In Focus: Noel Forgeard, CEO, Airbus
Airbus is starting production of what will become the world's largest passenger jet. CNN's Jim Bittermann reports
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LONDON, England (CNN) -- When European plane makers Airbus unveiled plans to build a 555-seat superjumbo in 2000, there were doubts over the company's ability to pull off the $11 billion program.
But with 129 orders for the $275 million A380 -- which will be the world's largest airliner -- already signed, and with the plane due to fly early next year, Airbus CEO Noel Forgeard tells CNN's Becky Anderson about steering the project towards success.
CNN: Give us a sense of how important this A380 is to Airbus. Effectively you've bet the company's future on it, haven't you?
NF: No, I think that's an excessive way of putting it. At Airbus we used to have a product range from 100-seaters up to about 380-seaters. We have a four-to-six hundred and we had a hole in the area of very big planes. So with the 380 we fill this hole in order to have the full product range. But you see, I think your expression would be justified if we'd had to take on huge amounts of debts or things like that to finance the 380 and it's absolutely not the case. We have so far totally financed the 380 and we plan to continue to do so. The word "bet" is not appropriate.
CNN: Okay, but just give me a sense of how important the 380 is to Airbus.
NF: Well, the market of very big airplanes represents 10 percent of the number of airplanes in the global market, but it's closer to 25 percent in terms of revenue. So it's a significant portion of the market in terms of revenue, equivalent to the other big segments of the market. In that respect it means a changing of scale in Airbus revenues and profitability.
CNN: Why was the decision to make this plane the right decision? Give me a sense of what went into the thought process and the planning of the A380.
NF: During the 90s there was an increasing feeling among the airlines that something was wrong with the biggest airplane at the time, the Boeing 747, because it appeared that this airplane had operating cost per seat that were about the same as smaller airplanes of the time -- the triple seven and later on our A345 and 600. So the airlines said, "What the hell? Normally when an airplane is bigger you should have better costs. And couldn't you imagine, Airbus, an airplane that would have lower operating costs. In the ballpark of 15 to 20 percent lower operating costs per seat-mile? Couldn't you also, Airbus, introduce new cabin amenities in terms of space for passengers, have internet on board and so on? Couldn't you imagine an airplane that could be environmentally very friendly, very green in terms of noise emissions and so on?" And from 1996 Airbus started to have a customer focus group of about 20 airlines to imagine together what such an airplane could look like. And when we pressed the button at the end of 2000 it was on the basis of a program that had been jointly agreed between our customers and ourselves.
CNN: How important was that transportation crisis and what roles did the airlines play in providing the sort of analysis you needed in order to put this together?
NF: Well, not an important role, not an essential role, but the role. The fundamental role. They designed with us everything. So in terms of the weight the airplane should have, the range it should have, the specifications of the major systems, we designed these things with them in all respects.
CNN: Aside the airlines we have regulators, airports, who else was involved?
NF: Well, at that stage, not so much the regulators of the airports because we quickly came to the conclusion that if an airport had to make major investments to receive the A380 it would not work. So we have designed the A380 to be basically compatible with all airports operating 747s. And so it's the case we have no measure of difficulties with airports any longer. It's only Los Angeles, which has an interim solution to service the A380 so definitive investments will come a little later. But as soon as it puts the interim into service, it will be able to receive the A380 as well.
The A380 will be the world's largest passenger plane.
CNN: Let me just talk about the ruling in Hamburg against the runway extension there. How are you going to surmount a setback like that? Because it surely is a setback at this stage.
NF: Well, no. Frankly it's a minor event. You know that the first level of judgment is never definitive and we shall go to the court of appeal. And if very, very unfortunately the ruling is negative, we would have what it takes to have an alternative solution in Toulouse, so it does not threaten the program at all. But I would be very disappointed for our German colleagues because we have built this program with a certain kind of work share that I would really like to keep.
CNN: OK, Let's go back to the consultation process. Who, ultimately, made the decision to go ahead with the A380?
