Superjumbo to white elephant

Airbus’ A380 project has lurched from one disaster to the next. Andrew White reports on the crisis engulfing the aviation giant.

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By  Andrew White Published  October 29, 2006

Airbus’ A380 project has lurched from one disaster to the next. Andrew White reports on the crisis engulfing the aviation giant.

As the plane touched down, the 50,000 aviation enthusiasts sitting on the grass banks lining the runway broke into wild – and spontaneous - applause. A small puff of smoke came from the wheels, and history was made as the world watched on.

The maiden flight of Airbus’ A380 ‘superjumbo’ heralded the dawn of a new era in aviation. The four-hour test was largely conducted at around 10,000ft, above the Bay of Biscay in southern France, and the crew of six even took the craft on a flypast before landing - a glorious moment on a glorious spring day.

“A new page of aeronautical history has been written,” beamed French President Jacques Chirac. “It is a total success, and a magnificent result for European industrial cooperation.”

Yet fast-forward 18 months, and those blue skies have turned to storm clouds for Airbus, and the A380. Thousands of jobs must go, leading executives have already been shown the door, and the crisis is so severe that Airbus’ parent company has become destabilized to the extent of which government intervention may be required.

“Airbus is a successful company, but it has a massive short-term problem on its hands,” says Philip Butterworth-Hayes, editor of Jane’s Aircraft Component Manufacturers. “Every time you bring out a new aeroplane, because the investment is so huge, you almost ‘bet the company’. Airbus is just about big enough not to ‘bet the company’ on a new aeroplane, but what it needs now is sales, and it’s going to be very difficult to get sales on the A380 in the next six months or so.”

Shatteringly, the first A380 will not be delivered until at least late next year. The future of aviation, it appears, just can’t get off the ground.

So how did a textbook maiden flight pave the way for the mid-air disintegration of an aviation giant? And will the ‘superjumbo’ become Airbus’ ultimate white elephant – a US$20bn flightless folly?

Airbus’ dream was that the A380 should usher in a new age of luxury air travel. The project was announced to the world in 2000, after a nine-year consultation on the possibility of building a super-large passenger aircraft. Airbus - comprising four partners from France, Germany, Spain and the UK – would transform air travel across the world.

“Airbus set themselves some tough technology goals, as you have to do every time you launch a new aircraft,” says Butterworth-Hayes. “You have to raise the bar considerably with the technology that you’re integrating, or nobody will buy your aircraft.”

The twin-deck A380 would carry as many as 840 people, on the strength of four Trent 900 engines, specially designed to bear the weight of the ‘superjumbo’ over a range of up to 14,500km. Carrying a third more passengers than its rival, the Boeing 747 jumbo jet, it was hailed as an environmentally friendly jumbo, and would form the flagship of any airline’s fleet.

This dream was shared by the world’s top airlines – including Emirates Airline, Etihad Airways, and Qatar Airways – who placed record orders for the US$285m jets. Emirates placed the largest order, for 43 aircraft, whilst in total Airbus took orders for 159 of the planes.

At the time, the aviation firm predicted that it would need to sell 270 aircraft in order to break even – a target that would comfortably be achieved as long as all went according to plan.

In early 2002, work began on manufacturing the aircrafts’ key components. It was a truly pan-European effort: The centre wing box, fuselage, nose section and Radome were built in France, the aft and forward fuselage and vertical tail plane in Germany, the tail planes and central belly fairing in Spain, and the wings in the UK.

Ahead of schedule, in May 2004, the assembly of the first aircraft began at a US$650m factory in Toulouse, France. Meanwhile, airports across the world began preparations to accommodate the ‘superjumbo’ in time for early 2006, when the first commercial A380s would take to the skies.

At Heathrow Airport in London, part of Terminal 3 was even demolished as part of a US$180m redevelopment scheme to ensure that the world’s busiest airport would be able to host Airbus’ giant double-decker.

Later that year, however, the first cracks began to appear in Airbus’ grand design. In December 2004, Airbus’ owner, the European Aeronautic Defense and Space Company (EADS), revealed that the project was US$1.8bn over budget.

There were, at this time, no mention of delays and the waiting airlines were none the wiser over the problems to come, and the A380’s maiden flight the following spring impressed even the most skeptical aviation analyst.

In June 2005, however, Airbus announced that the delivery schedule would slip by six months. It emerged that engineers were struggling to install the 700km of wiring that each plane needs, and that the complexity of the assembly programme was proving more challenging that anyone at Airbus had anticipated.

