Commentary: Earth to Airbus: What's the Flight Plan?

By Carol Matlack

Airbus Industrie Chief Executive Noël Forgeard can expect plenty of tough questions when the European aircraft maker holds its annual briefing for journalists and analysts on Jan. 17 in Paris. Just last summer, Airbus was reaping a record harvest of orders at the Paris air show and preparing for a big boost in production. Now it's being pummeled by the worst downturn in its 30-year history. Airbus' usually upbeat commercial director, John Leahy, said recently that aircraft orders this year could fall 60% below the 2001 level. That means revenues will remain anemic through 2003 and 2004, since orders are usually booked well over a year before the expected delivery date, and at least 80% of the purchase price is paid on delivery.

It's high time Airbus spelled out a plan to steer through this turbulence. It already has slashed projected deliveries to 300 in each of the next two years--30% below earlier estimates--as financially strapped customers delay or cancel scores of orders. But most analysts think those forecasts are still too optimistic and say deliveries could fall into the low 200s by next year. The slowdown couldn't come at a worse time. Over the next four years, Airbus is committed to spend at least $10.7 billion on developing the A380, a double-decker superjumbo scheduled for launch in 2006. Operating profits, which reached $1.3 billion in 2001 on sales of $17 billion, will be cut in half this year and could disappear by 2003 unless costs are cut.

So far, Airbus' response has been oddly muted. After September 11, the company froze a planned expansion of capacity, and it recently announced 500 job cuts in Britain. But no layoffs are planned in continental Europe, where most of its 44,000 employees work. Eliminating jobs at its French, German, and Spanish factories would be politically difficult and costly because of tough anti-layoff laws. Compare that with U.S. rival Boeing Co. (BA ), which axed 30,000 jobs and took a $700 million fourth-quarter write-off.

True, Airbus doesn't need to slam on the brakes as sharply as Boeing did. Boeing's commercial jet business has shrunk, from a peak of 620 deliveries in 1999 to an estimated 375 this year. Airbus, by contrast, has hiked production over the past eight years as it grabbed market share. Forgeard has said that Airbus can remain profitable even if deliveries slide below 300, although some employees might be placed on reduced work schedules if the number drops to 270. As for mass layoffs a la Boeing? In an interview with the newspaper Le Monde in November, Forgeard said: "That's the American management styleto appear to take radical steps to reassure investors."

Trouble is, investors do need reassuring. Shares in European Aeronautics Defense & Space Co. (EADS), which owns 80% of Airbus, have slumped 40% in the past year. Boeing stock is down 30% but has rebounded more strongly than EADS since September 11. It's hard to see how Airbus can remain profitable on its present course. "Their cost base is clearly sized for a lot more than 300 deliveries," says analyst Nick Cunningham of Schroder Salomon Smith Barney. And while Airbus has won tentative approval for its first military contract, the A400M transport plane, that project won't generate revenues for several years.

What should Forgeard do? Certainly, he must resist the urge to lure back customers with the deep discounts that Airbus has used to build market share in the past. Cutting costs is essential. Although laying off workers will take time, Airbus should start the process now, because 2003 and 2004 are shaping up to be even worse than this year. In the meantime, the company could put some employees on reduced work schedules, cut research and development spending, and slow down the A380 project.

The crisis raises deeper questions about Airbus. Lately, it has sounded more like a babble of voices than a corporation. Even as Airbus stuck to rosy projections last year, some managers and EADS executives quietly warned analysts that forecasts would be cut. Public statements were baffling: Shortly after Forgeard said no layoffs were needed, Airbus announced 2,000 job cuts in Britain, then reduced the number to 500.

Such confusion is no great surprise, given that Airbus was formed less than two years ago from a loose consortium of French, German, and Spanish companies. But it's bad news for EADS, which--since the planemaker isn't publicly traded--is treated by investors as a proxy for Airbus. EADS, itself the product of a delicate cross-border merger, may hesitate to push Airbus into a politically difficult downsizing. If the numbers don't improve soon, though, it may have to do just that.

Matlack covers European business from Paris.

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