AIRBUS'S SHAKY SUCCESS Europe's plane-building consortium is booking orders at a record clip, but it still hasn't learned how to make profits. And Boeing is fighting back.
By Louis S. Richman RESEARCH ASSOCIATE Margaret A. Elliott

(FORTUNE Magazine) – AIRBUS INDUSTRIE, the maker of Airbus planes, has always been as much a cause as a commercial enterprise -- proof that Europe can be a high-tech leader. Lately the cause has seemed worth celebrating. In the first ten months of 1985 Airbus booked firm orders for 81 airliners, the best performance in the four- nation consortium's 16-year history. And a good-size slice of those orders is for a new short-range, narrow-body plane called the A320 that next spring will start working its way down Airbus's final assembly line near Toulouse in southwest France. In the first half of 1985 the value of Airbus's new orders exceeded that of Boeing's and McDonnell Douglas's combined. Still, somebody ought to flash the seatbelt sign at Airbus, because there's plenty of turbulence ahead. Aircraft industry sales rose sharply this year, but they can dive just as quickly. Indeed, Airbus won a $1.1-billion order for A320s from Pan Am in part because it threw in cheap leases -- as well as immediate delivery -- on a dozen wide-body jets it had sitting around, left over from the dark days of 1983-84 when money-losing airlines canceled orders. And more than half the orders for the A320 came from Air France; Air Inter, France's internal airline; and Lufthansa, whose government owners put up money to develop the plane. Airbus's successes are building bonfires under its competitors. Boeing was furious when Indian Airlines, India's domestic carrier, canceled an agreement to buy Boeing 757s in September in favor of 19 A320s. Since then Boeing has been racking up orders faster than Airbus. ''We're out to see to it that the A320 has no more than four years in the market,'' says Dean Thornton, head of Boeing's commercial aircraft division. New Boeing planes, he thinks, can nip the A320 long before it approaches breakeven. And U.S. trade officials are contemplating some kind of retaliation on the ground that Airbus's subsidized operations are hurting the competitiveness of U.S. planemakers. The governments that have backed Airbus's planes are restless too. The consortium has yet to make a penny for any of them. With austerity the watchword across Europe, governments will be wary of proposals to develop new planes to follow the A320. ''We are looking for more private-sector participation,'' says an official of one of the governments. ''If we do provide new loans, we'll need to be convinced the program will succeed.'' Airbus is organized under French law as a partnership of France's Aerospatiale, Messerschmitt-Bolkow-Blohm of West Germany, British Aerospace, and Spain's CASA. Because the consortium is not obliged to publish an annual report, its income and expenses disappear in the labyrinth of each partner's financial statements. The total loss to date is difficult to estimate. A report of French government auditors once complained that Airbus accounts contained ''numerous and grave uncertainties.'' Says a Boeing executive, ''The Airbus partners aren't just hiding numbers; they don't know them.'' Industry experts, including security analysts, competitors, and European government agencies, reckon that since its inception the consortium has lost between $7 billion and $10 billion measured in 1984 dollars. So far, Airbus partners have received $7.2 billion in uncollateralized loans from the four governments to launch three models, the original wide-body A300, the derivative A310, and the new A320. The partners pay back $3 million for each new aircraft delivered. With 256 A300s and 70 A310s delivered as of the end of October, loan repayments probably total less than $1 billion. Airbus has a new top management team, the result of the first major shake-up since the consortium began turning out planes. The change was triggered last March when Roger Beteille, 64, a visionary French engineer who had run the production side of the consortium from the start, stepped down because of ill health. Beteille's title of general manager put him second to Bernard Lathiere, 56, president since 1975. A wisecracking bon vivant known as Monsieur Airbus to airline executives around the world, Lathiere was the supersalesman. But the austere Beteille ran the show in Toulouse. More than anyone else, he created Airbus out of a grab-bag of European aircraft companies. With Beteille stepping down, Airbus's supervisory board eased out Lathiere to make room for a fresh young team. The new men break the French grip on the top jobs. They are a triumph of Europe's cultural stereotypes -- a French chief executive officer, Jean Pierson, 45, to inject elan; a German general manager, Johann Schaeffler, 50, to impose discipline in the production process; and a British accountant, Robert Whitfield, 40, to keep the books. Pierson, a towering 6 feet 4 inches and stout as a wide-body Airbus, is a tough Gauloise-puffing engineer. A 1963 graduate of France's elite Ecole Superieure de l'Aeronautique et de l'Espace, he managed production of the supersonic Concorde and rose quickly through the ranks at Aerospatiale, becoming managing director of the commercial aircraft group. Schaeffler, a jocular German engineer who studied in Munich and at Caltech, coordinated development of Airbus fuselages in West Germany and was later named to the managing board of Messerschmitt-Bolkow-Blohm. Whitfield, who fills the newly created position of senior vice president for finance, is a graduate of Cambridge University with an MBA from Insead, a graduate business school outside Paris. He was a consultant to British Aerospace when it was sold by the government. Pierson bristles at the suggestion that Airbus hasn't been run strictly on a | commercial basis, with profits as No. 1 goal. ''There'll be no fundamental changes in the way we run our business,'' he insists, ''just evolutionary ones.'' Still, Airbus will have to evolve at supersonic speed if Pierson and his