Barry Eccleston

Aero Club

24 July 2009

WELCOME. Thanks to the Aero Club, Jim Bennett…

Open comments: 1969: Moon Landing; First Flight of Concorde; Birth of Airbus and my first job in Aerospace

Flight planning through the recession: A Manufacturer’s Perspective

1. The industry

• Airline Industry (our customers) is in the worst recession ever after a succession of events;

- economic recession

- credit markets

- housing and real estate problems

- unemployment growth

- and now the H1N1 Virus

Not surprising our customer airlines are in difficulty

• US airlines seemed to be holding up in the beginning of the financial crisis, as they already took capacity out and reduced costs last year, following the roaring fuel prices. Despite these efforts, there is a growing liquidity problem as the depth of the crisis continues to grow. At this stage there is no clear indication of when situation will improve
• IATA just published results for the 2^nd quarter. Although this represents the global airlines and does not include the LCC’s, they indicate that the stabilization they saw earlier was more due to a small rise in average distance flown, and geographical pattern of changing travel markets, and not due to a stabilization of passenger numbers. We particularly note that premium tickets are down 23.6 % versus last year, and it’s not getting any better...
• Some international regions (Europe to ME and ME to East Asia) have showed growth in economy travel but this might represent a shift by business travelers to the back of the aircraft and a larger market share of Europe to Far East markets being gained by Middle Eastern airlines rather than a sign of resurged travel.
• But where economies are growing, there are some hopeful signs. The African cross-border markets along with China’s domestic travel showed premium travel up 1.1 % in May. In Chile and Peru where there is solid economic growth, airlines are making money and traffic has increased (in May, domestic traffic increased with 30 % YoY in both countries). Brazil still shows economic growth and traffic holding flat.
• But, in general, airlines continue to face uncertainty around the timing of a recovery.

2. So how does Airbus approach this situation?

Airbus’ situation is not dissimilar to the US airline industry. We started taking action long before the recession; we are finding ways to manage our way through it.

Now although many commentators and the industry’s share prices would have us believe otherwise, we are not the only ones who see it that way. Just last week Joe Anselmo of Aviation Week wrote on the subject explaining why “measured against other sectors like banking, automotive, construction, hospitality, Aerospace and Defense is the picture of good health”.

Why would we be perceived as “A Picture of Good Health?”

In fact, I want to suggest it’s because we are getting smarter at managing this stuff… How is that?

A) First of all because of “experience”. This is not first down turn we are managing (my own experience is 4 of these things).

- end seventies/early eighties (oil crisis)

- early nineties (Gulf crisis)

- 9/11

- And now this recession

B) And we know the industry’s economic cycles tend to follow a rudimentary pattern. This provides some important indicators to help us gauge, - and so manage for - the pace and timing of the turn around. What we look for is:

1. Economic recovery, because GDP is the key variable for passenger traffic growth

2. As recovery takes root there is normally a return in traffic growth and load factors.

3. If this holds we should then start to see improving airline yields and eventually airline profitability. That’s where we would expect to start seeing some more activity on our order books

So the first thing we look at (in managing our way through this) is the macro, global economic data, and forecasts. We think we have a good idea of when the GDP will start an upswing, when it will become positive, and where it will happen first.

• But regardless of exactly when that turning point appears or what the rate of the upswing is, Airbus uses other tools to manage our way through the near-term crisis…

C. Like the US airlines (following the rise in fuel prices), Airbus already had put in place a huge restructuring program (including a large cost savings plan) in 2007, called Power8. For example, this called for a reduction in manpower of 10,000 staff. As a result, Airbus was already better prepared to go into a downturn. If we had not had Power8 on the way, we would have had to invent it now.

D. We focus on maintaining our backlog and if necessary, partnering with our customers to come through the crisis together. Our global backlog is over 3500 aircraft with (at the end of Q1), a consolidated order book value of around 365 billion euros. This represents about 7 years of production.

This backlog, built up during the period 2005-2008, represents a pillar of strength that we have never had previously as we manage through a crisis like this

E. Another strength of the backlog is its geographic diversity. We have over 50% of our backlog and almost 50% of our current deliveries) to developing regions of the world like China, Asia, Mid-East, Africa and Latin America – regions where traffic has maintained some growth, and in cases like China, is recovering quickly.

F. In the last downturn (2000-2004) we saw around 3% of total backlog lost. This is much less than people assume. It’s about the same this time around. We actually lose very few orders.

