NEWS FLAVOR http://newsflavor. com/opinions/airbus-a380-what-went-wrong/ Airbus A380: What Went Wrong? [pic]Published by Miqdad Sibtain on March 12, 2009 in Opinions “In most airline programmes of this size – including those of our competitors – things can run a little later than originally planned. ” – Airbus spokesman. “I am extremely sorry vis-a-vis investors that have placed their confidence in EADS. This announcement came as a big blow. But we will create recovery. ” – Noel Forgeard, co-CEO While we have some sympathy with Airbus for the sheer scale of the challenge, we believe it is difficult to justify warning so late of the problem or failing to anticipate the issue. ”1 Introduction On June 13th 2006, Airbus S. A. S. (Airbus), the world’s biggest commercial airplanemaker, announced a delay of six months in the launch of its much awaited/forthcoming A380 passenger jets. Airbus A380, which was nicknamed ‘superjumbo’, would be the largest passenger aircraft in the world with seating capacity of 555 passengers.
Back in 2005 also, Airbus had extended its delivery deadline by six months and planned to deliver the first aircraft in October 2006. The new announcement further deferred the delivery till April 2007. After the announcement, the market capitalization of European Aeronautic Defence and Space (EADS), the parent company of Airbus, fell by 26% on 14th June 2006. Airbus explained that the delay was caused by a problem in the installation of cables for the plane’s entertainment system.
Panicked by the announcement, the company’s biggest customers, including Emirates and Singapore Airlines, demanded compensation for the delay in the delivery of planes, while International Lease Finance Corporation (ILFC), the biggest aircraft-leasing company, threatened to cancel its order of 10 A380s. In the mean time, Singapore Airlines, which was the first to order A380, ordered 20 of Boeing Co. ’s2 (Boeing) new 787 ‘Dreamliners’ worth $4. 5 billion (or 3. 57 billion euros). Analysts opined that Boeing could benefit from Airbus’ crisis.
In the given scenario, experts debated how Airbus was going to overcome the crisis. They also wondered how Boeing intended to take advantage of the situation. Project A380 In 1970s, four European aircraft manufacturers, namely Aerospatiale (France), Deutsche Airbus (Germany), British Aerospace (UK) and Constructions Aeronautics (Spain), collaborated and formed ‘Project Airbus’ in order to compete with Boeing, which dominated the market with more than 80% market share. Later, the name of the company changed to ‘Airbus Industrie’ after British Aerospace exited from the consortium.
In the beginning, Airbus manufactured A300 aircraft to compete with Boeing aircrafts. A300 was lighter, more fuel-efficient and had lower operating costs compared to Boeing’s and, thus, was more profitable. In the early 1980s, Airbus developed A310, a derivative of A300, which competed with Boeing’s 767 aircrafts. Airbus’ next model was A320 which was positioned against Boeing’s 737. With a number of aircraft models (A300, A310 and variants of A320), Airbus was able to acquire a market share of 25%, while that of Boeing dropped to 56%. Afterwards, the company added A330 and A340 to its product line-up.
The A340 (Airbus’ largest aircraft) competed with Boeing’s 747, which was larger than A340. The extra size of 747 made it very popular with the airlines. During the 1990s, Airbus evolved as an innovative and customer-friendly aircraft manufacturing company. In the late 1990s, Airbus restructured itself controlled almost 50% of the market share. By the turn of the 21st century, Airbus perceived that the increasing number of passengers and cargo, alliance among various airlines and industry concentration would create demand for larger aircrafts.
The company predicted a demand for 1,144 large aircrafts (having more than 500 seats) by 2020. However, Boeing had different views of the future and projected a demand for only 320 such aircrafts. Though, Airbus began working on research and development of a very large plane in 1994, it was only in 2000 that it initiated ‘Project A380’ to manufacture the largest commercial aircraft. Project A380, with an investment of $13 billion, was officially launched on December 19th 2000 and production started on January 23rd 2002. For much of the development phase the double-decker passenger jet was known as the ‘Airbus A3XX’.
After years of research and development, Airbus came up with a prototype of the A380 which was unveiled in Toulouse (France) on 18th January 2005. The company decided to position its new aircraft against Boeing’s 747 jumbo which enjoyed supremacy in its category. Airbus stated that the new aircraft would be more economical and have 555 seats (up-gradable to accommodate up to 840 passengers) compared to 416 seats of 747 [Exhibit 1]. In its most ambitious civil aircraft project, Airbus sought to develop a competitor to the Boeing 747 and end Boeing’s dominance of the very large aircraft market.
