Turbulence Ahead

Recent Problems at Airbus:Bigger is Not So Beautiful

The French airline manufacturer Airbus might not be able to keep its wings in the air for long if crucial decisions continue as indicated by French and German politicians.

Airbus has been plagued by a drop in new orders, additional costs of producing the new Airbus A-350, and over €6 billion in losses associated with the A-380. This was on top of recent cancellations or deferrals by key customers like FedEx, UPS, Virgin Atlantic, and Thai Airways. With all these challenges, the last thing Airbus needs is to be influenced by political interests – especially when those interests may contradict the best interests of the company.

Airbus still seems unable to make serious corporate decisions without German and French politicians interfering | Photo: Creative Commons

The Airbus “Power 8” restructuring plan to cut 10,000 jobs over the next three years has been marred by political wrangling and pressure from the unions, with Germany convinced it is bearing the brunt of the cutbacks. While these cutbacks are also set to affect Britain and Spain, German and French political interests have been in the forefront of this controversy. The situation became so politically charged recently that German Chancellor Angela Merkel and French president Jacques Chirac made a joint statement promising that cutbacks will be “equal and balanced” in a restructuring plan expected on March 9th.

Complicating matters for Airbus and its parent company EADS (European Aeronautic Defense and Space Company) are a set of political barriers associated with these kinds of cutbacks. France and Germany each own a 22.5 per cent stake in EADS, and therefore a controlling interest. This gives the labor-friendly governments the ability to veto any plan to cut jobs, or as recently, severely reform it.

Airbus’ main competitor Boeing went through a similar restructuring plan in the late 1990’s, deemed necessary to maintain competitiveness, but culminating in the loss of thousands of jobs. From 1997-1998, Boeing was forced to close plants due to manufacturing delays and part shortages. Boeing Commercial Airplanes employed 122,000 workers in 1998. Today, it only has 55,000. Could Airbus ever be allowed to take such drastic steps?

The decline of Airbus seems to stem from prolonged delays with the A-380. In June 2005, Airbus announced a six-month delay due to wiring problems. A further delay of six months in July 2006 culminated in the resignations of chief executive Gustav Humbert, A-380 program manager Charles Campion, and parent company EADS co-chief executive Noel Forgeard. The resignations were followed with the appointing of new CEO Fabrice Bregier.

The hiring and firing of top-level executives is a predictable strategy, and is one that can turn around companies headed towards disaster. In the case of Airbus, however, it’s still unclear if this “house cleaning” will have a positive affect.

For years now, Boeing and Airbus have had vastly differing views on the future of air travel. Boeing believed offering a smaller airplane with higher fuel efficiency would meet market demand. Airbus has done the opposite, focusing on higher capacity planes capable of longer flights. As things have happened, rising fuel costs and concerns about the environment have put fuel efficiency over higher capacity in the planning of most airlines. The stakes for Airbus have been raised by the A-380’s substantial operating costs, including the costs to retool airport terminals to cope with the massive wingspan of the A-380.

In December 2006, Airbus’ parent company approved €10 billion to produce the A-350, a 200-350 passenger, fuel efficient, long-haul aircraft. The new aircraft is Europe’s answer to Boeing’s 787.  Boeing’s first 787 Dreamliner is expected to meet orders sometime in 2008, giving Boeing a six-year head start over the A-350, which will not be in final production until 2012. This head start may give Boeing the opportunity to dominate the market before Airbus arrives.

Stakeholders in airbus are already concerned about the company’s long-term health. Daniel Michaels of The Wall Street Journal called Airbus a financial “albatross” for EADS. The BBC corroborated the pessimistic outlook by reporting that Airbus, once on par with Boeing, has seen a 25% drop in orders since last year. Due to manufacturing delays, wrote the BBC, Airbus has already had to pay more than €6 billion, and Airbus expects to see losses with the A-380 reach €4.8 billion over the next four years.

Even with the barrage of problems associated with Airbus, the company has a number of factors on its side, including a long list of technological innovations and recent record production levels. EADS once owned only 80 percent of Airbus, but now has complete control over the company. The restructuring has also streamlined management, with the introduction of a single chief executive and chief financial officer, replacing the former joint executives representing Germany and France.

Even with these positive changes, however, Airbus still seems unable to make serious corporate decisions without German and French politicians having the last say. What happens, if these current cutbacks aren’t enough? What happens, if Airbus needs to lay off another 10,000 workers? Will the French and German governments allow this to happen? As they should be, a politician’s interests lie in keeping their constituents content and employed. There are times where political interests conflict with the long-term health of the company. Airbus and EADS have a monumental task ahead, and it’s still unclear whether it will emerge victorious.

The author has a connection through family members to Boeing Commercial Aircraft.

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