STIFLING HEAT made last week’s Paris Air Show an uncomfortable experience. As
jet fighters roared overhead, defence executives and generals thronged the
doors of the corporate chalets, hoping to escape from the blazing sun into
air-conditioned comfort.
Louis Gallois, chief executive of Airbus and joint boss of its parent, EADS,
must have wished he could find a similar reprieve from the sea of troubles
assailing the company.
The Franco-German aerospace and defence group has had a wretched couple of
years, marked by bitter wrangling among its former management,
confrontations with unions, and stormy relations with the French and German
governments, which remain significant shareholders.
And it’s not just trouble at the top. The A380 superjumbo, Airbus’s flagship
product, is running hundreds of millions of euros over budget and two years
late. The plane wowed the Paris crowds with a flying display last week, but
has hardly been flying off the shelves. To rub salt in the wounds, Boeing,
Airbus’s perennial rival, seems to be soaring away with the 787, a hot new
plane airlines can’t get enough of.
If Gallois is feeling the heat, he doesn’t show it. Sitting in an office well
above the scrum on the main floor of the EADS pavilion, he is cheerful and
calm. While his face is almost unknown on this side of the Channel, his bald
head and sticky-out ears are instantly rec-ognisable in France, thanks to
his time running SNCF, the French national rail company.
And while EADS and Airbus undoubtedly have their problems, Gallois meets
Napoleon’s test of being a lucky general. He was appointed chief executive
of Airbus last year (and at the same time joint chief executive of EADS
alongside Tom Enders, the German appointee), just as airlines were gearing
up for the biggest spending spree ever seen in commercial aviation.
Last week Airbus was able to announce more than $75 billion (£38 billion) of
orders, which analysts thought was the biggest haul ever for a single air
show. Some might cavil at an element of reannouncement (an order from Qatar
Airways, for example, had been in the wind for some time), but it was still
a decent riposte to critics who had written off the company.
“Airbus is back,” Gallois told a press conference, but later, speaking to The
Sunday Times, tempered this: “We are back, but that doesn’t mean the dollar
is not still weak,” he said. Airbus, which has costs in euros but sells
planes in dollars, suffers when the dollar slides – every 10 cent fall costs
the company €1 billion (£670m), according to Gallois.
Keeping pace with the falling dollar has meant thousands of job cuts and the
sale of factories, decisions that have caused uproar and strikes in France
and Germany (though not, so far, in Britain) and became a big issue during
the French presidential election. Gallois is unrepentant about his “Power 8”
restructuring plan.
“We are not as far advanced as Boeing when it comes to out-sourcing. On the
A380, we outsourced about 30% of the plane, while on the 787 it’s about 80%.
That’s a huge difference. I’m not sure we want to go that far because it’s
dangerous – you can lose control of the product.
“But clearly we are doing too much internally. We need to out-source, not just
because of cost, but because we need to find partners who can share the cost
and risk of developing new technology. And it’s better for us to sell these
plants than to empty them,” he said.
Gallois said there were now no problems with the government. “People say it is
difficult for companies to cut jobs in France but that’s not true. Peugeot
is doing it at the moment and we certainly did it at SNCF.”
The future of Power 8 is linked to another big challenge for EADS – financing.
Gallois’s plans for an increase in the company’s capital were rejected by
shareholders – namely the French and German governments – earlier this year.
Most commentators assumed the extra equity was needed to pay for the
development of the A350, Airbus’s answer to Boeing’s blockbuster 787, which
has racked up more than 600 orders before its first flight.
But Gallois said there was no urgency over the A350, which will not make its
first flight until 2012, four years after the 787. “It’s not so much about
the A350 as EADS as a whole. For the time being, we have a very strong cash
position. But research and development spending will increase up to 2010 and
perhaps beyond, so we wanted to be ready to seize the opportunity to raise
new funds while the market was good. But the shareholders wanted to see
Power 8 happen first.”
Gallois confirmed that the A350 would not have a completely composite fuselage
like the 787. Instead, it would be built from aluminium and composite. He
denied this would make it inferior. “It will be easier to build and less
expensive. We think it is prudent and efficient and we certainly don’t feel
behind them on this.”
EADS does, however, feel inferior to Boeing when it comes to government
spending on research and development. “Mr Mandelson (Peter Mandelson, the EU
trade commissioner) has produced figures that show Boeing received $800m in
2006 from different government agencies. We got about a tenth of that.
Certainly we are more clever than Boeing, but at that level we can’t
compete,” said Gallois. He demanded more money at a meeting with European
ministers at the show last Monday.
Research will be a telling factor when it comes to the next big showdown in
commercial aviation. Having allowed Boeing to steal a march with the 787,
Airbus is eager to avoid any slip-ups with a new small plane – the size of
the current A320 and Boeing 737 and the workhorse of the world’s airline
fleets.
“It is one of the most important decisions we will have to take inside EADS,”
said Gallois.
Most industry executives had predicted new small planes from both
manufacturers at about 2014, but such is the glut of orders for the existing
models that the forecasts are hastily being pushed back. “I don’t think they
will do anything much before 2015, if then – why should they when the
current planes are selling so well?” said Tony Fernandes, chief executive of
the fast-growing low-cost airline Air Asia, who signed up for another batch
of A320s at Paris.
“The timing depends on the demands of our customers, and they will want
at least a 15% performance improvement over the current planes,” said
Gallois.
The key technology is in engines, with Gallois predicting the new planes would
not use conventional jets, but new designs like “geared” turbofans or “open
rotor” powerplants.
“It also depends on what the competition does. It will be a bit of a poker
game between the two of us – and there is a huge market at stake. We are
talking about perhaps 15,000 planes here.”
BOEING’S WAY
LIKE Louis Gallois, Jim McNerney, his counterpart at Boeing, arrived after a
period of upheaval. And just as Gallois is stereo-typically French,
McNerney, tall, good-looking and permatanned, could only be an American
boss. But he wants the firm to become more international in outlook.
“The nature of our business means that we are US-centric. But more countries
are asking to house intellectual property with them, so we will have to
adapt to that,” he said.
McNerney is taking young executives and posting them overseas as country
managers, rather than relying on veterans.
Boeing has already internationalised its plane building, out-sourcing much of
the 787. However, McNerney said the trend would probably not go further. “I
don’t envisage we will see that developing any more. We have drawn the line
about where we want it,” he said.
