November 10, 2006
Airbus Must Thread a NeedleBy Thomas Lifson
The past week, which saw Europe celebrating the triumph of America's Democrats, produced more bad news for Airbus. Europe's champion 'social enterprise,' intended to serve the interests of more than just shareholders, and its chosen instrument rival to America in the strategically—important aerospace industry, has almost no room for error. If it succeeds in maintaining its position as a full line rival to Boeing, it will represent a brilliant and desperate achievement.
In order to remain a viable competitor in the production of advanced airliners, Airbus must thread a needle. Everything must go according to plan, and self—serving interest groups and leaders must be willing to compromise in order to assure the survival of the enterprise. Costs must be dramatically cut by dropping 80% of existing suppliers (mostly European firms), as announced on Monday and concentrating work in the hands of firms who can cut costs by a substantial amount. The strength of the euro against the dollar has severely handicapped Airbus, so it has announced it is seeking low wage suppliers located in dollar zone countries. This would exclude France and Germany.
Russian aerospace and Airbus
Russia is emerging as a key player in Airbus, with China striving to keep its own hand in the pot as well. Both nations can provide very low cost labor compared to Western Europe, and the former USSR aviation engineering establishment contains many talented engineers hungry for work. A month ago I reported on the growing ties between Airbus and Russia, including a substantial capital investment in Airbus by a state—controlled Russian bank.
This week, those ties started to bear fruit. Russian airline Aeroflot defaulted on its order for 20 Boeing 787 Dreamliners, the hot—selling new generation airplane for which Airbus must engineer a rival, or else risk losing the biggest market segment of all: fuel—efficient medium—sized, long range airliners. Airbus has been under pressure to announce the formal launch of its rival A350 XWB model. Russia clearly wants a hand in its development, and wants Aeroflot to swing as many orders as possible to the new airplane as soon as Airbus formally decides to commit its resources to the program.
Industry observers noted that on its own merits, Aeroflot's decision made no sense. Other leading airlines like British Airways and Singapore Airlines have already started vying for the delivery slots opened up by Aeroflot (the 787 is sold out through about 2012 at current rates of production). Moreover, the price agreed to by Aeroflot is thought to be substantially less than any new customer would pay. In effect, it is giving up a discounted price on a highly saleable airplane. Bargaining leverage with Airbus must be worth more to the Kremlin leaders behind this decision.
If Airbus follows the practices of the Japanese and of Boeing, a substantial amount of engineering will be outsourced, along with the actual physical components and systems to be supplied by the new contractors, including Russian and Chinese suppliers. This makes quality control and engineering liaison critical. Airbus has had much less practice at this than Boeing, which has very successfully outsourced major critical components of its jetliners, notably to Japanese suppliers highly skilled in the delicate technologies involved in manufacturing composite—based components, up to and including fuselage sections and even wing components.
Normally, much time and energy are required to work out relationships satisfactory to both sides when critical engineering responsibility is transferred to suppliers. But Airbus does not have the leisure Boeing enjoyed, as it gradually outsourced more work to its key suppliers. Everything must go right for Airbus, and it must go right quickly, if the A350 XWB model is to be produced in time to contest the market with Boeing.
Balancing Russia (and China) versus France (and Germany)
President Chirac announced he will visit Airbus HQ in Toulouse next Tuesday to 'find solutions.' M. Chirac has so far not notably shown himself interested in solutions which cost French workers their jobs. Germany, for its part, does not want to see jobs lost in Germany, where the A320 is assembled, and where many suppliers may well be cut off in favor of Russian and other low wage suppliers.
Airbus chief M. Gallois, the skillful former president of SNCF, the French railway, will have his work cut our for himself, persuading France and Germany to go along with job cuts. His major leverage comes from a threat to cancel the A350 XWB. But such an abdication would cripple Airbus' efforts to remain a full—line supplier to its airline customers.
Airbus recycled news of the big Chinese order for its aging A320 single plane, in order to garner at least some positive headlines, such as this — 'Airbus Gains Ground.' In return for the massive order, China will host an assembly line for the A320 jet, This will not contribute to steady employment in either Toulouse or Hamburg, where the 320s are currently assembled.
The A380 freighter program at risk
The real order book news is terrible. The very first outright cancellation of an order for the A380 came as Fedex cancelled its order for 10 superjumbo freighters. The remaining two customers, UPS (10 orders) and leasing firm International Lease Finance Corporation (5) have not yet reconfirmed their orders, and if they do not renew, the program will be dropped, costing the company 25 firm orders. While it would save a lot of engineering resources, this would leave the large freighter market securely in Boeing's hands.
Airbus can ill afford to concede any important segments to Boeing. That is where profits are richest, and Boeing continues to prosper while Airbus shows definite signs of a financial pinch. The financial director of parent EADS put it
Boeing ramps up
Meanwhile, facing extremely strong demand for its 777 twin jet medium—large long range airliner, Boeing is taking the step of changing its assembly procedures in order to ramp up production by as much as 20% or more. The 777 will be manufactured on a moving assembly line, just like Henry Ford's Model T, albeit it at a slower pace (1.6 inches per minute).
The moving assembly line serves to prompt workers as to the necessary time to be done with each stage of work for which they are responsible. The initial pace, timed to existing achievements in speed, can gradually be increased, as workers master their processes more fully, and as they focus more intently due to the prompting of the physical movement of the airplane. It has been used before to excellent effect by Boeing and other airplane manufacturers.
The 777 freighter, incidentally, is what FedEx is purchasing in place of its cancelled A380 freighter order. Other airlines, facing delays in their expected delivery dates for 380s, have also been ordering 777s. Boeing must be making substantial profits on it.
Pricing pressure on Airbus
The final and perhaps most costly bit of bad news for Airbus is the outbreak of open talk about the heavy discounting it is employing to 'move iron' as they say in the airliner business. Qantas, when it re—upped for more 380 options, boasted of the 'attractive package' it received, a euphemism for steep discounts. Now, the press is reporting that customers which ordered the old minimally—upgraded A350 design (which was dropped) will be receiving the new version, the XWB, at the old price they negotiated for the older model plane.
The losses per XWB airplane could be very substantial. The exact pricing figures are a closely—held secret, but it was understood that launch customers for the old A350 received deep discounts on an airplane that was to require only a billion euros or so to develop. The new XWB variant will require perhaps 10 billion euros or more. When one is losing money on discounts and is late to the market by a matter of multiple years, it is very hard to make up for low prices on volume
For the A380, it may be even worse.
A money—losing quarter
Airbus also announced a net loss for its third quarter, due to write—offs. Surprisingly, the news of the loss contained actual good news: outside of the write—offs on the A380, the rest of the company is moderately healthy. Defense aviation is a strong point, in particular.
However, depending on whether or not the company decides to go ahead with the A350 XWB program, as much as billion euros more in write—offs could be faced in the fourth quarter.
Even worse, however, is this small bit of verbiage buried in the company's official announcement.
Matters are clearly very dicey at Airbus. It faces incompatible demands from the marketplace versus powerful state actors it needs to placate, but who are not much interested in compromises that harm their own interests.
M. Gallois, bonne chance!
Thoams Lifson is the editor and publisher of American Thinker.