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Airbus Tallies Big Sales but Faces Trouble at Home

July 18, 2008

By Dominic Gates, The Seattle Times

Jul. 18–FARNBOROUGH, U.K. — Inside Airbus’ chicly appointed chalet, where aviation executives from around the world closed megadeals all week, airplane-sales superstar John Leahy took stock of new orders for 247 jets and declared this his best-selling Farnborough Air Show ever.

It couldn’t match last year in Paris, where Leahy’s tally hit 425 jets at the peak of the market. But at this time of deep crisis in the airline business it was, as Airbus Chief Executive Tom Enders put it, “pretty amazing.”

Airbus booked orders worth more than $40 billion at list prices this week. Boeing announced 197 orders, though that total included some from previously unidentified customers that were already on its books.

At the same time, Airbus is struggling with production and political issues back home in its network of European plants.

Counterintuitively, both Boeing and Airbus see their business holding steady — even as gloom enshrouds their customers.

That’s because of a “silver lining in the cloud, at least for the airline manufacturers,” said Leahy.

Air carriers worldwide are clamoring for new-model, fuel-efficient planes to replace the older jets that are eating up profits as they guzzle gas.

And deep-pocketed aircraft lessors are financing many of the sales, confident that the new jets will retain their asset value whatever happens to the luckless airlines.

Leahy said his worst-case scenario is that 27 percent of Airbus’ enormous order backlog could melt away as airlines collapse. Even then, he said, Airbus will still ramp up production of its A320 from 34 to 40 a month by next year to meet demand.

“We’ve got an awful lot of work to do just to get rid of some of that old junk,” said Leahy, refering to the old planes now operating. “I don’t see how American [Airlines] justifies flying MD-80s at $140 a barrel [oil prices]. They must be losing money on every trip.”

Although the U.S. airlines need to rejuvenate their fleets, Leahy said they cannot join the buying spree until they drastically reorganize.

“Serial Chapter 11 isn’t a business plan,” said the suave, New York-born Leahy, 57. “I don’t think they all can survive.”

He advises mergers that fully integrate jet fleets and reduce the financial burden of labor contracts, implying lots more pain ahead before the U.S. airlines get healthy.

Despite Leahy’s sales success, Airbus has its own big problems.

Even though the first five double-decker A380 giants have entered service already, the final assembly line in Toulouse, France is still a mess of out-of-sequence wiring work.

In May, Airbus announced a three-month slide in its delivery ramp-up, which Leahy said is “annoying the hell” out of his customers.

In a problem similar to Boeing’s on the 787, but on a much vaster scale, fuselage sections were delivered from Germany to France with much work unfinished.

A lurid account in The Financial Times of London this week described how nationalistic tensions have occasionally broken out on the factory floor among more than 2,000 assembly mechanics brought in from Germany and Britain and the 1,900 regular French workers struggling to put together the next batch of superjumbo jets.

Airbus executive vice president Tom Williams, the tough 56-year-old engineer from blue-collar Glasgow who is responsible for all airplane production, said reports of scuffles between French and German workers shouldn’t be exaggerated.

“Bringing 2,000 strangers into any site, you’re going to have clashes,” he said. “It [would be similar] if you were bringing people from Wichita into Seattle.”

Four A380s have been delivered so far this year. Eight more are supposed to be delivered by year end. Williams said no more aircraft will be sent from Hamburg to Toulouse with significant work unfinished.

But he now projects that it will take almost three years to reach the target of delivering four planes per month.

Airbus’ corporate structure has also suffered from Franco-German tensions.

The planned sale of Airbus-parts plants in France and Germany — described 18 months ago as an urgent necessity to share costs and risks — fell through as politicians and unions in each country fought for their local interests.

“There was clearly a preference for national champions” that overrode the business plan, Williams said.

The planned sale of the U.K. wing plant is not completed yet either.

The worldwide credit crunch makes it more expensive for a buyer to raise capital for such sales, and the fall of the dollar makes the sale less attractive because Airbus wants to pay for its parts in dollars.

Still, Williams said the financial impact of the weak dollar is increasing pressure to complete the restructuring.

Meanwhile, almost the entire top-management team at Airbus — including Enders, Leahy and Williams — faces an investigation by French prosecutors.

The probe centers on alleged insider trading in the selling of stock options in late 2005, months before the major delays of the A380 program became public.

Leahy, who called the allegations “absurd,” said the affair is “an enormous distraction” that takes up too much of his time.

Behind all this distracting drama, how Airbus will shape up in its battle with Boeing depends not on the niche-market A380, but upon the next Airbus jet: the A350.

At Farnborough, Leahy won 98 more firm orders for the proposed jet with a carbon-fiber-composite airframe that will compete with the 787 and the 777.

That brings the total A350 orders to 472.

In an interview at Farnborough, Boeing chairman Jim McNerney said the 787 is five years ahead of the A350, and that there’s time for the company to respond to any threat to the 777.

Airbus’ Williams said design of the A350 is progressing and most of the airframe suppliers are selected. He said the supplier of the A350 tail will probably be chosen by August.

Asked for his opinion of the 787 Dreamliner, Leahy said, “Like the A350, it’s a new generation of aircraft. I think it’s going to be a good aircraft.”

“We are going to share the market, 50:50,” he predicted.

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