Under Pressure,
Airbus Redesigns
A Troubled Plane
Faster, Roomier A350 Slated
To Compete With Boeing,
As Complaints Hit Home
Recalling Retired Executives
By DANIEL MICHAELS and J. LYNN LUNSFORD
July 14, 2006
Nick Tomassetti, a retired Airbus executive, was fishing in the Gulf of Mexico in early March when he received an urgent message from his former employer: Help us save the A350.
Airbus's latest long-haul jetliner was failing with customers. Desperate to improve the deteriorating economics of their industry, airlines said the plane lacked speed, comfort and efficiency and were flocking to rival Boeing Co.'s 787 "Dreamliner." Within days, Mr. Tomassetti had joined a crisis-management operation in France to redraw the A350 from scratch.
Now Airbus is scrambling to unveil its faster and roomier plane at next week's Farnborough Air Show, the year's most important industry gathering. Even if it does, it remains to be seen whether airlines like the new jet enough for Airbus to start building soon and avoid trailing Boeing for years to come.
The giant European plane maker faces this crisis because of two monumental business mistakes: Lulled by years of success in an industry with only two big players, it ignored the demands of its customers; and it underestimated arch-rival Boeing.
The A350, like the Dreamliner, is part of a new generation of airplanes that will carry the bulk of long-haul travelers for the next 20 years -- a highly profitable market likely to top 6,000 planes during the period, at $150 million to $200 million each. At a time of high fuel costs and plunging fares, the world's airlines are leaning heavily on manufacturers to design faster, lighter planes.
The new A350 is an attempt to address these concerns. Details could change, but according to a confidential Airbus marketing document, the new aircraft would match the speed of Boeing's 787 and slightly exceed its range. The A350 cabin would become slightly wider than the Dreamliner's, comfortably seating nine passengers in each row, instead of eight in the original version. Airbus hopes to make the A350 in three different sizes, in an effort to compete with the Dreamliner and another popular Boeing plane, the larger twin-engine 777. Airbus may rename the plane the A370.
If Airbus doesn't officially launch the plane at Farnborough, executives could still promise to pursue the project and start collecting expressions of interest from customers. But that would fall short of committing to invest money and build the plane. Several customers have indicated that if they don't like what they hear at Farnborough, they could jump ship and head to Boeing.
"If they don't launch this plane, they will lose," says Tim Clark, chief executive of Dubai's Emirates Airlines, a major Airbus customer. "How they handle the launch and how much credibility they bring will be key."
When Boeing unveiled its 787 long-haul jet in 2003, Airbus didn't take its U.S. rival seriously. Boeing had recently proposed two other projects and then dropped them. The European plane maker had dominated the market for several years and thought its momentum would continue.
But the Dreamliner, as Boeing dubbed it, made all Airbus models on the market look outdated. The craft, slated for delivery in 2008, would be made largely of carbon-enhanced plastic and propelled by new engines. This made the plane 20% more efficient to operate than existing planes of its size. In addition, the Dreamliner was faster -- airlines estimated it could fly from Los Angeles to Sydney up to an hour quicker than competing Airbus models. And it had a bigger fuselage, or body, meaning it gave passengers more headroom and more space between aisles.
Airbus officials initially dismissed claims about the Dreamliner's economics as far-fetched. Airbus Chief Operating Officer John Leahy, the company's top salesman, said all Airbus needed to do to compete with the Dreamliner was refit the old A330 with new engines.
The A350 was born, and immediately customers were dissatisfied. Compared with the Dreamliner, the new Airbus plane was too slow, had a small cabin and was costlier to operate because it didn't use new materials and technology. The A350's fuselage essentially had the same dimensions and production system Airbus had used since 1972.
"We were really coming down hard on the A350, but we didn't feel like we were getting their attention," says Steven Udvar-Hazy, chairman and chief executive of leasing giant International Lease Finance Corp., the largest customer for both Airbus and Boeing.
Former Airbus CEO Gustav Humbert conceded during a news conference that Airbus "underestimated" the Dreamliner.
Airbus soon began to pay the price. In April 2005, Air Canada announced plans to replace its whole fleet of Airbus long-haul planes. It chose the Dreamliner and, impressed by Boeing, it also ordered a batch of larger 777s.
The Air Canada win opened the floodgates for Boeing, which continued to bank orders through the rest of 2005 for both 787s and 777s. Each Boeing sale underscored the vulnerability of Airbus's offering in long-haul planes, which also included the A330 and A340 models. It came as Airbus struggled with other problems. In April 2005, the company announced that its giant A380, the world's largest passenger jet ever, had completed a successful maiden flight. But it also said deliveries of the plane, a two-deck superjumbo which seats 550 people, would be six months late. The delay was later attributed to wiring difficulties.
Last month, Airbus surprised customers with another six-month delay of the superjumbo, again because of wiring problems. The news sent the share price of Airbus parent European Aeronautic Defence & Space Co. plunging 34% in a single day. Airbus and EADS executives traded blame for a fortnight until Mr. Humbert and EADS co-CEO Noel Forgeard resigned earlier this month.