“An aircraft is a fairly customized package - every plane has a different specification and it’s a very complex piece of engineering,” says Butterwoth-Hayes. “The complex problem came when they realized they couldn’t do the customer wiring at the pre-assembly stage, they had to do it at the final assembly. That made it far more complicated, but the problem still should have been dealt with earlier than it was.”

Airbus was apologetic, but insistent that such glitches were par for the course on such a project.

“In most airline programmes of this size - including those of our competitors - things can run a little later than originally planned,” countered a spokesman. “The plane is continuing to perform well in tests.”

Yet despite Airbus’ public composure, it was at this point that alarm bells began to ring. Whilst steadfastly maintaining that the project would suffer no more delays, Airbus came under heavy pressure from both EADS and the airlines whose long-term strategies depended on prompt delivery of the A380s.

The ice broke a year later, in July 2006. It emerged that there would be a further delay of six to seven months – an announcement that was to lead to blood in the boardrooms of both Airbus and EADS.

Airbus chief Gustav Humbert tendered his resignation almost as soon as the further delays were announced. One of the German’s last announcements as chief executive revealed that only nine of the planes, instead of the scheduled 20 to 25, would be delivered next year – a failure that rendered his position untenable.

“The recently announced delays on the A380 production and delivery programme has been a major disappointment for our customers, our shareholders and our employees,” he said at the time. “As president and chief executive of Airbus, I must take responsibility for this setback and feel the right course of action is to offer my resignation to our shareholders.”

The second such departure of the summer, however, would prove far less straightforward. As soon as details of the latest delay were released, accusations began to fly that EADS co-chief executive Noel Forgeard had deliberately begun selling shares in the firm prior to the announcement.

Co-chief executive of Airbus since 2005, Forgeard had continually denied any wrongdoing over his selling of EADS shares. He told investigating market regulators that he sold the shares in question in March of this year, and that he did not know of delays in the production of the A380 until April.

Nevertheless, when the delays were announced, Airbus’s share price slumped 26%, and Forgeard’s protestations of innocence were not enough to calm shareholder outrage. Initially refusing to stand down – he told a French parliamentary committee that such a move was “out of the question” – he eventually had no choice but to fall on his own sword. The A380 had claimed its second, most high-profile management victim.

“The management certainly hasn’t helped at Airbus,” says Butterworth-Hayes. “As a result you have a company that has different views of the market, and different approaches, alongside immensely complicated technical problems.”

Less than three months later, and another hammer blow following an audit of the entire A380 production process.

A further delay of up to 12 months was announced - the first A380 would now be delivered to Singapore Airlines in October 2007, 20 months after the carrier had intended to start services.

With the first deliveries now due to be almost two years late, and the firm facing operating losses of US$3.6bn (as part of a US$6.1bn anticipated drop in profits) over the next four years, Airbus moved ruthlessly to install a series of cost-cutting measures.

Humbert’s successor, Christian Streiff, outlined a series of sweeping changes to the board. He demanded job cuts, and urged that all production of the A380 be shifted to Airbus’ headquarters in Toulouse. Meanwhile, single-aisle jet programmes, including the A320, would be concentrated in Hamburg.

Behind the scenes, EADS was also preparing to take full control of the ailing aircraft manufacturer. BAE decided to dispose of its 20% minority stake, for just over US$3.5bn, reportedly wary of further delays to the troubled project. In a statement, BAE said it thought that, “a significant amount of management focus, time and investment would be required to address the issues currently facing Airbus”.

At the time, EADS co-chief executive Louis Gallois maintained a brave face, saying that BAE’s comments had come as no surprise. “We knew we were facing considerable challenges. We are working on them and we will have a complete overview in a few weeks,” he said.

However, it quickly became apparent that Streiff’s proposals were unpopular politically. In Germany, where Airbus employs over 12,000 people, the pressure began to mount on EADS to reign in their fiery new chief executive.

German finance minister Peer Steinbrueck urged Airbus to safeguard jobs in Germany, and thus in the week that EADS agreed to take full control of Airbus, they also demanded that Streiff permit them close, day-to-day oversight of the aviation firm.

All this was too much to take for Streiff, who demanded autonomy and a free hand to run the firm, making decisions based on commercial rather than political concerns. To the indifference of the majority of the EADS management, who had grown tired of Streiff’s unwillingness to play political ball, the new chief executive walked just two months after taking the reigns.

