More importantly, can Europe afford Airbus?They've showed us the plane. Now, where's the money? At a Paris press conference on Dec. 4, Airbus unveiled plans for the long-awaited A350 XWB, a wide-body jet that will be its answer to Boeing's (BA) 787 Dreamliner.
The Airbus plane, repeatedly delayed by design uncertainties and the turmoil surrounding the A380 megaplane, finally got the green light on Dec. 1 from Airbus's parent, European Aeronautics Defence & Space Co. It's expected to enter commercial service in 2013, five years after the 787. "There has been some bad weather getting here," Airbus Chief Executive Louis Gallois admitted at the press conference. But, he said, "the A350 XWB is just the airplane the market needs."
With Airbus and Boeing in agreement that airlines will order some 5,700 midsized wide-body planes over the next 20 years, the new plane could help Airbus rebound from a deep plunge in orders. During the first three quarters of 2006, Airbus logged only 226 orders, versus 736 for Boeing.
They might fall to #3 behind the U.S. and Brazil as commercial airplane makers.
But the Airbus plane is going to cost a bundle to develop—$13.5 billion in R&D, plus $2 billion in capital expenditure, Gallois said. Where will Airbus get that kind of money? After all, the company is bracing for a $6 billion hit to earnings over the next few years because of production snafus on the A380.
Pah. It's going to be double that as the A380 continues to face delays.
At the same time, the strength of the euro and the British pound against the dollar has weakened the competitiveness of Airbus' mainly European manufacturing base.
Gallois said financing for the A350 XWB would come principally from cash flow and from major suppliers who would take a "risk-sharing" stake in the project. EADS also might raise money on capital markets, he said. And, the CEO said Airbus had not ruled out obtaining low-interest "development" loans from European governments, as it did for the A380 and other recent planes.
What about financing from other companies? Airbus has promised to outsource some 50% of the basic structural work on the A350, up from about 30% on the A380. It is especially keen to find
That leaves two other possible sources of financing: capital markets and European governments. Here, the picture gets even murkier. Gallois said on Dec. 4 that Airbus would "study all possible instruments" of financing, including a capital increase and loans from European governments. "I will not exclude anything, and will not be more specific at this point," he said.
Airbus clearly hopes to avoid taking out government loans, which could inflame an already-heated dispute before the World Trade Organization. Gallois said on Dec. 4 that he hopes the U.S. and European Union will negotiate a new agreement on aircraft subsidies, putting an end to what Airbus contends are equally unfair forms of aid that Boeing receives from the U.S. and foreign governments.
However, in an interview published Dec. 4, French Finance Minister Thierry Breton made clear that the Europeans are still willing to subsidize the new plane. "The four governments concerned [France, Germany, Britain, and Spain] have declared that they will provide guarantees," he told the French business daily La Tribune. "But for the moment, they are not locked into doing it."
Depends how many jobs they want to save.