IS AIRBUS CAUGHT IN A DOWNDRAFT – WHAT NEXT FOR A-400M?

Dec 04. Business Week reported that it’s supposed to be the moment of triumph for Airbus Chief Executive Noël Forgeard. On Jan. 18 a star-studded crowd, including four European heads of state, will gather in Toulouse, France, as the first completed airframe of an Airbus A380 rolls out of the factory. The biggest passenger plane ever built, the doubledecker A380 is on schedule to enter service in early 2006. Forgeard, 58, may even have a new title by then. He’s being backed by the French government for a big promotion, to co-CEO of Airbus parent European Aeronautics Defence & Space Co. next year. Advertisement

But two events have cast a shadow over both Airbus and Forgeard. On Dec. 10 the EADS board O.K.’d plans for a new midsize jet, the A350, that Airbus wants to put in service in 2010 to counter Boeing Co.’s of its existing A330 to match the 7E7, the A350 is a more ambitious overhaul that will cost at least $5.3 billion, but still not yield all the advantages of a brand new design. Then, on Dec. 12, Forgeard told a French newspaper that the A380 is running as much as $2 billion over budget.

These developments could spell big trouble. Startup costs for the A380 were expected to drop off sharply from a peak of $1.6 billion this year, to less than $700 million by 2007. Analysts thought Airbus would be able to tap at least $2 billion in additional cash flow over the next three years, enough to finance a modest A350. Now investors fret that paying for two planes will squeeze EADS’ bottom line. The company’s shares fell 4% on Dec. 13 after EADS predicted a 2005 operating profit of $3.2 billion, about 15% below analyst expectations. The prospect of a management reshuffle only adds to the nervousness. “The Airbus team has its hands full, so why change horses now?” says Lehman Brothers Inc. analyst Joseph Campbell.

Now that Airbus can’t finance the A350 out of cash flow, it will almost certainly seek sizable loans from European governments. That move will raise the temperature of an already heated U.S.-European dispute over aircraft subsidies. Although Airbus has received billions in such loans under a 1992 bilateral agreement, the U.S. maintains the European planemaker no longer needs help because it has pulled ahead of Boeing. Washington is threatening legal action before the World Trade Organization. “We’re serious about the litigation option,” U.S. Trade Representative Robert Zoellick told a BusinessWeek conference in Paris on Dec. 7.

The risks don’t end there. Industry watchers think the A350 will doom one of Airbus’ best-selling planes. The A330, which seats 250 to 350 passengers, is the closest aircraft in Airbus’ lineup to the 210-to-250-seat 7E7. As recently as this fall, management was arguing that the A330 could hold its own against the 7E7 without major modifications. But now Airbus proposes an ambitious makeover, with a more efficient engine and a new wing. “It’s going to either cannibalize or completely destroy the market for the A330 in just a few years,” says Doug McVitie, a Scottish aerospace analyst who once worked at Airbus. Boeing is exultant. “By offering the A350, they have thrown their 20-year product strategy out the window,” says Randy Baesler, Boeing’s vice-president for marketing.

Certainly, the picture’s not all gloomy. Airbus is set to deliver 320 planes this year, compared with 285 for Boeing. Forgeard says he plans to achieve $2 billion in cost savings from 2004 through 2006, mostly due to better efficiency: “Overall we have margins, before R&D, that are about 5 percentage points higher than Boeing’s.”

Yet Forgeard’s 11th-hour challenge to the 7E7 suggests that Airbus underestimated the market potential for a more efficient midsize jet. As for the A380, Forgeard didn’t make clear that even before the recently acknowledged cost overruns, development costs had soared far above the original $10.7 billion estimate, as the do