Airbus' Dillema

What a difference two years makes. Boeing has been on a tear lately, to say the least. At the same time, Airbus has been in free fall.

Here is a brief summary of Airbus' current problems:

• The A380 is two years late, and due to changes in the air travel market, may never reach original sales forecasts. The first A380 cancellation happened when FedEx canceled its cargo A380Fs in favor of Boeing 777s. Another potential A380F customer, Emirates, recently ordered Boeing's new 747-8F freighter.
  

• Airbus' current large aircraft, the A330 and A340, have been dealt a near-fatal one-two punch by Boeing's 777 and 787. Again Emirates recently canceled its Airbus A340-600HGW order in favor of more Boeing 777-300ERs.
  

• Airbus' A330/A340 follow-on, the A350, was basically a warmed-over A330 and was so panned by customers Airbus was forced to return to the drawing board to completely redesign the airplane, resulting in the A350XWB.

• The A350XWB engineering effort is directly competing with efforts to address the A380's problems.

• At the same time, Airbus has to plan for the "Airbus NSR", or "New Short Range", the follow-on to the very successful A320 line of mid-sized airliners.

How did Airbus get into this mess? I believe Airbus never saw the threat of the Boeing 777, nor the threat of two-engine long-range airliners to the three and four engine long range market, despite having a monopoly on the large twin-engine market with its A330. Airbus built the four-engine A340 for the long-range market. The A340 was basically a four engine version of the A330, using the proven engines of the A320. Airbus built a very good second generation A340, the A340-500 ultra long range aircraft and the high-capacity A340-600. However, all major international routes in the northern hemisphere can be served by twin engine airplanes. And Boeing was determined to make the 777 an international player from the start. It was no secret.

What Airbus should have done is recognized the threat of Boeing's big twin, and instead of the A340-500 and A340-600, it should have built a larger, longer-ranged, twin-engined A330 using the wing design of the A340-500/A340-600 and the 777's engines. This would have stalled Boeing's success, and allowed Airbus to offer existing customers a long-range, large capacity aircraft with significant commonality to its existing A330s.

But the past is the past. What is Airbus to do now? There are several options, none of them good.

1. Cancel the A380. Pros: It will likely never break even. It would allow Airbus to concentrate on the A350XWB and NSR. Cons: With 166 orders, Airbus would have to pay out penalties.
2. Cancel the A350XWB. Pros: Airbus could fix the A380 and focus on the NSR. Cons: It would cede the most profitable portion of the market to Boeing's 777 and 787, and leave Airbus as a niche player in the wide-body market.
3. Go forward with the A380 and A350XWB. Pros: Airbus would remain in the large airplane market. Cons: The A380 will likely not break even, the A350XWB will be too late to market to overcome Boeing's 777 and 787 momentum, and Airbus may cede the narrow-body market to Boeing's 737 follow-on.

My view is option 1 makes the most business sense. Option 2, is the face-saving option. Option 3 would be devastating, and return the European airliner industry to what it was in the 1960s and 1970s, a pure niche player.

I was almost certain Airbus would choose option 2. However, Airbus feels an all-new NSR follow-on aircraft for the 737 and A320 market is not viable until around 2014, which means they don't have to make a decision for two to three more years. Because of this, in the next few days Airbus is expected to choose option 3. Even with the NSR pushed out until the middle of the next decade, Airbus has its hands full fixing the A380 and bringing a completely new A350XWB to market by 2012. Not only do they absolutely have to get the A350XWB right, because as soon as it completes its test program they will have to start testing the NSR, but the NSR program must execute flawlessly.

Is Airbus capable of delivering two perfectly executed aircraft programs? We will see.