Operation Management Case Study

Airbus is currently implementing new logistics processes that it expects to cut costs by 20%. Part of this is because Airbus has been flying parts for planes to central locations to facilitate assembly. However, it is perhaps more important that this increases inventory turnover; because like all airplane manufacturers, Airbus has a backlog: if this backlog is eliminated or lessened by more expedient manufacturing, Airbus produces at a faster rate and is able to sell more products. The backlog is also counter-cyclical; customers get their orders faster when less are buying. The current backlog is over four years whereas cycles generally last ten or less with prolonged recessions rare. Only a sustained recession of more than several years can threaten Airbus'es production pipeline. This is unlikely as air travel has already recovered from its early-2003 low. Accoring to the exercise, a new airplane needs a total of 85 days in the Toulouse plant, although many of these days it does not (or all of it does not) spend within the plant itself.

Perhaps more disquieting is the falling dollar. Because most international banks use the dollar as a reserve currency, the Euro is able to buy drastically more than it did three years ago. Although this is good for western consumers, this occurs at the expense of European manufacturers who wish to export their products. Many companies such as Gulf Airlines that operate outside Europe and North America must now decide between expensive Airbuses and relatively inexpensive Boeings.

Analysts have commented that Airbus and other European companies have so far protected themselves against the dollar's slide using hedging instruments: forward contracts designed to lock in contracts at a specific price. Of course, Euro-denominated contracts that Airbus has backlogged are safe. (Airbus boasts a longer list of back-orders than Boeing, its only true direct competitor.) However, the Economist and other sources contend that the dollar will stabilize at a lower level, making the American economy more competitive. This bodes poorly for Airbus both inside and outside Europe. It is important to note that Boeing is reaping the benefits of several defense contracts, which are bid on by EADS and BAE but not by Airbus, which they own 80 and 20% of, respectively. Airbus'es operating margin last year was 16.5%, exceeding Boeing's 10.5. Airbus budgeted $10.2 billion to develop the A380 but this spending has reached its peak. (businessweek.com)

Airbus sold an average of 100 planes a year between 1972 and 2002. However, this figure is misleading due to exponential sales growth. According to CNN, "sales rose $20.5 billion from $17.2 billion in 2000 as it delivered a record 325 aircraft[in 2001], up from 311 in 2000." CNN also notes that orders dropped to 375 from 500, but these orders are projected several years into the future. When production capacity exceeds the number of orders, the backlog will begin to shrink: so far the reverse is true and the backlog has grown. Cancelled orders are a problem. Shrinking pre-orders have already began; however, the amount by which the market is shrinking is not threatening enough to halt development on the A-380. Most notably, Airbus beat its arch-rival Boeing for the second time in the past three years in 2001. Boeing received 335 gross orders that year, but was left with only 272 net orders after accounting for conversions and cancellations. This has since changed but mostly due to orders from the U.S. military. Boeing's CFO was forced to resign, however, due to corruption charges. There is a chance that rival firms may bring Boeing to an international trade court for unfair business practices, but this is doubtful. Boeing has begun work on a new aircraft engine that will allow it to alter its 767 aircraft, a competitor of the 200-320 models. This new engine will allow the aircraft to travel at near the speed of sound. Airbus expects to be able to develop a modified version of this engine so as to retain the market share that it has gained at Boeing's expense.

Business Week printed in an article last year:

Airbus Industrie has shed contract workers and shelved plans to jack up production by 50%. Sounds bad -- until you consider the situation at archrival Boeing Co. It has slashed production by half and is axing nearly 30,000 jobs from its commercial-airplane division. Business Week, August 5th, 2002

Orders dipped this year but are expected to reflect 2001 and 2002 levels in the future. Production efficiencies could lead Airbus to match its production capacity to the number of annual orders. If Airbus can replace the production of 320 and similar models with the production of the 380, it will enjoy higher profit margins. Airbus expects to make 300 planes this year and has collected 250 orders for new planes as of October 24th. Airbus expects to produce 300 planes in 2004 as well, with orders increasing. Orders in 2002 totaled 380 in 2002. (Airwise.com) Before this year, orders consistantly outpaced the company's production capacity.

I would think that orders will be up in 2004, but deliveries tend to lag a little bit behind, so the bottom point in deliveries will be probably be this '03, '04 period," Chief Commercial Officer John Leahy told Airbus.com, responding to a question about the potential impact on orders of signs of a recent recovery in air passenger travel.

The nature of the current market has underscored Boeing's reliance on military contracts for a future market for its products. Airbus President and CEO Noel Forgeard told Business Week: "For the airlines that are financially strong, it's a good time to place orders." Alternately, Boeing Chairman and CEO Philip M. Condit, who calls the slump the "worst decline the industry has ever seen." (businessweek.com)