Airbus Under the Gun to Find Fix

The company is under the gun to correct its problems quickly or Boeing's biggest rival could be reduced to a marginal aerospace player.

Buffeted by delays in the A380 superjumbo jet that triggered the ouster of senior management this week, Airbus faces the growing risk of losing its position as one of the world's two dominant aircraft makers.

European Aeronautic, Defence & Space (EADS), which owns Airbus, replaced one of its co-chief executives and the chief executive of Airbus after saying wiring bottlenecks in the A380 may cost it 2 billion euros ($2.6 billion) through 2010.

Airbus also has fallen behind Boeing in the race to offer a fuel-efficient 250- to 350-seat plane.

Delays in the $13 billion A380 program have prevented management from focusing on a competitor for Boeing's midsize 787.

Without a plane in this category, Toulouse, France-based Airbus would cede a market worth an estimated $450 billion over the next 20 years to Boeing.

"Airbus is at risk of becoming a marginal, niche manufacturer in a couple of years unless they act now," says Richard Aboulafia, vice president of Teal Group, a Fairfax, Va.-based consulting firm.

EADS on Sunday named French aerospace veteran Louis Gallois to replace Noël Forgeard as co-CEO. Christian Streiff, a former executive at glassmaker Saint Gobain, takes over from Gustav Humbert as chief executive of Airbus.

"There's not much time left," says Peter Rieth, an analyst at BHF-Bank in Frankfurt, Germany.

"The new chief executive officer primarily has the task of bringing the problems in the company back on track, especially with the A380," Rieth said. "That means not delaying deliveries any further and making strategic decisions such as how things will continue with the A350. These are two huge challenges for the new management."

There is precedent for the decline of a dominant plane maker.

McDonnell Douglas, once the world's largest aircraft maker, failed to invest in new planes and its product line was whittled down to one 300-seat model, the MD11, and a 140-seat plane, the MD90.

It was swallowed by Boeing in 1997, after Airbus established itself as a competitor.

Doug McVitie, managing director of Arran Aerospace, a consulting firm in Dinan, France, says airlines may support Airbus because they need two strong plane makers to keep prices in check.

"Most of the major airline bosses would hate to see a duopoly become a monopoly," McVitie says. "So they'll be anxious to see Airbus solve its problems. That'll translate into patience and flexibility, and airlines will also think twice about their orders in case it tipped the balance too far in one manufacturer's favor."

Boeing won gross orders for 358 planes in the five months through May and delivered 160 aircraft. Airbus has orders for 105 planes and delivered 179 in the same period.

Streiff met EADS' German Co-Chief Executive Tom Enders on Monday at Munich airport and flew with him to Airbus headquarters in Toulouse to review strategy, says EADS spokesman Michael Hauger.

Further management changes are contemplated, the company says.

The first priority will be to fix the A380 program, which is at least a year behind schedule. Sixteen customers have ordered 159 of the jets, a 555-seat plane that has a list price of $300 million.

EADS lost a quarter of its market value June 14 after saying delays in the A380 would reduce operating profit by 2 billion euros by 2010.

Emirates, the biggest customer for the A380, and Singapore Airlines, the first buyer, are seeking compensation from Airbus for late delivery.

Qantas Airways, Air France-KLM and Virgin Atlantic Airways, with six on order, have also said they'll seek penalties.

Steven Udvar-Hazy, CEO of International Lease Finance Corp., the world's biggest aircraft lessor and Airbus' single-biggest customer, has said he may cancel A380 orders.

Airbus blamed the A380 delays on wiring harnesses, bundles of wires that run throughout the plane. The wiring controls functions including in-flight entertainment, lights, air conditioning and basic airplane systems.

The company has assigned hundreds of employees, including 700 from its factory in Hamburg, Germany, to work around the clock in Toulouse to untangle the 300 miles of wire in each of the double-decker planes, the largest passenger aircraft ever built.

While the A380 has drawn the biggest headlines, difficulties with other wide-body planes have also hurt Airbus.

The company has managed to sell only 100 of its A350s compared with 350 for the competing Boeing 787.

Airbus' four-engine A340, which consumes more fuel than twin-engine models, also is losing ground. Boeing won 155 orders for the long-range 777 last year. Airbus received 12 for the A340-600 and none for the A340-500.

The broader wide-body market, planes with 200 to 500 seats, may total $1 trillion over 20 years, Aboulafia estimates.

Airbus is spending $10 billion to redesign the A350, people familiar with the decision said in May. With the management reorganization now resolved, the EADS board may meet before the Farnborough air show, which opens July 17 outside London, to decide whether to go ahead with a final design for the plane.

While EADS this week appointed new leaders, it left unchanged a corporate structure that splits control between German and French shareholders, with each side having a co-CEO and a co-chairman.

Under the company's bylaws, Streiff, who is French, must report to Enders, a German, whose specialty is defense rather than plane manufacturing.

"The management change was the first step, but EADS has a lot of challenges that it needs to face and soon," says Peter Braendle, a fund manager at Swisscanto Asset Management in Zurich, which oversees the equivalent of $51 billion, including 500,000 EADS shares.

"The new structure is the same as the old structure, and that's pretty disappointing. This will always be a more cumbersome decision-making process."

Information from Bloomberg News reporters Alan Katz in Paris, Richard Blackden in London, Susanna Ray in Frankfurt and Kyunghee Park is included in this report.



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