Airbus, EADS roiled by yet another A380 delay

Washington DC
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EADS will lose €2.8 billion ($3.6 billion) in pre-tax earnings between 2006 and 2010 because of another delay to its A380 program, which was revealed late today.

The delay, which will now push the first A380 delivery back a year to the end of 2007, will also defer about €2 billion in earnings expected in the five year period to 2010 into the next decade.

These financial problems, combined with an expected €1.5 billion increase in working capital resulting from inventory build-up over the latest delay period, will reduce EADS’ cash flow by €6.3 billion.

Importantly, language used in EADS’ statement indicates that these financial woes do not include costs associated with compensating A380 customers or possible cancellations.

With Airbus’ latest A380 delivery schedule, the first aircraft will now be delivered in October 2007. A further 13 will be delivered in 2008, while 25 A380 will follow in 2009.

“The industrial ramp-up will be completed in 2010, when 45 A380s are going to be delivered,” notes Airbus in a separate statement. The manufacturer adds that the first A380 freighters will be delivered in 2010.

A380 deliveries will match the manufacturer’s initial sequence, with Singapore Airlines (SIA) remaining the aircraft’s launch customer, EADS said during a conference call involving the parent company’s CEOs Tom Enders and Louis Gallois, CFO Hans Peter Ring and Airbus CEO Christian Streiff.

During the call, Streiff also noted that the company does not expect any A380 cancellations, and that “the customers are eager to get the planes as quickly as possible”.

Several A380 customers, including Emirates, Lufthansa and SIA, today said they are reviewing their A380 orders in light of yet another significant delay in the program.

The carriers were already in talks over compensation following Airbus’ June decision to delay A380 deliveries because of some wiring problems.

It is now apparent that the A380’s wiring is only part of a larger problem within the A380 program. In its release today, Airbus notes: “In June, the amount of work to be done to finalize the installation of the electrical harnesses into the forward and rear section of the fuselage had been underestimated.

“Beyond the complexity of the cable installation, the root cause of the problem is the fact that the 3D Digital Mock up, which facilitates the design of the electrical harnesses installation, was implemented late and that the people working on it were in their learning curve.”

In a separate speech today in Paris, Streiff also noted: “The root cause of the issue is that there were incompatibilities in the development of the concurrent engineering tools to be used for the design of the electrical harnesses installation. Quite simply, while the A380 is the most-advanced and modern plane ever made, the wiring harness installation design package in the forward and rear fuselage could not keep pace with the rest of the aircraft program.

“Also, the learning curve for wiring harness changes was too steep during the complex development phase. We have to update and harmonize the 3D design tools and data base - and it will take time to do this.”

Streiff at the same time stressed this was not a fault to be solely blamed on the company’s electrical design team, which is based in Hamburg, Germany.

“Airbus is one company. It is Airbus as a whole which failed, the management on several levels with several passports who failed, and certainly not the teams on the shop-floors,” he added.

New management and training procedures well as updated tools are being immediately introduced. This overhaul, which includes consolidating all A380 function in Hamburg under the full responsibility of one manager, Rudiger Fuchs, will be overseen by Streiff.

In addition, Airbus says it launching a program, ‘Power8’, which will reduce its development cycle times by two years, increase productivity by 20%, and hopefully cut cost by at least €2 billion from 2010 onwards.

The cost cutting exercise is also expected to save Airbus some €5 billion between now and 2010, the company adds.