team are to narrow Boeing's and McDonnell Douglas's big edge in production efficiency. Steep learning curves, with manufacturing costs falling sharply as more units are produced, dominate the economics of building airplanes. With over 130 Boeing and 85 McDonnell Douglas planes rolling off production lines each year vs. just 35 Airbuses, the Americans' cost advantage appears insurmountable. And the gap seems to be widening. Says Wolfgang Demisch, aerospace analyst at the First Boston investment banking firm, ''Boeing's total production costs, including the upfront design, engineering, and tooling, may soon fall below Airbus's costs for labor and material alone.'' Pierson and production chief Schaeffler are waging a two-front war on costs. They want to reduce the production cycle, now two to three years from the time an order is placed, to 18 months, about the time Boeing and McDonnell Douglas take now. And they want to cut labor costs, which account for 40% to 60% of production costs. COORDINATING production among the four Airbus partners and scores of subcontractors is a bigger job for Airbus than for its competitors. Most of the work on an Airbus is performed at factories scattered throughout Europe. Nearly finished parts are flown to Toulouse, where they are pieced together. A new computer communications system replaces a tide of telexes that clattered between the main Airbus manufacturing centers in Hamburg, West Germany; Chester, England; and production sites in France. Building airplanes by telex is a bit like buying and selling stocks by mail. ''Messages that weren't lost sometimes went unanswered for months,'' says Schaeffler. ''When answers finally came back, information was often out of date or incomplete.'' Labor costs have been hard to control. European labor practices make it hard for any enterprise to lay off workers in slow times. To decrease production by just one plane a month -- and shed the unneeded workers -- takes about 18 months. To combat the problem, Airbus has designed labor savings into the planes. Building the new A320 requires one-third the manpower of the older Airbus models. Selling planes is still, as they say around Airbus, job numero uno, un, eins, one. Despite his production background, Pierson has taken on the top selling job. Since becoming Airbus chief, he has taken just one week off, to go fishing with his wife and three children in Corsica. ''Fishing is the best sport I know for developing the patience needed to sell commercial aircraft,'' he says. Despite the A320's rousing start -- 82 firm orders and options for another 173 planes -- Adam Brown, Airbus's vice president for sales, thinks that new orders will be flat over the next two years. Airbus uses exceedingly optimistic sales projections. It predicts that airlines will buy 4,160 A320- type planes over the next 20 years and that more than 900 of them will be Airbuses. In contrast, the consensus at Boeing and McDonnell Douglas and among security analysts is that fewer than 3,000 A320-type planes will be sold in the period and that one-third will be delivered before the first A320 rolls out. Even if Airbus gets 25% of the remaining orders, it would sell only 500 planes, 100 fewer than its projected breakeven level. PIERSON IS COUNTING on the A320's technology to win extra sales. Fuel-sipping new engines, Airbus claims, can cut operating costs by as much as 30%. And the A320 will be the first commercial jetliner to offer an entirely computer- controlled flight system. Known in the industry as fly-by-wire, the system transmits the flight crew's commands to the wing flaps, rudders, and elevators by electronic signals, eliminating mechanical links. While passengers with a merely normal fear of flying might find that unsettling, Airbus insists that the system, already in use in jet fighters and the Concorde, gives the crew more precise control over the plane's movements than a conventional flight system. But rivals Boeing and McDonnell Douglas have some technical razzle-dazzle of their own in the works that they hope will make the A320 obsolete by the early 1990s. Each is planning to introduce new A320-size aircraft featuring a revolutionary propfan engine they claim can beat the A320's fuel consumption by 40%. The propfan adds a propeller with short, fat blades to a jet engine, making it more efficient though just as speedy. If the propfan can be perfected, Airbus would have little choice but to offer the engine in the A320, a redesign that could cost around $2 billion. Long before the fate of the A320 is known, Pierson wants to have new planes in the market. He is talking about two new models by 1991, a medium-range 300- plus seater called the TA-9 and a 270-seat model called the TA-11 for long + distances. The planes would share a common wing and flight control system, enabling Airbus to spread development costs over two aircraft. But only 25% to 30% of parts and tooling of earlier Airbuses would find their way into the new models. Launching the two planes could cost more than $1.5 billion. Part of that money would undoubtedly have to come from Airbus's governments. Pierson sees a potential demand for 1,500 TA-9s and TA-11s over the next 20 years, but like past Airbus forecasts, this could prove to be wishful thinking. McDonnell Douglas estimates the market for such planes at about half that number. The new Airbuses would compete against Boeing's new extended-range 767 and a new McDonnell Douglas plane to be called the MD-11. ''If Airbus goes ahead with the TA-11,'' says a McDonnell Douglas executive, ''it means a ferocious battle for a tiny market.'' Both the Boeing and McDonnell Douglas planes are derivatives of models already in production. One mark of success for Airbus would be to begin generating enough cash flow to finance new planes. That's a tough hurdle. ''When you haven't made a profit in your entire 16 years of existence, it's hard to get into the habit of starting to earn one,'' says First Boston's Demisch. If Airbus can't learn new habits, it can last only as long as governments are willing to pick up the tab.