Airbus Struggles to Turn Page on Crisis Year

Airbus, poised to fall behind U.S. rival Boeing Co. in orders for the first time in six years, must be wishing 2006 was already history.

But for the European planemaker and its parent European Aeronautic Defence and Space Co., the coming year may not be much easier.

Since new delays to the 555-seater A380 superjumbo came to light in June, EADS and Airbus have lost three CEOs, one A380 customer, a big potential order from another client and euro4.8 billion (US$6.4 billion) in forecast profits. EADS shares have fallen about 25 percent since the start of the year.

The quadrupling of the A380 production delay to two years prompted FedEx to cancel its 10 orders and was a likely factor in Lufthansa's Dec. 6 decision to buy 20 747s instead.

The threat of customer defections still hangs over Toulouse, France-based Airbus as it enters the New Year - a prospect that chief operating officer John Leahy is keen to play down.

"Most of the customers I've talked to are annoyed, they're rightfully upset," Leahy said at a news conference earlier this month. "But they aren't rushing for the doors."

Against this backdrop, the decision by U.S. and European aviation authorities to certify the A380 for commercial service, 10 months before the first plane is due for delivery to Singapore Airlines, was a small mercy.

Clouds were already gathering on Jan. 17, as Airbus announced 1,111 orders for 2005 - a new industry record - to Boeing's 1,002. Measured by catalog value, Airbus had lost its market leadership to Boeing, as its order share fell to 45 percent from 54 percent in 2004.

Stung by higher fuel prices, airlines were abandoning Airbus widebody airliners for Boeing's more efficient 777 and upcoming 787 "Dreamliner." Based on orders so far, Airbus is set to fall behind Boeing's full-year tally for the first time since 2000, as its share of new business by value extends its slide to about 37 percent.

EADS responded Dec. 1 by approving an ambitious upgrade to the planned Airbus A350 airliner, designed to take on both mid-sized Boeing models. The long-awaited decision had been caught up in the A380 production setback and resulting management crisis - which saw the departure of EADS co-chief executive Noel Forgeard and two Airbus CEOs in quick succession.

Forgeard and several of his former colleagues are under investigation over share sales conducted soon before the A380 delays emerged, along with EADS' two biggest corporate shareholders, Lagardere SCA and DaimlerChrysler, which both reduced their stakes around the same time.

The A350 is now due to enter service in 2013, five years behind the 787 and a year later than announced at July's Farnborough Air Show, where Airbus vowed that its new design would be significantly cheaper to operate than the 787.

In order to deliver on that pledge, Airbus has since increased the use of composites and the overall program cost - now euro11.6 billion (US$15.4 billion), compared with the US$10.6 billion announced at Farnborough.

"You don't come out with a 'me-too' airplane five years later," Airbus' Leahy said as he unveiled the new specifications this month.

EADS says a large, unspecified share of that cost will be met from its own cash-flow and from cost-cutting at Airbus, while suppliers will be invited to contribute euro1.8 billion (US$2.4 billion) through risk-sharing investments.

But the main EADS shareholders - DaimlerChrysler, Lagardere and the French government - have so far failed to agree on where the rest of the cash will come from.

EADS, Airbus and the governments of France, Germany, Britain and Spain must also decide what if any public aid the A350 program will receive. A renewed aid pledge could inflame a long-running EU-US trade dispute over subsidies to Boeing and Airbus.

With three years to go before the bulk of the A350 program costs kick in, it is the restructuring at Airbus that poses the more immediate challenge - and the bigger headache for 2007.

EADS co-CEO Louis Gallois, who also became Airbus chief executive in October, warned at the time of "painful" job cuts as Airbus seeks to save cash by rethinking its sprawling production lines - which traditionally split final assembly of each plane between France and Germany.

Airbus has still given no indication of where the A350 will be built. With the French and German governments already bristling over likely job cuts, the French presidential election in April could complicate Gallois' pledge to finalize the shake-up early in the year.

Forgeard's July ouster revived Franco-German cooperation within EADS but did not remove tensions inherent in the company's split structure.

Gallois, the new French co-chief executive, has said he sees little likelihood of changes to the management setup, despite the frustrations felt by both CEOs, who would "prefer to be alone." Later the same day, German co-chief executive Tom Enders predicted that EADS shareholders would eventually choose a single boss.

Airbus cannot afford any more of the infighting that produced the A380 catastrophe by undermining coordination between facilities in Toulouse and Hamburg, Germany.

Even in the market for smaller jets, which it still narrowly leads, Airbus has set itself a serious challenge: increasing production of single-aisle A320 planes by 20 percent in two years to meet delivery commitments and avoid more compensation payments to disgruntled customers.

The best news Airbus can hope for in 2007 - besides a successful A320 ramp-up, internal harmony and restraint from politicians as the company restructures - could be a slip by its Chicago-based rival.

Boeing warned in July that the 787 was facing weight problems and supplier delays but insisted the program was on budget. Since then, the company has announced $635 million in additional spending to pare the excess weight while - so far - maintaining its mid-2008 schedule for entry into service, with the first flight promised next year.

Boeing Commercial Airplanes chief executive Scott Carson admonished workers to "stay humble" about the company's newfound leadership, in a recent interview with an internal company magazine.

"The risk we face is thinking we are doing well and can relax," he said.

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