Online Extra: Looking Down from the Airbus Cockpit

CEO Noël Forgeard says the toughest battle facing the No. 1 plane maker isn't over subsidies or market share, but productivity

Noël Forgeard packs a powerful competitive punch. When he took the controls at European plane maker Airbus in 1998, Boeing (BA ) was king of the aircraft business, supplying two-thirds of the world's big passenger jets. But within five years, Airbus had pulled ahead in aircraft orders and deliveries. It's set to claim 53% of the market in 2004, and at least that much next year. Clearly rattled, Chicago-based Boeing on Dec. 4 replaced its top sales executive, amid concerns over a thin order book for the 7E7 Dreamliner, a new fuel-efficient jet set for launch in 2008 that seats 210 to 250 passengers.

Forgeard's accomplishments don't end there. He has Airbus' nearly $16 billion project to build the A380 doubledecker jet, the biggest passenger plane ever, on schedule for launch in 2006. He has led the company's transformation from an unwieldy consortium of European aerospace outfits into a single integrated company, formed in 2000. And he has produced solid financial results, even during a brutal industry downturn.


  Forgeard, 58, in many ways personifies France's clubby business elite. He graduated from the prestigious École Polytechnique and held several government posts, including a stint in the mid-1980s as an aide to then Prime Minister Jacques Chirac. In 1987 he moved to the privately owned Lagardère aerospace group, where he became a protégé of the late Chairman Jean-Luc Lagardère, a legendary figure in French aerospace. On Dec. 17, with the backing of President Jacques Chirac and Lagardère's son, Arnaud, he was named co-chief executive of Airbus's parent European Aeronautics Defence & Space Co.

But Forgeard, who raises thoroughbred racehorses as a hobby, is no mere technocrat. His deft political touch helped defuse rivalries among the former French, German, British, and Spanish groups that were merged into Airbus. When the U.S. complained recently to the World Trade Organization that Airbus had gained an unfair advantage by using government loans to finance aircraft development,

Forgeard fired back that Boeing itself had obtained billions in subsidies. Moreover, he fanned the flames by promising to seek more government help for the A350, a midsize jet being developed to counter Boeing's Dreamliner.


  Yet Forgeard contends that the toughest battle facing Airbus isn't over subsidies or market share, but productivity. As a younger company with a newer product line and more modern factories, Airbus has long enjoyed an efficiency edge over Boeing. But that's changing fast, as Boeing adopts lean manufacturing techniques for hot-selling models such as the 737.

The Airbus CEO now is pushing to slash final assembly time on the 737's competitor, the A320, by 30%. But he'll have to stay on his toes, because Boeing is promising even more dramatic efficiency improvements with the Dreamliner. Forgeard sat down recently with BusinessWeek Paris Correspondent Carol Matlack at his office in Toulouse, France. Edited excerpts of their conversation follows:

Q. You've said Airbus is engaged in an "industrial battle that is unprecedented, focusing on costs." What exactly does that mean?


In civil aviation, not enough attention is paid to one of the main drivers of profitability, which is the production cost of airplanes. For four or five years, we have been in a deflationary market, where volumes were rather low. The only way to build profitability has been to lower costs. At the inception of our company [in 2000], we had 3% annual productivity improvement. Now we have 5% to 7%, and in some areas about 10%. Overall, our margins, before R&D, are about 5% higher than Boeing's. There is just one reason for that: Productivity.

Q. Earlier this year, you promised to achieve $2 billion in cost savings by 2006. How are you doing this?


Our company is organized around what we call centers of excellence, each of which is a little company within a company. Each of them is expected to keep pace with the overall decrease in costs. Each manages its own make-or-buy policy, deciding to subcontract when they can get lower costs, introducing new materials, proposing design changes, and investing in modern machine tools.

Q. Sounds like Airbus is quite decentralized.


It was quite centralized at the beginning. With the organizational changes made last February, it's now quite decentralized.

Q. What are your weak points on productivity?


We are good when the product is standardized, but we are not as good in terms of production costs when it is customized [when optional features are added at the customer's request]. I would like also to have more productivity in engineering.

Q. Airbus is winning big orders from low-cost carriers such as Britain's easyJet, which used to fly only the Boeing 737. But narrowbody planes have thin profit margins. Will you have to cut costs further to make money on these sales?


Not at all. A good recipe for having difficulties is to sell at a discount, and then say, "We'll make efforts to cut costs." When I joined Airbus, I saw that Boeing had put themselves in an awkward position by doing just that. We plan the prices in function of what we know our costs will be.

Q. In the past three years, Boeing has eliminated 30,000 jobs, while Airbus cut only a few hundred. Of course you have been gaining market share, so you haven't had to reduce production as Boeing did. But are there other reasons?


We have always been extremely keen not to increase our internal headcount. Today we have a ceiling of around 53,000 people, which is pretty low. We have extremely high levels of subcontracting, not only in production but in engineering. We subcontract more than 35% of our engineering, which is a very high number.

Q. Will you increase outsourcing even more?


The A380 is the first program where we have clearly outsourced major elements on a risk-sharing basis. One-third of the program is outsourced. Boeing is maybe going even further [by outsourcing the wings and other major elements of the 7E7 to Japanese suppliers]. And we shall go even further on the A350.

Q. What about China? Are you trying to do what Boeing did in Japan –- hire local contractors to build political goodwill and win more sales?


I have made a commitment to double, from 2007 to 2010, the amount of work we subcontract to Chinese industry. For 2007, $60 million in contracts are already in place. Also, I would like to take Chinese industry on board the A350 at a significant level. My ultimate goal is that Chinese industry becomes a risk- and revenue-sharing partner for the next new Airbus program [after the A350]. I would like Chinese industry to have the kind of status that Japanese industry has for the 7E7. We shall make transfers of technology to make this possible.

I am a great believer in China, and I think geopolitically it's what Airbus has to do. We shall also invest in Japan, but we will never be able to erase the legacy of Boeing and the remarkable work it has done there. In China we start on an equal footprint, and everything is possible.

Q> What's the overall outlook for Airbus the next few years? You're in a highly cyclical industry. And you're hurt by a strong euro, since aircraft are priced in dollars, but most of your cost base is in Europe.


Until 2006, we know where we're going. We have orders, we have margins underpinned by the order backlog, we are protected on [exchange] rates by our hedging. We have very good visibility. For 2007 and 2008, we will have the full effects of our savings plan. We will have the margins of the A380 that are coming, that are big, and we will be at the peak of the cycle. We have secured a level of profitability which is assured even if [dollar-euro exchange] rates are at 1.30.

The A380 in itself is a remarkable poison pill against the dollar rate. We developed it during a downturn, when the dollar rate was excellent. Some people think the A380 will burden the profit-and-loss statement of Airbus until 2015, but that's completely wrong. The A380 will help it, starting in 2007.

What we have to work out now is the period post-2008. What will the dollar rate be? We have to forecast for the worst. Then we shall have the next downturn coming. We may have to continue to have a high level of R&D spending. So, I am already thinking how to model our profitability after 2008. But it's not so bad to be secure for 2005, 2006, 2007, and 2008.

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