RichardAboulafia.com 

:: June 2006 Letter ::

link

Dear Fellow Stunned Observers,

Mapping failure in our industry is easy. Aircraft fail due to technical reasons or market reasons or both. Technical failures include the A-12 and the Comet 1 jetliner. Market failures include the 717, F-20, and Concorde. Finding combinations of both types of failure is rare. Most of these get quashed before they leave the drawing board—like Sonic Cruiser. You need to search history for aircraft that represented both types of failure, like the Spruce Goose.

I’ve always thought the A380 would be a market failure. But we might be witnessing an unusual dual market and technical failure.

What’s bizarre about the recent Airbus A380 announcement is its excuse. “Some wires are tough to install. So production will be cut by 70% next year, and the delays will continue after that.” Damn that Radio Shack. This is the dumbest effort to deflect blame for the disaster (okay, second dumbest; first prize goes to Noël Forgeard’s pinning the blame on Gustave Humbert: “Mon Dieu! Leave the company in this German’s hands for a few months and this happens!”). What to make of all this?

First, no, it’s not just the wiring harnesses. Something looks wrong here. Most likely, they are finishing planes already in production, but making design tweaks for future aircraft, trying to get the weight down and improve performance. The initial planes will likely be overweight.

Second, there’s the market’s comment on this aircraft’s technical appeal. Aircraft delays happen all the time. But if a new plane came with a compelling case, people would wait for it. When people back out, or talk about backing out, that speaks to a serious ambivalence about the plane’s performance. ILFC’s Steve Udvar-Hazy knows more about airline economics and residual values than anyone; if he cancels that’s a serious warning.

I’ll put on my analyst hat and offer some free advice. Airbus and its stakeholders should do a brutally honest assessment of the A380. First, look carefully at the customer contract terms and pricing. Can it ever make money? Can the performance be improved? What will the penalty payments look like for missed performance promises and for late delivery? If the next few weeks see more than one or two customers cancel, that’s a good indicator that this plane will just suck cash.

Next, assess company resources. How quickly can money and engineers be shifted from the A380 to the A370? The A380 (along with the 747-8) is chasing 5-10% of the market by value; that middle market widebody segment is 50%. And, if they’re late with the A370, they run the risk of losing the narrowbody franchise, the other 40-45% of the market, to a Boeing 737 replacement. The situation was bad enough before the new delays. The new schedule implies an ongoing ulcer that distracts from the other 90-95% of the market.

In the interests of fairness, here’s some free (and obvious) advice to Boeing: as soon as the 787 is out the door, launch the 797 narrowbody. Do to the A320 what the 777 and 787 are doing to the A330/340.

To sum, if there is no hope of quickly turning the A380 into a competitive plane with decent economics and then shifting design and production resources to more important segments, kill it. The write-offs and political shame will be terrible. But national, continental, and corporate pride should have nothing to do with what is essentially a business decision. More importantly, the alternative—to keep going and risk losing everything—is worse. There isn’t a lot of time here, and it’s tough to learn from fatal mistakes.

The A380 problems are much bigger than a big plane. France, Europe, heck, everywhere, needs to look at this experience and learn from it. Many governments monkey around with their nations’ industries. Many allow strategic planning and forecasting to be corrupted by politics. Many fill top industry leadership jobs with incompetent party hacks. All of this is really bad. Period. Separation of government and economy (i.e. capitalism) is a great idea. It means the damage government can do is restricted to the public sector. It’s not just in Europe; clueless officials everywhere spent tens of millions in taxpayer cash on airport upgrades, just to accommodate a marginal requirement.

But old habits die hard. As the A380 news broke, French President Jacques Chirac said he had “total confidence” in the A380 (shades of G.W. Bush and FEMA director Michael Brown; “You’re doing a heckuva job, Forgie…”). Much worse than that, the debate now concerns the French Government taking a much bigger role in EADS/Airbus ownership and management. This would not go over well with the Germans. It would very definitely not go over well with the US Congress, obliterating chances of a tanker contract. It wouldn’t go over well with any capital provider or investor or global markets either.

Sure, major changes are needed at EADS France; but it needs less government control, not more (best recommendation I’ve heard: bring back Jean Pierson, last seen fishing in a boat off Corsica). And in the weirdest twist yet, France’s Socialist party is criticizing the government’s Airbus policy. Of course, we don’t know what they want. It isn’t likely that fans of free enterprise will be in the awkward position of rooting for the Socialists. It’s more likely that the Socialists will use the crisis as a talking point on the evils of a market economy.

I have no idea what will happen in France, but I have a bad feeling about it. It would take years to undo re-nationalization and de-globalization. If the big government crowd succeeds, the petty tyrants in charge of the French economy will one day suffer a “Ceausescu moment”: the sudden realization that the crowd in the square is yelling, not cheering.

Another lesson. The A380 illustrates why risk is spread through outsourcing. For all the talk, the only parts of the A380 that were globalized were the systems (some, thankfully, were off-the-shelf). The airframe itself is basically 100% European. This means an unpleasant level of exposure for Airbus companies, including BAE Systems, which is now trying to extricate itself from Airbus, rather like a fox from a cruel fur hunter’s trap. Contrast this with Boeing’s approach. If the 787 test fuselages start fizzing like Alka Seltzer, Boeing’s total exposure is relatively light. Much of the damage would be spread to Japan, Italy, and Vought. Of course, the European taxpayer politely provides Airbus with some insulation, much as Japanese and Italian taxpayers help insulate Boeing.

I’ll close this note with a defense of Airbus. Despite the industrial malpractice that has brought Airbus to this point, the market doesn’t want a monopoly. Customers will encourage anything Airbus does to reinvent its product line. That’s another reason to think about canceling the A380 and moving on. If Airbus admits defeat with this fratricidal behemoth and turns everything to the A370 and then the A320-X, airlines and lessors might step up to the plate and do what they certainly won’t do with the A380: order planes.

We’ve updated the A380 report this month, along with the Trainer overview, A400M, PC-9/T-6, Tornado, ALH, LCA, and the ATR family. See you at Farnborough.

Yours, ‘Til the Flying Asylum Opens for Business,

Richard Aboulafia

 

© Richard Aboulafia 1997-2006, All rights reserved.
RichardAboulafia.com
  ~  Last updated on January 08, 2006