Back in June, it all started to go wrong for Airbus and EADS, with news of A380 delays, profit warnings, anger among shareholders, allegations of insider trading and a shake-up of top management. At the time, the airliner manufacturer and its then-80% owner vowed they would bounce back, with new Airbus boss Christian Streiff promising to think the unthinkable if necessary, beginning with a top to bottom 100-day review of the A380 programme.

Three months later, far from reassuring customers and investors, Airbus’s crisis has deepened, with a further delay to A380 deliveries throwing airline and supplier plans into chaos. The troubles have hit Airbus’s soon to be 100% owner (see BAE briefing opposite), which despite its efforts to broaden its defence, helicopter and other non-Airbus businesses, is still hugely affected by the fortunes of its biggest division. Last week, EADS released a profit warning totalling €4.8 billion ($6.2 billion) between 2006 and 2010.

EADS is now expecting cost overruns and late delivery payments resulting in irrecoverable expenses to lead to a reduction of around €2.8 billion in earnings between 2006 and 2010, after Airbus said just one A380 would be delivered in 2007. Around €2 billion of earnings originally forecast for the five years to 2010 are expected to be pushed back into the next decade.

Sash Tusa, an analyst with Goldman Sachs, describes Streiff’s plan for cost-cutting and rationalisation of manufacturing as an “aggressive and potentially radical plan” to “fundamentally change the structure and culture of Airbus”. But will these measures be enough to turn around a scenario that is in danger of spiralling out of control?

A major element of Streiff’s plan is a cost-cutting programme: Power8. But analysts are cautious about its reach; an earlier project, Route06, will generate only an estimated €1.2 billion in savings, compared with a forecast €1.5 billion, says Goldman Sachs. The investment bank expects Power8 to generate savings of only around €1.9 billion a year by 2011, compared with EADS’s own target of cutting costs by €2.1 billion a year, and saving €5 billion by 2010.

Deutsche Bank analyst Ben Fidler agrees: “Although sounding dramatic, there are likely to be some questions over its credibility bearing in mind the shortfalls seen on earlier Airbus cost reduction plans.” But even these financial forecasts do not take into account a major potential element of the debacle – the compensation and costs associated with cancelled orders if airlines and lessors decide to cut their losses and look for alternatives to the A380. Streiff’s plan may be far-reaching, but it is unlikely to restore full confidence in the company: “The conjecture about possible cancellations seems likely to continue,” says Robert Stallard, a Bank of America analyst.

Tusa agrees: “With this third A380 delay, and the programme now two years late, we believe that some cancellations are possible, with Emirates having the largest orderbook.”

But the most far-reaching consequence of the A380 debacle could be the effect Streiff’s rescue plans will have on Airbus’s and, to a lesser extent EADS’s, problematic pan-European structure. The tense Franco-German relationship, which has always hovered spectre-like over Airbus and EADS since their formation as integrated organisations at the start of the decade, may get even more fractious as Streiff begins to think the unthinkable and rationalise production plants.

Revenue at Eads 

Goldman Sachs estimates that Airbus will need to get rid of seven of its 16 sites in France, Germany, Spain and the UK to reduce its vertical integration, cut research and development costs and increase its dollar-denominated cost base. Tusa believes the rescue plan is likely to include a consolidation of final assembly lines, including the possibility of moving all A320 lines to Hamburg and all A380 lines to Toulouse. “We believe that such a move alone could generate intense political opposition in France and Germany,” he says.

Speaking in Paris last week, Streiff was adamant that Airbus as a whole was to blame for the situation it finds itself in. “What I can firmly say is that it is not the electrical design team of Hamburg who failed. 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.” But carrying through this philosophy into the practical implementation of the plan will be the real test.

Streiff is not intending to reveal detailed plans for the manufacturing rationalisation until the start of next year, giving yet another indication of the magnitude of the task of getting Airbus and the A380 back on track.

EADS wants the world to believe that it is more than Airbus. But, just as the airframer’s success in recent years has been the main driver behind its soaring earnings, so now its problems are dragging EADS down.

Source: Flight International