Airbus' Behemoth Hits Turbulence
Airbus' A380, the world's largest passenger jet, is turning into a mega-problem for Airbus and its parent, European Aeronautics Defense & Space (EADS). On June 14, EADS shares plunged 34% after the company acknowledged that A380 production delays would reduce operating profits by $2.5 billion for 2007-2010. The delays, caused by difficulties in installing electrical wiring systems, mean that some airlines now will have to wait about a year longer than expected to receive their planes.
"This announcement comes as a big blow," EADS co-Chief Executive Noël Forgeard, who as Airbus' former boss oversaw most of the A380's development, told analysts in a conference call. (For a look at how the A380 is assembled, click on "Building a Behemoth").
No kidding. The delays could prompt some airlines to cancel or scale back their orders for the 555-seat plane, and carriers that were considering the A380 might now take a second look at Boeing's (BA) competing model, a 450-seat stretch version of the Boeing 747. Airbus says there have been no cancellations so far, but the airlines clearly aren't pleased. "We are considering our position and will be engaging [in talks with Airbus] over the next few weeks," says a spokesman for Emirates Airlines, which accounts for 45 of the 159 planes on order (see BusinessWeek.com, 3/27/06, "An Airline with a Deafening Roar").
The latest snafu with the A380 could amount to far more than a public-relations nightmare for Airbus and EADS. More than 90% of an aircraft's purchase price is paid upon delivery, and Airbus originally expected to start pocketing fat payments, close to $200 million per plane, as the first planes were delivered this year. But now the first delivery, to Singapore Airlines, has been pushed back to the end of 2006, and Airbus says only nine planes will roll out of the factory in 2007, down from the 25 planned earlier.
Production schedules for 2008 and 2009 have been scaled back, too. The result: Some $2.5 billion in operating profits that EADS had been expecting over the next four years have vanished. By comparison, EADS is projecting operating profits this year of $4 billion to $4.2 billion (see BusinessWeek.com, 3/30/06, "The Escalating Woes at Airbus").
Moreover, landing new orders for the A380 looks increasingly difficult for Airbus. Not only have the production delays dented its credibility, but one of the plane's key selling points now appears in doubt. The A380 was designed to appeal to carriers at congested airports such as London Heathrow and Tokyo Narita, which hoped to make maximum use of their limited landing slots by squeezing more passengers onto a single plane. But safety concerns that turbulence from the big plane could threaten nearby aircraft now threaten to undermine that argument.
The International Civil Aviation Organization, meeting in Montreal in early June, let stand an earlier recommendation to require any jet landing behind an A380 to stay at least 10 miles behind it—twice the distance required for Boeing's 747. Airbus says it's still in talks with safety authorities, and that its own tests show that turbulence in the A380's wake is no greater than the 747's. But few new A380 orders are likely to come in until the issue is resolved.
The A380's mounting woes also raise the question of when, if ever, it will make a profit. Airbus initially said it would reach the breakeven point after selling 250 planes. But cost overruns have pushed up the plane's development cost from $12 billion to nearly $16 billion, so that even before the delays were announced, most analysts already reckoned the breakeven point would be above 300 planes. "My guess was 350, and now I am going to add to that," says Nick Cunningham, an analyst at the London brokerage Panmure Gordon. Cunningham figures the A380's total development cost now will rise even higher, since Airbus won't be able to recover penalties and other losses related to the delays.
The squeeze on the bottom line could hardly come at a worse time. Over the next few years, Airbus will need to spend at least $10 billion to develop a new wide-body plane to counter Boeing's all-composite 787 Dreamliner. Underscoring the urgency of that project, Singapore Airlines on June 14 announced a $4.5 billion order for 20 Dreamliners.
Singapore, a global industry leader, had been heavily courted by both Boeing and Airbus (see BusinessWeek.com, 5/29/06, "Airbus Has a Bad Case of Jet Lag"). At the same time, Airbus is under pressure to revamp or replace its long-range A340 wide-body model, because most airlines are opting for Boeing's more fuel-efficient 777.
With less cash than expected coming in from the A380, it now seems almost certain that Airbus will seek loans from European governments to cover up to one-third the cost of developing any new planes. That could inflame a trade dispute at the World Trade Organization, where the the U.S. has complained that such loans amount to an unfair subsidy.
With the A380 in so much trouble, could Boeing lure away customers with its stretch 747? The new 747 is set to enter service in 2009, and so far Boeing has sold only a handful of planes, mainly freight versions. A mass migration from the A380 to the new 747 seems unlikely, though. The A380 is so much bigger—it can accommodate up to 800 passengers, though few carriers plan to carry that many—that it's not really comparable to the 450-seat Boeing plane. Despite Emirates' disappointment with the A380 delays, a spokesman says the airline is unlikely to switch to the new 747 because it has no other 747s in its fleet.
At least, Airbus can console itself that Boeing faces its own problems in launching a brand-new plane. The U.S. company has already run into production glitches on the 787, an unusually complicated project because it's the first commercial jet made entirely of lightweight composite materials (see BusinessWeek.com, 6/19/06, "The 787 Encounters Turbulence"). In this high-risk, notoriously cyclical business, he who crows today can easily find himself crying tomorrow.