Airbus: Losing altitude
Delays, redesigns, and a management shakeup have sent the company into a tailspin. Can it pull out of trouble?
By Nelson D. Schwartz, Fortune Magazine

(Fortune Magazine) -- When it comes to building passenger planes, redundancy is a virtue. The new 555-seat Airbus A380, for example, has four flight-control systems, any one of which can keep the plane in the air by itself.

The Boeing (Charts) 747 boasts four engines, yet it can safely fly on just two in an emergency. But when it comes to managing the company that makes the planes, redundancy - as the recent downward spiral of Airbus and its corporate parent EADS demonstrates - is anything but an asset.

And that was never more obvious than at last month's Farnborough Airshow, the aerospace conclave outside London where customers from around the world gather to order new planes, trade gossip, and eye the latest military and commercial jets.

Farnborough should have been a triumph for Airbus - it was the A380's first appearance at the biennial show - and the 386-ton jet soared into sunny English skies on the first day, making graceful loops that belied its status as the biggest passenger plane ever built.

Beyond project delays

Instead, Farnborough was more like a daily exercise in hara-kiri, as one Airbus executive after another apologized for delays in the A380 program that have infuriated customers, cost EADS more than $2 billion in profits, and exposed management problems years in the making.

"We are learning to be humble and change our bad habits," said Christian Streiff, Airbus's new chief. "Airbus is in the middle of a serious crisis with our customers."

Only two weeks into the job, Streiff said he has experienced "a kind of vertical takeoff, full thrust, with a lot of noise and speed." It was a welcome light note. But a few minutes later the director of the A380 program, Charles Champion, brought everyone back to earth when he admitted, "We have many legacy systems that do not talk to each other."

The same could be said of EADS, the European aerospace consortium that owns 80% of Airbus (the other 20% is controlled by Britain's BAE Systems (Charts)) and makes everything from unmanned drones and Exocet missiles to military helicopters and Eurofighter jets.

Because of EADS's complicated ownership structure (Germany's DaimlerChrysler (Charts) and France's Sogeade each own 22.5%, Spain's SEPI has roughly 5%, and the rest is publicly traded), the company is blessed with not one but two CEOs - one French, one German.

If that weren't trouble enough, EADS also boasts French and German nonexecutive chairmen. So if you think EADS and Airbus seem like Anglo-Franco-German-Spanish productions with more moving parts than an A380, you're right.

"This is a plane that's made by four countries that hate one another," says one London analyst who spoke on condition of anonymity. "It only succeeds because the greater enemy is America."

What's remarkable is how successful Airbus had been in spite of its byzantine org chart. In 1995 it had just 19% of the market for big passenger jets, compared with 81% for Boeing.

But in the late 1990s, Boeing stumbled badly, and Airbus took off with models like the A330, which clobbered the similarly sized Boeing 767. By 2005, according to Airbus, its market share had risen to 52%, vs. 48% for Boeing.

The world's largest passenger jet

But in attempting to build the world's largest passenger jet while also pleasing investors, satisfying customers, and keeping Boeing at bay, Airbus ended up like Icarus.

The A380's electrical system is complicated even by jumbo-jet standards, and it didn't help that the work was split between centers in France's Toulouse and Germany's Hamburg. Airbus exec Tom Williams says engineers sometimes didn't know what modifications their colleagues in the other city had made until days afterward.

By mid-June, Airbus was forced to push back deliveries of the plane, scheduled for later this year, by six months. Then it emerged that EADS's French co-CEO Noël Forgeard and his family had dumped more than $3 million worth of company stock before news of the A380's troubles reached investors.

Forgeard claims he didn't know about the delays when he sold the stock. EADS co-chairman Arnaud Lagardère said he, too, had been in the dark about the depth of the A380's problems.

"I have the choice between being considered someone dishonest or someone incompetent who doesn't know what is going on in his factories," he told reporters. "I prefer the second version."

Lagardère is still chairman, but Forgeard resigned in early July and was replaced by Louis Gallois, a well-regarded veteran of the aerospace industry who most recently ran France's state-owned railway, SNCF.

At Farnborough, Gallois and his German counterpart, Thomas Enders, made their joint debut before the media, and while they share an easy familiarity, their styles couldn't be more different. A product of the French grandes écoles, the 62-year-old Gallois is urbane, self-deprecating, and above the fray. Enders, 47, with his ramrod posture and chiseled features, resembles a German fighter ace (he actually once was a paratrooper).

Getting Airbus back to cruising altitude would be difficult enough with one pilot in charge, but Gallois says there's no need to change EADS's two-headed system. "I don't know if bicephalism is an English word," he says, "but it brings out the best."

EADS will certainly need it. Airbus racked up twice as many orders as Boeing at Farnborough, but Boeing still looks set to beat Airbus for total orders in 2006 for the first time in five years, as customers flock to the 777, the 747, and the fuel-efficient 787, which will debut next year and is challenging Airbus in the midsized market.

In response, Airbus unveiled the new A350 XWB at Farnborough, an engineering wonder with the largest windows ever designed for a passenger jet. It is expected to cost about $10 billion to develop and isn't scheduled to fly until 2012.

"It will be a golden plane," promises Airbus's top sales executive, John Leahy. If it ever gets off the ground, the A350 XWB probably will be a marvel of design, like the A380. Whether it actually makes any gold for EADS is another story.

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.