A380 delays set back Airbus in Asia

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A380 delays set back Airbus in Asia
By Duncan Freeman
Airbus parent company European Aeronautics and Space Defense Co (EADS) shocked the civil-aviation industry this month and sent its stock into a steep tumble when it announced a six-month delay in most deliveries of its giant, double-decker Airbus A380. The news was nowhere more consequential than in Asia, regarded as the big aviation growth market of the 21st century.
It is likely that the A380 delay will significantly damage Airbus's efforts to match Seattle-based rival Boeing in Asia. The A380 represents a gamble on the future for Airbus, since its success will be based on as yet unproven assumptions about the future needs of airlines, and has pitched the superjumbo against Boeing's 787 Dreamliner.
The A380, with its unrivaled passenger capacity, is relying on future demand to fly large numbers of people from hub airport to hub airport, while the Boeing 787 is intended to fly smaller payloads from point to point, without necessarily going through the large hub airports that normally serve long-distance flights today. Also, the Dreamliner reflects Boeing's calculation that airlines will be more interested in an economical mid-size airliner that uses new technology and materials to reduce operating costs and increase passenger comfort.
So far, it is unclear which strategy will win out, but the A380 delay fiasco has done little to help Airbus's cause. It was not the first time: a similar set of problems last year also put back production.
The announcement of the delivery delays, which resulted from problems with electrical-wiring harnesses, had an immediate effect on the company. As shares in EADS fell sharply, bitter recriminations were made against the management of Airbus, along with a whiff of scandal after it emerged that the EADS joint head Noel Forgeard, who was formerly chief executive officer of Airbus, and a number of other senior executives had sold large amounts of shares in the company in March, only a short time before the problems were made public. The first question being asked is whether they knew about the production problems when they sold shares, which could make them open to charges of insider dealing.
The follow-up question is, if the senior executives did not know about the A380 problems, why didn't they, given the seriousness of the delays and their implications for the firm? Even senior figures such as Arnaud Largardere, one of the joint chairmen of EADS, have conceded that there is a major crisis at Airbus. The problems with the A380 are also compounded by delays to the new A350, which is intended to compete directly with Boeing's Dreamliner.
The implications for the performance of Airbus and the A380 in Asia are not yet clear. Airbus still maintains that it will deliver the first A380s to launch customer Singapore Airlines by the end of this year. However, there will be a production shortfall in the following years, so that in 2007 only nine aircraft will be produced compared with the original target of 20-25, with a shortfall of five to nine aircraft in 2008, and about five aircraft in 2009. Thereafter, Airbus maintains, production should reach the scheduled targets.
Asia has proved a lucrative market for Airbus, and the A380 has received a relatively good initial reception in the region. There are currently orders for 159 A380s, with by far the largest order coming from Dubai-based Emirates, which ordered 43 of the enormous airliners. But Asian airlines account for a large proportion of the aircraft currently on order. Qantas has ordered 12 A380s, Singapore Airlines 10, Thai Airways International six, Malaysian six, China Southern Airlines five, Kingfisher Airlines (based in Bangalore) five, and Korean Airlines five. In fact, orders from Asia outstrip those from Europe, where so far Lufthansa (15), Air France (10) and Virgin Atlantic (six) are the only passenger carriers to have ordered the aircraft. To date, no US passenger carrier has ordered the A380.
Singapore Airlines is scheduled to be the first airline to fly the A380. In fact, on the basis of the original production schedule, the airline should already be flying the aircraft, with the deliveries supposed to have started at the beginning of this year. After the initial delays last year, the first delivery was delayed until late 2006. Despite the new delays, the airline still insists that it will have aircraft carrying passengers by the end of this year. Qantas, on the other hand, has said that delivery of its first aircraft will be delayed from this October to next April. Some airlines in Asia insist that they will not be affected by the delays; for example, THAI has said it will be unaffected since its aircraft are not due for delivery until 2009.
So far, no airline has canceled A380 orders. Although the delivery failures will have an impact on the airlines, for the moment they appear to be willing to live with the delays. Still, there is no question that Singapore Airlines and Qantas, among others, will be able to claim hefty compensation from Airbus for losses caused by the delays.
Airbus regards China as a crucial future market, and an Airbus China Ltd spokesman said on Thursday that China would get its first A380 on schedule despite delays.
"We are doing our best to ask our headquarters to ensure that China receives its first A380 before the 2008 Olympic Games," said Airbus China Ltd spokesman Kevin Gu, adding, "China is one of the most important markets for Airbus given the fact that we have put engineering, training and customer support facilities into the country and will even produce aircraft here."
Gu noted that pilots from China Southern Airlines, the first Chinese airline to fly the A380, will receive flight training in France next month as scheduled.
Airbus announced recently that it has selected Tianjin as the site for a proposed final-assembly plant in China for the A320 series aircraft. According to Airbus, the site selection will allow an ongoing feasibility study to be completed with a view to making a final decision on the establishment of the plant by the end of September. If a positive decision is made, the plant will commence operations by 2008.
China is a market where Airbus has had growing success in recent years, although it still lags well behind Boeing in terms of the total number of aircraft in service there. The establishment of the final-assembly plant in China is a move intended to make sure that it is able to continue challenging Boeing in China.
The possibility of the assembly plant was first announced during a visit to Europe by Premier Wen Jiabao in December. Airbus and its Chinese counterparts have moved forward rapidly since then, and are evidently closer to making a positive decision on the plant. After the difficulties with the A380 and the A350, Airbus will need all the success it can get with its other aircraft models in China.
Duncan Freeman is a writer and consultant based in Brussels. He can be contacted at duncanfreeman@skynet.be.