NF: Well, first, there was Juergen Thomas (special advisor to Airbus' CEO), who was really the spirit of this project from the beginning. Then it came to general management level at Airbus; myself, of course, and some others. And obviously on a project of this size the shareholders. That is to say ELS on the one side, Arnaud Lagardere, then chairman of EADS, Manfred Bischoff (Chairman of EADS) from the German side, as well BAE Systems' Mike Turner.
CNN: Was it an easy decision?
NF: Well it was, for a project this size it was a rather easy decision, yes. Of course it was discussed, debated. But you know, as long as there was a genuine, sincere, strong expression of interest by the customers it was a rather easy decision, yes. Because finally it took three months between September and December of 2000.
CNN: Give us a sense of the initial budget at the development phase of this plane.
NF: There was no initial budget -- there is a budget that is still the same. And that is 10.7 billion dollars in the economic conditions of December 2000 and it is still the budget.
CNN: How much of that was used in the development?
NF: Well, it's a complex question. We have a little over 60 percent engagement because the budget also includes continuous development during the first years as well as derivatives, a number of derivatives including freighters that should enter into service in 2008.
CNN: How involved are you in this project on a day-to-day basis as CEO?
NF: I am very much involved. I can tell you frankly I'll carry the fame or the blame, with my colleagues, of course. So I am involved in marketing campaigns, together with our brilliant chief commercial officer. We have worked together on all the launch customers, and we work on a few prospects that we have right now, that will materialize in the 12 months to come. I work a lot also with the teams internally on the control of the project. We have very strong management team. We have segmented the project into what we call aircraft components, manufacturing and development teams, and each of these teams report to Charles Champion (executive vice president). Each of these teams addresses a deliverable part of the aircraft, such as wings. They have a head and a fully fledged management team with people taking care of design, manufacturing, finance, procurement and, last but not least, the financial controller.
CNN: Lets talk about the project, give me a sense of the enormity of the responsibility then that you feel as CEO for what is ultimately one of the biggest project management cases in its history.
NF: Well it's a very big project. I won't tell it's a small project because it's a very big project. But it's not unusual in this industry. When airbus launched the A330 and the A340 family in the 80s it was about seven billion dollars at the time, so you see it was very comparable. Then we have done the A340-500 and -600 which were about 2.5 or 2.7 billion and which are behind us now and went well. So the A380 is a very big project but it's not by any extent something that is out of the normal scope of such developments. And I repeat, it happens that companies bet a lot on bigger projects. But it's absolutely not the case here. We have so far self-funded totally the development. Our cash position is higher than at the creation of the company. We capitalize no cost whatsoever; all our R and D costs are depreciated each year in full compliance when the aircraft enters into service. Any cash, any revenues, will go down directly into our bottom line.
CNN: What sort of cost control measures are in place to ensure that this project stays on budget, because it would be incredibly easy to go over the budget? Give us a sense of the difficulty and what sort of controls are there in order to make sure they stay within your budget limitations?
NF: Each of the aircraft component leaders commit on a yearly budget. They each have a financial controller who reports, as in any good organization, to our chief financial officer so we know exactly at each point in time where we are. We know the areas in which we are absolutely ok. We know the areas in which there are some tensions. Everything is transparent: we have a few little tensions in the systems area, and in the forward fuselage area but we are confident due to a better situation in the other areas, that we will stay inside the budget. And for the internal rate of return for the project, for the profitability of the project at completion, even more important than the non-recurring costs is the way we sell the recurring costs. And today we have evidence that our recurring costs are in control and we hope will do better than we thought.
CNN: For those who don't understand about balance sheets or don't read balance sheets on a regular basis just explain what you mean by the recurring costs?
NF: I mean the production costs. The production costs of the aircraft that will be the basis on which we shall trade margins in the future. Because in the future on each aircraft sold we shall trade the margin, which is the difference between the revenue and the production cost -- what I called the recurring cost.
CNN: What's your sense of how this project is moving along? You will have signed off on projections at the start of this project. How did those projections that you originally signed off on compare with the way that the project is progressing to date?
