Global Economics

Proving Time for Airbus


Fighter jets will swoop and dive overhead as the Farnborough Airshow opens outside London on July 17. But the real drama will be played out on the ground—and the spotlight will be squarely on Airbus. The European airplane maker, buffeted by management upheaval, production delays, and weak sales, is under intense pressure to reassure customers and financial markets that it's getting back on course.

By just about any measure, Airbus has had a terrible year. Shares in its parent, European Aeronautics Defence & Space cratered last month after the company disclosed production delays in Airbus's new A380 superjumbo. On July 2, EADS ousted Airbus CEO Gustav Humbert and Noël Forgeard, the EADS co-chief executive who oversaw the A380's development as head of Airbus from 1998 until last year (see BusinessWeek.com, 6/30/06, "Major Screwup at Airbus").

And Airbus is getting clobbered by rival Boeing (BA) on aircraft sales. On July 10, the European plane manufacturer reported it had booked only 117 orders during the first six months of the year, less than one-quarter of the 480 orders logged by Boeing during the period. Most alarming for Airbus, it had only 21 orders for widebodies—the main source of profits in the industry—versus 105 widebodies sold by Boeing.

DESIGN CHANGES.The Boeing 787 Dreamliner is outselling Airbus' rival A350 by a wide margin, while Boeing's 777 is luring customers away from the less fuel-efficient Airbus A340. Airbus hasn't logged a new order for the A380 in months. "Airbus took its eye off the ball," says Doug McVitie, a France-based aerospace analyst who formerly worked in marketing at Airbus.

To restore confidence, Airbus has already signaled that it will jettison the poorly selling A350 and replace it with a brand-new widebody model that will be unveiled at Farnborough. Although engineers may not yet be ready with a detailed design, the new plane is sure to include features that the airlines have been clamoring for, including a roomier cabin, greater flying range, and improved fuel efficiency, thanks to more extensive use of carbon fiber reinforced composites.

The new plane, which may be called the A370, would not only take on the 250-seat Dreamliner, but could be offered in larger versions to compete against the Boeing 777. "We have to end this [uncertainty] by the time of the airshow," Airbus sales chief John Leahy says.

MATERIALS SETBACKS.Building a new widebody will hardly be a cinch for Airbus. Development is likely to cost $10 billion, which the company can't afford without seeking European government loans, a form of aid that is already the subject of a U.S. complaint before the World Trade Organization.

Airbus is less experienced than Boeing in working with composite materials (see BusinessWeek.com, 5/29/06, "Airbus Has a Bad Case of Jet Lag").

Indeed, even Boeing has faced setbacks in early tests of composite parts for the 787 (see BusinessWeek.com, 6/7/07, "On a Wing and a Prayer").

Boeing already has a big head start, too. Most analysts reckon Airbus couldn't get a new plane into service before 2013, five years after the 787 is set to take to the skies. Ironically, there is one silver lining for Airbus in the strong backlog for Boeing's new plane: With more than 360 Dreamliners now on order, Boeing factories will be so busy that airlines ordering the plane now probably wouldn't get their first deliveries until after 2013. That could move some airlines to order from Airbus instead.

GERMAN RELATIONS. One thing is certain: Airbus can't afford to let Boeing dominate this lucrative segment of the market. The two aircraft makers expect that over the next two decades, airlines will buy anywhere from 4,500 to more than 6,000 midsize widebodies, each selling for as much as $200 million.

Besides spiffing up its product line, Airbus has to show that its new management will be able avoid the kind of missteps that led to the recent turmoil. The company's new CEO, Christian Streiff, is a respected former executive of French building materials company Saint-Gobain who spent many years working in Germany—a background that could help him defuse Franco-German tensions that are never far below the surface at Airbus.

Parent company EADS, which until now has given Airbus plenty of operational leeway, has promised to tighten the reins, too. But changing the course of a $27 billion-a-year company takes time. The drama at Farnborough will only be the first act.


Race, Class, and the Future of Ferguson
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

 
blog comments powered by Disqus