Wade Armstrong: What Happened to Airbus?

What Happened to Airbus?

Posted Tuesday November 14, 2006 in Business

Just a two years ago, Airbus was a darling. It had pulled ahead of Boeing in total orders, was in contention for a contract to sell tankers to the US Air Force, and seemed to be becoming the premier commercial aircraft company. Last week, Airbus reported its first quarterly loss in three years and followed that up with the cancellation of FedEx’s entire order for the aerospace company’s new flagship aircraft, the superjumbo A380. Complications in the A380 program have already caused the resignation of two Airbus CEOs this year, caused strife between the French and German governments, and inspired British aerospace and defense giant BAe Systems to sell its 20% share in Airbus parent EADS at a very substantial loss. Now, I’ve been an aviation buff since junior high, and I want to know how one new aircraft program could cause such turmoil. The answer turns out to be fairly straightforward: the A380 program came out of flawed planning and, because of that, now represents a very risky (and very expensive) bet on a dubious vision of the future.

Airbus’s Planning Mistake

The A380 came out of a planning process at Airbus that developed a document called the Global Market Forecast. The GMF specified a vision for the future, and the plane that was developed to meet that vision was the A380. Airbus made a plane for a forecast, not a scenario, and that massively increased their risk in the program and decreased their chance of success¹.

The consequences of this error have been well-described in a recent article in Popular Mechanics, which asks the serious question “will [the A380] ever get off the ground?” I don’t think it’s that serious, but the problems for Airbus have been legion:

The A380 is late; consequently, Airbus has to offer discounts to airlines that have ordered the plane, dropping the price paid for a new A380 from a list price of about $300 million to an actual price of about $100 million.
Orders are lagging expectations — only about 160 firm orders for the A380, versus about 450 for the 787.
With the high cost of the project, Airbus has been contemplating layoffs; the French and German governments are now attempting to dictate the distribution of these layoffs.
The CEO at Airbus’s parent, EADS, was forced out over the problems in the A380 program; his successor stayed less than three months before quitting, saying the mess of the program was too much for him to handle.
Scandal has overtaken Airbus as it was revealed that execs sold stock based on insider information right before the revelation of negative information about the A380 program (this is apparently not illegal in Europe).
The aircraft has run into technical problems, including wing strength and challenges with all of the wiring the plane requires.
Safety organizations have suggested that the turbulence caused by the wake of the large A380 is so great that only half as many can be landed land in a given period of time as can 747s.
Many airports are still not equipped to handle the superjumbo.
Because Boeing used more advanced, composite structures with the 787, the mostly-metal A380 may be obsolete by the time the superjumbo enters service; Boeing, meanwhile, may have a one-generation lead in structural skill with which to build a competing superjumbo.
While Boeing’s estimate is now that the world market for A380-sized aircraft is reasonably large, they still believe that the market will be so slow in emerging that they have years in which to design a next-generation competitor, meaning that the A380 may be too much too soon.

What’s the Difference Between a Scenario and a Forecast?

Most companies use forecasts to look into the future. A forecast describes how the company expects things to be in the future. Scenarios describe not one specific state of affairs in the future, but the range of possible states of affairs — called system-states — and what values of what intervening variables will cause each of these possible states to occur. Scenarios have a number of handy attributes:

Because you model out what values of which variables cause each system-state to occur, as time passes and different variables take on new values, you can know which system-state is emerging.
Since a scenario includes a range of possible system-states, you’re able to plan for a range of possible futures, not just one likely outcome.
The act of developing a scenario forces you to enumerate and understand the inputs — both those you can control and those you can’t — rather than just listing the end results you’re interested in measuring.
Because you can see a range of outcomes, you have better understanding of the value of your option to abandon² and of the effects of variations at the margin on your ultimate outcome.
Seeing the possible combinations of values lets you know if any one system-state requires a crazy set of values to be true for that state to occur. This is particularly useful in that it lets you see if your desired outcome is less likely than you think.
If some combination of other ending system-states is more likely than the single most likely ending system-state, then you can see that combination and plan for it as well.
You’ll know the possible positive and negative system-states before they become reality, helping you to proactively understand and respond to them if they do emerge.

