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W I L L I AM SC H M I DT
The history of state influence on Airbus, and a disappointing delay in the delivery of the critical A380
announced in 2005, had given Radek some initial reservations about the funds position in EADS. But there
were also signssteady improvements in the commercial aircraft market, relative pricing stability, and
stronger shareholder accountability from EADSthat EADS could be a solid investment for the fund. With
Airbus on the verge of proving itself the leader in the large commercial aircraft manufacturing space, the
timing of a second delay could not have been more inopportune. How could this delay have occurred,
particularly after managements reassurances in the wake of the 2005 delay?
Radek settled in at her desk to review once more the investment file on EADS in hope of finding
something that would shed light on this latest development.
Overview of Airbus
Politics and controversy had been part and parcel of Airbus since its inception. Its formation was
negotiated in the mid-1960s by ministers from France, Germany, and the United Kingdom seeking to
counter US domination of the large passenger aircraft industry. They believed that European firms, unless
they cooperated, risked being marginalized by their larger American counterparts. Although EADS
established a range of business divisions, Airbus remained the largest by far. Table A summarizes the 2005
financial performance of each division. Information on the financial performance of EADS for the past year
can be obtained from Exhibit 1.
The use of common cockpit systems and fly-by-wire across its product line differentiated Airbus from
Boeing. Common cockpit systems assured maximum commonality of cockpit configuration and operating
procedures across Airbus models; fly-by-wire accommodated similar handling across models. By making
Copyright 2016 William Schmidt. To order copies or request permission to reproduce materials, email wschmidt@cornell.edu. This publication may
not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of William Schmidt. This case was prepared
using information from public sources. This case is developed solely as the basis for class discussion. It is not intended to serve as endorsements, sources
of primary data, or illustrations of effective or ineffective management.
Airbus A380 A Model for Disruption
it easier to cross-train pilots on different Airbus aircraft, these features reduced training costs and facilitated
cross-crew qualification and mixed-fleet flying by affording greater flexibility in matching aircraft with
available pilots. Airbus succeeded in expanding its customer base from large European airlines to a range
of airlines worldwide. Airbuss largest customers were:2
With approximately 633 square meters of cabin area and accommodation for more than 550 passengers,
the A380 was the largest commercial aircraft ever built. Its initial list price of $285 million was raised to
$295 million in June 2005. Airbus projected sales of more than 700 A380s during the aircrafts estimated 30-
to 40-year lifespan3 . The company had firm orders for 159 A380s, 132 for the passenger version and 27 for
the freight version.4
The market for commercial aircraft larger than the Boeing 747-400 was driven by the growth of the
airline market generally, flight congestion at major airports, increased cost pressure on airlines, and
demand for more environmentally-friendly aircraft. Many of these factors presupposed improved
technology, superior design, new manufacturing processes, and better supplier collaboration. To minimize
weight and reduce fuel costs, for example, the A380 incorporated a range of advanced materials such as
4 Frost & Sullivan, World Airports MarketsImpact of the A380, October 28, 2006.
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Airbus A380 A Model for Disruption
carbon fiber reinforced plastics and a new aluminum and fiberglass laminate.5 The design and
implementation of such advanced materials necessitated close coordination with a wider range of
suppliers, potentially including outsourcing of some elements to suppliers that possessed deep expertise
in particular areas as well as creative thinking on the part of such suppliers about how the expertise of
secondary suppliers might be exploited to help meet specifications and requirements. All of which would
massively increase the complexity of the supply chain.
The A380 program was instrumental in driving fundamental changes at Airbus, forcing it to reevaluate
its consortium structure, manufacturing processes, and corporate governance, and contributed directly to
the reorganization of the consortium into an integrated company and the formation, in 2000, of EADS, the
largest transformation in the companys 30+ year history. A single chief engineer was made responsible for
the entire program across the four operating divisions that were formerly independently managed by
France, Germany, the United Kingdom, and Spain, new manufacturing processes and organizations were
introduced, and the program was organized around the physical deliverables needed to build the aircraft
rather than national borders. The major milestones in the launch of the A380 are summarized in Table B.
