deal contains a number of contingencies itself, and Airbus is not dealing from a position of strength here, either. Big though the A 320 deal is, only half a year ago China confirmed a deal for 80 more Boeing 737s, the direct competitor for the 320, with no local production involved.
Most interestingly, Airbus had previously announced that it was moving A 320 assembly out of its headquarters operation in Toulouse, and sending an extra 320 assembly line to Hamburg, in return for moving A 380 interior work (interior wiring is the announced cause of the delays) from Hamburg to Toulouse.
The German workers, and the local, state, and federal German governments must now be wondering if they are going to have to compete with low wage Chinese workers for assembly work on the 320s. Germany's employment costs are generally reckoned to be the highest in the world.
Germany has been feeling indirect pressure to increase its ownership stake in the parent of Airbus, EADS, as automaker Daimler has indicated it may reduce its substantial shareholdings. The Hamburg works is therefore a bit of a hostage.
The challenge for Airbus
I have serious questions about the ability of Airbus to supply all the engineering and supervisory talent necessary to manage all the change that it already had on its plate with the A 380 delays, the A 350WXB development and eventually replacing the 320, much less the challenge of moving A 320 work to both Hamburg and Tianjin, China. In the short run, this will absorb a lot of manpower for training, and the productivity of new workers will be far lower than of workers experienced in working on the A 320. Similarly, the workers in Toulouse will have to gain experience on the A 380, so there could even be a temporary loss of productivity in the final assembly phase.
No outsider knows the financial cost to Airbus of the 'attractive package' offered to Qantas, but one has to wonder if cash flow from deliveries of those 8 additional aircraft will be anything like the anticipated revenues per plane of the postponed Virgin Atlantic order, booked in what were, in retrospect, the salad days of the 380.
Finally, there is the matter of the testy relationship with Emirates, who hold 43 orders for 380s, and who additionally account for two more to be sold to a leasing company. Emirates CEO Tim Clark is both admired and known for playing hardball with aircraft suppliers.
Boeing, for its part, just unveiled a new product brochure for its 747—800 series of airliners, a stretch derivation of the existing 747 series, powered by new generation engines and approaching the passenger capacity of the A 380, though still definitely smaller. The freighter version has sold very well already, but the passenger version has languished. Should Emirates cancel some or all of its order for A 380s in favor of the 7478i passenger planes, the troubles at Airbus would grow exponentially.
The most fascinating story in the world of business shows no signs of getting boring anytime soon.
Thomas Lifson is the editor and publisher of American Thinker.