Airbus A380

Airbus A380 case study

ASSIGNMENT QUESTIONS

PREAMBLE

This case study focuses on Airbus, which is at a crucial juncture in its journey to becoming a behemoth in the large passenger aircraft segment. Airbus’s A380 is set to be a new benchmark with a seating capacity of over 500+ seats, along with better efficiency and fuel utilization.

The Company has undergone a corporate restructuring process in order to merge from a consortium to a single corporate entity of EADS. This was followed by the program and launch of building the A380. The complexity of it’s supply chain, new technological improvements and changes in parts and suppliers, along with a wide spread area of it’s operations and decision makers, has lead to delays in the deliveries of the A380s to customers across the world.

The company has encountered two delays in deliveries(2005 and 2006), and now is on the verge of feeling this impact on its stock prices and in it’s operations. With Boeing on course with the launch of their 747-8 Dreamliner, Airbus is in a bit of a dilemma on how to address their multitude of problems, which are both internal and external.

1. Anticipate how investors will react the day after the case, i.e., on June 14th, 2016. Would the reaction to this delay announcement be different from reactions to previous announcements? If so, how and why? In identifying your response, think about the importance of the A380 program to EADS, and the company's financial and operating characteristics.
   

INVESTOR REACTIONS

• The investor sentiment is likely to be negative, as the management has not properly ascertained the complexity of getting the new A380 to the market.
• The projected drop in EBIT for ’07 is slated at 500 million Euro, with a similar loss continuing in each of the years from 2008 to 2010
• The delays will increases costs to the project due to the following

1. Penalties paid to customers
2. Labor costs
3. Material and Carrying costs
4. Redesign costs
5. Lower revised future sale potential with new customers.

• ON the upside the A380 has passed all the necessary flight worthy tests and come through with a clean sheet.
• The investors will be bullish on the A380’s impact in the airline industry, but will have a negative outlook in the short to medium term (2007 to 2011) as far as its earnings goes.
• Deutsche Bank’s advisory still indicates a hold on the stock based on future earnings potential.
• The comforting factor of zero cancellations by customer in spite of these delays, are testament that the A380 will be a game changer to the aviation industry.
  

IMPACT OT EADS’s A380 PROGRAM AND INTERNAL OPERATIONS AND FINANCIALS.

• The launch of the A380 commercially is critical to the launch of Airbus’s large body aircrafts that is to compete with Boeing’s, 747-8 which is in demand by airlines due to it’s increased passenger capacity and better efficiency.  
• Their financial projections for the next 5 years will be severely impacted and revised downwards
• The downward revisions of its earnings along with the delay in deliveries means that there will be a pressure on its cash flow for operations.
• Operational issues to be addressed will be

1. Labor costs
2. Material and Carrying costs
3. Redesign costs

1. What recommendations would you have for CEO and EADS?

• Address the key issues that are affecting the delivery, namely

1. The complex 520 kilometer long wiring with the change from Copper to Aluminum
2. Customization options given to customers in the future, must not affect the production timelines.
3. The variation in Software and systems between the teams in the UK,France and Spain, Germany, which has resulted in design and implementation delays, msut be addressed.
4. The complex supply chain which has long transits times and arduous clearances procedures for transportation to be streamlined and minimized as much as possible.

• Introduce a steering committee to consolidate processes and assembly to ensure that all teams are working in unison
• Interact with customers, key shareholders and media personnel to focus on the progress made on the A380’s multiple flight worthy tests.
• Create a strong PR campaign around the A380 being an industry game changer and all it’s USP that it will bring to Airline companies, Airports and Customers alike.
• Ensure the company is well capitalized to deal with the increase IN Cash flow requirements for the next 5 years.
• Setup an independent high level customer relations team to keep the clients up-to-date with the exact production and launch process of the A380, while also making an effort to woo future customers through various trade shows.  

1. What can companies do to avoid surprises like the one with A380?

• Unify the processes and systems that all the independent offices that were situated across Europe, thereby creating a single window system of operation and execution.
• Due to the complexity of the new A380 program, the company could have had weekly reviews and progress reports, which could save time and money. It will also reduce lead time for changes and shipping of various parts
• Streamlining their supply chain processes every month, as there are lot of entities, organizations and extrinsic factors that impact the movement of their parts, and eventually leading to delays in production.
• Regular updates to the clients, investors and the media on the production and test status of the A380. All stakeholders can deal with delays as long as they are not ‘rude shocks’ as is the case now.
• The company should have factored in a buffer period for delivery and production since the A380 was a first of it’s kind, and also went through a dramatic process of reengineering from the old Airbus planes.
• It’s projected sales for this new category of Planes were too aggressive vis-à-vis Boeing, and therefore the future earnings calls have been inflated. The CEO could have been cautious with earning forecasts and then outperformed market expectations.

CONCLUSION

Airbus are certainly faced with a turbulent period for the next 5 years, however, this will just be a passing phase in what looks like a promising future for the company and it’s new A380. The team at Airbus must ensure that it takes into account all it’s stakeholders, and addresses each of their issues with a great deal of depth and sensitivity, in the view of forging long lasting relationships that will hold the company in good hands in the years to come.