Select Committee on Trade and Industry Ninth Report

1  Introduction

1. In February 2007, the European aircraft manufacturer, Airbus, announced the details of a massive restructuring programme, alongside the allocation of work packages for its next generation of long-range planes—the A350 XWB (extra-wide body). A key aspect of the planned changes is to be the shedding of around 10,000 jobs, just over 1,500 of which will be from the company's two UK-based plants at Broughton in North Wales, and Filton near Bristol. This short Report outlines the background to the restructuring programme (Chapter 1); its implications for Airbus UK (Chapter 2); and the future role of government in ensuring the ongoing presence of the firm in this country (Chapter 3). As part of our inquiry we took oral evidence from Airbus UK, the Society of British Aerospace Companies (SBAC) and the Department of Trade and Industry (DTI). We also received memoranda from various other individuals and organisations.[1] We would like to express our thanks to all those who contributed to our evidence-gathering.

Company background

2. The origins of the firm known today as Airbus SAS (Société par Actions Simplifiée) lie in a decision by the French, German and UK governments, during the 1960s, to develop a co-ordinated response to the then dominance of the global civil aviation market by the American companies, Boeing and Lockheed. Airbus Industrie was formally established in 1970 as a European collaborative venture, with the Spanish joining a year later. Its initial products were the A300B—the world's first wide-body, twin-aisle, twin-engine aircraft—and its smaller derivative, the A310.[2] Although the UK government chose not to invest in these aircraft, the design and manufacture of the wings were still undertaken in this country through the sub-contractor, Hawker Siddeley Aviation. In 1978, Britain rejoined the partnership when British Aerospace (the result of a merger of Hawker Siddeley Aviation and the British Aircraft Corporation) purchased a 20% shareholding in the venture.[3]

3. Airbus operated as a consortium until 2000, when the French, German and Spanish parent companies—DaimlerChrysler Aerospace, Aérospatiale-Matra and CASA—merged to create the European Aeronautic Defence and Space Company (EADS). As a result of this, EADS and what is now BAE Systems established Airbus SAS as a standalone firm with a unified management team. The management structure of EADS is based on an equal sharing of power between the French and Germans, which stems from the state ownership of large shareholdings in the company by both countries. Since October 2006, Airbus SAS has been wholly owned by EADS, following the decision by BAE Systems to sell its stake in the company.[4]

4. Over the years, Airbus has developed a full range of aircraft to compete with its main rival, Boeing. The A300/310 planes, which will shortly be discontinued, have achieved sales of more than 800 over the past three decades.[5] The A320 family was launched in the 1980s. Aimed at the smaller capacity, short haul market, it has been extremely successful, amassing over 5,000 orders from around 170 customers.[6] The larger capacity A330/340 family followed in the 1990s, and has achieved around 1,000 orders from over 60 customers.[7] Then, in 2002, Airbus moved into the very large airliner market, up to that point dominated by the Boeing 747 family, with the launch of the A380 programme, capable of carrying between 555 and 850 passengers. Airbus currently has orders for 160 of these aircraft, the first delivery of which, for Singapore Airlines, is expected in October 2007.[8] More recently Airbus launched the A350 XWB (extra-wide body) programme—a family of medium capacity, long range aircraft, which will compete directly with Boeing's new 787 Dreamliner. It is expected to come into service in 2013 and so far has over 100 orders.[9] Finally, Airbus is developing the A400M, a military transport aircraft, for which it has 192 orders, and is due for first delivery in 2009.

5. Airbus currently has a global workforce of 57,000 direct employees spread across 16 sites in the UK, France, Germany and Spain, plus around 30,000 workers employed as sub-contractors. The company has more than 1,500 suppliers and industrial partners in 30 countries, including major subsidiaries in the US, China and Japan.[10] It is managed by a 12 member Executive Committee, which includes two British members. Louis Gallois, also joint Chief Executive Officer of EADS, is the President and CEO.[11]

6. Over its lifetime, Airbus has developed into a major player in the large civil aircraft sector, overtaking Boeing, in terms of market share, in the late 1990s.[12] It had a record year in 2005 with 1,111 new aircraft orders.[13] In 2006 the company achieved its second best year, with 824 orders.[14] However, this was below the 1,050 achieved by Boeing in the same period, underpinned by massive demand for its new 787 Dreamliner. This was the first time in recent years that Airbus had fallen behind its rival, although it was still ahead in terms of delivered planes—434 against 398 for Boeing.[15]

Airbus in the UK

7. Throughout the lifetime of the company, the UK has had overall responsibility for the wings for all Airbus planes. This covers a range of activities, including design and development. The manufacture of wing parts is also largely undertaken here, either by Airbus UK or through sub-contractors, although some wing parts are manufactured abroad, such as in the US and Korea. The different parts of the Airbus wing are outlined in an annex to this Report on page 27. Final assembly takes place in the UK, as does all wing equipping for the A320, A380 and A400M parts of the Airbus family.[16] This refers to the final stages of preparation of the wing, including fuel system and landing gear integration.[17] Overall, the UK content of Airbus wing production is about 70%.[18] Notionally, the UK contributes around 20% of the value of Airbus planes, reflecting the shareholding it used to hold in the company.[19] To put this in perspective, the A380 programme alone has resulted in £7.5 billion of work being placed in the UK, which should double over the lifetime of the programme.[20]

