Airbus Flies in the Face of Recession Winds

At a Jan. 15 press conference at Airbus (EAD.PA) headquarters in Toulouse, France, Chief Executive Tom Enders displayed a satellite photo of a massive, swirling hurricane to illustrate the outlook for the commercial aerospace industry this year.

Yet Airbus, in contrast to its U.S. archrival, Boeing (BA), is predicting it can fly through the turbulence with relatively little disruption. On Jan. 9, Boeing said it would lay off 4,500 workers, or 6.7% of its commercial jet workforce, on expectations of a sharp downturn in 2009. Airbus says it expects no layoffs—and it's forecasting that it will deliver almost as many planes this year as it did in 2008, when it shipped a record 483 aircraft. (Boeing, crippled by a two-month strike, delivered only 375.) "We are calm and confident," Enders says.

True, Airbus expects a big drop in new orders this year and next. The European planemaker made a strong showing in 2008, selling 777 planes, well ahead of Boeing's 662 orders. But in 2009, the company says it expects to log only 300 to 400 new orders—"probably in the low end of that range," says John Leahy, Airbus' sales chief. Moreover, Leahy predicts the market weakness will extend well into 2010.

Cash on Delivery

Another challenge for both companies is making sure that airlines actually take delivery of planes rolling off their assembly lines. That's urgent, because more than 90% of an aircraft's sales price is typically paid upon delivery. Canceled and delayed orders are a worry in any downturn, but especially this one, because of the global scarcity of credit. Boeing has already said it will extend at least $1 billion in financing to credit-squeezed airlines, and Leahy says Airbus is likely to extend a similar amount.

Airbus is counting on European export credit agencies—quasi-governmental banks that help finance export deals—to provide financing for about half of Airbus deliveries this year, twice the normal level.

At the same time, Airbus executives say that a two-year-old cost-cutting program, known as Power 8, has yielded benefits that make layoffs unlikely. The company has slashed annual operating costs by more than $1.7 billion and is on track for more than $2.5 billion in additional savings by 2012, Chief Operating Officer Fabrice Brgier said on Jan. 15. Already, the company's full-time workforce has been cut from 54,000 to 47,600, with some of those positions shifted to temporary workers or subcontractors.

That's likely to help the company, whose competitiveness has been badly dented by the euro currency's strength against the dollar. Airbus also plans to outsource a record 50% of major work on its next planned aircraft, the A350, including substantial work in lower-cost venues such as China, Russia, and North Africa.

Customer Withdrawals?

Still, is Airbus underestimating the challenges it faces during the worst economic downturn in more than half a century? Key drivers of growth for both Airbus and Boeing in recent years have been fast expanding carriers in emerging markets such as China and India, as well as low-cost airlines that have flourished worldwide.

The risk now is that these formerly enthusiastic buyers will cancel or delay delivery of planes they've ordered. Airbus lost a 65-plane order last year when Skybus, a startup discount carrier in the U.S., went belly-up—one of some 30 airlines worldwide that went out of business last year. Bloomberg News reported on Jan. 15 that China Eastern Airlines (CEA) might cancel 15 aircraft orders, divided between Airbus and Boeing.

Sales chief Leahy acknowledges that emerging-market and low-cost carriers are likely to face further "shakeouts." But he says massive cancellations are unlikely, since stronger carriers will emerge who can take delivery of planes already in the order book.

One encouraging sign for Airbus is that no carrier has canceled or delayed an order for its much delayed A380 megaplane. Nine additional A380s were ordered last year, bringing the total order book to 198. Leahy says he expects to log roughly the same number this year. On Jan. 15, Air Austral, a carrier based on the French-governed island of Runion, signed a preliminary agreement to buy two of the doubledecker jets.

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