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The Escalating Woes at Airbus

Just when things were going so well for the European plane maker, two major customers demand costly redesigns. The likely winner: Boeing

Airbus, struggling to gain altitude against a couple of archrival Boeing's (BA) hot-selling models, has hit two major patches of turbulence in the past few days.

On Mar. 28, the European planemaker's biggest customer, the International Lease Finance Corp., a Los Angeles-based subsidiary of American International Group (AIG), called for a top-to-bottom redesign of the A350, the plane Airbus plans to launch as a rival to Boeing's 787 Dreamliner.

FUEL FACTOR.

  Then, on Mar. 30, Airbus acknowledged that Dubai-based airline Emirates, the biggest buyer of its A340 widebody plane, has delayed a $4 billion order for 20 of the aircraft because it wants them redesigned to match the fuel efficiency of Boeing's competing 777 model.

This adds up to a big embarrassment for Airbus. But even more important, these public rebukes by two key customers are likely to cause severe problems for Airbus's financial-planning and marketing efforts.

The bad news on the A350 came from Steven Udvar-Hazy, ILFC's chief executive, who told an aviation-industry conference in Orlando that the new Airbus would sell poorly unless it was redesigned to increase fuel efficiency -- a key selling point of the 787. ILFC is Airbus's largest customer and has ordered a dozen A350s.

REDESIGN? WHAT REDESIGN?

  In remarks at the same conference, Henry Hubschmann, president of General Electric Co.'s (GE) aircraft-leasing unit, GECAS, said he agreed with Udvar-Hazy. GECAS has ordered 10 A350s. Neither executive said whether they might cancel their orders if the changes weren't made.

BusinessWeek Online was unable to reach either Udvar-Hazy or Hubschmann for this story, but their comments were confirmed by participants at the conference, organized by the International Society of Transport Aircraft Trading.

The two executives' comments were an unusually sharp and public blow to Airbus, whose top salesman, John Leahy, was present at the conference. Airbus CEO Gustav Humbert phoned Udvar-Hazy and Hubschmann soon after the meeting, an Airbus spokeswoman said. However, she said Airbus has no plans to redesign the A350. Plans for the aircraft's design were finalized in January, "and that's the aircraft we are going to build," she says.

FEW OPTIONS.

  Yet industry watchers say Airbus will probably be forced to revamp the plane, even though the changes suggested by Udvar-Hazy would boost development costs from $5.3 billion to as much as $10 billion. Airbus' current design is based on its existing A330 widebody plane, with the addition of more fuel-efficient engines and increased use of lightweight composites.

Five days before the conference, Udvar Hazy told BusinessWeek Online that unless it was redesigned, the A350 would sell poorly against the 787, perhaps winning as little as 25% of the market. "Airbus has boxed themselves in on the A350," he told BusinessWeek Online. "Airbus has to make some changes."

Even before the criticism by Udvar-Hazy, Airbus was struggling to match Boeing's sales success with the 787. Since putting the A350 on the market in December, 2004, Airbus has logged 100 firm orders -- including an order for nine planes signed on Mar. 30, 2006, by Finnair. That compared with 291 orders booked by Boeing for the 787 since May, 2004 (see BW Online, 1/17/06, "Why Airbus Can't Glide on 2005").

FINANCIAL SQUEEZE.

  While redesigning the A350 might attract more customers, it would cause big headaches for Airbus. It would delay the launch of the plane, now scheduled to enter service in 2010, about two years after the 787. That would give Boeing an edge in snaring orders from carriers eager to expand their fleets quickly.

Moreover, it's unclear how Airbus would finance R&D for a more-expensive A350 without loans from European governments. Airbus has used such loans in the past to pay for up to one-third the cost of developing new planes such as the doubledecker A380 (see BW Online, 3/14/06, "Airbus's Jigsaw Plane"). But now the U.S. has complained to the World Trade Organization that the loans amount to unfair subsidies.

Airbus, in hopes of reaching a negotiated settlement in the WTO dispute, until now has not requested any government loans for the A350. But analysts say Airbus can't afford to finance a $10 billion project out of current cash flow (see BW Online, 10/7/05, "Airbus' A350: Flying into a Storm?").

FASTEN THOSE SEATBELTS.

  Emirates's decision to delay taking delivery of 20 A340s will add to the financial pressure, since most of an airplane's purchase price is paid at the time of delivery. Emirates President Tim Clark told BusinessWeek Online recently that he was considering such a delay in hopes of forcing Airbus to develop a new engine and make other modifications that would boost fuel efficiency. Making such changes would cost Airbus hundreds of millions of dollars.

By some measures, 2005 was Airbus' best year ever. It delivered a record 378 planes to airlines, well ahead of Boeing's 290 deliveries. It booked an astonishing 1,055 aircraft orders, ahead of Boeing's 1,002 tally. Largely because of Airbus' strong performance, its parent, European Aeronautics Defence & Space Co., on Mar. 8 announced profits were up 39%, to $2 billion, on sales of $41 billion. But if the events of the past few days are any measure, Airbus is in for a turbulent 2006.

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