In formation

The A380 rarely flies economy

TEN years ago this September Airbus’s first A380 superjumbo, laden with passengers, took to the skies over Toulouse. Airbus’s bosses hoped that the world’s largest jetliner, the first with two full decks, would help the European planemaker get even with its American rival, Boeing. But problems quickly mounted. In October 2006 Airbus revealed the third delay to the A380 programme. Development costs spiralled out of control, to $15 billion; three chief executives lost their jobs in succession that year.

The trauma prompted a sweeping modernisation effort that went further on September 30th with a restructuring announcement by Tom Enders, Airbus Group’s chief executive. The company began as a jumble of the national aerospace firms of France, Germany, Britain and Spain, jointly known as EADS, in 1967. Mr Enders has laboured, with much success, to reduce state influence on the group and to create a profit-driven firm like any other. But the roots of the past run deep. Airbus Group sits at the top of three divisions—jetliners, defence and space, and helicopters. The jetliner division, for example, still thinks of itself as French in character, and the defence and space unit keeps some sense of its former German identity.

Now the top entity, Airbus Group, headed by Mr Enders, will be merged into the most important division, which builds civil aircraft including the A380, and will be called just “Airbus”. The other two divisions are to become that entity’s subsidiaries, so that in theory, there will be less scope for national loyalties. Another aim of the restructuring is to focus the group more on the market for jetliners—which is booming, thanks largely to rising demand for air travel from the expanding middle classes in emerging economies.

Mr Enders’s principal goal is to close the long-standing profitability gap with Boeing. The European firm’s average pre-tax profit margin was 2.2% in the decade to 2015, compared with 6.8% for Boeing. That was before a fresh list of problems hit Airbus, wiping nearly a fifth off the firm’s market valuation since December.

The bad news began in April, when the group’s defence and space division, which produces a fifth of group revenues, revealed new engine problems on its A400M military transporter, which had already accumulated more than €5 billion ($5.6 billion) in write-downs. The jetliner business, which makes 70% of group sales, also hit turbulence. Expensive defects on its new A320neo and A350 planes led to a halving of profits, year on year, in the first quarter. Airbus Helicopters, meanwhile, suffered as demand fell for choppers in the offshore oil and gas industry.

Regulatory setbacks have piled up, too. At the start of August Britain’s Serious Fraud Office (SFO) opened a full criminal investigation into allegations of bribery by the firm that have already cost it access to cheap export financing. And in September the WTO ruled that the EU had failed to cut illegal state aid to Airbus, which Boeing alleges is worth $22 billion over decades. The ruling opens the door to America imposing tariffs on Airbus’s planes, although an appeal could delay any such action for years.

Airbus’s management is moving to contain the technical troubles on its new planes. Few sales have been lost at Rolls-Royce, an enginemaker, since a similar SFO investigation began there in December 2013. More of a concern is Airbus’s flagship superjumbo. Although passengers love the A380, few airlines do because they find it too big to fill profitably. Early on, Airbus hoped to sell up to 1,200 supersize planes over two decades; it has produced only 194 so far. Just 125 orders remain, and half of those are likely to be cancelled. Airbus’s executives are keen to prop up production in the hope that demand will rebound, but it will cost them. In July the firm said it would cut production from 27 a year, which is the number at which the plane can be made profitably, to just 12 by 2018. At that rate, Airbus would lose as much as €250m a year on making the planes, says Sandy Morris, an aerospace analyst at Jefferies, a bank.

Each of Airbus’s problems is manageable by itself because of the firm’s sheer size: this year the group is forecast to generate €65 billion in revenues. Airbus now has around half of the global jetliner market, up from 19% in 1995, and its share is expanding. It has received a tenth more orders across its range than its American rival over the past decade.

Mr Enders’s next challenge will be margins. The firm’s run of problems pose a threat to slim profits of around €2 billion a year. In the 2000s Airbus’s government shareholders often saw propping up local plants as more important than profits. It now returns the cost of capital invested in it; but there is still a way to go. “They now not only need to deliver their planes on time—but their profits too,” chides one adviser to Airbus’s management. Mr Enders has weakened the influence of state investors in his efforts to make Airbus a more normal company. Private shareholders are likely to be harder to please.


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