Airbus Gains Altitude

The European jetmaker flies higher on widebody orders and faster-than-expected cost-cuts. But exchange rate and development woes cloud the skies

by Carol Matlack

Airbus Chiefs Announce Annual Results Pascal Parrot/Getty Images

It's been a long time since Airbus has had better news to deliver than Boeing BA. But on Jan. 16, as the U.S. jetmaker was acknowledging additional delays on its new 787 Dreamliner (BusinessWeek.com, 1/15/08), Airbus reported logging a record 1,341 orders and 453 airplane deliveries in 2007, while making better-than-expected progress on cost reductions.

True, Airbus' 2007 order tally fell short of Boeing's 1,413 planes. But Boeing lagged slightly behind its European rival on aircraft deliveries, with 441. Perhaps the best news of all for the European aerospace giant was the 292 orders placed by airlines last year for the A350 widebody jet, its planned answer to the 787 Dreamliner.

A350 Sales Lift Off

Because Airbus was slow to settle on a design for the A350, in the past few years it had fallen badly behind Boeing in sales of widebodies, which carry much richer profit margins than narrow-body planes such as the A320 and Boeing 737. It wasn't until last summer's Paris Air Show that orders for the A350 finally began to pile in (BusinessWeek.com, 6/18/07).

Now, including a total of 385 A350 widebodies on order, Chief Executive Tom Enders told reporters at the company's Toulouse, France headquarters on Jan. 16, Airbus has "a huge and high-quality backlog of more than 3,400 aircraft filling our order book for something like six years."

Airbus executives downplayed the effects of the Boeing 787 delays on their transatlantic rivalry, though. "It shows how complex aircraft manufacturing is," Airbus sales chief John Leahy said. "I don't see any advantage for Airbus."

Relieving Exchange Rate Pressure

Indeed, the aircraft maker still foresees that 2008 will be a very tough year, as it struggles to find relief from the weak dollar, which has badly dented its competitive edge (BusinessWeek.com, 1/7/08). Nearly all its manufacturing is in euro-denominated Europe, while its sales around the world are mostly made in dollars.

Airbus has promised to squeeze out $3 billion in cost reductions by 2010, and Enders disclosed on Jan. 16 that an impressive $750 million in savings—compared to about $440 million originally forecast—already were achieved last year.

In another move aimed at damping the exchange-rate problem, Airbus said on Jan. 15 that it may build freighter planes in the U.S. if its parent, European Aeronautics Defence & Space (EAD.PA), wins a contract to supply refueling tanker aircraft to the U.S. Air Force.

More Cost Savings Urgently Needed

But Enders said that even more drastic measures could be in store to offset the exchange-rate pinch. "We have to find extra savings from somewhere," he said. "We are seriously discussing what this could be." Near the end of last year, the company took further steps toward a long-anticipated plan to sell six European manufacturing facilities to outsiders (BusinessWeek.com, 12/19/08).

Airbus urgently needs to economize as it gears up to build the A350, whose total development cost could top $15 billion. Cash flow will be weak for the next few years because of costly production delays on the A380 super-jumbo and, more recently, on the A400M military transport plane. Analysts at Deutsche Bank (DB), who recently downgraded EADS shares to sell, said on Jan. 16 that the stepped-up pace of cost savings at Airbus, while encouraging, wasn't enough to change their recommendation.

One thing already is clear: Last year's record order harvest won't be repeated in 2008. Industry analysts—and both planemakers—say that airlines are likely to scale back purchases, partly because of high oil prices and higher credit costs, and partly because of the huge number of planes already on order. Boeing and Airbus have sufficient backlogs to keep their factories running flat-out for more than four years. "We are near the top of the cycle," Airbus sales chief John Leahy told reporters on Jan. 16.

Matlack is BusinessWeek's Paris bureau chief.