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selecta · Member Joined: 24 Dec 2006 Posts: 813 Location: ORD

By Daniel Michaels
THE WALL STREET JOURNAL
Sunday, Jan. 14 2007
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PARIS — A slide in Airbus' share of the lucrative market for wide-body
jetliners could mean new financial headaches for the European plane maker
starting around 2010, giving Boeing Co. a fresh chance to gain a competitive
edge.

For the second straight year, Airbus ended the year
farhttp://www.semissourian.com/story/159679.html behind Boeing in terms of
orders for big twin-aisle jetliners. The U.S. plane maker took in orders for
315 wide bodies last year, while preliminary figures indicate Airbus booked
around 100.

The main laggard in the wide-body range is Airbus' four-engine A340, which is
struggling against Boeing's two-engine 777, a plane the airlines prefer because
they say it burns less fuel.

Slow orders today for the A340, which flies intercontinental routes and carries
a catalog price of about $210 million a plane, means fewer deliveries and lower
revenue several years from now.

The result: a probable hit to earnings for Airbus and its parent company,
Franco-German European Aeronautic Defence & Space Co., starting around 2010.
Airbus SAS, the largest unit of EADS, in recent years has accounted for around
80 percent of the aerospace group's earnings before interest and taxes, or
Ebit, which is basically operating income.

"No doubt, the Ebit contribution from twin-aisles will start to diminish from
2010," said Olivier Andries, the head of strategy at Airbus.

A dip in revenue and profitability after 2010 would be bad news, especially as
Airbus is trying to extract itself from deep financial woes and major
management upheaval sparked in June by manufacturing delays on the A380
two-deck super jumbo.

Airbus' troubles with its wide-body models persist even though 2006 probably
was the second-best year for total jetliner orders, after 2005. Continued
robust sales mean the boom in aircraft orders will last longer than industry
officials had predicted and may generate a more stable flow of work for
aviation suppliers. The A340's absence from the party indicates airlines still
are focusing closely on the operating economics of the planes they acquire.

The contest between Airbus and Boeing over twin-aisle-plane sales is
particularly significant because of the size and profitability of this segment
of the market. Both manufacturers predict that wide-body models will account
for about 40 percent of the roughly $2.5 trillion that airlines will spend on
jetliners over the next 20 years.

More important, the big planes typically carry a proportionally higher profit
margin than small models. A twin-aisle model has a return on sales of up to 30
percent, while a single-aisle model can return around 10 percent, according to
executives at both Airbus and Boeing.

Boeing landed 76 net orders for the 777 in 2006, the company said last week,
after an exceptional performance of 154 orders in 2005.

Airbus plans to present its final order and delivery figures on Wednesday. But
a preliminary tally of Airbus sales in 2006 indicates that it took in around
five A340 orders, down from 15 in 2005, and around 30 orders each of the
previous three years.

The A340 is "under heavy pressure," EADS chief financial officer, Hans Peter
Ring, acknowledged during a call with analysts in November. He added that
demand for the plane was very low, forcing Airbus to make "significant
concessions" on contract terms.

The slide in Airbus' wide-body orders — and the gap between the 777 and A340
order tally — comes as Airbus is set to log its second-best year for total
plane orders. It registered 1,055 net orders in 2005 and is expected to book
more than 700 for 2006. Last week, Airbus confirmed an order for 50 A320
single-aisle jetliners from Malaysian budget carrier AirAsia BHD and options to
buy an additional 50.

As in 2005, however, the vast majority of orders last year were for A320
single-aisle planes that carry far lower catalog prices than twin-aisle models.
This shift means the mix of Airbus' overall deliveries will swing to
lower-priced models around 2010.

In part to compensate for declining A340 sales, Airbus is developing a
long-haul plane — the twin-engine A350 — which it began selling in December
after months of delays. But the plane won't begin deliveries before 2013 at the
earliest, so it can't plug the hole in Airbus' product line until the middle of
the next decade.

Airbus executives say they see ways to mitigate the looming profit slump. For
one, rising deliveries of smaller planes will boost income. Managers also are
considering increasing production of the twin-aisle A330, which is selling much
better than its larger and more expensive sibling, the A340.

Airbus also plans to deliver the first A380 late this year. Ring, the EADS
financial officer, predicted that the model will be "strongly profitable" by
2010.

EADS and Airbus also are launching a major restructuring program, called
Power8, that is aimed at boosting the plane maker's profit margins across its
product line. Airbus officials say the plan will let them ride out the
forthcoming troubles.

J. LYNN LUNSFORD OF THE WALL STREET JOURNAL CONTRIBUTED TO THIS ARTICLE.
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