Airbus Announces Double Dose of Bad News

Airbus delivered a double dose of bad news for the company that could signal another seismic shift in its sharply contested competition with Boeing for dominance of the world's commercial airplane market.

From its headquarters in France, Airbus, the commercial airplane division of the European Aeronautic Defense and Space Co., or EADS, announced that orders for new planes dropped to 824 in 2006, down dramatically from an industry record of 1,111 orders in 2005. The company trailed Boeing in orders for the first time since 2000.

Boeing reported earlier this month that it had won orders for 1,050 airplanes, which set a company record.

When it came to deliveries, however, Airbus, with 434 airplanes, still topped Boeing's by 36.

But that fact could not soften the blow for Airbus, which also warned that it would report an operating loss of as yet unspecified size.

"These are the consequences of our 2006 turbulences, in particular the effect of the A-380 delay," said CEO Louis Gallois in a statement to the press.

A380 Superjumbo Becomes a Supermoney Suck

At its fanfare-filled unveiling, the A380, a 555-passenger superjumbo jet, was considered a plane that would revolutionize long-haul travel and provide Airbus with a competitive edge and a cash cow. Boeing, with its aging original jumbo jet -- the 747 -- had lost traction.

But after $12 billion of development costs, the A380 has been late in getting to its customers. Delivery has now been delayed twice, for a total of two years, because of manufacturing problems. Now the A-380 is sucking more money out of Airbus in the form of compensation to customers such as Emirates and Singapore airlines, in addition to the money spent to fix the manufacturing problems.

"We at Airbus are taking all measures to get the issue under control and to ensure that something like that never happens again," added Gallois in his statement.

Despite its manufacturing problems, the A380 has met all its flight tests and was certified in December by the U.S. Federal Aviation Administration and European regulators.

But analysts said it might take a while before the company can recover from the A380's disappointing delays.

"The headline today is that the storm's starting to impact Airbus and there's worse to come before it gets better," said Richard Aboulafia at the Teal Group.

Emirates, which has ordered 43 of the planes, making it the biggest A380 customer, said that it is still in talks with Airbus for the amount the manufacturer will compensate the Dubai-based airline for the delays. Industry sources believe those negotiations are in the final stages, and that the compensation will force Airbus to take a huge write-off.

Boeing's Competitor Jet Takes Off

The A380 is only one of Airbus' problems. Another is trying to compete with Boeing's 787 Dreamliner, a highly efficient long-range plane with about 250 seats that is the industry's hottest seller. So far, Boeing has 471 orders and commitments for the plane, which has not yet flown but promises to carry passengers farther at less cost than any other commercial plane flying today.

Airbus, meanwhile, was developing the A380, which had sold only 159 planes before FedEx cancelled its order for 10 planes because of the delays. Airbus scrambled to develop an aircraft to compete with the 787 and, after lukewarm industry response, went back to the drawing board and produced the A-350 XWB (extra-wide body), which is five years behind the Boeing plane.

"The A380 is a huge drag, diverting resources," said Aboulafia. "The market is speaking quite eloquently: 'Get going on the A350.' "

Airlines are rooting for Airbus to solve its problems from a purely economic point of view. The last thing the airlines want is for one manufacturer to dominate the industry and dictate prices.

Airbus' Problems Not the Only Story From 2006

Both Boeing and Airbus did well in 2006 with narrow-body planes like Boeing's 737 and the Airbus A321.

Boeing also made a breakthrough sale to German Airline Lufthansa for its redesigned passenger version of the 747, called the 747-8, which was once thought dead. The new version will carry more passengers, be more fuel efficient and have more carbon fiber composites in its fuselage.

"The 747 just had a terrific year," said Randy Baseler, vice president of marketing at Boeing Commercial Aviation. "It's outselling the A380 by a 10 to 1 margin."

Baseler also pointed to sales of the popular 777, another of Boeing's existing wide bodies.

Airbus, too, had success with its existing wide bodies -- the A330 and A340 family of planes.

As international travel booms, sales of "those planes are likely to continue booming," said Aboulafia, "because of how many premium passengers they can attract."

The premium passengers occupying first- and business-class seats account for 40 percent of an airline's profits.

Despite Airbus' problems, 2006 was a booming year for airplane sales worldwide as U.S. and European airline markets continued to recover, and those in Asia and India grew. Production slots at both Airbus and Boeing are filled for the next several years, and factories are expected to continue humming until 2010, longer than analysts anticipated just two years ago.

"It's been another great year for customers throughout the aviation industry," said Boeing's Baseler, "with almost 2,000 orders for commercial airplanes between the two manufacturers for a total of almost 4,000 for the past two years."

By one estimate, that added 63,000 aerospace industry jobs worldwide last year, a 23 percent increase.

While neither Baseler nor officials at Airbus are willing to forecast next year, analysts pointed out that U.S. and most big European airlines have yet to place orders to update their aging fleets. Those orders could keep the boom alive and add thousands of more jobs to the aerospace industry.