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Purser: Shutdown for Airbus

Problems afflicting the A380, the world’s largest passenger airliner, approach an ultimate crisis point.


September 27, 2007
By Richard Purser

Topics

On the last business day of September a terse announcement emerged from
Amsterdam: “Today the EADS Board of Directors met to … discuss the
A380 situation. The Board of Directors will continue this discussion in
the near future.”

These
simple words only hinted at the turmoil within the European Aeronautic
Defence and Space Company – EADS N.V. – owner of Airbus S.A.S., the
36-year-old manufacturer of jet airliners. (Britain’s BAE Systems owned
20% of Airbus, but its shareholders on Oct. 4 voted by 99.85% to sell
that stake back to EADS.)

Not so long ago Airbus appeared to be
outgunning its American rival, Boeing Commercial Airplanes, but last
year Boeing overtook Airbus for the first time since 2000 in value of
aircraft ordered, if not in number of aircraft ordered.

“The
A380 situation,” as the EADS Board so delicately put it, is the
delivery delays that have afflicted the world’s largest commercial
airliner. The 555-seat double-decker made its first flight from the
Airbus home base of Toulouse on April 27 last year and was supposed to
go into service with Singapore Airlines this year (16 customers have
ordered the aircraft). But barely a month after that much-publicized
first flight, Airbus told its initial customers that first deliveries
would be six months late due to difficulties with installing the
aircraft’s wiring.

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There had already been forebodings: half a
year earlier EADS co-CEO Noel Forgeard had disclosed that the A380
program would run 1.45 billion euros over budget. And worse was to
come: the assembly line had to shut down completely for three months in
mid-2005 while configuration of the cabin wiring was worked out.
Program head Charles Champion acknowledged after the assembly line’s
reopening that Airbus had “underestimated the level of engineering
needed to customize the aircraft” for each airline.

And this
June EADS announced that the wiring problems were still so extensive
that deliveries would be delayed by another six months. Forgeard and
Airbus CEO Gustav Humbert resigned. (Forgeard had also been under fire
for selling EADS stock before the announcement. And BAE felt that the
announcement of a new delay was itself designed to slash the value of
its stake in the put-option sale of its Airbus stake to EADS. The stock
indeed promptly fell 26%.) A couple of months later the new Airbus CEO,
Christian Streiff, replaced Champion as A380 program head with Mario
Heinen, formerly head of the single-aisle jet program (A320, etc.).

Streiff
had said when he was appointed that he would report on “the A380
situation” by the end of September, but September ended with only the
announcement of continued Board discussions, although EADS had said a
few days earlier that there would be further delays, without giving any
details.

But even that vague statement caused some A380
customers to grumble publicly, so when the Board next met, four days
after its end-of-September session, it had to announce details – the
delay would now be for a total of two years! – and to state that it
expected the A380’s problems would cut another 2.8 billion euros from
its operating profit over the next four years. (In June it had
announced an initial hit on profits of 2 billion euros.)

Emirates
Airlines’ CEO Tim Clark promptly announced that “the position is very
serious for Emirates and we are now reviewing all options.” Emirates
has the largest order for A380s. Other customers such as Virgin
Atlantic Airways, Qantas and International Lease Finance Corp. were
also “reviewing options” at WINGS’ press time. Singapore was looking
more at additional compensation for the delay, which will now see its
first aircraft delivered in October 2007.

Whether Airbus can
achieve the necessary reorganization – and also realize the cost
reduction program, also newly announced, that is supposed to save 5
billion euros by 2010 – is an open question. Along with the managerial
and technological challenges, there are the political considerations
such as now cause the aircraft to be assembled in Toulouse but its
interiors to be equipped in Hamburg. Emirates’ Clark noted pointedly
that the job “will need a strong leader without the political
interference that has so plagued” Airbus and EADS.

Airbus CEO Streiff could not overcome the politics and resigned Oct. 9 after only three months on the job.