Accordingly, it designed the A380 in such a way that offered high operational efficiency. It decided upon a double-deck configuration mainly because it required significantly lighter structure. The design of the aircraft enabled it to use existing airport infrastructure with little modifications to the airports. Besides, operating costs per seat were 15-20% lesser than those for the 747-400. With 49% more floor space and only 35% more seating than the previous largest aircraft, A380 offered wider seats and aisles for more passenger comfort.
Airbus also claimed that the A380 was designed to have 10-15% more range, lower fuel burn and emissions, and less noise. After A380 was unveiled in January 2005, a website claimed that it was “Airbus’ answer to air travel congestion and to estimates that passenger traffic will double in 15 years. ”3 Similarly, an analyst commented that A380 was “the culmination of European manufacturer Airbus’s ascent to the world’s number one plane manufacturer. ”4 Airbus had high expectations from A380 and considered it as a triumph of ‘European innovation and cooperation’.
The company highlighted three selling points for A380 against 747: at least 35% more seats, fuel efficiency and the fact that it could fly 10% farther without refueling. The airlines worldwide gave a warm reception to A380 and by early 2006 Airbus received order for 159 planes from 16 airlines [Exhibit 2]. A380 Delay: What Went Wrong “It is not clear yet where exactly the delays have manifested, but in a project of this size some delays were to be expected. ”5 In mid-June 2006, Airbus announced that the planned deliveries of its A380 planes would be delayed by six to seven months.
The news created a panic among the airlines that were waiting to induct the ‘superjumbo’ into their fleet. The company said that it suspected a sabotage as it found three cables cut on an A380 at its Toulouse plant in France. An Airbus spokesman explained, “We don’t know the reason why it was done. At the moment it seems that it wasn’t an accident. ”6 An investigation, carried out by the company, revealed that installation of electric wiring for the plane’s entertainment system was severed and caused the delay.
Though the installation process was not complicated, it required hard labor as each plane required around 500 km (around 300 miles) of cabling. Also, while installing, misplacing cables meant redoing the whole process from the start. Partially, the delay was also attributed to certain ‘production issues’7 at the company’s part manufacturing plant in Hamburg (Germany). Noel Forgeard (Forgeard), co-CEO of EADS claimed that the company promptly acknowledged its production problems. However, analysts believed that EADS was late in identifying the problem and making the fact public.
An analyst said, “Strategic planning myopia has always been there in Airbus. ”8 Apart from that, some analysts cited internal politics and dual management structure as the major problems. In 2005, there was an internal clash between the German and French managers for the positions of cochairmen and co-CEOs. French shareholders owned 22. 5% of EADS (with government holding 15% and Lagardere, French media firm, holding the rest), while Germany’s DaimlerChrysler held another 22. 5%. SEPI9, the industrial holding company of the government of Spain, controlled 5% of the company and the remaining 50% was publicly traded.
In May 2006, EADS again ran into trouble again when it decided to shut down a loss-making plant in Sogerma in Bordeaux (France) and cut over 1,000 jobs. However, after the French prime minister intervened in the matter, EADS agreed to save 300 jobs out of the total number. To make the matter worse, some shareholder of EADS alleged that Forgeard had inside knowledge of the company’s difficulties when he sold a big part of his shares in EADS in March 2006 which earned him 2. 5 million euros ($3. 2 million).
Shortly after the incident, EADS disclosed that six members of its board of directors exercised their stock options in March and the sales were approved by EADS’ compliance officer. Later in April, Legardere and DaimlerChrysler sold 7. 5% each of their shares in the company. While the French financial regulators were investigating the charges against the top officials, Forgeard defended his sale of shares calling it an ‘unfortunate coincidence’. He said, “If I had had the slightest privileged information, I would not have sold the shares. 10 In the midst of the chaos, various customers of the A380 stated that they were considering there positions. Qantas, (Australia), Emirates (Dubai, UAE) and Singapore Airlines (which was the launch customer of A380), said they would be seeking compensation from Airbus under the terms of the contract. ILFC, on the other hand, said it might cancel its order for 10 A380s worth $3 billion. However, United Parcel Service (UPS), and Korean Air said they had no plans to cancel or scale-back their orders for 10 and 5 planes respectively. According to company estimates, compensation to be paid amounted to 3 billion euros.
