Airbus' crisis looks like Boeing's in 1997

Airplane parts clog factory floors. Profits evaporate. Customers demand compensation. Heads roll in the corporate suites and new executives sketch costly restructuring moves.

This is Airbus 2006.

It was also Boeing 1997.

Airbus now faces a crisis much like the one that hit Boeing a decade ago. Because the European plane maker can't get its crucial A380 superjumbo jets finished on time, it's losing the confidence of the airlines. Its new chief executive may be about to bail.

And the response Airbus outlined this week is strikingly familiar: Increase outsourcing, reduce the work force, consolidate factories and software systems and become an "integrator" of parts built by others.

Industry observers believe the plan to remake Airbus will be very difficult to execute and cannot go nearly as far as Boeing's 787 global manufacturing model.

Even so, Airbus will likely emerge a tougher rival with new airplanes — including a new, possibly all-plastic A350 that will be a potent competitor to Boeing's forthcoming 787 and strong-selling 777 jets.

Months of turmoil

April 7: BAE Systems, Europe's largest defense contractor, confirms plans to sell its 20 percent stake in Airbus to EADS, which already owns 80 percent.

June 13: Airbus announces a seven-month delay in delivery of the A380 superjumbo, cutting $2.6 billion from expected profits.

July 2: EADS co-chief Noël Forgeard and Airbus CEO Gustav Humbert resign. Christian Streiff, former chief of materials giant Saint-Gobain, named Airbus CEO.

Aug. 30: A Russian state bank discloses it bought a 5 percent stake in EADS.

Oct. 3: Airbus postpones delivery of first A380 by another 10 months, about two years behind the original timetable; this third delay lops another $3.6 billion from projected EADS profits through 2010.Streiff outlines a restructuring plan to consolidate factories and cut costs by $6.3 billion through 2010 and $2.5 billion each year thereafter.

Oct. 6: EADS denies reports it has accepted Streiff's resignation, and Airbus denies he is leaving to run automaker Peugeot.

Source: Seattle Times news services

"The 1997 production fiasco was Boeing's epiphany. The mess surrounding the cost overruns, delays and production problems with the A380 is Airbus' epiphany," wrote aviation analyst Scott Hamilton last week, "Just as Boeing came out of the 1997 mess a stronger company and competitor, Airbus will, too."

Despite the grim short-term prospect of job cuts and red ink, and even though long-term profitability is dubious, industry insiders remain confident that European governments won't let Airbus fail. And that, they say, means ensuring it has the cash needed to re-launch the A350. Airbus is set to submit a new A350 plan to the board of parent company European Aeronautic Defence and Space (EADS) later this month.

"Of course they'll go ahead with the A350. Will the A380 get fixed? Of course it will," said Wolfgang Demisch, longtime industry financial analyst. "If push comes to shove, there's not going to be hesitation on the part of the European government leadership to do what is necessary to ensure Airbus' continued survival and effectiveness."

For now, though, the Airbus news is all bad. The A380 delays now stretch out two years and have slashed projected profits through 2010 by $6 billion. Available cash will be reduced by $8 billion in that period. Further big charges are expected to follow from the restructuring itself.

Meanwhile, Airbus A380 production is at a standstill. A380 wings are stacked up at the Airbus UK plant in north Wales, with the final assembly plant in Toulouse, France, not ready to accept them.

On Tuesday, Christian Streiff, new Airbus chief executive, and Tom Enders , co-CEO of EADS, outlined a plan for deep labor cuts and increased outsourcing.

"Airbus must change and change quite radically," Enders said. Streiff said the plan would tackle three "taboos": streamlining final assembly lines, consolidating the manufacturing structure around Europe, and sourcing more parts outside the company.

"We will progressively make Airbus more and more a true architect and integrator," Streiff said.

Charles Armitage, a London-based Airbus analyst with Merrill Lynch, said the restructuring plan mirrors production changes Boeing introduced after the 1997 crisis.

"It's a total vindication of Boeing's restructuring of its supply chain," he said.

In 1997-98 Boeing assembly lines in Everett and Renton had shut down for weeks because of parts shortages and mismanagement.

In the years that followed, Boeing Commercial Airplanes laid off tens of thousands of workers, adopted Toyota-style lean methods to reshape its assembly lines, and outsourced simpler work. It sold off parts plants, including the largest in Wichita.

Boeing Commercial Airplanes employed 122,000 workers in 1998. It has 55,000 today.

Airbus plans in doubt

European financial analysts are expecting the closure of some Airbus plants, though not the largest ones in Toulouse and Hamburg.

But by Friday, speculation was rife that Streiff will announce his resignation this weekend and jump to the top job at French automaker Peugeot.

When Boeing commercial airplanes chief Alan Mulally recently joined Ford, he left Boeing in good shape. If Streiff exits, after just 100 days in the job, it will inevitably suggest a pilot bailing out as his airplane dives to earth.

"It's not clear he's the right man for the job," said Doug McVitie, a former Airbus salesman who runs consulting firm Arran Aerospace.

McVitie, an unrelenting critic of Airbus management who retains many contacts within the company, said Streiff proposed radical production changes that were politically unacceptable. These include the consolidation of A380 and A350 assembly at one site in Toulouse and the shift of all A320 narrowbody assembly to Hamburg, Germany, in compensation. Airplane assembly is currently done partly at both locations.

Hostility to that plan from the German government, which has invested heavily in Hamburg to win A380 production work, and from the French unions, reluctant to let go of the humming narrowbody assembly lines, seems to make that idea a non-starter.

"It makes commercial sense," McVitie said, "but Airbus isn't commercial. It's political."

Airbus vice president Rainer Ohler, in an e-mail, acknowledged that European realities mean Airbus cannot restructure its manufacturing model as freely as Boeing did on the 787.

"A certain balance between our sites in France, the UK, Spain and Germany is required," he wrote. "Airbus is different and will never go exactly the same road as Boeing. ... We live in Europe. Things tend to be a bit more complicated here."

Ohler said the bulk of the coming job cuts would not be made from among the 57,000 permanent workers but from the 32,000 temps and contractors who work on site in Airbus' factories but lack the legal and social protections of the regular work force.

Funding the next plane

Raising the money to develop the A350 appears to be compulsory for Airbus. Without the A350, Airbus essentially cedes the widebody market to Boeing and relegates itself to making largely single-aisle jets.

"It would be suicide if they didn't go ahead with the A350," said an executive with an Airbus supplier in Washington state who asked not to be identified. "They don't make much money on those little planes."

Development of the new jet could cost as much as $10 billion.

McVitie said Airbus has developed a new plan for the A350. It calls for entry into service to be pushed out even further than announced last June, he said, to allow development of a 787-like carbon-fiber-reinforced plastic airframe.

Analyst Demisch said there's no question that the EADS board will give the go-ahead and that government funding will be provided, perhaps in some indirect way to get around the subsidies issue.

"The idea that an industrial entity that has substantial state ownership and is viewed as a national champion is going to be curtailed because there is a few billion Euros shortfall over a few years is to underestimate the ingenuity of European accountants and financiers," he said. "I don't think there's going to be any trouble funding this."

Boeing wasn't finished in 1997, and Airbus is hardly finished now.

Dominic Gates: 206-464-2963 or dgates@seattletimes.com