Global Economics

Airbus Restructures to Catch Boeing


Airbus Chief Executive Christian Streiff had no choice. In unveiling plans for a restructuring of Airbus during a Sept. 29 board meeting of its parent European Aeronautic Defence & Space, Streiff tacitly acknowledged what has become painfully evident in recent months: Airbus has fallen behind archrival Boeing (BA) not only on aircraft orders, but, even more worrisome for the Europeans, on the urgent task of improving efficiency and reining in costs.

Airbus and EADS haven't yet revealed details of Streiff's plan. After the meeting, the EADS board issued only a terse statement that it would "continue this discussion in the near future." But it's clear that big changes are needed at Airbus, and soon (see BusinessWeek.com, 9/21/06, "Another A380 Delay Rocks Airbus").

Only five years ago, it was Boeing that looked flabby, with a workforce nearly twice as big as Airbus'. But starting in 2001, Boeing slimmed down dramatically, laying off one-third of its commercial-aircraft employees. The U.S. company also decided to outsource an unprecedented 40% of the work on its newest plane, the 787 Dreamliner, to Japanese manufacturers.

FAULT THE EURO. While Boeing shrank, Airbus expanded its payroll as it ramped up development of the A380 super-jumbo. From 2001 to today, Airbus's workforce grew from 44,000 to 57,000, while Boeing's declined from more than 80,000 to 54,000.

What's more, nearly all of Airbus' manufacturing is done in Europe, where the strong euro pushes up production costs. Pressure from European governments, which provide loans to help finance development of new Airbus models, makes it politically difficult to move jobs elsewhere.

Equally important, Boeing has outpaced Airbus in moving to lean manufacturing techniques. Assembly time on Boeing's best-selling plane, the 737, has been cut by 50%, to only 11 days. While it's difficult to make precise comparisons because of differing assembly methods, most experts say that Airbus' similarly sized A320 model takes considerably longer to put together.

A BAD FIT. Then of course there is the A380, which has now fallen at least a year behind schedule because of assembly-line glitches. Recent reports in the French press and by the Bloomberg news service have highlighted a key reason for these problems: Airbus upgraded design software at its assembly plant in Toulouse more quickly than at some of its other factories.

The result was that components from certain factories sometimes didn't exactly match the computer-generated design model that guides final assembly in Toulouse (see BusinessWeek.com, 3/14/06, "Airbus' Jigsaw Plane"). Airbus declines to comment on the press reports.

If the reports are true, they describe a stunning oversight that goes a long way toward explaining the A380 delays. Production of the megaplane bogged down because thick bundles of electrical wiring, delivered to Toulouse from a factory in Hamburg, were shorter than called for in the Toulouse factory's computer model. Assembly-line workers had to pull the bundles apart and rethread them through the aircraft cabin. EADS has already acknowledged that the delays will shave $2.5 billion off its bottom line over the next few years—and many analysts think that figure will rise by at least another $1 billion.

MODEST CHINA PROPOSAL. This all adds up to a huge challenge for Streiff, a former building-materials company executive who took the controls at Airbus only three months ago. What will he do? French labor unions are already warning that he might move jobs out of Europe—as indeed he must, to keep costs down.

Airbus has already proposed a modest assembly operation in China for its narrow-body planes, but it must go much further. For example, it could follow Boeing's example by outsourcing a big chunk of work on the planned A350, the widebody that Airbus is developing to counter the 787.

At the same time, Streiff has to push Airbus even harder toward lean manufacturing and cutting-edge design software. Although 36-year-old Airbus is a young company compared to nearly century-old Boeing, it's still encumbered by its history as a former consortium of aerospace companies in four countries.

NOT EASY AT BOEING. While Airbus now claims to be an integrated company, its factories in different countries still don't always march to the same drummer. Fortunately, Streiff won't have to look far for new software: The top global supplier, already used by Airbus' French factories and by Boeing, is a French company, Dassault Systèmes.

Certainly, Boeing faces its own challenges. The new 787, built primarily from tricky-to-manufacture lightweight composites, has already encountered some production snafus (see BusinessWeek.com, 6/19/06, "The 787 Encounters Turbulence"). Airbus, despite playing catch-up with its A350, could benefit from the extra time to perfect state-of-the-art composite production techniques.

But for now, Airbus's flight path looks far more difficult than Boeing's. Moving jobs offshore and knitting together its European operations will take determination and political skill. But Airbus must rise to that challenge to regain its competitive edge.


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