G. Now, we do see requests for deferrals. But we also see requests to advance deliveries for those that want to take new, more efficient aircraft earlier. All that is part of managing the order book. Our sales teams help by making an enormous effort to be close to the customers and check with them regarding how to proceed in each individual situation. By the way, this process also means that the “quality” of our near term deliveries is improving.

H. Another tool, learned from experience, is that to give us forward visibility, we have a “watch tower” process this combines teams from different business areas and that follow the delivery program on a bi-weekly basis, with a 6-month look ahead, including the financing situation of each delivery.

I. I will be honest, that just like our airline customers, we do sometimes “overbook” since we know – experience tells us – some of our orders will fall out or get deferred. Actually, we are getting quite good at managing this bit.

J. What we see is that a vast majority of airlines still want to take delivery of younger more efficient aircraft that will help to increase profitability. However the credit market is still not fully functioning as they should and banks remain strangely reticent when it comes to financing the most mobile internationally regulated and recognized asset that exists.

So we are working hard to increase the financing with the support of export credit agencies (40 % this year, likely the same next year). And in very specific cases we also can provide backstop financing.

K. On the production side, even with the huge backlog we have, we are reducing our production rates for the SA from 36 to 34 (instead of ramping up to 40) and keeping our long range at 8.5 instead of going up to 10 or higher. This is a delicate balance. On the one hand we need to have the flexibility in production. On the other hand we must maintain production to protect our employees and suppliers, as we need their knowledge, resources and skills when the upturn comes. We have to very carefully manage our supply chain and have a very open and direct communication with our suppliers and partners. To be clear: we are not leading anyone down a wrong path when it comes to our planned production output. If we say we need the parts, we need them. We cannot afford to be planning to build and sell “X” aircraft next year is our suppliers don’t work at the same rate.

So that’s a quick look at how we are managing the immediate crisis…but that’s only part of the flight plan.

3. Outlook

• In terms of market outlook, 2009 seems OK; in fact we will build and deliver about the same number of aircraft at last year which was a record of 483. A bigger unknown is 2010, right now it looks strong - - But in case the economy gets worse I may have to revisit my cautious optimism. Eventually, of course, the upturn will arrive and the air traffic will bounce back and follow its long term trend of doubling in the next 15 years.
• So Airbus and our suppliers continue to have to plan for the long term. We have been through many cycles. There will be others but I want to remind you that most long terms forecasts still support the notion that the world needs around 1200 new airplanes (above 100 seats) on average every year for the next 20 years!!
• So, notwithstanding the near term angst, another key responsibility in our flight plan, even in these tough times, is to continue our new programs – We have to complete the ramp up of the A380, and we have to design, develop and deliver the A350 on time and on cost. We have to fly the A400M, a great tactical and strategic aircraft, where important steps have been made, including the creation of Airbus Military. And, we have a terrific market for our military tanker aircraft, having won all the recent competitions, - underscoring the value of the multi role tanker aircraft based on the superb A330 platform.
• We have to continue our Power8 restructuring program to secure and maintain the required results, and – by the way - we are fully on track right now.
• And we have to continue to invest in technology and people. Not only in Europe but at a global level. We are doing that in China with our new Final Assembly Line for the A320 family and we are doing that in other countries such as India and Korea. But the US, by far, is our biggest partner on the global scale.
• Last year, we purchased more than $10B of high-technology flying parts in the US, supporting more than 190.000 American jobs in 40 states. In fact, it’s more flying parts than we buy in France, Germany and the UK combined. Over the years, our American industry partners have become an indispensable component of our success, and Airbus of theirs. There can be no doubt that given free and fair markets, Airbus’ strong partnership with American aerospace will grow in the future.

4. Conclusion

To conclude, I hope I have been able to convince you that, contrary to some industry commentators, and even some customers, Airbus does know what it’s doing. This is the most serious crisis our industry has ever faced. But for reasons we have covered here today, I want to suggest that we are doing a reasonable job so far (I hate to tempt fate) of managing our way through the immediate challenges. At the same time we are maintaining our longer-term drive to develop better, more fuel efficient and environmentally friendly airplanes. A famous Dutch phrase says “After rain comes sunshine but in the meanwhile we need the umbrella”…. We have the umbrella and are working hard to stay dry so as to be ready when the sun comes out.

Thank you!