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Squeezed by Strong Euro

Airbus' Cost Cuts Don't Fly

By Carol Matlack

The überstrong euro, on top of a failed plan to sell factories, means the planemaker may have to take brutal measures that will slash European jobs.

Airbus will have to go back to the drawing board.

No, it's not a plane that needs redesigning -- it's the European company's increasingly desperate plan to regain its cost competitiveness against Boeing.

On May 7, Airbus' parent European Aeronautics Defense & Space confirmed it had halted negotiations to sell two of the planemaker's French factories to Latécoère, a French aerospace equipment supplier. Its plan to sell three German factories to other buyers also has fallen apart.

Disposing of the factories was a key element in its push to find billions in cost savings in order to battle the dollar's decline, which has sent costs at its European factories soaring far above those of Boeing. Now that the effort has failed, Airbus will have to contemplate "brutal, radical measures" that could shift thousands of jobs outside Europe to lower-cost countries, says Sandy Morris, a London aerospace analyst with ABN Amro.

Already Two Years Behind

At the same time, Airbus faced new uncertainty this week over its troubled double-decker A380 plane, as it sent a letter to customers saying meeting the aircraft's delivery schedule would be "challenging." Airbus said the letter did not warn of slippage in the schedule, but Middle Eastern carriers Emirates Airline and Etihad Airways said they were bracing for more delays. Emirates has ordered 58 of the planes, and further slippage "will do us serious damage," the carrier's president, Tim Clark, told Reuters.

The A380 is already two years behind schedule because of wiring problems caused by mismatched design software. The problem wasn't discovered until the planes were on the assembly line. Workers are having to rewire 25 planes, which has slowed production to about one superjumbo per month. Airbus has said that to meet current delivery targets it will need to boost that to four per month within two years. That, a spokeswoman said, is what prompted the company to tell customers about the "challenging" schedule. But she said Airbus won't know whether more delays could be in the offing until it completes a review of the program in the next few weeks.

While a further A380 delay could lead to millions in penalty payments to airlines, those sums pale in comparison to the billions Airbus is losing from the weak dollar. Because aircraft sales are priced in dollars, but Airbus builds planes mainly in Europe, every 10 cent rise in the euro's value against the dollar slashes more than $1.6 billion off its bottom line.

Plans for Spin-Offs and Outsourcing

Early last year, when Airbus announced its so-called Power8 restructuring program, it figured it needed to cut costs by $3 billion annually to offset those losses. But since then the euro has risen another 20 cents against the dollar, to about $1.55 currently. That means Airbus needs to find another $3 billion in savings, according to ABN's Morris. "It has become a matter of survival," he says. "If things stay as they are, Airbus ultimately will be driven out of business."

Airbus had planned to spin off six European factories to suppliers who would use them to build components for Airbus. Aside from the cash infusion and balance-sheet boost from the divestitures, the hope was that suppliers -- less sensitive to political pressure than Airbus itself -- could produce more cheaply by outsourcing some work to low-cost countries. Airbus also wanted the suppliers to pony up some development money for its new A350 widebody jet.

But the numbers didn't add up. Just like Airbus, the potential buyers couldn't figure how to operate the factories profitably with the euro above $1.55. And with tight global credit markets, they had trouble obtaining financing. Latécoère, with annual sales of $650 million, would have needed to raise $300 million for the French factory deal.

Must Go Much Further to Cut Costs

Airbus says it has a fallback plan to spin the French and Germany factories off into holding companies that could sell them later. The planned sale of two more factories, one in England and the other in Germany, is likely to go ahead. "EADS and Airbus maintain the (profit and cost-savings) targets previously communicated," EADS said in a statement, adding that it was prepared to "front the capital expenditure required" to build the A350.

But Airbus clearly must go much further to cut costs. It already has promised to parcel out work on the A350 to China, Russia, and other non-euro-zone countries. Now it will almost certainly have to shake up production arrangements for its existing planes such as the A320 and A330. Airbus Chief Executive Tom Enders has already hinted at that, saying at a press conference in Berlin on Apr. 24 that the company was considering "supplemental measures" to limit its exposure to the euro.

What kind of measures? Airbus could renegotiate contracts with suppliers, forcing them to shift manufacturing to lower-cost countries, or else find new suppliers. The company would have to compensate suppliers in those cases, but the expense would be far less than the savings it would reap.

Labor unions and some politicians protested when Airbus announced its Power8 plans to sell off factories. But, Morris says, "What's coming now is going to be even more brutal. Power 8 will have been the easy bit."