On the face of it, yesterday was a good day for Airbus.
Fraught with problems for over two years, the beleaguered European aircraft manufacturer has finally started securing orders on a range of aircraft. And not just on its problem-free varieties.
As well as three firm orders on the infamously delayed super A380 jumbo jet, the glitch-plagued A350 was flying off the shelves at the Paris Air Show.
Having managed to sell only 13 of them so far, more than a 100 have been sold in the past week alone. Not bad going for an aircraft that’s five years behind its closest rival…
But in the transatlantic duopoly that pits the Toulouse-based manufacturer against Boeing, Airbus still has a long way to go before it’s worrying its American rival once again.
Two years ago it was all so different. At the last Paris show in 2005, Airbus announced orders worth $33.5 billion, more than double Boeing’s $15 billion, as airlines salivated at the prospect of flying more passengers for less money in the company’s new A380 super jumbo jet.
With 35% greater passenger capacity than Boeing’s most recent 747 model, and 13% less fuel burn, it would be more cost effective and greener than ever. For companies like Singapore Airlines, looking to make the best use of limited slots in airports from Heathrow to Hong Kong, the prospect was too good to be true.
And so it was. Wiring and other technical problems have already set delivery of the A380 back two years. It’s set to cost Airbus parent company European Defence & Space Co (EADS) €4.8 billion in profit over the next four years.
Technically, the aeroplane is second to none. But then that was never the reason behind the prolonged delays. They, said one Airbus insider, stem from the chronically poor management that plagues the firm.
“What you have is an upper layer of management, who don’t want to hear bad news, and a lower one not keen on reporting it,” said the employee, who declined to be named. For example, miscommunication between the French and German factories originally led to cables in the A380 being too short, and thus incapable of interconnecting.
“It’s a big organisation that is expanding, so experience is getting laid thin,” he added. Meanwhile, engineers took the decision that it would be too costly and lengthy to retrain engineers on new design processes. With predictable irony, that conclusion set the project back even further. “Planning is done by engineers who don’t understand planning, who are making decisions without understanding the repercussions.”
So although Airbus may have stole the march on its US rival yesterday with the confirmation of new orders, it still has a long way to go before it can win back the confidence of the industry. Louis Gallois, the company’s 4th CEO in just two years, has already put a much needed restructuring plan in place. Airbus aims to close three factories and lay off 10,000 people in the next four years, thus saving the company €5 billion a year until 2010, and another €2.1 billion a year from that point
But if Airbus is to regain its crown, it will have to start selling more of its long range, wide bodied A350s, an aircraft that “is absolutely vital to the future of Airbus strategy,” says John Plueger, chief operating officer of Los Angeles-based aircraft leasing firm ILFC, on Bloomberg. “If it doesn’t go forward, Airbus faces big problems.” It had only 13 firm orders in place before the show for the plane, against 584 for Boeing’s rival aircraft, the 787 Dreamliner. So while the gap has narrowed slightly, it’s only just.
By the end of May, Airbus had reported 210 new orders for planes, Boeing 429 at the beginning of June. That should keep the Chicago based company, trading on a forward p/e of 20, ticking over nicely for a while. Meanwhile, shares in Airbus parent company EADS have dropped 4.5% to €24.28 since the scale of the problems facing the A380 were first revealed in June 2006. Boeing stock, in contrast, has risen 28% to $98.15 in the same period.
But it’s worth remembering that Boeing has found itself in similar straits before. In 1997, US assembly lines were forced to shut down for weeks because of mismanagement and parts shortages. So they outsourced simpler work, adopted Toyota-style lean methods on assembly lines and slashed the workforce. Boeing now employs over 55,000 people against 122,000 in 1998.
Now its Airbus’s turn for a comeback. “The 1997 production fiasco was Boeing’s epiphany. The mess surrounding the cost overruns, delays and production problems with the A380 is Airbus’s epiphany,” wrote aviation analyst Scott Hamilton back in October, ‘Just as Boeing came out of the 1997 mess a stronger company and competitor, Airbus will, too.”
With plenty of hurdles still to overcome, it’s probably too early for investors to be piling into EADS right now. But it’s certainly a story to keep an eye on.
Turning to the wider markets…
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In London, the FTSE 100 closed 28.9 points lower yesterday evening at 6,703. Paint and chemicals company ICI was the main mover, after Dutch rival Akzo Nobel put in a £7.2 billion bid for the company, which was subsequently rejected. Shares rose almost 16% to 634p.
For a full market report, see:London market close
On the Continent, the Paris CAC-40 fell 18 points to end the day at 6,087. The Frankfurt DAX-30 rose 4 points to 8,036.
In the U.S., the Dow Jones fell 26 points to close at 13,612, while the tech-heavy Nasdaq was basically flat at 2626.60. And the S&P 500 fell back 2 points to end the day at 1,531.
In Asia, the Nikkei added 14.09 points to 18,163.61, its highest close since Feb. 26. In Hong Kong, the Hang Seng soared 565 points, after speculation that China Mobile was set for a possible A-Share listing on the exchange. It closed at 21,582.
Crude oil approached $70 a barrel after Nigerian Unions threatened to strike this week. Oil for July delivery rose $1.05 to $69.05 a barrel yesterday. Brent oil prices for July were down 8 cents at $67.92 in New York yesterday.
Spot gold slipped to $656.60/658 on an ounce late in New York on Friday.
And in the UK this morning, Cadbury Schweppes said it planned to cut 15% of its workforce by 2011. 7,500 jobs will go at the company as part of a cost reduction plan, which they say will boost profit margins from 10.1% to the mid teens by 2011.
And our two recommended articles for today…
How the global economy has changed over the past 25 years
– Stephen Roach reflects on the key changes that have occurred over the past quarter century, from falling inflation to the rise of globalisation and a debate about the place of the US in the global economy that has just come full circle. For Roach’s analysis of this period of extraordinary transition – and thoughts on the future – click here: How the global economy has changed over the past 25 years
Three things you should know about taxes
– The Onassis team explore recently developments in the taxation field in their bid to help you beat the taxman. For clarification on tax relief rules for owner/manager businesses, an important deadline to watch out for – plus a legal way to defer tax – see: Three things you should know about taxes