Amid the superjumbo's embarrassing troubles last year, Airbus sales chief Mr. Leahy struggled to close major deals for the A350. Top carriers, including Emirates and Singapore Airlines, urged Airbus to compete more aggressively against the 787 by increasing the A350's speed, widening its cabin and improving its fuel efficiency.
Through last summer and fall, the plane maker's engineers gave the plane a bit more seating capability by transferring the space where pilots rest from the passenger deck to an area in the belly below the cockpit. Airbus also simplified the plane's skeleton, allowing for bigger overhead bins and a tad more elbow room.
They increased the jet's speed marginally and hired carmaker BMW AG to design a new interior with smoother curves, better lighting and the illusion of greater space. The changes allowed Mr. Leahy by October to land firm commitments from nine airlines and leasing companies for 140 A350s. Sixty came from one customer, Qatar Airways. Mr. Leahy boasted that by year-end the tally would rise to 200.
But Airbus's key longtime customers, such as Messrs Clark and Udvar-Hazy, were still unhappy because the plane maker was standing firm against an almost universal complaint -- that the cabin was too narrow. The Dreamliner was also still faster.
Mr. Clark said that talking to Airbus about improving the A350 cabin "was like knocking my head against a brick wall."
By this point, it became increasingly clear that Airbus's early cockiness would cost it heavily in money and time. Redesigning the fuselage would result in a cascade of new tasks, including developing new wings and landing gear. It would also require Airbus to invest in new manufacturing equipment. All of that could easily double the plane's budget, which had already climbed to around $5.5 billion by mid-2005 from an initial estimate of $1.5 billion 18 months earlier.
'Not Changing the Fuselage'
Designing a new fuselage would also add a year to the development, pushing the A350 as much as four years behind the 787. The prospect might have been manageable for Airbus executives had they not already been grappling with two other problems: fixing the superjumbo's wiring problems and stemming a fall in orders for the A340 long-haul jet.
"We are not changing the fuselage" on the A350, Mr. Leahy told reporters last September, calling the existing dimensions "optimal." Despite his public comments, Mr. Leahy started to realize Airbus's reputation was at risk. In November of last year, he sent a memo to Mr. Humbert and other top Airbus executives warning that the company needed to fix its image quickly. In the letter, Airbus's top salesman acknowledged fundamental problems with some products.
By December Qatar Airlines hadn't yet signed a contract for its big order of 60 A350s. That same month, despite two trips in one week by Mr. Leahy to Australia, Qantas skipped over the A350 and ordered up to 115 787s with a catalog value of around $13 billion.
Even in the face of defeat, Airbus continued to rebuff customers' complaints about the A350. In public statements, Mr. Leahy said Qantas went with Boeing simply because the 787s could be delivered faster than any A350.
But to Mr. Leahy's boss, Mr. Humbert, the Qantas loss was an alarm bell that could no longer be ignored. Airbus was ending 2005 with 87 signed A350 orders, not the 200 Mr. Leahy had predicted. Boeing, meanwhile, had already booked 235 orders for the 787.
It was crisis time. Mr. Humbert decided Airbus needed to design an entirely new A350 and quietly put a team of engineers on the case. In early March, the Airbus CEO picked up the phone to several respected Airbus alumni and asked them to come back. In addition to Mr. Tomassetti, the retired executive in Florida, Mr. Humbert recalled Gerard Blanc -- a man he had beaten out for the top job at Airbus months earlier.
Rushing Against Time
The veterans' mission was to act as a counterweight to the main team of Airbus engineers working on the new A350. "Our job was to look at the various configurations that Airbus had already put in the mill and come up with what we though was the best, given the limits" such as time, money and manpower, Mr. Tomassetti says.
The men knew they were rushing against time to ease customers' growing irritation. In March, Singapore Airlines CEO Chew Choon Seng pulled Mr. Leahy aside after an Airbus presentation to ask why the plane maker hadn't yet "gone whole hog" on a new fuselage for the A350, both men recall. Days later, before 700 people at an aviation conference in Orlando, Fla., ILFC's Mr. Udvar-Hazy said that if Airbus continued to cut corners on revisions to the A350, the plane maker would get a "silver medal instead of a gold." "Airbus is listening to its customers," Mr. Humbert insisted days later during a reception in Toulouse, France, where Airbus is based.
As engineers worked on their new designs, Airbus started sharing details with potential buyers. Customers finally started to warm. When Mr. Udvar-Hazy visited Toulouse in April, he was satisfied enough to pull out a $100 bill and scribble on it that he considered it a down-payment.
But just as it looked like Airbus was finally turning a corner on the A350, the European plane maker got sidetracked by the superjumbo's delays. Christian Streiff, who has spent 26 years at French glass and industrial giant Saint Gobain, was brought in as Airbus's new CEO. Over the past two weeks, he has been working overtime to get to know all of Airbus's products. Fixing the A380's wiring problems and making a decision on when to officially launch the new A350 are his top priorities, company officials say.
Framed in Mr. Streiff's office is Mr. Udvar-Hazy's $100 bill. Mr. Humbert gave it to the new Airbus CEO when he took over as a reminder of the A350's importance. Mr. Humbert recalls telling his successor: "Now you have to make a billion dollars on the plane."
