Is Airbus a victim of it's own greed for market share?

[Panama Jack]

I have been reading a number of articles during the past month such as this one (http://www.spiegel.de/international/business/0,1518,519021,00.html) about Airbus' crisis, namely, that it is considering moving much of it's manufacturing off-shore, out of the Euro-zone, because the weakness of the US Dollar and strength of the Euro is "killing" it. Airbus has a record number of orders, yet it claims record losses, because aircraft are sold in dollars, yet most of its costs are in Euros.

Over a few decades now I've heard accusations of Airbus Industrie selling aircraft either at subsidized cost or other tactics that have made buying an Airbus very attractive to a customer, but leaving little margin for profit (market share being the goal), in which case I feel very little sympathy- except for the average employee of course who has to suffer the consequences of a company who was unwilling to let real economic factors dictate their strategy.

Your thoughts?

[Wizofoz]

When easyJet made its record order for A319s, Boeing was quoted as saying it simply could not build a 737 for the price Airbus were charging. I would imagine the build cost of a 319 using European labour would be signifigantly higher that a 737.

Airbus have consistently shown that they will put market share ahead of profit. It could be argued that even the entire A380 program, which is unlikely to ever show a profit for Airbus, was embarked upon more for the prestige of building the worlds largest aircraft, rather that because of any sound business case.

And if you believe that could never happen, let's talk Concorde!

[Loose rivets]

except for the average employee of course who has to suffer the consequences of a company who was unwilling to let real economic factors dictate their strategy.


Perhaps it's the world trade in currency, often by thousands of totally selfish and unproductive people, that's the fault.

[Desert Diner]

AB will never make a profit if they continue to build their planes in Europe and still try to placate the owner countries by decentralizing the construction.

I remember watching the Discovery Chanel with my jaw wide open as they showed how the A380 wings was build somewhere in Wales, barged down a river only at low level as the had trouble going under some bridges, put it on a ship to take it to France, I think they barged it some more, then they put it on a truck and had to shut down whole towns as they moved it through medieval roads with only inches of clearance.

I set there wondering how could they ever make any money with such inneficient methods.

[Lowkoon]

Oh joy. An already crap product soon to be "made in China". That should improve the build quality... :rolleyes:

[Colonel Klink]

If you think it cannot happen, remember Fokker's demise was due to exactly the same thing.

[Volume]

AB will never make a profit if they continue to build their planes in Europe and still try to placate the owner countries by decentralizing the construction.

If Airbus would do 100% of the production in Toulouse, the city would grow to three times its size, the housing costs would explode and all workers would need a 30% wage increase, so they could afford to live there. Not talking about the costs for the land to build the new production facilities on. Compared to this, the costs of moving some wings over 1500km is neglectible.
It is much creaper to produce parts "in the middle of nowhere" (the welshmen may excuse this description for Broughton) and ship them to the final assembly line.

And if you believe that could never happen, let's talk Concorde! If we would still have 1960s fuel prizes today, nobody would talk subsonic air trafic.

Nevertheless, I can not understand sales managers that come back from an aeroospace trade fair, have sold over 50 aircraft there, and on the first day back tells the employees, that Airbus has to cut costs by 30% now, to produce the aircraft for the price he has sold them.
I cannot understand modern management strategies anymore, but well, thats why I´m an engineer.

[Panama Jack]

It could be argued that even the entire A380 program, which is unlikely to ever show a profit for Airbus, was embarked upon more for the prestige of building the worlds largest aircraft, rather that because of any sound business case.


Your observations Wizofoz and Volume certainly make it sound like European, or at least Airbus' business mentality has a lot in common with the Arabian business mentality at most of the GCC's (Arabian Gulf area's) "up-and-coming" airlines.

Earlier last year read a book called "The Myth of Market Share" which make me ponder (in astoundment) why so many companies go after having a bigger pie, even if it means sacrificing profit. Maybe it is the primitive "size" envy thing?

http://www.richardminiter.com/images/book_covers/myth_cover_150.jpg

It will be interesting to see where the Chinese go with aeronautical manufacturing both as an Airbus franchise and in their own "home-made" regional-size jet. Quality-control remains an issue in China, however, I recall that a number of decades ago "Made in Japan" was also associated with cheap, low-quality, plastic crap.

[interpreter]

Certainly they are in trouble - largely due to the ridiculous business of selling your aircraft in another currency. However, that said, it it must be crippling to build the aircraft in so many different locations and then expect to compete with a manufacturer like Boeing that is already located in currently the largest market and has all the economies of single country production.

Pesronally I have always found Airbus aircraft more appealing than Boeing and the flying experience more enjoyable but it does not detract from the realistaion that Airbus has to get its act togther. BUT all large organisations run into trouble. It was not so long ago that Boeing were in trouble. Read this:

http://www.bizjournals.com/seattle/stories/2005/03/14/newscolumn2.html

Who would have thought that the largest and most famous airline would fold -namely PanAm?