Singapore Airlines, which was set to be first carrier to fly A380 in March 2006, ordered 20 787 planes from Boeing as Airbus announced that it would deliver its first ‘superjumbo’ to the airline by the end of 2006. Airbus said that in 2007 it would be able to deliver only 9 A380s, against the target of 20 to 25 and deliveries planned for 2008 and 2009 would be further delayed. The company feared that the backlog of delays would spill through the decade and warned that its operating profit would be cut by about 500 million euros ($625 million) per year between 2007 and 2010.
An analyst with Goldman Sachs said, “This is very damaging to both the credibility of EADS management, and also to Airbus’s reputation for program management. ”11 BOEING: FEASTING ON AIRBUS FAMINE? “Boeing already looked set to regain its place as the largest commercial aircraft producer in the coming years. Now with the growing orders for Boeing aircraft — including the 787 Dreamliners — it looks like it is going to happen sooner. ”12 On 14th June 2006, a day after the announcement of the delay in the delivery of A380, the share prices of EADS plunged by 26% to $23. 65 (18. 3 euros) [Exhibit 3]. In tune with the share prices, the maket capitalization13 of the company lost 5. 5 billion euros ($6. 9 billion). On the other hand, Boeing’s share prices surged by 5% to $80. 83 after acquiring the order for 20 787 Dreamliners from Singapore Airlines. An analyst with J. P. Morgan, observed, “The Singapore order is a clear win for Boeing and somewhat troubling for Airbus. ”14 After Boeing bagged large orders for its 787 Dreamliner, Airbus decided to develop A350 to compete with it. However, airlines did not like its design and wanted a redesigned plane model.
Redesigning the A350 would double the development cost to $10 billion and would delay the deliveries of A350 by 2 to 3 years giving an edge to Boeing 787. Industry-watchers and airlines speculated that Boeing, which was overtaken by Airbus in orders since 2003, would use this setback to regain the lead in the commercial jet market. In addition to 787, Boeing had orders for its 747 aircrafts too (18 orders for cargo versions of its 747 and 1 for passenger version) and analysts felt that it could sell more of its 747s that competed against A380.
Experts believed that the fact that any new airline ordering A380 would have to wait at least six years before receiving the plane, would boost 747 sales. Steven Udvar-Hazy, CEO, ILFC, expressed, “The current situation could precipitate one or more airlines ordering it and that would be a serious setback for Airbus. ” However, a section of the analysts felt that Boeing faced a tough schedule of its own to put its 787 Dreamliner into service in 2008 and might not be able to speed up the production to take advantage of the situation. Charlie Miller, director, communications, Boeing, said, “Being arch rivals, all would expect us to rejoice. On the contrary) failure of Airbus to deliver would only mean added pressure on us, which could spoil our timetable. ” Richard Aboulafia, an analyst at Teal Group, aerospace consultants, echoed, “Boeing has huge challenges in front of it, nothing has changed there. ” He added, “The biggest risk is if (the 787) just doesn’t deliver as advertised, or ends up costing more to build than the price it was sold at. ” Boeing’s 787 was a mid-segment aircraft (having 250 to 290 seats) which competed with Airbus’ A350 and outsold it. By mid-June 2006, Boeing ad orders for 350 its 787 planes compared to 100 for Airbus’ A350. WHAT NEXT? In 2005, Airbus secured 1,111 new orders with a net value of $95. 9 billion, representing 52% of the global market. However, experts believed, after some year of dominance, Airbus would slip behind Boeing by the end of 2006. Boeing was expected to overtake Airbus in terms of numbers as well as value. Airbus, on the other hand, had a task of revamping its operations. The company had orders for 159 A380s which was far below the number of aircrafts it must sell to offset the development cost of around $14 billion (12 billion euros).
With 100 more orders for A380 the company was expected to break even. The cost of the delay would add to the number of planes it must sell to reach break even. According to estimates, the global aircraft fleet would grow to 35,500 by 2026 and the share of mid-sized aircrafts would be 3,000. Considering the fact, analysts opined that, apart from concentrating on its A380, the company should focus on its A350 and A330 which was successful and could serve as an alternate product. The company’s A320 family of aircraft also looked promising.
With Air China ordering 24 A320s for $1. 74 billion, Airbus gained entry into the mainland China, which was long dominated by Boeing. Commenting on how the delay would impact Airbus, an analyst said, “The global status of Airbus will not be swayed much by recent developments unless clients go to (court) for damages,” while another analyst said, “If Airbus can’t get its act together until 2014, then you are talking about a healthy amount of time for Boeing just to make an awful lot of cash for everybody. ”