May 20, 2013
With the demand slump for very large civil aircraft continuing, Airbus is slowly nearing crucial decisions on its planned A380 production rates. If order intake does not improve soon, the manufacturer may be forced to follow Boeing's move on the 747-8 program and reduce output in the medium term.
Harald Wilhelm, chief financial officer of both Airbus and parent EADS, admitted last week that Airbus still has open a “single-digit number” of production slots for the A380 in 2015. Therefore, it is a “high management priority” to fill the remaining slots as quickly as possible. Any determination of the consequences of continuing demand weakness would have to come later this year, given the very long lead times in the supply chain.
Airbus has been suffering from slow A380 demand for some time and the issue is of huge concern internally. Wilhelm is one of the first executives to openly admit it. The manufacturer has already reduced output to 25 from 30 this year, reflecting the incorporation of the newly designed wing rib feet and spars that will become standard for new deliveries from 2014. This has built up inventory well beyond normal levels in the first quarter and contributed to the company's €3.2 billion ($4.2 billion) negative cash flow for the quarter.
The production cut has been considered a short-term issue not driven by demand. Should Airbus have to lower the production rate in 2015, the program would almost certainly miss its break-even point for the foreseeable future. The aircraft maker has gone to great lengths to ensure that the A380 will not lose money at the build rate of 30 per year—although the calculation does not take into account the multibillion-euro research and development for the aircraft. Instead, the break-even estimate focuses on recurring costs of production versus the revenues from A380 sales. While Airbus has markedly reduced recurring production costs, Wilhelm remains “cautious about the further potential for breakeven below 30” units per year.
The A380 sales problems could signal a more general trend away from large widebodies. Boeing has announced a slower build rate for its largest twin-aisle, the 747-8, slated to take effect next year. Since Airbus has firm orders for 262 A380s—101 of which have been delivered—the backlog will fill more than five years of production at the 30-per-year rate.
While A380 production is slowing, the A350 program is bustling. Airbus rolled out the first prototype, MSN001, from the paint hangar last week. It was due to be transferred to flight-testing by May 17, according to industry sources, although the manufacturer itself did not confirm that.
Typically, final ground tests before first flight take a minimum of about 20 days, so, if no technical issues emerge, the A350 could take to the air for tests a week before the June 17 opening of the Paris air show. Wilhelm says that “for quite a number of months, we have seen no further drift” in the schedule. But neither has more margin been built in.