How to Develop a Scenario

Scenario development in strategic planning was pioneered by Royal Dutch/Shell in the 1970s, and allowed that energy producer to weather changes in the oil market better than most. Shell’s Pierre Wack described the company’s approach in two articles in the Harvard Business Review; since that time, a few of Wack’s colleagues have written books on the topic as well. The approach recommended distills down to something fairly simple and actionable:

Describe the current reality
Determine what outcome variables — profitability, demographics, consumer preferences, etc. — are important to you to measure.
Determine what the important driving variables — global warming, terrorism, the “graying” of first-world countries, etc. — define the major changes that will affect your company, and what can change the values of these variables. (You can use your experience, the results of model-building, or just plain visionary thought to do this.)
What other variables can affect the values of these variables? These intermediating variables are important, but quite possibly entirely outside of your control. (Again, use experience, models, regressions, and your own vision to determine these variables; while a more precise process will give better results, a casual approach will still provide a lot of value.)
Learn how your driving variables and intermediating variables cause your outcome variables to change.
Starting with the current reality, vary your driving and intermediating variables to build a range of scenarios with specific ending system-states possessing known outcome variables.

What Could Airbus Have Done Differently?

Airbus’s Global Market Forecast foresaw a new driving variable: future growth in customers for air travel would outstrip the growth in landing slots³ at existing hub airports. Their solution to this challenge, the A380, aimed to double the number of passengers that could be landed in any one slot. Boeing saw the same limit and theorized that airlines’ response, and customers’ preference, would be more point-to-point travel between secondary airports that are not currently saturated, such as flights from Des Moines to Rochester; the American company’s solution, the mid-sized 787, is a fuel-efficient twin-engine widebody that can fly between a wide range of airports. Boeing didn’t plan for any airline preference to fit more people into the same number of airplanes; Airbus didn’t plan for any airline preference to fly more direct routes from secondary markets.

There are a lot of intermediating variables that determine which of the two solutions — more point-to-point, or bigger planes — the airlines prefer:

Availability of public and private money for airport construction
Alternative transport options (for instance, trains in Europe)
Consumer expectations of transport experiences
Population growth patterns
The price of oil
Developments in structural technology
Terrorism
Growth rates in developed countries vs. growth rates in the developing world
And more

All of these have different effects on airline preferences, and manipulating these variables can result in a wide variety of ending system-states. Only some of these include the need for a superjumbo such as the A380. Boeing is fortunate because, in almost all of the possible ending system-states — even those in which the A380 is successful — there’s the need for a fuel-efficient mid-sized widebody like the 787.

Had Airbus used a solid, proven scenario planning approach, it could have decided to build a mid-sized aircraft — in fact, it already had one, the A350, on the drawing board⁴. A scenario planning approach would also have helped Airbus to understand the role of the mid-sized market, the role of technological change (the 787’s structure is far more advanced than the A350 or A380), and the role of timing (especially in the development of new structural technologies and the pacing of demand growth in the airline industry) in new product development, and optimized a solution for all of these intermediating variables. Airbus could have realized that, in a wide variety of system-states, encompassing most of the probable outcomes, the A380 was inordinately risky, and avoided taking on such an albatross. Instead, Airbus, like Boeing, could have invested in the smaller A350⁵, satisfying the majority of possible system-states, even if that aircraft didn’t meet the needs of the single most likely system-state, because that system-state’s likelihood of emergence was far less than the collective likelihood of the other system-states.

Even if it bombs, the A380 won’t drive Airbus out of business; European governments will bail out the company in the worst-case scenario. But misjudging its opportunity and building the wrong airplane will impact Airbus’s ability to compete over the full range of aircraft for a decade or more, and it will be fascinating to see how it recovers from this misstep. Meanwhile, we can all learn from the experience the costs of using forecasts, rather than scenarios, in long-term planning.

¹ In fairness, Boeing’s planning process seems to have been essentially similar, so they made the 787 for a forecast, not a scenario, as well; since the 787 has been the most successful commercial airliner launch in history, it’s clear Boeing forecasted better. But a forecast is just a high-stakes bet on how the future will be, and who wants to bet a company on whether or not a forecast is correct? We’ll go over a better way to plan for the future.

² The value of the option to abandon is how much money you can save by cancelling the project now, minus how much money you’ll pass up by cancelling the project now. If things go south, you want to be able to cancel before you invest too much money if you won’t be gaining the return you expect in your current project — and understand when such a thing is a good idea. For instance, if you’ve already invested substantial funds in a capital project, you may be able to get a positive income stream from the project while changed circumstances ensure that you’ll never pay back the initial investment. In that case, your option to abandon will be negative, because you can’t take back the initial investment.

³ A landing slot is the right to land an airplane. The number of landing slots is limited by the number of runways, the separation between aircraft necessary for safety, how long it takes an aircraft that just landed to transit to its gate, the capacity of air traffic control, and more.

⁴ Airbus can’t just build the A350; not only has the initial design been leapfrogged by Boeing, but it appears that Airbus doesn’t have the institutional capacity to carry out two major new product development projects at once.

⁵ In fact, airlines are now clamoring for the A350.

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