The Airbus A380 Project Failure - Case Study Example

THE AIRBUS A380 PROJECT FAILURE By The of the School The THE AIRBUS A380 PROJECT FAILURE   Airbus made headlines in the year 2007 but not for great reasons. The iconic European corporation, EADS, went through tumultuous times with issues arising with the onset of a project to manufacture the Airbus A380. Initially, the Airbus A380 project was viewed as a groundbreaking project for greater projects and a higher level of clientele and production. This was not to be so; instead this production led to EADS’s major surgery and re-organization from the top management to the production floors. The company’s executives had to undertake measures to caution it from the results of the misfortunate Airbus A380 project (Barrie, D., 2007). This case study focuses on the problems that surrounded the company when the project failed. EADS’s financial health deteriorated drastically at the time. The background f these particular issues are highlighted in this case study. Herein, there is a highlight of how this project affected the company’s long term and short term financial goals. The study will also bring into perspective the results that this project had on the organization’s financial health. Introduction Huge capital investment is a requirement in the commercial aircraft industry, in manufacturing, development and research. EADS is one such corporate giant that produces the infamous airbus A308. The corporation is a major and well known aerospace technology oriented firm. EADS was as a result of a merger between the French, German and a Spanish company. As at the year 2007, 800 million shares were outstanding. By that time, 30% of the shares were being held by the French shareholders, 22.5% and 5.5% held by the Germans and Spanish shareholders respectively while the rest was held by other minor shareholders. Case Study of The Troubled History of the Airbus A380(2012) Figure 1.0 EADS Stock Owners The main customers of EADS are commercial airlines and also other private air transport firms and organizations. EADS is one of the leading aircraft manufacturers. Popular news agencies and the media had stories running telling of the sad happenings at EADS. They tried to quote the management and staff and even carried out a study of the state that the firm had found itself in. Although everyone tried to give their side of the story, and much was being said, it was very clear that because of the influence that EADS had in the business world, this would affect the concerned countries (Wall, Rangly, 2007). EADS is managed by a board of directors, eleven in number. Upon research, I concluded that there is a very long chain of order and so much bureaucracy to be followed for there to be made any major decisions. The eleven member board comprises of different prominent persons and has two chief executive officers (CEO’s). One of them gets to be nominated by Daimler-Chrysler and the other by SOGEADE. These two companies have this advantage because they are the major shareholders in the business. This is also done as other members of the board are nominated by the two groups. There are, however, two directors that are independent, with each group nominating one member (Sparaco, P., 2007). This complex management structure made it hard for the running of the corporation. Decisions would not be made in time. The complex board structure is as follows: Case Study of The Troubled History of the Airbus A380(2012) Figure 2.0 EADS Management Structure (Board of Directors) Literature Review The NGA (Next Generation Aircraft) models have an expectation on their hands to revolutionize the air transport industry. These are classified into either light jets or new large aircrafts. The A380 was part of the large aircraft being produced and its rival Boeing had the 787 Dreamliner. A number of papers have shown interest in the airline industry. They have particularly shown interest in the competition between the two main aircraft producers. These papers have specifically shown interest in Airbus and Boeing like Esty and Ghemawat (2002) paper. According to the paper, the companies used the game theory approach, the main company decisions on product launch or cancellation were determined on the criteria of empirical data. An interesting conclusion is that it was discovered that it was possible to have a more established player loosing on the competition as they launched a product as in the case of EADS. The company launched the Airbus A380 while Boeing announced that they would be lunching the ‘stretch Jumbo’, a beta version of the 747, a move that never succeeded. The production and marketing strategies of the two companies differed as Airbus made a 3 times more estimation of the demand of the very large aircrafts. Main factors considered in the analysis were conclusions from calculations on operating profits, launch costs, discount rates, on-going expenditure etc. By looking art Benkard’s (2000) ideas, insight is brought upon the decision making by the aircrafts producers. He discussed the learning effects found in the production industry. He used data acquired from Lockheed and determined that like other production industries, the aircraft production industry I subject to changing possibilities and production costs that purely depended upon the previous business period’s overall levels of production of particular aircrafts. One particular article included in this study is an article published by the U.S. DOT Office of Aviation Research. The article tries to focus on the impact that introduction of large airplanes like the A380 would have on airports as they would have to rebuild their infrastructure to accommodate them. Their predictions were seconded by many other publications, suggesting that airports would have to make significant changes in order to accommodate these large aircrafts. Case of Singapore Airlines (SIA) In September the year 2000, SIA disclosed that it had made an order of up to 25 A380’s a US$8.6 billion purchase. This order was delayed when Airbus announced a six month delay in its supply schedule. This displeased SIA whose chief executive officer made an announcement stating that they would be purchasing their airplanes from Boeing. SIA’s trust in Airbus ability to deliver its promise landed it in trouble. SIA had to make last minute adjustments. Another delay was announced by Airbus pushing the delivery date by another six months. More disappointment was to follow as the company announced another delay. The final delivery date was to be October 2007. By this time SIA had restructured and decided to purchase 40 Boeing 787-9s. The delay in the delivery of the A380’s disoriented SIA as it had already made plans for the staff that would be working in the