Friday, May 14, 2010

A380 production cost weigh down EADS earnings; Airbus hopes rising dollar will save program

Just a warning on where I stand: I think Airbus pursuing the development and production of the A380 is one of the worst decisions the European company could have made. I know there are many readers who will take issue with that and I certainly welcome your frank and polite response.

EADS just announced that its earnings are being negatively impacted by continued production problems on the A380. Airbus salespeople wanted to have as much customization as possible so that airlines can out do each other in terms of flying amenities. Fine but that obviously presented a huge (ongoing) headache for Airbus' A380 engineers and operations people who have to design and coordinate the massive customization of each and every A380 and has dramatically increased the A380 costs and pushed out the breakeven to beyond 500 airplanes.

Airbus is at such a point in the program that the success or failure of the program no longer hinges on the merits of the aircraft but on the direction the US dollar trades in the foreign exchange markets.

Airbus has come to a point where the destiny of the A380 program is not in their hands anymore they are at the mercy of forces that are beyond their control. World events and financial speculation create volatility in the financial markets thus having the A380 profitability be determined by these forces is very scary. And this is $25bn that we're talking about here. That's not chump change!

Mismanagement is partly to blame but so is Airbus' hubris that they thought they could sell 1000 A380s. Truly the only reason Airbus bought the A380 to market is that they wanted to lay claim to the building the largest passenger aircraft flying. Well they have that distinction but they're also going to have the distinction of making one of the worst industrial production decision ever.

Hans Peter Ring, EADS finance chief is hoping that the dollar appreciation over the next 5 years can help the A380 program breakeven. Take note here, it not customer orders that's going to save the A380 program, it the strong dollar that Airbus is laying its hopes on. The aircraft will garner a couple hundred more orders but with the rumored breakeven at 500 or 600 units, this program will not breakeven on orders alone.

Saj Ahmad of also has the same take on the A380 program:

Saj Ahmad: Shoot the Dog (Part 5)


A380 said...

It can't be any worse then the B748 that has sold less then the A380!

johnv777 said...

A380: One of the big differences between the A380 and the B748 is that Boeing had a much smaller investment for the incremental move from the 744 to the 748 than Airbus had with the brand new A380. Boeing already had a robust production process in place and did not have to reinvent the wheel. So Boeing has a lot less upfront cost to recoup. Boeing will also not give away the B748 below cost as Airbus has done.