In February, Airbus Industrie revealed its Power8 program, an effort to reduce costs by restructuring the company and changing the way it builds airplanes. It also announced continued and unprecedented production increases for its most successful aircraft programs.
These measures need to be understood in a broader context--the urgent and essential need to sustain high levels of new product development to bring the A350 XWB to market. But the magnitude and timing of this requirement leave little room for error.
The A350 XWB (extra-wide body) is the sixth incarnation of Airbus' efforts to reinvent its middle market product line. This 250/400-seat market segment, primarily driven by rapidly increasing international traffic, has been growing at a very strong pace. It now comprises over 45% of the jetliner market in terms of delivery value. We project it to grow to 50% of the market by the end of the decade.
While Airbus holds a strong position in this market with the A330, that 250/300-seat product is quickly being overtaken by Boeing's new 787 Dreamliner. Airbus' other midmarket product, the A340 series, has been plagued by higher operating costs relative to its competitor, the 777, and has suffered on the market.
Development of the A350 cannot proceed at a leisurely pace. Demand for aircraft in this class has been extremely strong over the past five years, as evidenced by 500 up-front 787 orders and a record 777 backlog. In fact, there have been 1,500 orders for aircraft in this class since the A380 was launched in 2001. By contrast, after February's UPS cancellation, the A380 order book totals just 156 aircraft.
On the positive side, the first firm A350 XWB order was signed by Finnair in March, covering 11 planes. But the only other likely imminent customers are either secondary carriers or politically captive markets like Aeroflot. Worse, since the A350 became the more ambitious A350 XWB, several original A350 customers have either ordered 777s and 787s or announced plans to revisit their decision.
Much of the remainder of this middle market, at least for the next six to nine years, could commit to an aircraft in the next 18 months. There are several important upcoming airline competitions that could determine whether the A350 XWB has a place in the blue-chip carrier market, or if it will continue to be marginalized as a less competitive machine. Specifically, Air France/KLM, British Airways, Emirates, Lufthansa, and USAirways all have considerable requirements for aircraft in the 250/400-seat class.
If all of these carriers decide in favor of Boeing, they will join most of the other first-tier carriers in the world that have taken sizable positions in the 787 and 777-300ER. Airbus will be stuck in a permanent second place, and inferior pricing for its widebody products will hamper its efforts to generate additional new models.
Therefore, it is essential for Airbus to fund a credible A350 development road-map, to assure potential customers that their aircraft will arrive as planned and on schedule. This credible roadmap is also needed to attract investors for Airbus' parent, EADS.
Reinventing Airbus' entire midmarket product line will create unprecedented investment challenges. The likely $10-billion A350 XWB development bill would not be difficult under normal circumstances, but manufacturers typically make such investments once or twice a decade. Airbus, by contrast, is still in the midst of spending about $18 billion bringing its 550-seat A380 to market. This bill could even grow due to the program's cost overruns, delays, and the need to make penalty payments to customers waiting for aircraft.