by Richard Pettibone, Aerospace & Defense Companies Analyst, Forecast International.
Airbus had quite the tumultuous year, with corruption investigations, aircraft delivery delays due to engine issues, doubts over the A380’s future, and financial penalties associated with its A400M airlifter. Despite the difficulties, the company did score a major win during the year with its surprise acquisition of a majority stake in Bombardier’s CSeries program. The year ahead looks to be one of transition as management changeover at the top level continues apace.
Over the course of the year, the company was hit with a series of investigations from Austria, France, the U.K. and the USA. The respective agencies in these countries are looking into violations that range from improperly reported supplier payments to more serious allegations of bribery in defense and commercial sales.
The fallout from these investigations will likely tally billions in fines and has no doubt led to a management shakeup that has seen numerous top officials replaced. Second-in-command Fabrice Brégier – long thought to be the company’s next CEO – has already stepped down, and CEO Tom Enders will exit in 2019. Enders will use 2018 to clean up the mess and prepare the way for a new generation of executive leadership.
At its commercial aircraft operation, Airbus finished the year on a very high note – booking an astounding 776 net new orders (841 gross orders) in December alone – more than double the intake of the previous 11 months. For the full-year 2017, the company booked 1,109 orders, beating rival Boeing’s order tally of 912. Airbus’ backlog now stands at a record high of 7,265 firm bookings, roughly 10 years’ worth of work at current delivery rates.
The focus now is on sharply managing aircraft delivery. Here the difficulty has been in managing the supply chain. Airbus has announced production rate increases on several models, including an unprecedented 60 A320s per month by 2019. As such, the pressure on supply chains to meet the demands of delivering highly engineered components in increasing quantities and on just-in-time schedules will be intense.
Cracks in this system have appeared in the past and have rippled through the assembly lines, leading to delivery shifts. At the moment, the biggest issue concerns the Pratt & Whitney PW1100G engine, which is tied to thousands of A320neo orders. Delivery of the engine slowed in mid-2017 due a quality issue with a subcomponent supplier. While this was resolved, another problem arose in early 2018 when the European Aviation Safety Agency (EASA) issued an emergency airworthiness directive concerning a potential dual-engine in-flight shutdown on A320neo aircraft powered by the engine. This latest issue was quickly traced to the knife edge seal in the high-pressure compressor (HPC) aft hub on the PW1100G-JM engine. With the problem identified, deliveries should again pick up pace.
Airbus’ flagship A380 received a major boost in early 2018 when Emirates signed an outline agreement for 20 of the double-deckers, with an option to buy 16 more. This buy will extend production of the superjumbo out to 2029 if all options are taken. In addition to extending production, it also gives Airbus more time to convince other customers to order the aircraft. Production of the A380 has already been cut, as its backlog shrank to 95 aircraft in December 2017. Looking ahead, production will drop to six A380s beginning in 2020, lower than a previously planned cut to eight in 2019.
On the other end of the market, Airbus made a bold play and acquired a stake in Bombardier’s CSeries program. Airbus’ new operational role in CSALP (C Series Aircraft Limited Partnership) includes sales and marketing support, management of procurement and negotiations with suppliers, and customer support. Airbus will also manage the program’s final assembly line in Canada and produce aircraft for the U.S. market at its Mobile, Alabama, facility. Bombardier and Airbus both believe that producing the aircraft in Alabama will abrogate the need for tariffs.
Airbus made out very well in the negotiations. It has added the CSeries to its product line without assuming any of the program’s debt. While it must invest to create new production facilities and expand its product support team to handle the new member of the family, this cost is relatively minor compared to the potential benefits of the deal. Adding the CSeries to its product line will cost it little in sales and expands the company’s offerings down into the 100-130 seat range of the regional jet market.
In military markets, Airbus Defence and Space reached a critical agreement on its troubled A400M military airlifter with the program’s founding countries to delay deliveries and, most critically, revise financial penalties. Most recently, the company took a EUR2.2 billion charge on the program in 2016 due to gearbox issues, which affected deliveries and led partner nations to withhold payments. As a result of the new agreement, the A400M production rate will gradually fall from 19 aircraft in 2017 to eight per year from 2020. This extension will give Airbus more breathing room to secure export sales, which have been slow in coming for the model.
Meanwhile, Airbus Helicopters is improving its operations and continuing to grow its international presence.
Airbus Helicopters delivered 409 rotorcraft and logged gross orders for 350 helicopters (net: 335) in 2017, with a strong commercial performance on the heavy and super-medium segments. The company booked 54 orders for helicopters of the Super Puma family and 19 orders for the super-medium H175. Bookings also included 168 orders for light single-engine helicopters and 105 orders for the H135/H145 light twins. At the end of 2017, the overall backlog stood at 692 helicopters.
In the U.S., Airbus Helicopters continues to reap the benefits of its 2006 selection for the U.S. Army’s Light Utility Helicopter requirement. The company’s UH‑72A fulfills the Army’s LUH need, with a potential program life-cycle value of more than $2 billion. The decision marked Airbus’ first major win as a prime contractor for the U.S. military. More recently, in 2014 the Army announced its intention to acquire 100 more UH-72s for use as pilot trainers.
In Asia, a nice win for the firm was the selection of the H155 as the foundation of South Korea’s Light Armed Helicopter (LAH) and Light Civil Helicopter (LCH) programs. Korea Aerospace Industries will act as the prime on these efforts, which have a combined value of $1.4 billion. This win shows the value of Airbus Helicopters’ earlier partnering efforts with KAI on the Surion. Simply put, it is usually easier to go with the incumbent.
Overall, Airbus has some difficult times ahead as it deals with myriad issues in its upper management. Thankfully, it appears that many of the firm’s programs are now on much more stable footing, helping to ensure their success.
The Defense & Aerospace Companies series focuses on worldwide aerospace and defense prime contractors and subcontractors. Concise reports provide data on individual corporations regarding recent mergers, restructurings, and joint ventures, along with a Strategic Outlook that examines the company’s strengths, weaknesses, and opportunities. Also included in each report are financial and industrial segment data and snapshot coverage of major aerospace and defense programs.
A military history enthusiast, Richard began at Forecast International as editor of the World Weapons Weekly newsletter. As the Internet grew in importance as a research tool, he helped design the company's Forecast Intelligence Center and currently coordinates the EMarket Alert newsletters for clients. Richard also manages social media efforts, including two new blogs: Defense & Security Monitor, covering defense systems and international issues, and Flight Plan, which focuses on commercial aviation and space systems. For over 30 years, Richard has authored the Defense & Aerospace Companies, Volume I (North America) and Volume II (International) services. The two books provide detailed data on major aerospace and defense contractors. He also edits the International Contractors service, a database that tracks all the contractors involved in the programs covered in the FI library. More recently he was appointed Manager, Information Services Group (ISG), a new unit that encompasses developing outbound content for both Forecast International and Military Periscope.
