Why Airbus Can't Glide on 2005

It may have beat archrival Boeing in jet orders and deliveries, but buried in those numbers are some worrisome trends for the European planemaker

Airbus has done it again. On Jan. 17, the European planemaker reported that it booked 1,055 net aircraft orders in 2005, just ahead of the 1,002 logged by Boeing (BA ) in a record-breaking sales year for both companies. Chicago-based Boeing had been widely expected to reclaim the No. 1 spot after trailing since 2001, but a surge of deals concluded in December kept Airbus on top.

Airbus also said it delivered 378 planes for a record $27 billion in revenues last year, well ahead of Boeing's 290 deliveries. Financial results for Airbus parent European Aeronautics Space & Defence (EADS) are expected on Mar. 8, while Boeing will report yearend results on Feb. 1. "It was the best year ever for Airbus," Chief Executive Gustav Humbert said in announcing the results.

SKINNIER MARGINS. Behind the impressive figures lie some big challenges for Airbus, though. While the Toulouse (France)-based company sold more planes than Boeing last year, the dollar value of Boeing's order book was considerably higher -- $105.9 billion vs. $95.9 billion for Airbus. That's because roughly 85% of the planes Airbus sold were narrowbody jets such as the A320, which typically cost only one-third to one-half as much as widebody planes.

What's more, narrowbodies typically have profit margins around 20% less than the bigger planes. That could make it difficult for Airbus to maintain the healthy 10% operating margins it has achieved through aggressive cost-cutting over the past two years.

Perhaps most worrisome for Airbus, sales of its widebody A340 plane are in a stall. Airlines ordered only 15 of them last year, compared to 154 orders for Boeing's competing 777. It's looking more and more likely that Airbus will have to redesign the four-engine A340, to help it compete against newer, more-efficient twin-jet models of the 777 that have snared recent orders from key customers such as Hong Kong-based Cathay Pacific and Dubai-based Emirates.

FINANCIAL PINCH. Humbert, while acknowledging concern about the A340's poor sales, declined to say whether a redesign was in the works. But Emirates President Tim Clark told BusinessWeek in a recent interview that Airbus was already talking to customers about possible modifications, including a more-efficient engine and increased use of lightweight composites. "A combination of those two [changes] would give you a formidable aircraft," Clark said.

A revamp would be expensive, though, costing hundreds of millions of dollars at a minimum. Airbus is already feeling a financial pinch as it gears up to produce another new plane, the twin-aisle A350, which it hopes to get airborne by 2009 as a rival to Boeing's hot-selling 787 Dreamliner, set to enter service in 2008l. Airbus has estimated development costs for the A350 at more than $5 billion.

And while Airbus in the past has obtained low-interest loans from European governments to finance new aircraft projects, it may have to develop the A350 on its own euro. The U.S. and European Union are battling before the World Trade Organization over the issue of aircraft subsidies, and Airbus, saying it hopes for a negotiated settlement, so far hasn't asked for any government aid.

SLOW STARTS. Adding to the financial pressure, initial delivery of Airbus' new doubledecker A380 jet has been pushed back from this spring until the end of 2006 to iron out technical glitches. That means the company won't book substantial revenues from the program before 2007.

Airbus also needs to gin up more orders for the A350, which won only 87 firm commitments last year compared with 235 for the Boeing 787. That's challenging, but hardly impossible: Airbus sales chief John Leahy notes that Boeing logged only 56 firm orders for the 787 during the first year it was offered to customers.

And while sales of the A380 megaplane have also been slow, with only 20 orders booked during 2005, it's common for new aircraft to experience a lull between the initial burst of launch orders and entry into commercial service. In all, Airbus has booked 159 orders for the A380, enough to keep production lines busy for several years.

OUT OF THE DOLDRUMS. The outlook for Airbus certainly isn't grim. It has an order backlog of 2,177 planes -- well above Boeing's 1,809 � with higher-margin widebody planes accounting for about 25% of the total. Humbert says Airbus is cranking up production rates on almost all its models. He's forecasting more than 400 deliveries, another record, in 2006.

Although new orders in 2006 are unlikely to match 2005, when both planemakers inked huge multiyear deals with fast-growing carriers in Asia and the Middle East, the aerospace industry has clearly pulled out of its post-September 11 doldrums. That means these fierce transatlantic rivals will have plenty of business to keep fighting over.

READER COMMENTS

Matlack is BusinessWeek's Paris bureau chief
Edited by Andy Reinhardt

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