Timeline:
1996 Large Aircraft Division at Airbus created
2000 Commercial Launch of A3XX
2001 Development of A380 begins
2002 Manufacturing of A380 begins
2003 Subassembly of A380 begins
2004 Final assembly of first A380 begins
2005 Maiden flight of A380
First delay of A380 announced
2006 Second delay of A380 announced
Source: Airbus, Boeing.
Manufacturing and design of the A380 was spread across 85 countries, dozens of Airbus facilities, and
hundreds of suppliers. The first A380 development center opened in 2001 in Hamburg, Germany. The
German division of Airbus, which included facilities in Bremen, Stade, Hamburg, Dresden, Finkenwerder,
Laupheim, Nordenham, and Varel, manufactured and assembled the forward and aft fuselage
components, carbon fiber reinforced plastic vertical tail plane, wing trailing edge flaps, and cabin
furnishing, and was responsible for final assembly of the fuselage subassemblies, cabin painting, and
delivery to customers in Europe and the Middle East. The U.K. division of Airbus, which included facilities
in Broughton and Filton, manufactured the wings, wing-box, aluminum alloy wing skins, and wing ribs.
The Spanish division, which included facilities in Illescas, Puerto Real, and Getafe, manufactured the
composite horizontal tail-plane, tail-plane boxes, aft fuselage, main gear doors, rudder, dorsal fin, and belly
fairing. The French division, which included facilities in Meaulte, Nantes, St Nazaire, and Toulouse,
manufactured the fuselage shells, nose, center fuselage, and main wing box, and was responsible for final
assembly of the A380 and delivery to customers in the Americas and Asia Pacific.6
Altogether, not counting supplier facilities, 16 Airbus sites scattered across Europe were involved in the
construction of the major components of the A380. Each site produced a complete section of the aircraft,
which was transported to the final assembly lines in Toulouse by air, land, and sea, the size of the
subassemblies presenting a major challenge. Indeed, many of the manufacturing facilities were purpose-
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Airbus A380 A Model for Disruption
built to accommodate the massive size of the A380 and its component pieces as were the barges and trucks
needed to transport components such as the center fuselage and wing assembly, which weighed
approximately 100 tons.7
The need for collaboration between suppliers and organizations not regularly associated with those
suppliers put additional pressures on the supply chain. Airbus and its suppliers had to not only manage
close and continuous interactions with more than 20 airlines and 60 airports, but also, to ensure
compatibility among equipment, operational practices, and functional specifications, develop deep
working relationships with other entities that would be affected by the A380 including the Federal Aviation
Administration, European Aviation Safety Agency, International Air Transport Association, ICAO, and the
Airport Council International and International Organization for Standardization.
Delays in production that pushed back early deliveries began to have the inevitable impact of delaying
later deliveries, however, and Airbus began to notify all customers that the delivery schedule for the A380
program would slip (see Table C).
Updated Target
Year Original Target (June 2005)
2006 10 2
2007 35 25
2008 Not available 37
2009 Not available 45
Source: Deutsche Bank AG, EADS Encouraging investor forum, June 21, 2005, 2005;
EADS N.V., Q1 2005 EADS N.V. Earnings Conference Call, May 9, 2005; EADS
N.V., Full Year 2005 EADS N.V. Earnings Conference Call, March 08, 2006; Credit
Suisse, 2005 Okay. Outlook and Accounting Issues Appear, 13 March 13, 2006,
2006
According to CNN, Qantas CEO Geoff Dixon expressed disappointment upon learning of the delay,
reflecting the mood of many A380 customers. Emirates Airlines CEO characterized the delay as a serious
issue, and several airlines, including Qantas and Singapore Airlines, indicated that they would seek
8 Airbus A380 delays to hit additional carriers, International Herald Tribune, June 2, 2005.
9 Ibid.
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Airbus A380 A Model for Disruption
compensation for the delivery setback.10 Airbus conceded that the delay would likely incur some penalty
payments to customers, but indicated that these could not be disclosed as negotiations with those
customers were ongoing.
