The A380 Crisis: What Now for Airbus?

The planemaker vows to restructure, but job cuts will be politically tough and developing new aircraft while cash is tight won't be easy either

By Carol Matlack

Updated: 9:00 p.m. PT Oct 24, 2006 - -Transparency has never been Airbus' strong suit. For most of the company's 36-year history, its ownership structure has been complicated and its financing arrangements shrouded in confidentiality. Since it's not a listed company, outsiders have never gotten a close look at the books.

Now, the veil is starting to lift -- and what's underneath isn't pretty. In presentations to analysts and investors over the past few days, Airbus and its parent, European Aeronautic Defence & Space Co. [EADS], have provided a surprisingly detailed look at the financial and management crisis facing the planemaker.

Production snafus on the A380 megajet will cause a cash shortfall of nearly $8 billion from 2006-2010. Besides forgoing billions in expected revenues from aircraft deliveries, Airbus will have to shell out as much as $400 million to fix design problems that have snarled assembly of the plane, while paying millions in late-delivery penalties to customers.

It now looks as though the double-decker plane won't break even for at least a decade. And while Airbus as recently as two years ago was saying it expected a better than 20% rate of return on its investment in the A380, it now forecasts no better than 13%. At the same time, the weak dollar is clobbering Airbus by making its European-based production relatively more expensive than rival Boeing's. "Airbus is in a crisis," Senior Vice-President Harald Wilhelm told investors in his presentation. "To do nothing is not an option."

Litany of Inefficiencies

That's for sure. Airbus urgently needs to start developing another new plane to counter Boeing's fuel-efficient 787 Dreamliner, which is gobbling up the lucrative market for midsize wide-body jets. But developing a new plane, which Airbus has baptized the A350-XWB, will cost at least $10 billion. And analysts say that to stay competitive with Boeing, Airbus within three or four years will need to start making big investments to upgrade its A320 family of narrow-body jets.

EADS has told investors that it may issue bonds next year to strengthen its cash position. Airbus is also likely to seek loans from European governments for up to one-third the development costs of the A350-XWB, as it did for the A380 and earlier aircraft programs. And it may outsource some work on the A350-XWB, in hopes of lining up partners that would share the financial risk. But bonds, loans, and outsourcing still won't fill the financial gap.

That's why Airbus now promises a top-to-bottom restructuring of its operations -- and acknowledges that such a move is long overdue. Its presentation to analysts spells out a litany of inefficiencies, from disjointed purchasing to poorly organized production arrangements. Its restructuring plan, which the company promises to implement fully by the end of 2008, calls for slashing overhead, integrating balkanized operations, and introducing "lean" manufacturing techniques companywide.

A Revival Like Boeing's?

Could such a shakeup, along with a few well-placed cash infusions, get Airbus back on track again? Most analysts think it's possible -- so long as politics doesn't intervene. Streamlining the company's operations will require eliminating European jobs, probably thousands of them, from the current Airbus workforce of more than 55,000. Politicians and unions are already girding for battle against possible layoffs. The German government has even discussed taking a stake in EADS to help defend the country's interests.

So far, EADS and Airbus look to be holding firm against such pressure. White-collar job cuts are already under way in France and Germany. And Daimler Chrysler (DCX), EADS' key German shareholder, has spoken out against government involvement in the company.

The next few years could be pretty miserable for Airbus. But, just as its U.S. rival survived a near-death experience with the launch of the Boeing 747 more than 35 years ago, Airbus could recover -- and thrive. "There's a new spirit of reality and contrition" at Airbus, says Richard Aboulafia, an aerospace analyst with the Virginia-based Teal Group. "They're still not a listed company -- but they might as well be."