March 7, 2012 / 3:08 PM / 7 years ago

Airbus fine-tunes tactics after record order run

PARIS (Reuters) - After taking the airline industry by storm last year with record sales of a revamped passenger jet, Airbus EAD.PA is quietly switching tactics by putting emphasis on sales of the preceding model to prevent unwanted gaps in production.

An A380 aircraft is seen through a window with an Airbus logo during the EADS / Airbus 'New Year Press Conference' in Hamburg January 17, 2012. REUTERS/Morris Mac Matzen

Executives said the European planemaker has set a target to sell 300 of the 150-seat A320s this year, even as it puts the finishing touches to designs for a more fuel-efficient version, the A320neo, which is the current flavor of the market.

The temporary change of focus highlights a dilemma common to Airbus EAD.PA and rival Boeing (BA.N) as well as other manufacturers with long lead times - how to preserve demand for existing products while promising something better tomorrow.

It also sheds light on the financial risks of allowing any gaps to appear in an impressive but fragile production machine that churns out on average more than one medium-haul Airbus A320 or Boeing 737 airliner every day on each side of the Atlantic.

“The way to make sure there isn’t a problem is to continue the sales process,” Airbus sales chief John Leahy told Reuters.

“Last year we sold 244 (of the existing A320s), and I have set a sales target this year of selling 300.”

Airbus plans to introduce the spruced-up A320neo from 2015, and Boeing is responding with its revamped 737 MAX, due in 2017.

By adopting the latest engines, both aircraft are meant to cut fuel costs by about 15 percent, leading to a flood of orders from airlines struggling with high fuel costs.

“There is a transition period that will run to 2018,” Leahy said. “We are sold out in 2013 and ‘14, but we still have open slots in ‘15, ‘16 and ‘17, which I would like to sell as many of as possible this year.”

Planemakers previously suggested they were heavily sold out until late in the decade for the most popular models.

Industry sources say that as the first delivery for the A320neo or 737 MAX approaches, it will be harder to sell existing models, even though some airlines are impatient to get rid of old fleets or unwilling to pay premiums for new models.

Some analysts add that dominant players Airbus and Boeing are playing a risky game by sticking to plans to raise output ahead of the changeover and may have to slash prices.

“Airbus and Boeing both have to bridge the gap, and it is not going to be easy to keep going at very high rates,” aerospace analyst Richard Aboulafia of Virginia-based Teal Group said.

“The only way to avoid it is to discount heavily, and even then there is a question of whether people will finance the last few aircraft in the existing series.”


The financial stakes behind the sales tactics are high.

Production gaps would hit revenue further down the line as about 80 percent of the value of a plane is paid on delivery. But having gaps in production of the most popular jets can have an even deeper financial impact by reducing the cash available for costly future airplane developments.

Lower production also drives up marginal production costs.

“Costs are particularly sensitive to volume when it comes to the single-aisle aircraft,” a senior industry official said.

Buoyed by growing demand for air transport in emerging markets, Airbus and Boeing are keeping their production lines for medium-haul jets such as the A320 and Boeing 737 at record levels despite the economic gloom in home markets.

Airbus plans to increase production across the board this year, with the A320 rising to 42 aircraft a month by the end of the year. It plans to lift A330 wide-body output to 9.5 aircraft a month and A380 output to 2.7 aircraft a month by end-year.

Industry sources say Airbus has a particular interest in keeping production up because a relatively high proportion of A320 variable costs are in dollars - improving its defenses against currency volatility. Aircraft are paid for in dollars, but Airbus parent EADS must account for them euros.

Airbus plans to deliver 450 A320 single-aisle aircraft this year out of a total delivery target of 577.

Boeing, which delayed a decision to revamp its 737 after hesitating whether to go for an even bolder redesign, is meanwhile expected to dominate sales of the new generation of aircraft in 2012 as it chases its rival. It foresees 1,000 sales of the MAX, after Airbus sold more than 1,000 A320neos in 2011.

As an insurance policy, both Boeing and Airbus are believed to be encouraging airlines to take some of the classic models when they place new orders for the revamped A320neo and 737 MAX.

This year’s mostly keenly awaited order for some 150 aircraft from United Airlines UAL.N, postponed from January and expected in a month or so, is likely to contain several dozen of the older models whoever wins, market watchers say.

editing by Jane Baird

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