plane. Several employees had to be laid t rest until the airplane was delivered. It became clear to SIA that Airbus couldn’t be entrusted to keep its word, thereby SIA tried to plan for the inconvenience. Although they acquired a new large airplane, SIA went along and started a program to reduce the small aircraft for there was less passengers and the A380 had an up to 853 passenger capacity.. Methodology I analyzed information that I gathered and compared it with the literature that has been published in the past concerning this project. I targeted EADS as a business. Specifically, this study dwells on the financial data that concerns the corporate structure of the business and how the project affected this business. The A380 was a major project at EADS that consumed a substantial portion of the company’s annual income in the form of expenditures (Thomas, J., 2001; Gummesson, E, 2006). I evaluated the organizational structure and leadership at EADS in this study. To ascertain the financial repercussions that the project had on EADS, I examined the financial statements of the business. These statements are readily available to the public as it is a public corporation. To be specific, I focused on the quantitative analysis of the company during the period from 2004 to 2005. To understand the place that EADS found itself in after the running of the project, I compared it’s financial performance to it’s main competitor, Boeing. Boeing is a major airplane manufacturer that competes with EADS in the air transport industry (Wall, Rincoln & Flottau, Junior, 2007). Assessment of Financial Health Financial Statements – Ratio Analysis Investors will always examine the past and present financial records of the business to determine whether it would be wise to invest in them. Trends in the cash flow and profit of the company are paramount. The income statement serves to disclose expenses and revenues and the profits collected for a period of time. The table below displays the financial data of EADS used subsequently in the calculation The following table displays EADS’ financial data used in subsequent ratio analysis. Case Study of The Troubled History of the Airbus A380(2012) Table 1. Business Data Segment Table of EADS Collection of Data The published EADS statements served as the source of the financial data that I used in this study. EADS is a listed company meaning that its stock are publicly traded and legally, they are required by the law to publish this information for the stakeholders to read. The collected data includes annual reports that contained the company’s income statements, financial statements, cash flows, segment information and also statements of operations. The company has also published data on its stock price at its website. More information was obtained from the Annual main Reports which the Transport Commission of the E.U. published about airplane manufacturers. The Transport Department of thee United States published statistical information which came in handy in the generating of this report. In order for me to do business analysis and the ratios, I used a suitable quantitative method. I got more information was acquired from scientific journals and scholarly articles. You will find these articles listed as references. I was not able to obtain all the data and information that I wished to obtain, though; I secured crucial information regarding the airplanes that were supposed to be delivered through the project so as to break even (Mathews, N. et al, 2006). I was not able to obtain the pricing rates of these airplanes; neither was I able to acquire the penalty that was incurred for not delivering plans to the customer at the stipulated time. Information on governance, leadership and the organization structures of EADS was obtained from the company itself. Other factors to consider The dollar/euro exchange rate was an additional factor that negatively affected the financial health of the corporation. The administration of the organization is almost like running a country. There is so much bureaucracy. It would have been better if the organization was running under the stewardship of one CEO, who would be answerable to the stakeholders and government organizations to, than having all these CEO’s who would not agree and plan strategically for the better of the organization. EADS was not in a position then to take advantage of the scale because the production units that were duplicated could not allow this. There was inefficiency also as the uncoordinated synergies that were between the major productions units led to higher costs. The leadership at the business was outright ineffective and were uncompromising too. This was because the government intervened a lot. All this countered the efforts by the business to better its financial health. EADS’s poor performance was also attributed to the poor exchange rates which should have been addressed. The state at the business at the time when they were implementing the A380 project was critical, and it would have been quite okay if there were a new administration and management. Conclusion and Recommendations As I carried out this study, my particular aim was to establish where EADS went wrong, and also to establish whether the organization could have made it. I wished to establish whether there was a classic mistake that the business did which has happened before in other major corporations. As I analyzed the financial reports and the management structure of the business, it became very clear that the organization had a complex administration structure that complicated its running and also created loopholes for there to be wrong decision making based on misinformed decisions. These options like the A380 project that lead to the demise of the mighty and international corporation. I evaluated the impact that this project had on the corporation and actually realized that were it, not for this project, the corporation would have made it big in comparison to another major airplane manufacturer like Boeing. In conducting this study, I aimed at evaluating the king of impact that this project had on EADS. In this study, the financial statements of EADS are analyzed. It is in the light with the conducted study that I conclude by saying ‘was a bad idea’. Clearly, EADS had not conducted enough research and did poor planning before they embarked on the A380 project. References (2012, 12). Case Study of the Troubled History of the Airbus A380. StudyMode.com. Retrieved 10, 2014, from http://www.studymode.com/essays/Case-Study-Of-The-Troubled-History-1310984.html Aboulafia, R., “The Airbus government funding question.”, American Institute of Aeronautics & Astronautics, 38 Issue, 2000, p20. 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