Image: Airbus A380
Chung Sung-jun  /  Getty Images file
Costs from all the toubles associated with the A380 will land squarely on Airbus' bottom line.
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updated 1/21/2007 4:09:22 PM ET 2007-01-21T21:09:22

We knew it was the worst year in Airbus' history — and now it looks as if it might have been even worse than we thought. On Jan. 17, Airbus acknowledged it would post an operating loss for 2006, with fallout from production woes on the A380 megajet slashing billions from the bottom line, even as the planemaker reaped a record $33.6 billion in revenues.

In a profit warning, Airbus' parent company, European Aeronautics Defence & Space, said it would take charges for penalty payments to A380 customers, and for asset writedowns connected to the project. Costs from a restructuring program spurred by the big plane's troubles also will be loaded onto the 2006 books. "We are cleaning the ground to start again on a sound basis," Airbus Chief Executive Louis Gallois said at a press conference in Paris. Gallois also serves as co-CEO of EADS.

EADS didn't specify the amount of the charges, but it's a safe bet they are in the billions, since Airbus posted almost $3 billion in operating profits in 2005. Moreover, EADS said the A380-related costs were still being tallied, and warned that the red ink could rise even further.

Underscoring its difficulties, Airbus disclosed that last year it booked aircraft orders worth $75.1 billion at list prices. Archrival Boeing's order book was almost $109 billion. The crucial difference: Boeing sold more than 300 widebody planes, led by its newest model, the fuel-efficient 787 Dreamliner. Airbus, which only last month settled on final plans for a new plane to counter the Dreamliner, booked only 150 widebody orders. Widebodies are far more profitable than narrowbody aircraft such as Boeing's 737 and the Airbus A320.

To get back in the game, Airbus must launch its new widebody, the A350, as quickly as possible. Yet to do that, the company has to raise $15.5 billion in startup costs, even as it digs out of a financial hole from the A380.

Equally urgent, Airbus must slash costs to compensate for the euro's strength against the dollar. Since 2000, Gallois acknowledged, "We have lost 20 percent in price competitiveness vis-à-vis Boeing." Airbus still hasn't revealed exactly how it plans to tackle all those challenges simultaneously, but the recovery plan is likely to include at least three major elements.

First, Airbus will sharply ramp up production of its best-selling model, the A320. Monthly production rates are set to rise from the current 32 planes to 36 by the end of next year. A difference of four planes a month might not sound like much, but over the course of a year it will generate hundreds of millions in extra cash flow that Airbus sorely needs. "When one looks at the company and whether it comes out in good shape or not, it's all down to the A320," says Sandy Morris, an aerospace analyst at ABN AMRO in London. "It may not be the highest-margin product, but if you sell enough of them, you survive."

Boosting production is risky, though. In the 1990s, Boeing nearly collapsed after it couldn't keep pace with a big rise in orders for the 737. Complicating Airbus' task, it has two different narrowbody assembly lines—one in Hamburg, Germany, and the other in Toulouse, France—and is planning to open a third next year in China, at a new factory near Beijing. "Airbus needs to get its whole supply chain to pull together," Morris says. "If they get it wrong, it's a horrible risk."

At the same time, parent EADS is likely to turn to capital markets for an additional cash infusion. At the Jan. 17 press conference, Hans Peter Ring, the chief financial officer of both EADS and Airbus, said the company was considering a possible share issue as well as other options. "We'll consider all instruments strengthening the equity base," he said. EADS' major shareholders are French media and defense group Lagardère, the French government, and Germany's Daimler Chrysler, which is selling its stake to a group of German banks.

By far the most ambitious element of Airbus' recovery plan, though, is its so-called Power8 restructuring initiative, which seeks to squeeze out nearly $2.8 billion in operating costs by 2010. Gallois has said he will disclose details of the plan in February.

But French and German unions are already bracing for a fight, in anticipation of Gallois trying to save money by outsourcing more work to non-eurozone companies, and by consolidating some of Airbus' scattered production activities. For example, the company might decide to paint and furnish the cabin interiors of A380s in Toulouse, where the plane is assembled, rather than flying the unfinished aircraft to a factory in Hamburg for painting and furnishing.

Another intriguing possibility is that some of Airbus' 16 European factories could be sold to outside investors. Although the plants would continue to produce output for Airbus, selling them would give the company a much-needed cash injection. And the new owners might be more willing than Airbus and politically-sensitive EADS to carry out drastic cost-cutting measures.

Taken together, such changes could radically transform Airbus. Indeed, Gallois told reporters, "We have to give birth to a new Airbus." If 2006 was Airbus' worst year ever, 2007 could well prove its most critical.

Copyright © 2012 Bloomberg L.P.All rights reserved.

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