PARIS, 18 June 2006 — The announced seven-month delay in deliveries of the new super-jumbo Airbus 380 was supposedly because of wiring problems. There were also allegations of illegal insider share dealing which followed a dramatic drop in the share price of Airbus’ principal parent company, European Aeronautic Defense & Space Company. Such news can only have delighted the company’s US rivals Boeing. After all, only a few months ago, Boeing was in the doldrums after its chief executive, Harry Stonecipher, was forced to resign because of an affair with a female company vice president. Ironically, he had been appointed to clean Boeing up after a scandal two years earlier.
The rivalry between the two aircraft manufacturers has been bitter and intense for several years, with both companies accusing the other of receiving unfair government subsidies. The bitterness has gone from bad to worse — and for sound economic reasons. In the 1980s and 90s, Boeing dominated the skies. Since 2002, however, Airbus has consistently outsold Boeing in terms of aircraft sold. Last year, when aircraft sales were more than three times the normal, was particularly galling for Boeing. Even though it sold more in cash terms, Airbus sold 1,055 aircraft to Boeing’s 1,001. The rivalry is intense because the rewards are great. This is why the United States filed a WTO case last year against the EU, alleging illegal subsidies at Airbus and why, the very next day, the EU filed a counteraccusation against the US for support for Boeing. Though this may be nothing more than a case of turbulence, there are nonetheless some real fears. One expressed by market analysts is that because of the delay in A380 deliveries, airlines will switch to other airliners, notably Boeing’s 787 Dreamliner.
This is fantasy. Switching the choice of aircraft on the basis of a delay might make sense in some cases but not in this. The companies are rivals but the two aircraft are not. There is a completely different economic rationale behind each. The A380 Superjumbo will be the world’s largest airliner, seating over 800 passengers. The Boeing 787 Dreamliner is medium-sized. Companies choosing Dreamliner want to develop direct long-haul flights, between major and minor airports; that is the Dreamliner’s forte. Airlines that chose the A380 — 159 firm orders from 16 carriers including Etihad, Qatar Airways, India’s Kingfisher, Qantas, Virgin Atlantic and, the biggest order of all, 43 from Emirates — have done so because their focus is on mass hub-to-hub transit; that is the Superjumbo’s specialty. The Airbus rival to the Dreamliner is not the A380 but the medium-sized A350 which Boeing has already beaten into second place; the first A350s are not due for delivery till 2012, three years after the Dreamliner. Last week Singapore Airlines ordered 20 Dreamliners, not in preference to the Superjumbo — it has 10 on order — but in preference to the A350. The A380 delay cannot have influenced that decision although the announcement came just hours after the airline expressed anger at the A380 delay. Still, spending $4.52 billion on 20 aircraft involves a lot more than a few hours’ instant decisions.
Several other airlines have also announced that they will review their plans following Airbus’ announcement that it will roll out only seven A380s next year rather than the 27 planned. That does not, however, mean changing plans or planes. It means adapting to the situation.
Changing plans over a seven-month delay would be expensive and potentially devastating. It would mean rethinking their entire economic strategy for the medium term — and with little chance of a new one succeeding. Malaysian Airlines which has ordered six A380s still wants them and wants an assurance that it will get at least one of them next year. Like Singapore Airlines, Qantas is also angry about the delay and wants compensation, but is not canceling its order.
Quite apart from upsetting carefully planned economy strategies, the other reason carriers are extremely unlikely to change their choice at this stage is that despite the delay, the Superjumbo will still be available to them long before the Dreamliner. The first 787 Dreamliners will be delivered in 2008, providing Boeing does not have any delays of its own — always a possibility.
Any new orders for the 787 will be some way down the line in terms of delivery: 2009 or 2010 at the earliest. Boeing is having a good laugh at its rival over its present embarrassment plus the announcement from EADS, which owns 80 percent of Airbus, that it expects the delay to cost $634 million a year between 2007 and 2010.
The notion that the A380 is not going to be a commercial success when it eventually takes to the skies is untenable. The A380 meets the criteria that hub-to-hub carriers such as Emirates or Qatar Airways want for their development strategy. And with aviation fuel prices at record highs with no sign of decreasing, most airlines are going for efficiency — and this is where the Superjumbo scores. Moreover, in the bigger picture of each company’s overall performance and taking into account their other aircraft sales, the two are running neck and neck. Last year in fact was a bumper year for both.
In France, where the Superjumbo is being assembled, there is strong confidence in it. President Chirac has gone on record to state his belief that Airbus will get over the problems. Where there is concern, however, is over the allegations of financial skullduggery.
The 26 percent slump in shares in EADS which followed announcement of the delay has prompted some shareholders to ask pointed questions about the sale of EADS shares in March by EADS Chief Executive Noel Forgeard and other senior officials. Forgeard was chief executive of Airbus at the time; he moved to EADS last month to beef up the company’s military division. The suggestion is that he and the others sold their shares, knowing of the A380’s problems and also that the share price would fall. Forgeard has denied this, saying that he first knew of problems in April and that even until the end of May everyone at Airbus thought the problems would be resolved in time and that it was only on June 13 that investigations reported the delays and that the findings were made public the same day.
The French market regulator, AMF, has set up an investigation. An investigation is not evidence of guilt but AMF had to act once allegations were made. For their part, shareholders feel the pain and want someone to blame.
There is, however, every reason to believe, along with President Chirac, that Airbus will recover — and EADS shares along with it. The collapse of the shares is not market-led, but dealer-led.
If, on the other hand, Noel Forgeard is found to be lying, there will be devastating consequences for the future of EADS and its share price.
Meanwhile, it is surprising that no allegations have spread to British Aerospace which owns the other 20 percent in Airbus. The company announced it was selling its stake in early April, just when the A380 problems were becoming apparent. The announcement of the A380 delay and the financial implications have already hit BAE in the pocket. Its stake was worth up to $6-$8 billion before the bad news came out. Ten days ago, it decided to force a sale of its shares to EADS, which it can do under a 2001 agreement, but it is unlikely to get anything like $6 billion now. It is likely to be the biggest victim of the A380’s problems. It could not have chosen a worse time to get out.
Airbus will recover. Its sales overall are substantial and there is reason to believe the A380 will, in the long term, be as successful as the A320 and EADS shares will rally. The problem is now. BAE will surely lose if it sells now.