8. Airbus UK has a workforce of over 13,000 people, up from 10,000 in 2001. Through its supply chain of some 400 companies, as well as induced employment in the wider economy, the company estimates that it supports around 135,000 jobs in the UK.[21] Staff are based at two sites—Filton near Bristol, and Broughton in north Wales. Filton is the home of Airbus UK's engineering teams as well as its support functions such as procurement and human resources. High-value wing manufacture and assembly also takes place there, including the A330/340 outer box and the A380 fixed trailing edge.[22] Airbus UK told us Broughton is "widely acknowledged to be the world's leading manufacturer of large civil aircraft wings".[23] Its tasks include the production of large-scale components such as wing skins and spars, and the assembly and equipping of complete wings. In recent years the company has invested £350 million to expand the site. With more than 300,000 m2 of space used for wing production, it is now the largest manufacturing workspace in the UK.[24] Overall, Airbus UK constitutes a vital part of what is the world's largest aerospace industry outside the US.[25]

Recent challenges

9. In the past year, Airbus has had to confront three overlapping challenges. First, the company is facing increasing competition from Boeing. One reason for this has been the recent weakness of the US dollar. Airbus's costs are largely in sterling and euros, yet its aeroplanes are priced and sold in dollars. The company estimates it has seen a 20% loss of competitiveness over the past six years because of the weak dollar.[26] In addition, Boeing has also benefited from outsourcing large parts of its manufacturing processes. Whereas Airbus currently outsources around 25% of the work on its existing programmes, the figure for Boeing is now 80%.[27] For example, with the 787 Dreamliner, the firm has developed major partnerships with Italy and Japan, in which the latter has taken on full responsibility for wing production.[28]

10. The second major challenge Airbus faces is the increasing financial burden of the A380 programme. In June and October 2006, the company announced further delays to the delivery schedules for the period 2007 to 2010.[29] The first delivery, in October 2007, will be around two years behind schedule. The main reason for the delay has been a problem relating to the electrical harnesses in the aircraft. Although production will ramp up significantly from 13 aircraft in 2008, to 25 in 2009, and 45 in 2010, the delays have led to many of the A380's customers seeking to review their contracts with the company. Virgin has delayed its order by four years, while the decision by FedEx and UPS to cancel their contracts has led Airbus to abandon the freight version of the A380.[30] Elsewhere, though, Qantas has increased its order from 12 to 20 aircraft, almost certainly as a result of securing a better deal from the company.[31] With the compensation bill and delays, Airbus believes it will not now make a profit on the A380 until it has sold 420 units.[32] Partly as a result of cost overruns and late delivery payments to its customers, Airbus reported a loss of £389 million for 2006.[33] Although the delays have also had knock-on effects for UK suppliers to Airbus, the Society of British Aerospace Companies told us that high overall demand in the sector has prevented the need for any job losses within the supply chain.[34]

11. The third main challenge faced by Airbus is the need to finance its new A350 XWB programme.[35] Announced in December 2006, the medium-sized long haul aircraft is a reworking of the original A350 design, which was launched in 2005, but met with criticism from airline customers.[36] Airbus claims the A350 XWB is a wider, stronger, lighter and more fuel-efficient version of the original design, being largely made from advanced carbon-fibre composite materials rather than metals.[37] It is expected to come into operation in 2013—around five years after its competitor, the 787 Dreamliner, which has already received 544 firm orders.[38] The cost of the programme is estimated at €10 billion.[39]

12. Since its creation almost 40 years ago, Airbus has developed into a major player in the large civil aircraft market and, until recently, has been ahead of Boeing in terms of orders won. In the past twelve months, however, the company has faced a number of challenges. These include a loss of competitiveness resulting from the weak US dollar; cost overruns and delays on the A380 aircraft; and the need to find finance for its new A350 XWB programme. Overcoming these difficulties will be crucial to the company putting itself on track to recovering its market position in the future, and meeting the challenge laid down by its rival, Boeing.

1   The oral and written evidence are published as a separate volume, HC 427-II. Back

2   Appendix 1 (Airbus UK) Back

3   Ibid. Back

4   Appendix 7 (DTI) Back

5   Ibid. Back

6, May 2007; Appendix 1 (Airbus UK) Back

7   Appendix 7 (DTI) Back

8, May 2007 Back

9   Appendix 7 (DTI)  Back

10 Back

11   Ibid. Back

12   Q 1 (Airbus UK) Back

13   Airbus, Annual Review 2005 Back

14   Airbus, Annual Review 2006 Back

15   'Airbus behind rival as orders dip', BBC News website, 17 January 2007 Back

16   Q 11 (Airbus UK) Back

17   Appendix 1 (Airbus UK) Back

18   Appendix 7 (DTI) Back

19   Q 9 (Airbus UK) Back

20   Appendix 1 (Airbus UK) Back

21   Ibid. Back

22   Ibid. Back

23   Ibid. Back

24   Appendix 10 (Flintshire County Council) Back

25   Appendix 14 (SBAC) Back

26   Airbus press notice: 'Power8 prepares way for "New Airbus"', February 2007 Back

27   Appendix 2 (Airbus UK) Back

28   Appendix 5 (Confederation of Shipbuilding and Engineering Unions) Back

29   Appendix 1 (Airbus UK) Back

30   'Last A380 freighter order scrapped', Financial Times, 3 March 2007; 'Virgin defers A380 by four years', BBC News website, 26 October 2006 Back

31   'Qantas ups A380 superjumbo order', BBC News website, 29 October 2006 Back

32   'Airbus hikes A380 break-even mark', BBC News website, 19 October 2006 Back

33   'A380 delay leads to Airbus loss', BBC News website, 9 March 2007 Back

34   Q 63 and Appendix 14 (SBAC) Back

35   Airbus press notice: 'Power8 prepares way for "New Airbus"', February 2007 Back

36   'Airbus plays catch-up in A350 dream', BBC News website, December 2006 Back

37   Ibid. Back

38 Back

39   'Upbeat Airbus launches A350 project', Financial Times, December 2006 Back

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2007
Prepared 26 June 2007