There are certainly troubles ahead but with some very loyal, rich and dare I say it customers not favourably disposed to the US the outlook is less bleak than it might be. Also it is healthy to have two large, at least, companies competing for the larger commercial aircraft customer.

[henry crun]

interpreter: You said " it it must be crippling to build the aircraft in so many different locations"; like the Boeing 787 ?

[interpreter]

Yes - exactly - and then to have to force - YES FORCE, two sections of the fuselage together seems ludicrous!

[twistedenginestarter]

The drop in the dollar only affects American labour. Imported goods, materials and services will rise to compensate. American labour can't even now be particularly cheap because only a few days ago it was announced we Brits had just eased past the Yanks, and we are an expensive country. This makes me suspect that Airbus are simply noticeably less efficient than Boeing and that's why they're hurting when the airline business gets vicious on margins. Going abroad will help but it's dangerous for the EC if we can't sustain even high-tech industries against third world competition

[WHBM]

It's not only Airbus who bring parts from wide-apart points. Boeing have long built 737 fuselage sections in Wichita, Kansas, and then shipped them to Seattle by rail, a distance far greater than any of the Airbus plants are from each other.

Pricing goods in dollars (aircraft; oil etc) may be headed for an end if it continues its decline. Already major transactions in Russia, for long listed in dollars and then converted to Roubles only when the cash is transferred, are notably starting to change to Euros.

[Basil]

LR,
Perhaps it's the world trade in currency, often by thousands of totally selfish and unproductive people, that's the fault.
Can't see how FX traders are responsible for a manufacturing company trying to maximise profit. Certainly gives the lie to the "We need immigrants to keep manufacturing prices down." brigade. Am I concerned by loss of manufacturing in the UK in particular and the EU in general? I certainly am.

I'd agree that FX spreads are far too great, a greedy little fact used to advantage by a new company known as OzForex / UKForex who have succeeded by simply cutting theirs and offering a better deal to customers. Without FX trading how would international business proceed?

nb: MacQuarrie bought 51% of OzForex last year but said they would not alter pricing structure :hmm: Cynical? Moi?

[ISO100]

Twistedengine – Well said.

Airbus have been putting pressure on subcontractors to source production/ components in the far east and some are highly concerned about the ability of the Chinese to copy products. Sourcing product abroad reduces your company to a brand only. If the Far Eastern OEMS start to build their own brands as a result of being given the “know how” then the Europeans and Americans will be hard pressed to stay in business. Having said that its perhaps only a matter of time before they catch up in terms of technical knowledge and design skills and are able to do this anyway!

So I guess the question is, do you embrace the inevitable shift to The East and make the best of it or do you slowly watch your business decline as the Far East gobbles up your customer base?

If far eastern wages continue to rise as a result of their success than I guess there might be an outside chance that things will balance out before we lose all our industry but my guess would be that this is unlikely.

[Panama Jack]

From what I gather, it seems like Airbus' profit margin, which was probably set razor thin in order to gain market share (or on the mentality that "we create profit by selling in bulk") is the victim of exchange rates now.

In this case, somebody in Airbus didn't keep his pencil sharp or there was too much optimism that the bubble-value of the US Dollar (the demise of which some economic forecasters had predicted years ago) would not burst so soon.

In any case, I wonder whether they learned anything or sold airplanes at Dubai for below cost so they could claim bragging rights for having secured the most orders?

[Sallyann1234]

I just wonder what prices Boeing would now be charging if Airbus wasn't in business?

[CaptJ]

Of course they are. Unlike Boeing, who are philanthropists, caring only about their employees, third world debt and the environment.:ugh:

[MarkD]

Re: the Easyjet A319 order - similar things were said when Ryanair put in their B737 megaorders when the aviation sector was reeling post 9/11. The reality is that the industry has arguably contracted too much, and one manufacturer can make money every time the other's orderbook fills as there's no place else to go.

[Hunter58]

Ahhh, the old myth again...

'Airbus greed for market share'

I don't know, but a market share of 50% with two suppliers seems pretty reasonable for me. Oh, and, as a little course (free of charge) in aircraft economics 101, the biggest competitor for new aircraft is not the ones the other blokes accross the pond (goes both ways) are selling/building, but all the ones that have been build before. That sets your price! Either you live with this or you close shop...

[WHBM]

There's another aspect to "Greed for market share", which is that there are too many examples in the business world of managements (notably accountant-led) who pursue an approach of starting to be picky and choosy about what business they will take and whether it is profitable or not. Before too long the business starts to downsize as they let go of what is "unprofitable" until they have no capacity left to handle increased volume (because that would be wasteful) and they start to steadily reduce in size compared to their competitors. Things that were left behind because they seemed financially thin turn out to be good business indeed for the competition. Profits may increase for a while, but then start falling off as their overall activity shrinks. The extrovert, business-chasing, growth oriented sales teams get demoralised and leave. And one day you miss them.

Moral : be careful about your profitability, but be very careful about turning business away. It's a thin line to walk.

BAe have been an example in recent years, and GEC from slightly longer ago. It appears British Airways are starting to head the same way as well.