Catastrophic Innovation at Airbus
20 Nov 06
Airbus performed
extraordinarily well from 2003 to 2005. By late 2003, Airbus was
selling more planes than Boeing. Its stock had risen more than
five-fold, from a low of less than 7 euros a share in early 2003 to
about 35 euros in early 2005.
Airbus announced
the launch of its newest super-jumbo jet, the A380, on 18 January 2005.
This was a revolutionary new product, the first new jumbo jet since the
Boeing 747 of thirty years ago.
The Airbus A380 Super Jumbo Jet
The Airbus A380
has two floors of passenger seating. It can carry 555 passengers in a
three class configuration, and as many as 840 when configured for
maximum carrying capacity. Boeing’s 747, the only jumbo jet that
currently competes with the A380, typically carries 416 passengers.
Airbus’
announcement and the period immediately following it represented a high
point for both the company and the project. Since then, the project has
run into major problems.
These problems
have significantly affected the overall company’s performance. In the
third quarter of 2006, Airbus parent EADS posted a $305 million
operating loss, largely because of production delays on the A380. The
stock fell of a cliff In April 06 and is now trading at around 22 euros.
Stock Price: EADS (Purple) vs Boeing (Blue)
What Happened?
The major cause
of the production delay lies in problems with the wiring harnesses that
represent the electronic circulatory system of the aircraft. Many of
these complex bundles are made in
Hamburg, Germany and shipped to Toulouse, France for assembly. When
installed, they don’t work.
According to a
13 October article in The New York Times, one of the main
problems lies in the differences in design software being used by the
two groups of Airbus engineers in Hamburg and Toulouse. To overcome the
production problems, engineers from Hamburg are currently learning to
use the more advanced design software that is already being used in
Toulouse.
So the problem
lies with a relatively common issue -- incompatible design software.
This is symptomatic of a much larger set of concerns for Airbus,
relating to how much the company is managed as a state owned enterprise
rather than a for-profit organization. Much of the work on the A380 has
been split between organizations that had once been different companies,
in two countries (France and Germany) that have a long and complex
history with each other. Any shift of work between these organizations
has political implications in both France and Germany, making rapid
operational change very difficult.
Everything else
in this exceedingly complex operation seems to have gone on schedule.
In fact, everything but the wiring harnesses has been completed
on-time. There are several almost-finished A380s parked on the tarmac
of the Airbus assembly operation in Toulouse, waiting for functional
wiring harnesses.
Manufacturing the A380 – Everything Works But the Wiring
Customers are
growing tired of waiting, however. On 7 November, Federal Express
announced that it was cancelling the order it had placed for ten A380
planes. The company plans to buy 15 Boeing 777 freighters for $3.5
billion instead.
Many analysts
expect that other companies will follow the path of Federal Express, and
cancel their orders for the A380. Emirates Airlines, the largest
customer for the A380 with an order for 45 of the super-jumbos, is also
said to be reconsidering.
The A380 has
already used more than $14 billion in development costs. Analysts
estimate that Airbus needs to sell 350 of the super jumbos to break
even; with the cancellation of the FedEx order, it currently has firm
orders for fewer than 150 planes.
The problems
with the A380 underscore the catastrophic risks that come with big
innovation. If successful, these new products and services can create
and grow new industries. If they fail, they can imperil the fortunes
and the futures of the companies developing them.
Other big
innovation failures, like Motorola’s Iridium satellite phone, were
brilliant technical successes but missed in the market. We don’t yet
know how the A380 will perform in operation - its problems still lie in
the technical and organizational challenges that come from manufacturing
this exceedingly complicated piece of equipment.
More Information:
-
Airbus
company analysis done in New York Times 13 Oct 06. That’s
here.
-
Fedex story
from Business Week on 20 Nov 06 is
here.
-
I’ve written
on the Airbus 380 several times before – the update from early 2005
is
here, and I revisited the situation in late 2005
here.
-
For more on
the Airbus wiring problems, see the story in The International
Herald Tribune on 28 June 06. That’s available
here.
