Oct. 30 (Bloomberg) -- Air France-KLM Group takes delivery today of its first Airbus A380 double-decker jet fitted with a lounge bar and on-demand video, luxuries that have complicated assembly of the plane already plagued by production delays.

Letting airlines take travel comfort to the next level with showers, enclosed suites or bar lounges has made the A380 a hit on routes in Asia where the super-jumbo operates. For Airbus, the gizmos have spawned engineering woes that haunt a program reeling from cost overruns, sluggish demand and order deferrals.

“They customized the plane to death, and that’s preventing them from reaching the production levels they’d talked about,” said Rupinder Vig, an analyst at Morgan Stanley in London. “The other issue is that customers clearly don’t want the plane now as much as they wanted it a year or two ago.”

Air France is the first European airline to receive the world’s largest passenger aircraft, which will link Paris and New York after its Nov. 20 maiden voyage. Airbus, the world’s largest maker of commercial aircraft, hands over the jet, which seats more than 500 passengers, at a ceremony in Hamburg today.

When the A380 entered service in October 2007, it was two years late and $6 billion over its original $12 billion budget. The delays were partly the result of French and German engineers using different software tools. As a consequence, cabins were improperly wired, and the work had to be redone by hand.

‘A Challenge’

Customizing the A380 for carriers is “a big challenge,” Airbus Chief Executive Officer Thomas Enders said in a Bloomberg Television interview today. Giving customers wide latitude with design and cabin outfit has helped them generate higher revenue per passenger, making it worth the effort, said Stefan Schaffrath, a spokesman. And while many airlines have postponed deliveries, not one has canceled the passenger jet, Schaffrath said.

Airbus introduced a single design platform so the planes could be assembled by automation starting from the 26th model. That move, started this year, proved slower than foreseen, partly from challenges to get workers up to speed on the unified software. With Air France today, Airbus will have delivered just seven A380s this year, compared with its target of 13.

Nick Cunningham of Evolution Securities in London says Airbus was under pressure to grant a previously unheard-of customization level. The aircraft itself didn’t bring major efficiency benefits over smaller jets such as Airbus’s 250-seat A330-200 widebody model, he said. The additional space also prompted airlines to consider cabins impossible on other jets.

Gizmos

“They needed to sell the plane on other things,” said Cunningham. “They had to offer a lot of customization, such as showers, and all sorts of gizmos.”

By contrast, Boeing Co. kept customization to a minimum when it began offering the 787, letting clients visit a showroom in Seattle where they could pick from pre-selected options. That plane, too, is more than two years behind schedule, though for reasons relating to materials, design and supplier bottlenecks.

The additional space on the Airbus has allowed Singapore Airlines, the A380s first customer, for example, to add private cabins that feature Italian leather seats and full-sized flat beds. There is no plan to add showers or bars to the cabins for now, said Nicholas Ionides, a spokesman for the airline.

When Airbus first disclosed the magnitude of the design flaws more than three years ago, the company slashed initial targets. By October 2006, a new schedule called for one plane being delivered in 2007, 13 in 2008, 25 in 2009 and 45 in 2010.

Behind Target

Airbus only came through on the first year. In 2008, it handed over 12 jets, and dropped the target for 2009 to 18 at the start of this year, before lowering it further to 14, and subsequently 13. For 2010, Airbus is officially targeting “more than 20”, or less than half the number planned earlier. Vig, the Morgan Stanley analyst, predicts deliveries closer to 13.

Airbus began offering the plane in December 2000 and estimates it’ll get at least 700 orders within 20 years. So far, it has 200 firm orders from 16 customers. They include 14 airlines, as well as airplane leasing company International Lease Finance Corp. One private customer, Saudi billionaire Prince Alwaleed bin Talal, also ordered a jet.

The last new order came from British Airways Plc in September 2007, for 12 aircraft. No new customer has signed up since. European Aeronautic Defence & Space Co., Airbus’s parent, estimated in 2006 it would break even on its A380 investment after selling 420 planes. The company had previously set that mark at 300 units. Since 2007, EADS has refrained from public targets, saying Boeing doesn’t disclose such figures either.

Profitable Project?

“The critical question is: Are they ever going to make any money on this plane?” said Hans Weber, the chief executive officer of consulting company Tecop International that advises companies including Boeing and EADS.

Weber estimates Airbus is selling the first 100 jets at a discount of 40 percent on average off the initial list price of $240 million. The price for an A380 has since risen to $327 million. He also puts development costs at about $20 billion.

The slow production pace is creating additional cost overruns. Inventory has built up before Airbus needs the parts. The A380 is pieced together in a cross-border effort, with the wings coming from Wales, the tail from Germany and Spain, and the cockpit from France. The pieces are sent by ship, barge and truck to Toulouse in southwestern France, where the plane is assembled before flying to Hamburg for cabin outfitting.

Slumping Travel

To be sure, the A380 has to contend with turbulences beyond the company’s control. The global airline industry may lose $11 billion this year, the International Air Transport Association predicted in September, widening its June forecast by $2 billion. Asia-Pacific carriers, a key customer group for the A380, will account for a third of that, the group predicted.

Of the 14 airline customers for the plane, 10 have asked to push back at least some A380 deliveries. Yesterday, Deutsche Lufthansa, which has 15 on order, announced that it would defer some A380s. Other postponing carriers include Singapore Airlines, Kingfisher Airlines in India, Qatar Airways, Air France, and Virgin Atlantic. The biggest single customer for the jet is Emirates, which eventually aims to operate 58 A380s.

Still, wherever the A380 does fly, passengers are flocking to board the plane. Singapore Air flew more than 1.6 million passengers on the A380 since flights with the 471-seat plane began in October 2007, filling more than 80 percent of seats on average, said Ionides, the airline spokesman.

“It’s definitely an attractive flagship for airlines,” said Richard Aboulafia, vice president of the Teal Group, a Fairfax, Virginia-based forecaster. “But it will never be the mainstay of anyone’s fleet.”

To contact the reporters on this story: Andrea Rothman in Toulouse, France at aerothman@bloomberg.net

Last Updated: October 30, 2009 06:26 EDT