Since the A380's launch, Airbus independent research and development (IR&D) spending has averaged over 8% of sales, which is extremely high for a commercial aerospace firm. This represents a major surge that is difficult to sustain. Yet to introduce the A350 XWB by 2013, this 8-9% level of IR&D expenditure needs to continue, particularly since Airbus must also start work on a new narrowbody successor to its strong-selling A320 family. Even if this new narrow-body jet does not arrive until 2015, that means some development work must be funded starting around 2010.
By contrast, Boeing's new product development spending has not exceeded 6% of sales for more than 10 years. It has ramped up in the past two years to meet 787 and 747-8 development needs, but given a rising (and highly lucrative) wide-body revenue base, the company is very well positioned for future product development. It can easily meet existing product development needs, and develop a 737 narrowbody successor, with an average IR&D level of less than 5% of sales.
In fact, if the company can maintain that 5% level, it will be able to introduce a major 777 upgrade, or an all-new 777 replacement using composite structures, just after the A350 XWB arrives.
The challenge of sustaining high levels of new product investment is the biggest issue confronting Airbus. It dwarfs the lesser (but significant) challenge of coping with an expensive euro and a weak dollar. After all, if currency concerns were overwhelmingly important, the A320 and A330 would not be selling in record numbers.
Funding the A350 is difficult enough, but there are serious structural changes under way at EADS. Several private sector stakeholders are withdrawing equity, most notably DaimlerChrysler. Injecting government cash to replace the private sector equity could create political headaches. To attract private equity, the company could be forced to continue to pay dividends.
In fact, DaimlerChrysler is demanding continued dividend payments, and still owns 15% of EADS (and controls 22.5% of the shares' voting rights). This money would be diverted from new product development initiatives.
In short, these EADS structural changes will likely make Airbus behave more like a publicly held company--like Boeing. And as the U.S. company's new jetliner funding history shows, companies in this business are lucky to sustain an IR&D level of 5% of sales.
Original plans called for Airbus' new product spending to ramp down after first A380 deliveries, in early 2006. This would have allowed Airbus to focus on satisfying shareholders while maintaining a 50+% market share position with a new product line. Yet thanks to the A380's marginal commercial relevance, the 777's victory over the A340, and Boeing's renewed commitment to the market in the form of the 787, Airbus has no choice but to press ahead and generate the cash any way it can.
Airbus' most obvious method of funding the A350 is to increase production of its existing models. The A320 narrowbody family production rate, already headed to 38 aircraft per month, may go on to 40 per month. In March Airbus chief commercial officer, John Leahy, announced that the A330/340 widebody rate, already scheduled to rise to nine per month, would possibly be raised to 10.
But even though the A330 has been a notable success, it will shortly be eclipsed by the 787. The newly launched A330-200F freighter will help for a time, but it is unlikely that A330 numbers can be sustained beyond 2009. Meanwhile, the A340 backlog is dwindling. Airbus' order book states it at 60 aircraft, but this includes some highly dubious orders, such as 18 A340-600s for Emirates. That airline announced in 2006 that it canceled this order, and that it had never actually placed firm orders for all 18 aircraft.
Although A319/320/321 sales are strong, they are unlikely to justify more than two or three years of production at the new peak rate. Single-aisle plane deliveries have already reached 50% of the jet transport market by value of deliveries, the first time that has happened since the advent of the twin-aisle era. Since international traffic is growing in importance to carriers, the balance will likely shift back in favor of larger, longer ranged jets by the end of the decade.
The A320 family backlog stands at 2,000 planes, but this too includes some soft orders, such as 65 aircraft for Skybus, a highly uncertain new startup carrier based in Ohio. In fact, about 20% of the A320 family order book can be regarded as highly speculative.
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The company cut its full-year earnings guidance, reflecting delays in the Airbus A380 superjumbo program.
Airbus has disclosed orders at the Paris Air Show from carriers in Latin America and Asia for its A320 and A330 models. The orders restore the company's order-booking lead over rival Boeing, at...