As Airbus slowly but steadily overtook Boeing Co. (BA) as the No. 1 global aircraft maker in the past decade, the biennial Paris Air Show became the showcase for the European planemaker's triumphs. This year's event, which opens on June 13, was to be no exception. The public would get its first close look at the A380 double-decker megaplane, and Airbus officials hinted at a sheaf of orders for their next new jet, the midsize A350.
Instead, the show could highlight a growing list of woes at the company, based in Toulouse, France. On June 1, Airbus acknowledged that the first deliveries of the A380 will be delayed up to six months, from mid-2006 until early 2007, due to unspecified production difficulties. Then Emirates airlines, which had been expected to announce a big order for the A350 at the air show, said it was not ready to make a decision. Airbus sales chief John J. Leahy, who said earlier that he might announce more than 100 orders for the A350 in Paris, now says big orders could come "a week or two after."
Has Airbus lost its mojo? The past few months have been rough. Boeing, after trailing Airbus on orders for the past three years, has racked up 255 orders as of the end of May, compared with only 196 for Airbus. Even more worrisome, Boeing's new 787, which boasts better fuel efficiency thanks to lightweight composite materials and next-generation engine design, is proving a hit with airlines. They have placed orders and commitments for 266 of the jets, while Airbus has yet to announce a major deal for the competing A350. Meanwhile, the A380's order book has been stuck at 154 since last year.
Delivery delays for the A380 mean Airbus is likely to owe airlines tens of millions of dollars in penalties. And because the bulk of an aircraft's purchase price is paid at the time of delivery, Airbus won't get the bump in revenues it was expecting from the roughly half-dozen A380s that were set for delivery in 2006.
Providing some relief is the fact that the impact on the bottom line will be minimal. Discounts of over 30% offered to early customers on the A380, which lists for about $250 million, meant that margins were already going to be narrow, says Ben Fidler, a London-based analyst for Deutsche Bank (DB). In keeping with standard industry practice, the late-delivery penalties are likely to be paid via noncash arrangements, such as discounts on spare-parts purchases and crew training, that could be spread over several years.
The result? If A380 deliveries begin in 2007, as Airbus now predicts, the delays will cost it from $150 million to $200 million, Fidler reckons. That compares with the $2.3 billion in operating profits Airbus booked last year. Profits are also picking up as research-and-development spending on the A380 winds down. That, and Airbus' backlog of orders for other planes, is giving a nice lift to its parent, European Aeronautic Defence & Space Co., which posted first-quarter profits of $403 million, a fivefold rise over the same period in 2004, with sales up 16%, to $8.6 billion.
But in the brutal aircraft sales wars, image is as important as numbers, and here Airbus is struggling. Partly it's just bad luck. Leahy, the supersalesman who has led Airbus to market dominance, was sidelined by illness this spring just as Airbus was hoping to score A350 launch orders from Air Canada (ACHAQ) and Northwest Airlines Corp. (NWAC). In his absence, Boeing not only lured those customers away with its 787 but also racked up a $7 billion order from Air India for 50 long-range jets.
It's also true, though, that Airbus has compounded its troubles with poor judgment. The company damaged its credibility by staging extravagant A380 launch ceremonies earlier this year at which Airbus execs bragged that the plane was on schedule, even though, industry watchers say, they almost certainly had learned months earlier that delays were likely. Airbus officials say that while they were aware of potential delays earlier, the magnitude of the problem didn't become evident until recently. The company also bungled its public relations by infuriating Indian officials with complaints that Air India had been unfairly biased against Airbus when it ordered Boeing planes.
A savvy CEO might have avoided such embarrassments, but Airbus didn't have one. Last December its longtime boss, Noël Forgeard, was named co-chief executive of EADS, touching off a Franco-German struggle over his replacement at Airbus. The dispute still hadn't been resolved as BusinessWeek went to press, though Airbus Chief Operating Officer Gustav Humbert is widely expected to get the job. While Humbert is a respected manager, some fear Forgeard will continue to dominate Airbus. The leadership uncertainty has put Airbus at a disadvantage because customers often expect top brass to seal deals personally. "With no CEO and no John Leahy, there was nobody to fight at the same weight as Boeing," says Doug McVitie, a Scottish aerospace consultant who formerly worked at Airbus.
Leahy faces a tough rival in Scott E. Carson, a Boeing veteran who was brought in last December to juice up Boeing's sales operation. Carson has been given wide discretion to offer big discounts to customers.
To resume its upward trajectory, Airbus urgently needs orders for the A350. It's now clear that the company has nothing in its lineup to lure customers away from Boeing's 787. While Airbus has a backlog of 1,535 orders for other planes, vs. 1,225 for Boeing, the 787 could enable Boeing to open a wide sales lead that would hit Airbus' bottom line starting in '08.
In marketing the A350, Airbus has been hampered by uncertainty over its design and financing. As recently as last fall, the plane was promoted as a modest revamp of the existing Airbus A330. But as airlines began showing interest in the all-new 787, Airbus said it would develop a more ambitious plane costing up to $5.5 billion. "By not having the right airplane soon enough, we lost some orders," concedes Leahy.
What's more, the higher A350 price tag has led Airbus to apply for low-interest loans from European governments, spurring the U.S. to complain to the World Trade Organization that such loans are unfair subsidies. European officials suggest that they might curtail or eliminate such loans in exchange for having Boeing forgo some tax breaks and financial aid it receives from foreign governments.
With so many uncertainties, the most interesting spectacle at this year's Paris show may not be gyrations of planes over Le Bourget but the maneuverings of Airbus and Boeing on the ground.
By Carol Matlack in Paris, with Stanley Holmes in Seattle