The first delay was attributed primarily to difficulties with the aircraft wiring, which consisted of nearly
100,000 wires bundled into 530 kilometers of cables held in place by 40,000 connectors.11 The complexity of
the wiring problems was compounded by a switch from copper to aluminum wiring, incompatibility
between two versions of the same design software being used by Airbus engineers, and the variety of
configuration options Airbus offered its customers.
The switch from copper to aluminum wiring was likely made to reduce weight, but different properties
of the latter included a larger bend radius that made it more difficult to maneuver around corners within
an aircraft and could entail rerouting of some harnesses, changes that might not have been adequately
captured in the integrated design models because the A380 teams in Spain and Germany were using an
earlier version of design software than the teams in the United Kingdom and France, which had upgraded
to a more recent version (compatibility issues precluded incorporating some design changes to the electrical
wiring into the master design). The wiring issues were compounded by the unprecedented degree of
flexibility Airbus had offered its customers with respect to the configuration of the aircraft. Virgin Atlantic,
for example, had proposed a casino area and space for exercising. The customization associated with the
configurability options increased the complexity of the cabin wiring.
In the aftermath of the first delay announcement, Airbus indicated that the wiring problems were
contained and that no further slippages were expected to the A380. News out of Airbus regarding the
progress of the A380 became consistently positive after mid-June 2005 (see Table D).
Table D Airbus Press Releases on the A380 between June 15, 2005 and June 1, 2006
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Airbus A380 A Model for Disruption
[C]an you just comment again on the A380? The certification process and whether there are any
reviews on the workload for 2007? Thank you.
Hans Peter Ring, EADS COO for Finance
The program is progressing; you have seen some of the milestones which were communicated
publicly. We do have [so] in the ramp-up, a lot of outstanding work of the sections which are arriving
in Toulouse. The next significant and important step in the ramp-up process is the cabin
specification, which is currently underway; we just started with the virtual cabin test on ground,
which worked satisfactorily. So it was more or less okay, or as expected.
But in terms of EBIT impact, we would not expect that for this year there is anything coming into
the EBIT line from that, and even for next year, even in case we would not meet the final planned
delivery rate of around 20, even then there wouldnt be a material impact on EBIT next year because
of the learning curve effect.
Those problems, however, eventually surfaced, and after the close of trading on 13 June 2006, Airbus
announced the second delay to the A380 program, which, in fact, did have an impact on EBIT in 2007 of
500 million, and an equivalent projected impact each year from 2008 through 2010.13 The delay would also
significantly shift delivery dates. Table E summarizes the projected impact on customer deliveries; a copy
of the press release announcing the delay is reproduced as Exhibit 2.
Table E Effect of First and Second Delay on Annual A380 Customer Deliveries
2006 10 2 1
2007 35 25 9
2008 Not available 37 2832
2009 Not available 45 40
Source: Deutsche Bank AG, EADS Encouraging investor forum, June 21, 2005, 2005; EADS N.V., Q1
2005 EADS N.V. Earnings Conference Call, May 9, 2005; EADS N.V., Full Year 2005 EADS N.V.
Earnings Conference Call, March 08, 2006; Credit Suisse, 2005 Okay. Outlook and Accounting
Issues Appear, 13 March 13, 2006, 2006; Airbus maintains target date for A380 certification
and first delivery by year end, but announces shift in the production programme, Airbus press
release, June 13, 2006.
Airbus maintained that the second delay was traceable to bottlenecks formed in the definition,
manufacturing, and installation of electrical systems and resulting harnesses , in other words, reminiscent
13 A380 Woes, Downgrading Recommendation to Hold, Deutsche Bank AG, June 2006.
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Airbus A380 A Model for Disruption
of the problem to which the first delay announced more than a year earlier had been attributed.14 Whereas
the analyst community had been generally positive about EADSs prospects, how that community, or the
overall market for that matter, would react to the latest announced delay in the A380 program was unclear.
The closing share price of EADS prior to the delay announced on June 13, 2006 was 25.42.15 Table F
summarizes target prices and ratings for a sample of analysts following EADS stock as of 12 June 2006.
