Airbus: Headed for a Breakup

It's hard to believe that just a few years ago, Airbus was cracking open the champagne to claim victory over U.S. rival Boeing. Talk about celebrating too soon. Over the past year, the company has run through three bosses and its shares have plummeted 30 percent. Following announcements of 10,000 job cuts and several possible factory sell-offs, European unionists responded last week with spectacular strikes. At Airbus headquarters in Toulouse, 15,000 protesters marched, waving banners that asked: is there a pilot on the plane?

In fact, the company has been on autopilot for the past six years. Airbus's problems stem from three long-term issues: disastrous management, a politically motivated reluctance to downsize or outsource and a failing gamble on the biggest plane in history. The troubles came to the fore last summer, when the company was forced to admit that its new megajet, the A380, had technical problems and couldn't be delivered on time, costing the company billions.

Since then, Airbus has done a 180-degree turn—refocusing on smaller, more-energy-efficient planes, streamlining management and cutting jobs. Last week's mass layoffs, the first in Airbus history, won't likely be the last. But despite the pre-election hand-wringing over the issue from French presidential candidates, this crisis could be the best thing that's happened to the company since its meteoric rise in the 1990s. "Airbus is having to face its demons," says Chris Partridge, aviation analyst at Deutsche Bank. The result could be that Airbus operationally breaks up into a collection of leaner, independent companies that would give Europe a fresh chance to compete in aviation.

First, Airbus has to turn an aeronautical Titanic. Back in the late '90s, the company had pulled ahead of Boeing in global market share. Then, in 2000, Airbus bet the farm on the monumental A380, a plane that stretches World War II-era design, with metal wings bolted onto a metal fuselage, to its absolute limit. (Any larger, and the wings would drag on the ground at low speeds.) The timing of this airborne SUV couldn't have been worse, as 9/11 made massive jets a frightening prospect and sent oil prices skyward. By 2005, fuel prices had doubled.

Meanwhile, Boeing took a wise bet on a green future, developing the first all-plastic plane—the 787 "Dreamliner," due to hit the skies next year. Plastic planes are lighter, stronger and more energy-efficient. The Dreamliner's fuel costs are $3 million less per year than those of similar aluminum planes—let alone the massive A380. As one former high-level Airbus engineer, who does not wish to be named because he is afraid of angering former colleagues, puts it: "The Airbus A380 is the last dinosaur of the aluminum age."

Inside Airbus, everyone knew the A380 was a time bomb. But the then CEO Noel Forgeard didn't want to hear it. To him, the superjet was a headline grabber, a ticket to the job he really wanted: co-chairmanship of the Franco-German conglomerate EADS, Airbus's parent company. Anyone who expressed doubts about the A380 was shot down. Says the former engineer, "It was a very aggressive environment. There was a saying you'd hear all the time: 'If you don't do it, I'm going to smack you'." Forgeard moved to EADS in March 2006, after dumping all his Airbus shares. By June, the A380 troubles were public. Forgeard, who was forced out from EADS in July, is now being investigated by French authorities on suspicion of insider trading.

Experts say that Airbus's new CEO, Louis Gallois, is the pragmatist the company needs. But EADS, which took over Airbus in 1999, is a structural nightmare, with management divided between Germany and France. Wrangling and lack of communication is endemic, and helped create the wiring problems that led to delays of the A380. Unable to agree on common software, French engineers operated in 3-D, the Germans in 2-D. When they brought the designs together, nothing matched.

Troubles are still mounting. The two biggest A380 customers, FedEx and UPS, recently canceled purchases worth $5.8 billion. Experts say this isn't necessarily a bad thing, if it helps release the company from its self-destructive commitment to the freighter version of the superjumbo, giving it resources to focus more on the A350—its answer to the Dreamliner. "Because it's coming out later, we plan to make the A350 a little bit better in each category than the Dreamliner," says John Leahy, Airbus's global head of sales.

But Airbus may need more than a hit plane. Many aviation analysts say the bloated European champion should be split up along country lines. Airbus says it's not planning such a split, but it is easy to see the upside. The French division, fueled by government loans, could finish off the A380, leaving the more nimble German division to focus on advanced narrow-body jet designs. "A [managerial] split is almost inevitable now," says Doug McVitie, director of the France-based Arran Aerospace market consultancy, and a former director at Airbus.

Such a split would also make the company more attractive to investors. Interested parties are rumored to include Russia's United Aircraft Corp., which recently bought a 5 percent stake in EADS, and Dubai Aerospace Enterprise, whose Emirates subsidiary is the biggest buyer of Airbus planes. Outsiders could provide new capital for A350 R&D, and help bolster outsourcing (currently only 15 percent of production, versus 80 percent at Boeing).

That would also help release the currency trap. Airbus pays most of its bills in the rising euro, but aviation sales are in the falling dollar: Airbus says every 10 percent decline in the dollar costs it about $1 billion. By manufacturing in less-costly sites overseas, Airbus could help offset its currency losses. It could then focus on design, and leave the heavy lifting to others. That solution is sure to provoke even more banner waving in Toulouse. But it might help keep Airbus itself flying.