A New Route for Airbus

The jetmaker's latest shakeup may lead to more efficient growth.
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The continuing meltdown at Airbus likely signals years of decline for the company, given the long lead times that aircraft orders require. But each disaster brings its own opportunity.

Four months ago, the European jetmaker seemed in complete disarray. Its A380 program had been delayed by seven months, cutting profits by $2 billion over four years, its A350 program seemed lost, and two top executives were forced out.

Then things got really bad. Last week Airbus said the delay in A380 production would extend for two years and reduced projected profits by $8 billion. On Monday, Airbus Chief Executive Christian Streiff, who was brought in to solve the problems,

resigned after just 100 days.

"I progressively came to the conviction that the mode of corporate governance at Airbus didn't allow for the success of my plan," Streiff told the French newspaper

Le Figaro

. He was replaced by Louis Gallois, who will also retain the job he assumed in July as co-CEO of parent company

European Aeronautic Defence and Space Co.

.

In an interview with Europe 1 radio, Gallois said that he foresees job cuts as well as improvements in Airbus' manufacturing processes, exactly what Streiff had proposed. "We have to ask questions about the sites, the assembly lines, in order to rationalize it," he said. "We cannot live with two sites that each share all the assembly lines."

Although Gallois is saying the right things, he may not provide a long-term solution to Airbus' geopolitical style of corporate governance, says consultant Richard Aboulafia of the Teal Group. Streiff had moved too fast, Aboulafia says. "Gallois is going to restore stability, but he's the opposite of reform," he adds. "He represents France Inc. If you believe in heavy state involvement, he's going to provide the most competent version of it."

Still, over time, change is coming, says consultant Scott Hamilton, who publishes an online newsletter about Airbus and Boeing. "In the long run, this is all good for Airbus," says Hamilton, who notes that Boeing faced similar problems in 1997 and emerged as a stronger company.

What Airbus needs, its critics say, is a divorce from geopolitical management and more access to private markets and outsourcing. For years, it has functioned largely as a jobs program, under which sections of each plane are produced in their factories in Europe, then shipped to Toulouse or Hamburg for final assembly.

Airbus is not about to die. It is easy to forget that the company has just concluded a five-year period during which it led Boeing in aircraft orders. In fact, Airbus contends on its Web site that commercially, 2005 was its best year ever, as 1,111 new orders gave it a market share above 50%.

The Boeing Beacon

European governments began talking about a strategic alliance to build jet planes in the early 1960s. At the time, U.S. firms

Boeing

(BA) - Get Report

,

Lockheed Martin

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and McDonnell Douglas controlled the world aircraft market, while Europeans held less than 10%.

Airbus was formed as a consortium in 1970. In 2001, the controlling French, German and Spanish interests created the single company EADS, which holds 80% of Airbus stock. (A state-owned Russian bank recently acquired a small stake as well.)

BAE Systems

, the successor to British Aerospace, holds the remaining 20% of Airbus stock.

Part of today's problem is that "Airbus' extraordinary decade-long run of financial and operational success kept its organizational demons firmly locked up in the attic," CreditSights analysts Brian Studioso and Roger King wrote in a report on Tuesday.

But now, the demons are out. And because "the commercial aerospace market moves in decade-long cycles, monumental events such as the A380 meltdown could be the catalyst that will solidify Boeing's position ahead of Airbus for a long time," the analysts said.

If the next decade belongs to

Boeing

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, it is because the company saw the error of its ways in the late 1990s. At the time, Airbus was making major inroads. Seeking to fight a market-share battle, Boeing "pushed capacity to a point where it outstripped the supply chain," Hamilton says.

The imbalance forced a temporary shutdown of 737 and 747 production because of parts shortages. In 1997, Boeing reported its first annual loss in 50 years.

The subsequent management shakeup included the installation of a new management team at Boeing's commercial airplane group. Headed by Alan Mulally, the group oversaw a process change that included reduced inventory and a move away from stationary production. Boeing also increased outsourcing: The share of components made in Washington has declined from about three-quarters to about a third. The success of Boeing's 787 Dreamliner reflects the benefit of the changes.

"What Airbus has to do is to copy what Boeing did in coming out of its fiasco," Hamilton says. "They have to outsource more, adopt better processes and move to lean manufacturing. They have to get the governments out -- and that takes time."