Airbus struggles to gauge how much scaling back is too much

[PARIS] The most dramatic contraction in civil aviation history poses a challenge for Airbus SE in how to balance its response.

Factories that churned out aircraft in record numbers before the coronavirus crisis face an unprecedented production cut. But retreating too far risks leaving the company wrong-footed in a rebound and diluting its advantage over Boeing Co.

Airbus warned last month that it wouldn't achieve its earnings goals this year, hinting it would slow output without providing specifics. This week, the European planemaker reports orders and deliveries for March, the month that virus-induced lockdowns became a global phenomenon, grounding airline fleets in Europe and the US and forcing customers to defer acceptance of aircraft.

Demand was already flagging in February, when the coronavirus downturn was upending flight schedules in Asia. Airbus failed to secure any new orders that month. Now customers and suppliers, from Deutsche Lufthansa AG to EasyJet Plc to Rolls-Royce Holdings Plc, are bearing the full brunt of what the International Air Transport Association has called the industry's worst crisis. That's raising pressure on Airbus to give some of its most loyal buyers more flexibility.

The trick will be to pare back output on models like its A320 narrow-body workhorse, where production stood at close to 60 units a month, without going so far that suppliers will be starved out of business.

"If Airbus went into it at 60 A320s a month, they are very unlikely to even make 40," said Sash Tusa, an analyst at Agency Partners LLC in London, who is predicting the worst civil aerospace recession in a generation. "They will be making the decision now, but the rate cut will happen progressively over the next three to four months."

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Airbus said it's identified a number of operational measures it can take to minimze its cash outflow. These will be activated "depending on the further development of the pandemic." It had no further comment ahead of its disclosure of monthly orders and deliveries.

The company also holds its annual general meeting next week, and may choose to save any comments on its output plans for that mostly online gathering. Last week, Airbus told employees that a return to full production was unlikely in the short-term, after it temporarily idled facilities across Europe. It said on Monday that German sites in Bremen and Stade would be paused for parts of April. A plant in Mobile, Alabama, where it makes A220 and A320 jets, is shut down at least through April 29.

Chief Executive Officer Guillaume Faury has preached patience, while building up a 30 billion-euro (S$45 billion) liquidity buffer to get through the hard times. He said he'd base his decisions on facts and discussions with customers.

"I would not make judgments that would be too early," he said last month. "Sometimes we are wrong to be right too early."

Wide-Body Woes

The air of crisis marks a reversal of fortunes for Airbus, which entered the year with a clear advantage over its main rival, Boeing. Still reeling from the grounding of its popular 737 Max model after two fatal crashes in rapid succession, the US manufacturer was already in distress after halting production of its bestselling model. Airbus, by contrast, had lifted output to a record and was looking for ways to create even more capacity for the A320 family at its factories.

Now such ambitious plans are on hold, and Mr Faury predicted that the market for wide-body aircraft used for longer flights will suffer as intercontinental travel dries up. Airbus's offering in that segment consists of the A330neo and the more advanced A350 models. Any decrease in that area will likely come with a delay because many aircraft due this year are already partially paid for and close to completion, making deferral harder, said Richard Aboulafia, an analyst at aviation consulting firm Teal Group.

"Wide-body production won't drop off that much this year; it's 2021-2022 that we have to worry about," said Mr Aboulafia, who estimates A330 output could fall to zero, while Airbus may manage to "hold the line" at six A350s a month.

Lufthansa CEO Carsten Spohr was among the first aviation executives to paint a bleak picture of his airline's future fleet requirements. The company, historically among the biggest buyers of Airbus jets, has grounded almost its entire fleet of more than 700 aircraft and mainly operates cargo and repatriation flights of customers stranded overseas.

"We had planned to receive a new jet every 10 days this year, now we need none of these," Mr Spohr said last month. "We are discussing down payments, postponements, and cancellations with Seattle and Toulouse," he said, referring to the cities where Boeing and Airbus have their main production facilities.

Last week, leasing customer Avolon Holdings Ltd. deferred delivery of nine A320-family orders from to 2027, while canceling an order for A330neo wide-bodies. The pain was worse for Boeing, which saw an order for its grounded 737 Max slashed by 75 planes.

New Normal

Boeing, too, has acknowledged that the coronavirus crisis will transform the industry, with CEO David Calhoun saying on April 2 that "the size of the commercial market and the types of products and services our customers want and need will likely be different."

Boeing has said it plans to trim back output of its popular 787 Dreamliner wide-body. The new 777x airliner only recently performed its maiden test flight.

Adjusting production in either direction is always a delicate task for the manufacturers. While Airbus and Boeing have orders for single-aisle models and some wide-bodies stretching out several years, there's a limit to how far suppliers can remp up when demand peaks. During a trough -- or an extraordinary crisis like the 737 Max grounding -- the drop-off rips through the supply chain with even greater force. That's why the companies try to minimize shocks to the broader manufacturing ecosystem.

It's a backlash most recently felt by Rolls-Royce, which provides engines for the A330, A350, A380 and 787 Dreamliner jets. On Monday, the biggest UK manufacturer said flying hours that determine revenue from the wide-body planes it powers fell 50 per cent in March, and it predicted a further tumble this month and beyond. To preserve cash, the company eliminated its dividend for the first time as public company.

Among Airbus's most hotly debated standing orders is a purchase agreement with UK low-cost specialist EasyJet Plc, whose founder and biggest shareholder, Stelios Haji-Ioannou, is pressuring management to halt a contract for more than 100 A320-series jets and refrain from buying more aircraft. The carrier is exploring a delay in plane orders to conserve cash if needed for a longer-term downturn, people familiar with the matter said, asking not to be named because the discussions are confidential.

If no new orders arrive and airlines are able to defer deliveries, Airbus could quickly lose up to 3 billion euros in payments, said Sandy Morris, an analyst at Jefferies International.

"At the same time, inventory builds up as Airbus is left with aircraft that cannot be delivered," he said. "It amounts to the proverbial double-whammy for cash flow."

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