“There’s certainly a tension between EADS and Airbus,” says Butterworth-Hayes. “There would not be an Airbus without the French, who have been the key driving force both in political and economic support. They have been an absolutely vital element in the company’s historical success.

“Going forward, however, you have to ask whether that model can continue,” he adds.

“There has to be a cultural change – the French system works extremely well when you’re trying grab market share; when you need a lot of money and investment; when you need time to develop competitive products. It seems to me it works less well when you’re in a position of superiority and you have to continue that momentum.”

Such shenanigans have only served to worsen the moods of airlines, whose long-term business strategies are increasingly being threatened by Airbus’ woes. After many months of refusing to comment on speculation that the A380 project was in trouble, many of the manufacturer’s key clients have attacked Airbus.

Though no airline has yet cancelled orders, several – including Emirates, Qantas, Virgin and Singapore – have expressed deep disappointment at the latest delays. In a strongly-worded statement, Emirates said that it was “reviewing all its options” and that the delay will “definitely have an impact” on growth. Virgin said the delays had “serious implications” for growth, whilst Qantas was “disappointed” by the delays.

Air France, in addition, has already announced plans to seek financial compensation for the postponed delivery of 10 A380s. Analysts predict that compensation is a likely option for each airline, and Airbus is braced for a massive bill, which some forecast could reach US$2.5bn.

The A380s’ delivery delay now stands at two years, and British aircraft engine-maker Rolls Royce Plc has even suspended the production of engines for the ‘superjumbo’. Even more alarmingly for Airbus, the manufacturer has now calculated that it must sell 420 A380s just to break even on the project – a giant leap from the previous estimate of 270.

Moreover, the A380 problems have impacted upon work on other projects, notably the A350 ‘Widebody’, which has suffered as a result of the short-term cashflow crisis.

“Potentially with the A350 they have a very powerful product,” says Butterworth-Hayes. “The problems with the A380 have affected work on the A350, which is the really important one for Airbus. The A350 is their next cash cow, and they really could have done without the knock-on from the A380.”

At the beginning of this month, Airbus announced that there would be “painful” job losses as a direct result of the A380 fiasco. A week later, the firm’s latest chief executive, Louis Gallois (who is also co-head of EADS) revealed that the company was to cut 66 head office staff, and freeze the salaries of senior managers. The firm said the job losses would be “split roughly half and half” across its twin headquarters in Munich and Paris, which employ 666 staff in total.

In addition, thousands of Airbus workers - many of whom were present as the A380 touched down for the first time in Toulouse – are expected lose their jobs over the coming months.

These are bleak days for the European aviation giant, and its parent company are feeling the pressure as German motor giant DaimlerChrysler is considering reducing its own shareholding in EADS. It has signaled its intention to sell a 7.5% stake – a move that has forced the German government into considering buying a stake.

Worried that Germany’s influence within EADS could diminish if non-Germans bought Daimler shares, German finance minister Peer Steinbrueck intervened, saying: “We can’t let Airbus fall headlong because some mismanagement has left it in a difficult position.”

Meanwhile, Airbus’ chief rival is taking advantage of the European firm’s troubles. Just 18 months ago, on the day of the A380’s maiden flight, US manufacturer Boeing quietly published their quarterly results for the first three months of 2005.

Profits had slipped – down to US$535m from US$623m in the same period the previous year. As Airbus wowed the aviation world with their ‘superjumbo’, it looked as though Boeing were slipping further behind the Europeans.

Boeing chief executive, James Bell, congratulated Airbus, but reinforced the US manufacturer’s belief in their new aircraft, the ‘Dreamliner’ – a project that is, today, on target and scheduled to arrive years sooner than Airbus’ equivalent, the A350.

“Boeing are doing extremely well – the ‘Dreamliner’ looks like a very fine aeroplane and it’s just what the market wants,” says Butterworth-Hayes. “It’s extremely adaptable, and it’s going to be 15-20% cheaper to operate than the competitor. You have to say at the moment that it looks pretty good for Boeing.”

“Of course we thought the A380 would fly, that is what aircraft are made to do,” said Bell, 18 months ago. “But we thought our bet on the mid-range [airline] market was a better bet, and we still do.”

Right now, as Airbus fights to keep the A380 project alive, the shrewd money might well be on their rivals on the other side of the Atlantic. The ‘future of flight’, it appears, has a long way to go.

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