Airbus

In formation
Europes big planemaker takes another short hop towards being a normal firm
Oct 8th 2016 | From the print edition

TEN years ago this

September Airbuss
first A380
superjumbo, laden
with passengers,
took to the skies
over Toulouse. The A380 rarely flies economy
Airbuss bosses
hoped that the worlds largest jetliner, the first with two full decks, would help the European
planemaker get even with its American rival, Boeing. But problems quickly mounted. In October
2006 Airbus revealed the third delay to the A380 programme. Development costs spiralled out of
control, to $15 billion; three chief executives lost their jobs in succession that year.

The trauma prompted a sweeping modernisation effort that went further on September 30th
with a restructuring announcement by Tom Enders, Airbus Groups chief executive. The
company began as a jumble of the national aerospace firms of France, Germany, Britain and
Spain, jointly known as EADS, in 1967. Mr Enders has laboured, with much success, to reduce
state influence on the group and to create a profit-driven firm like any other. But the roots of the
past run deep. Airbus Group sits at the top of three divisionsjetliners, defence and space, and
helicopters. The jetliner division, for example, still thinks of itself as French in character, and the
defence and space unit keeps some sense of its former German identity.

Now the top entity, Airbus Group, headed by Mr Enders, will be merged into the most important
division, which builds civil aircraft including the A380, and will be called just Airbus. The other
two divisions are to become that entitys subsidiaries, so that in theory, there will be less scope
for national loyalties. Another aim of the restructuring is to focus the group more on the market
for jetlinerswhich is booming, thanks largely to rising demand for air travel from the expanding
middle classes in emerging economies.

Mr Enderss principal goal is to close the long-standing profitability gap with Boeing. The
European firms average pre-tax profit margin was 2.2% in the decade to 2015, compared with
6.8% for Boeing. That was before a fresh list of problems hit Airbus, wiping nearly a fifth off the
firms market valuation since December.

The bad news began in April, when the groups defence and space division, which produces a
fifth of group revenues, revealed new engine problems on its A400M military transporter, which
had already accumulated more than 5 billion ($5.6 billion) in write-downs. The jetliner
business, which makes 70% of group sales, also hit turbulence. Expensive defects on its new
A320neo and A350 planes led to a halving of profits, year on year, in the first quarter. Airbus
Helicopters, meanwhile, suffered as demand fell for choppers in the offshore oil and gas industry.

Regulatory setbacks have piled up, too. At the start of August Britains Serious Fraud Office
(SFO) opened a full criminal investigation into allegations of bribery by the firm that have
already cost it access to cheap export financing. And in September the WTO ruled that the EU
had failed to cut illegal state aid to Airbus, which Boeing alleges is worth $22 billion over
decades. The ruling opens the door to America imposing tariffs on Airbuss planes, although an
appeal could delay any such action for years.

Airbuss management is moving to contain the technical troubles on its new planes. Few sales
have been lost at Rolls-Royce, an enginemaker, since a similar SFO investigation began there in
December 2013. More of a concern is Airbuss flagship superjumbo. Although passengers love
the A380, few airlines do because they find it too big to fill profitably. Early on, Airbus hoped to
sell up to 1,200 supersize planes over two decades; it has produced only 194 so far. Just 125
orders remain, and half of those are likely to be cancelled. Airbuss executives are keen to prop up
production in the hope that demand will rebound, but it will cost them. In July the firm said it
would cut production from 27 a year, which is the number at which the plane can be made
profitably, to just 12 by 2018. At that rate, Airbus would lose as much as 250m a year on making
the planes, says Sandy Morris, an aerospace analyst at Jefferies, a bank.

Each of Airbuss problems is manageable by itself because of the firms sheer size: this year the
group is forecast to generate 65 billion in revenues. Airbus now has around half of the global
jetliner market, up from 19% in 1995, and its share is expanding. It has received a tenth more
orders across its range than its American rival over the past decade.

Mr Enderss next challenge will be margins. The firms run of problems pose a threat to slim
profits of around 2 billion a year. In the 2000s Airbuss government shareholders often saw
propping up local plants as more important than profits. It now returns the cost of capital
invested in it; but there is still a way to go. They now not only need to deliver their planes on
timebut their profits too, chides one adviser to Airbuss management. Mr Enders has
weakened the influence of state investors in his efforts to make Airbus a more normal company.
Private shareholders are likely to be harder to please.

From the print edition: Business

Case questions:

-Identify at least 5 accounting terms from the article and check their
definition

look up Airbus' Annual report for 2015 and check its revenues and profits

Look up where Airbus is listed (Stockholm exchange) and what is its

current share price

explain which statement 'profit margin' comes from

what is market valuation and how much is it for Airbus