Full Throttle for Airbus' Superjumbo Jet
While the global aviation industry struggles to pull out of its worst downturn ever, European airplane manufacturer Airbus Industrie seems to be maintaining altitude. On Mar. 21, Airbus broke ground in Toulouse, France, for the factory where it plans to build the biggest commercial jet ever. The Airbus A380, scheduled to begin service in 2006, will be a double-decker plane with room for more than 555 passengers.
The new aircraft is a direct competitor to the Boeing 747, now the largest plane on the market. And it's a big bet for Airbus, which estimates it will spend $10.7 billion to develop the A380 by 2006. The project won't break even, most analysts figure, until more than 250 of the A380s are sold.
Airbus, however, contends that commercial aviation is already rebounding from the double whammy of global recession and last September's terrorist attacks. The company says it's confident it can avoid the kind of painful downsizing that its archrival Boeing (BA ) is undergoing. Last year, Boeing announced it would lay off 30,000 employees.
Indeed, Airbus has gained market share as Boeing has dramatically curbed production. The two companies now each claim about 50% of outstanding orders for big passenger jets. The European Aeronautics Defense & Space Co. (EADS), which owns 80% of Airbus, announced on Mar. 18 that Airbus posted a healthy $1.45 billion in operating profits last year on $18 billion in sales.
Still, Airbus faces financial turbulence. EADS said it expects Airbus' earnings to drop in 2002 (it didn't specify by how much). The plane maker will deliver fewer aircraft this year. At the same time, it's pouring close to $400 million into research and development on the A380 and committing an extra $1.6 (a hike of some 50%) in loans to help financially strapped customers buy planes.
Another concern is the probe into the crash of an American Airlines Airbus A300 jetliner last Nov. 12, shortly after takeoff from New York's John F.Kennedy airport. In the crash, which killed 265 people, the vertical tail fin and rudder broke off after the plane experienced unusually sharp rudder movements -- raising concerns that the carbon-composite material used in the tail might be prone to damage from unusual stresses or movements.
The National Transportation Safety Board said in early March that it found signs of tail damage in another Airbus plane that encountered severe turbulence over Florida in 1997. Now, airlines are voluntarily testing six other Airbus A300s and A310s after a review of their flight records showed they also encountered ususual stresses that might have caused tail damage. Airbus, while declining to comment in detail, said that it concurred with the additional testing and is cooperating fully.
BusinessWeek Paris Correspondent Carol Matlack visited Airbus headquarters in Toulouse and talked with Executive Vice-President Philippe Delmas and Chief Commercial Officer John Leahy. Following are edited excerpts of their conversation:
Q: What's the evidence that commercial aviation is recovering? Delmas:
Q: What's the evidence that commercial aviation is recovering?
Delmas:The load factor is growing again in Europe, the U.S., and Asia. But the yield [profit per passenger] is still pretty low, because the airlines are still trying to get people back [by discounting fares]. And capacity has been decreased sharply.
Q: What does this mean for aircraft manufacturers? Leahy:
Q: What does this mean for aircraft manufacturers?
Leahy:We're going to see a trough in orders this year. You'll have 300 or 400 total orders, industrywide. [Orders in 2001 totaled 710 -- 375 for Airbus and 335 for Boeing.] The trough in deliveries will come in 2003. We'll see about 600 deliveries industrywide in 2003, of which we expect to do about 300. [This year, total deliveries are projected at about 680 -- 380 for Boeing and 300 for Airbus.]
Q: What about orders for the A380? Leahy:
Q: What about orders for the A380?
Leahy:We've got 97 firm orders, which is ahead of our business plan. From here on, we expect to pick up about one key customer a year, with each customer ordering in the range of 5, 10, to 15 aircraft. If we achieve that, we'll be happy.
Q: The Japanese market is critical to the success of the A380, but so far Airbus hasn't awarded any major contracts to Japanese industry, which many people think is essential before Japanese carriers order the plane. Right now, the Japanese carriers fly Boeing 747s. Leahy:
Q: The Japanese market is critical to the success of the A380, but so far Airbus hasn't awarded any major contracts to Japanese industry, which many people think is essential before Japanese carriers order the plane. Right now, the Japanese carriers fly Boeing 747s.
Leahy:We've had no major breakthroughs there. But remember, whether the Japanese airlines buy it or not, the A380 will be flying into Japan by 2006 [because customers such as Virgin Atlantic Airways plan to use it on Japanese routes]. That's going to create great competitive pressure on the Japanese carriers, because the A380 costs less per passenger mile. And remember, the 747 is at the end of its life cycle. It's a great product, but it's been around for more than 30 years. The only 747s being sold now are for freighters (see BW Online, 2/28/02, "The Final Horizon for Boeing's 747?").
Q: Post-September 11, we've seen a big upsurge in discount air travel in Europe. But it seems most of these carriers prefer the Boeing 737. For instance, Dublin-based Ryanair recently ordered up to 150 Boeing 737-800s. Leahy:
Q: Post-September 11, we've seen a big upsurge in discount air travel in Europe. But it seems most of these carriers prefer the Boeing 737. For instance, Dublin-based Ryanair recently ordered up to 150 Boeing 737-800s.
Leahy:There's a real myth out there that the 737 is preferred by low-cost carriers. Carriers like [New York-based] JetBlue are showing that if you're well-financed, you will choose the Airbus A319 and A320, [though] it's true that if you're starting out and you can only buy secondhand planes, you might look at the 737.
Q: What about the rumors we often hear that European governments are subsidizing the A380? Delmas:
Q: What about the rumors we often hear that European governments are subsidizing the A380?
Delmas:Under a 1992 agreement [between the U.S. and European Union], Airbus can receive refundable loans from EU governments for up to 33% of the development cost of an aircraft. On the A380, we expect to receive refundable loans totaling $3.1 billion. These will have to be repaid in a maximum of 17 years after they're disbursed. And the interest rate must be realistic -- on the A380, it will be in line with the interest rates that big utility companies are paying.
Q: How will the A380 affect Airbus' profitability the next few years? Delmas:
Q: How will the A380 affect Airbus' profitability the next few years?
Delmas:We'll have a massive surge in research and development spending. But our operating profits clearly will not decrease. Will our [net] profits decrease slightly? Yes. Will they collapse? No.
Q: Is Airbus jeopardizing its financial health by extending more loans to customers? Delmas:
Q: Is Airbus jeopardizing its financial health by extending more loans to customers?
Delmas:No, on the contrary. Just five years ago, these [customer loans] were above 50% of our total turnover. But since then our financial exposure has been declining every year. Now it's below 20%. This is a remarkable feat.
Q: With air carriers still hurting financially, are you offering deeper discounts to keep sales up -- and if so are you at risk of hurting your profit margins? Leahy:
Q: With air carriers still hurting financially, are you offering deeper discounts to keep sales up -- and if so are you at risk of hurting your profit margins?
Leahy:Prices are a little bit lower now than they had been, but not that much. Everyone understands that this is a cyclical industry. Just yesterday, I had a major U.S. carrier tell me, "This is the right time to buy aircraft." But we have no intention of having a lot more than 50% of the market. As long as no one suddenly tries to take a lot more of the market, it shouldn't be a problem.
Edited by Thane Peterson