Table F Sample of Analyst Target Prices and Ratings (if provided) on EADS as of June 12, 2006
Target Price 43 35 22 28 33 32 33
Market
Rating Buy Buy Sell Neutral None given Buy
Perform
Source: MM Warburg & Company, Metzler Equity Research, Socit Gnerale, Credit Suisse Equity Research Europe, Natexis
Bleichroeder Inc., Sanford C. Bernstein & Co., LLC, Deutsche BankAG.
Questions swirled in Radeks mind. Should she liquidate her position in EADS at the start of trading?
Should she look for opportunities to expand her position in EADS? It was critical that she have some
assessment of the markets response to this disruption before the market opens. New information was
forthcoming after the European markets opened in the morning. EADSs management team had scheduled
an analyst and investor call for June 14, 2006 at 10:00 a.m., Paris time. Radek felt reasonably sure that many
investors would delay trading on the stock until after the call was complete, giving her precious hours to
take action.
Radek asked her assistant to assemble her leadership team. She needed everyones best insights on this
issue. As she waited for everyone to arrive and contemplated how to proceed, Radek received an e-mail
from a colleague marked UrgentDeutsche Bank Bulletin on EADS. She opened the attachment and
scanned it. The title told her all she needed to know: A380 woes; downgrading recommendation to Hold
(the Deutsche Bank bulletin is reproduced as Exhibit 3).
14 Airbus maintains target date for A380 certification and first delivery by year end, but announces shift in the production
programme, Airbus press release, June 13, 2006.
15 Capital IQ, Inc. database.
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Airbus A380 A Model for Disruption
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Airbus A380 A Model for Disruption
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Airbus A380 A Model for Disruption
Airbus maintains target date for A380 certification and first delivery by year end, but announces shift in
the production programme
13 June 2006
Airbus has informed its customers today that a review of the A380 programme has shown that
the delivery schedule will undergo a shift of six to seven months due to production ramp-up issues.
In parallel, Airbus confirmed to its customers the satisfactory progress of the flight test campaign,
which is expected to lead to certification and delivery of the first aircraft by the end of the year. The
shift in the production ramp-up is likely to limit aircraft delivery to nine in 2007.
The new delays are caused by industrial issues only. They are mainly traceable to bottlenecks
formed in the definition, manufacturing and installation of electrical systems and resulting
harnesses.
As testing and development advances, as well as customisation specifications from airlines are
integrated, modifications of electrical systems and reworks have been necessary at section level,
progressively disturbing the final assembly flow. A new organisation for the equipment of sections
and a revised pacing of transfer to the final assembly line have been put in place, to absorb past
inventory build-up and to deal with further mitigating factors. As a result, there are currently 15
aircraft already assembled, including the static and fatigue test frames, while production of sections
for aircraft serial number 36 has started.
A recent programme review has led Airbus to the conclusion that 2007 deliveries will likely be
limited to nine, and that a shortfall of five to nine aircraft deliveries in 2008 and around five aircraft
in 2009 could be expected, compared to initial delivery planning. The review also concluded that
further actions are required to secure a ramp-up recovery in 2008 and 2009.
Today, Airbus President and CEO Gustav Humbert has ordered the immediate setting up and
implementation of such a recovery action plan. Airbus also announced to regularly update airlines
and all stakeholders on the progress of the recovery action plan.
Airbus is fully aware of the burden this industrial issue represents for the airlines who are
anxious to begin operating the A380. Airbus is working with its customers to facilitate their
operations, while ensuring a successful entry into service.
Airbus continues to be very satisfied by the performance of the A380. The aircraft handles
extremely well and airline pilots who have already flown the aircraft, report enthusiastically about
it. Overall, the aircraft have performed more than 1,400 flight hours in over 430 flights and 950 take-
offs. Results are as predicted. All the tests performed, including at airports, indicate that the A380
will meet or exceed the expectations. Also first results of the cabin tests are encouraging. Since the
first flight of the first A380 in Toulouse on 27 April 2005, four more aircraft have taken to the air.
The first two are heavily involved in the flight test campaign, two more are used for cabin testing
and the fifth one is currently undergoing customisation and cabin furnishing in Hamburg to be
ready for first aircraft delivery at the end of 2006.
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Airbus A380 A Model for Disruption
11