Bloomberg News

Airbus A380 Wing Cracks Threaten on Deliveries as Costs Rise

May 16, 2012

European Aeronautic, Defence & Space Co. cautioned that delivering 30 Airbus A380 superjumbos this year will be a challenge and that fixing wing cracks on the double-decker airliner will occupy the company for years.

EADS booked 158 million euros ($200.1 million) in charges in the first quarter for a “permanent fix” of A380 wings, it said today when posting earnings. It had already booked 105 million euros against 2011 earnings to fix planes in service, and Chief Financial Officer Hans Peter Ring estimated total charges this year of 260 million euros.

“The good news is that we have fully understood the root causes, we have proposed and decided internally on a final fix and repair,” Ring said on a call with journalists. “It’ll keep us busy for a couple of years likely.”

Airbus is being forced to devote more attention to its flagship aircraft just as the manufacturer struggles to keep its A350 wide-body program on track and the company prepares for a management switch at the beginning of next month. Airbus said the A350 program, aimed at competing with Boeing Co. (BA:US)’s new 787 and bestselling 777 aircraft, remains “very challenging”

Rising Stock

Airbus handed over four A380s in the first quarter, the same amount as in the year-ago period. The company delivered 26 of the aircraft to customers in all of 2011. While fixing the wings turned out to be more complex than originally believed in March, Airbus still aims to break even with the program at the start of 2015, EADS reiterated today.

EADS rose as much as 75 cents, or 2.6 percent, to 29.78 euros in Paris, and traded at 29.03 euros as of 1:11 p.m. The stock has gained 21.3 percent this year, compared with a 1.1 percent drop for Chicago-based Boeing in the same period.

First-quarter earnings before interest tax, goodwill and exceptional items doubled to 480 million euros, EADS said. The company raised its guidance for earnings per share to “above 1.85 euros” for this year from more than 1.65 euros, and maintained a goal to lift jet deliveries to a record 570.

EADS also reiterated guidance for operating profit before special items to rise above 2.5 billion euros. Ring said the guidance would be reviewed at the end of the second quarter, by which time EADS is under new management. Tom Enders, now chief of Airbus, will become CEO of EADS from May 31.

Manufacturing Process

After discovering the cracks last year, Airbus diagnosed the issue, saying it stemmed from a combination of manufacturing processes and materials, and is now working on a two-step fix for cracked wing brackets.

For now, the approach involves inserting a piece where the wing bracket isn’t sufficiently strong. Eventually, Airbus will address the issue by changing the materials and process used to manufacture the wing. It can’t put that change into practice until the European Aviation Safety Agency gives approval.

The wings for the A380 are built in Broughton in the U.K., where Airbus employs more than 5,000 people. The structures are partly made from carbon fiber material and are transported by road and river to the sea from where they are shipped to the Airbus headquarters in Toulouse in France for final assembly.

Airbus is now in discussions with A380 customers about deliveries, Ring said.

Airlines eager to put their new A380s into service can fly the planes without immediately fixing wing brackets, as EASA directives require fixes only after a certain number of landings and takeoffs. Some airlines may prefer to insist that Airbus make the fix first, before they accept delivery.

A total of 253 A380s have been ordered by 19 customers, with 71 planes delivered so far to customers including Singapore Airlines Ltd. (SIA), Qantas Airways Ltd. (QAN), Emirates, Air France (AF) KLM Group, Deutsche Lufthansa, Korean Air Lines Co. (003490) and China Southern. (1055)

“It’s the same problem we’ve seen on many aircraft programs before,” said Nick Cunningham, managing director at London-based Agency Partners. “If you build a plane with a fault, then you have to go through a change process, and that’s very, very expensive because you’ve got to take the part and fix it and put the plane back together again. And then you’ve got a $300 million plane sitting there, using your cash.”

To contact the reporter on this story: Andrea Rothman in Paris at aerothman@bloomberg.net

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net


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