Airbus Revamping A 350

Airbus to Spend $10 Bln on New Plane as Orders Sag (Update2)
May 10 (Bloomberg) -- Airbus SAS, acknowledging that the proposed redesign of the A350 plane is a failure, plans to spend 8 billion euros ($10 billion) to develop a new 300-seat plane, said three people with direct knowledge of the matter.

European Aeronautic, Defence & Space Co., the parent of Toulouse, France-based Airbus, gave initial approval in mid-April and will make a firm decision this month, said the people, who declined to be identified until a decision is announced. The new plane will cost twice as much as the redesign of the A350.

Airbus, trailing Boeing Co. in the market for midsized planes, only got 100 orders for the A350 compared with 350 for Boeing's 787 Dreamliner. Airbus lost out to Boeing in value of new orders for the first time in five years last year. The world's two biggest planemakers estimate airlines will buy as many as 3,000 of these midsized aircraft over the next 20 years.

``It'll be expensive and they'll have to admit they made mistakes,'' said Richard Aboulafia, vice president of the Teal Group, a Fairfax, Virginia, consulting group. ``But Airbus is finally targeting exactly the right spot in the market.''

Airbus spokeswoman Barbara Kracht said the planemaker is ``exploring'' ideas with customers and declined to comment further.

``From the beginning of the 787 program we fully anticipated that they would have a viable competitor,'' said Mike Bair, chief of Boeing's 787 program. ``I can't wait to see what they come up with.''

Airbus Strategy

Airbus Chief Executive Officer Gustav Humbert, 56, is trying to improve the planemaker's midsized, widebody offerings, which are losing sales to Boeing. While the 787 has been outselling the current A350, the two-engine and more fuel efficient Boeing 777 has been beating Airbus's four-engine A340, which uses more kerosene. He's also working to deliver the first of the 555-seat A380s by year-end, which will be the world's largest commercial plane and cost $13 billion to develop.

Alan Mulally, 56, chief executive of Boeing Commercial Airplanes in Seattle, decided against building a direct competitor to the A380 and to concentrate on planes, such as the 787 and 777, that can fly directly between smaller airports and avoid the congestion of major hubs to be served by the A380 like London's Heathrow Airport.

Shares of EADS have gained 40 percent in the last 12 months, valuing the company at 25.8 billion euros. The shares of Chicago- based Boeing are up 44 percent over the same period, giving it a market value of $70.4 billion.

EADS Earnings

EADS's net income rose 39 percent last year to 1.7 billion euros while sales were up 8 percent to 34.2 billion euros. Boeing's 2005 net income rose 37 percent to $2.57 billion and sales rose 4.3 percent to $54.8 billion.

Airbus will seek government loans to cover 33 percent of the development cost of the new plane, said two people familiar with the proposal. The application might exacerbate a dispute between the U.S. and Europe over aircraft subsidies. The World Trade Organization has been asked to examine complaints by both the U.S. and the European Union against one another on the issue.

The new Airbus model will require newly developed engines in at least one version that would offer more range and capacity than any of Boeing's 787s. It might also be a competitor for the 777.

Airbus will offer the new plane in three models: the A350-800, which will seat around 250 passengers, the A350-900, seating around 300, and he A350-1000, that will carry 350.

The third version might help Airbus ``leapfrog'' Boeing's widebody family by providing sufficient capacity and range to compete with the 777-300ER, Aboulafia said. The 777-300ER seats 365 passengers and offers range of 7,880 nautical miles.

General Electric

``GE and Airbus have a successful 35-year history together, and the majority of all Airbus aircraft have been launched with GE or CFM engines,'' said Rick Kennedy, spokesman for General Electric Co.'s engine unit. ``So the company will work very closely with any future aircraft that Airbus is considering.'' CFM is GE's joint venture with France's Safran.

United Technologies Corp.'s Pratt & Whitney unit, through its venture with GE that makes engines to power the A380, is studying what might be required for a new plane, said Pratt & Whitney spokesman Ron Rand.

The new Airbus plane would first become available in 2012, two years later than the current A350 proposal and four years after the 787s scheduled entry into service. The new plane would also be called A350 and airlines that ordered the earlier model will be able to switch to the new version, the people said. An announcement on the new plane and its customers may come at the Farnborough International Air Show, which opens July 17, the people said.

Customer Criticism

The current A350 design has been criticized by Airbus customers, including Steven Udvar-Hazy, chief executive of International Lease Finance Corp., the world's biggest plane- leasing company, and Chew Choon Seng, chief executive of Singapore Airlines Ltd. the world's No. 2 carrier by market value.

Hazy told an audience of aircraft traders in Orlando, Florida, in March that Airbus needed to design an all-new fuselage and wing to make the A350 bigger and faster to compete with the 787.

Customers have been drawn to Boeing's 787 as fuel prices more than doubled over the last two years. The Boeing aircraft will be more than 50 percent made of carbon fiber composites, which are lighter than the aluminum traditionally used for construction, making the aircraft 20 percent more efficient than aircraft it replaces.

The all-new plane represents Airbus's fifth attempt to come up with a competitor to the 787. Between 2003, when Boeing began marketing the 787, and last October, Airbus announced four different versions, each based on the existing A330-200. As Airbus failed to reach its target of 200 A350 orders last December, the planemaker began exploring possibilities for an all-new plane, the people said.

Emirates Order

Emirates, the largest Arab airline has been looking at both Airbus and Boeing midsized models.

``We're still talking to Airbus about the A350 and we're open to new ideas,'' said Maurice Flanagan, Emirates vice chairman, in an interview in London yesterday. ``We're looking for maximum return in terms of range, comfort and revenue per seat.''

Klaus Breil, who helps manage $6 billion at Adig Investments in Frankfurt, including EADS shares, said an 8 billion euro- investment in a new plane might be warranted.

``They have 5.5 billion euros in cash, and they have deliveries of the A380 starting later this year, which should be good for future cash flow, so I don't have any doubts that if they do an all-new plane, it would be a good decision,'' said Breil. ``I think companies should invest in future products.''