The prospect for a new delivery record and the growing backlog that Airbus forecasts for 2011 might suggest the dark days are behind the European aircraft maker, but plenty of headwind persists that could cause serious disruptions to the business.
Management attention is shifting from the crisis of recent years—when airlines deferred and canceled orders—to the pitfalls of increasing output while facing supplier bottlenecks, rising raw material costs and questions about the duration of this up cycle.
A December order spurt helped Airbus surpass rival Boeing in terms of deliveries (510 to 462) and orders (net 574 to 530; gross 644 to 625). Airbus CEO Tom Enders projects 520-530 deliveries this year, and orders exceeding deliveries to further bolster the backlog that was 5,552 units and is still ahead of Boeing’s.
While market demand gives Airbus reason for confidence, the company’s financial performance does not. The high cost of A380 production, A350 development spending and the weak dollar will likely keep the EADS unit’s operating profit at low levels similar to those of 2010. In the first three quarters of last year, Airbus reached an operating profit of just €296 million ($399 million).
Both Airbus and Boeing suffered a raft of cancellations in 2010, and Airbus’s chief operating officer for customers, John Leahy, expects that to persist into 2011, despite improving market prospects. “It is going to be somewhat of a rocky year,” he says. “There will be winners and losers.” Some airlines simply will not recover from the recession, leading to cancellations roughly on par with last year, he projects.
Nevertheless, the backlogs for both aircraft makers are huge. To help satisfy that demand, Airbus is looking at ramping up production. Narrowbody output could increase to 42 or 44 units per month. A decision on how to proceed is due in the next few weeks, says Airbus’s executive vice president for programs, Tom Williams. Widebody output could even reach 10 aircraft monthly, although that decision is partly contingent on Boeing’s 787 delivery schedule; if Boeing falters again, A330 demand could justify another increase.
One matter that will dictate whether Airbus ramps up further is the sustainability of demand. Airbus wants to make sure it can keep up the high rate for at least two years. “We don’t want to jack the supply chain up and bring it back down again,” Williams notes.
The current growth cycle is still in its early days and has yet to penetrate some smaller segments of the commercial aircraft market, and its longevity is uncertain. Nominally, the next down period could emerge around 2016, but Leahy says that from a production perspective, that is when the A320 New Engine Option will hit the market. That should smooth out any trough, given the many airlines keen to obtain more fuel-efficient aircraft.
Airbus managed the last downturn by trimming output and shuffling airline delivery positions to minimize cancellations and preserve deliveries. Asked if there is one thing company officials might do differently next time, Leahy says, “I would have started to ramp up faster.”
One of the first issues Airbus will have to manage in the coming months is the crisis over Koito Industries’ falsification of seat crash test data (see p. 32). There are concerns that regulators could force the replacement of thousands of seats, affecting, for instance, the Airbus A380.
Airbus has been working with the Japanese seat supplier to see how the impact can be minimized. “I am now more of an expert on seats than I ever wished to be,” Williams quips. However, he is optimistic that many of the installed seats and those already built can be salvaged with retrofits. There are other bottlenecks of buyer-furnished equipment, he acknowledges. In some areas, Airbus is pushing suppliers to make investments in more capacity, including in the landing gear area.
Another potential concern is the cost of raw materials, with the global economic recovery gradually taking place and growth in Asia particularly strong. Williams says carbon fiber supply is indicative, given the high demand wind turbine production is placing on the sector. “We’ve tried to get contracts in place” to assure supply, he notes.
Airbus is also worried by the Organization for Economic Cooperation and Development’s new agreement on commercial aircraft export credit agency (ECA) financing. ECA support was instrumental in the past three years in sustaining deliveries. About 30% of Airbus deliveries received export credit agency backing last year, and this year’s level is expected to be about the same, Leahy says. But the new agreement governing loans is “very complex,” Williams notes, creating concerns that the support mechanism may not be as effective in a future downturn.
Much of Airbus’s focus for 2011 will be program execution, rather than big product decisions. Fabrice Bregier, Airbus chief operating officer, notes that the coming months will be critical for the A350 twin-widebody; work on the final assembly line should commence toward year-end. The first aircraft is expected to take nine months to build, followed by 12 months of flight-testing, leading to service introduction in the second half of 2013. “We are making reasonably good progress,” Bregier says, adding that “we know it is very challenging.”
On the military side of the business, Airbus is due to deliver its first six A330-based tankers this year, four to Australia and one each to the U.K. and Saudi Arabia. The aircraft maker also remains poised for a decision from the Pentagon in the KC-X competition.
The exact timing of the first handover of the KC-30A tanker to lead customer the Royal Australian Air Force (RAAF) has not been set, although Enders says it is imminent. The program has suffered repeated delays: The first aircraft was initially to be handed over in the first quarter of 2009; that was adjusted to mid-2010 and then the end of 2010. The reason for the latest delay is not technical, but largely a matter of getting paperwork finished, says Domingo Ureno-Raso, the head of Airbus Military.
The RAAF plans for the KC-30 to reach full operational capability (FOC)this year. Despite the delays, Ureno says Airbus can deliver enough aircraft to allow that, although it is the customer’s decision on whether to declare FOC.
Additionally, Airbus plans to deliver 22 smaller military transports, a mix of CN-235s and C-295s. The company booked 21 orders for those last year, 15 CN-235s and six C-295s. It also delivered six CN-235s in 2010, along with 13 C-295s, and one modified P-3 to the Brazilian air force.
Also ahead this year is the plan to receive civil certification for the Airbus A400M. Serial production is to start very soon, Enders says, and fatigue-testing of MSN5001 has begun. Of an upcoming decision by the German Bundestag budget committee on the A400M order, Enders says, “I don’t think the government wants to delay this process further. I believe [the last contractual details] can be sorted out in the very near future.”
Moreover, a potential leadership change at Airbus could become an important issue toward year-end. Enders’s contract expires in June of 2012. If the main EADS shareholders—Daimler, Lagardere Group and the French government—stick to their 2007 agreement, EADS will be led by a German CEO from next year and Airbus by a French CEO. That could lead to Enders being promoted to EADS, while his deputy, Bregier, could replace him at Airbus. That change itself should not disrupt ongoing operations, but such moves have sometimes been followed by reshuffling in lower management levels, too. As the A350 will then be in a crucial development stage just ahead of first flight, the transition timing does not look ideal.
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