NF: Well, first we have signed off on a long-term base of customers which today is absolutely firm. Again there is nothing to hide. The only long-term customer that has slightly postponed deliveries is Virgin Atlantic, which has confirmed its order but asked for postponement 18 months. All the others are okay, with very few months delay on the Air France side due to terminal issues, but otherwise everything is okay on the side of the customers. Of course we have friendly debates with them because all the people would like to have splendid equipment on board, but splendid equipment is weight and weight is the enemy of the aircraft manufacturer. And we have a healthy debate on that. And on the side of performance of the aircraft, what can I tell you we shall see during the flight tests from the first quarter of 2005? It would be stupid to anticipate at this stage. But I think at this stage of the development we have a very good control of performance. And we do not anticipate any major difficulties.
CNN: Let's just talk about the issue of weight. The weight of the aircraft is creeping up isn't it? Is this due to what your customers are asking for onboard and how does that effect the efficiencies of this plane going forward?
NF: Well, it's very simple: an aircraft manufacturer does not sell weight they sell performance. The performance is a combination of the weight, fuel consumption and aerodynamics. The performance we have sold we delivered without any exceptions. And so the aircraft, the airborne exterior meets the performance guarantees we have given. The mistake we have made maybe in terms of communication is to make public the objectives that we set for ourselves on the side of weight which is just one of the parameters. To compare this to the internal objectives we had given ourselves, we are a little less than two percent more which is absolutely not abnormal and absolutely not worrying, the best illustration of that being that we did deliver all the performance guarantees we have given.
CNN: It may not be a problem for you, but in a rising oil price market, particularly when one considers the price of oil two-and-a-half years ago, as this project gets closer to its delivery date, you are working in a quite different geopolitical climate, so you must have to appreciate what your customer is going through when they see issues like weight increases. Surely there will be elements that will have to be stripped back to in order to allow for a change in the weight?
NF: You're absolutely right. But, first, high fuel prices are very favorable to very economical airplanes, so high fuel prices are very favorable to the A380 which burns a lot less than any other airplane on the seat-mile cost. Second, now if on this side we see where we are in terms of what we call specific fuel consumption we shall be better than we thought. The first engine is now flying on the flight test bed and it delivers excellent performance. I'll take this opportunity to congratulate Rolls Royce who designed it.
CNN: How do you as the Airbus CEO ensure that this project is ultimately a success?
NF: The CEO has to be able to scan all aspects of such a big project. So I first check that the project is still tuned to the market needs, and it is. I have to check that the airlines remain committed, and they are. I visit them regularly to check their heart. I have to check that we are in control of the performance, so I review the project regularly with the engineers. On the cost side, every two months we review the cost, in which I participate, to see where we see ourselves in terms of cost at completion, both for fixed cost and for the unit cost and so far so good.
CNN: What do think the most difficult parts of this project are to keep on track?
NF: I would say equipment vendors because we've got such a huge community of equipment vendors. By the way, I do not know if you know the man sitting in front of you is the number one customer of the U.S. aerospace industry. I am the first customer in the world of the US aerospace industry for the values of vendors from whom we buy between five and six billion U.S. dollars a year. At this time, you see a debate on out-sourcing, in-sourcing. We in-source a lot of jobs in the US. And so this huge community of vendors, the U.S. vendors, the European vendors, we have to keep them on track so they deliver on time and on quality. Sometimes it's difficult because we've asked for very aggressive commercial conditions, and some of them try to escape.
CNN: When you first came to this project, could you conceive of, did you conceive of being at this point as quickly when one considers the enormity of this task? It only happens that new planes are developed, what, every 20 to 30 years. The longevity of these projects are enormous and the responsibility on the shoulders of a CEO who runs a project like this is enormous. As you say, it's not the make or break of Airbus, you say it's not necessarily an enormous bet, but the responsibility must be huge.
NF: Yes, yes, it is, but Airbus is a family, Airbus is a community, it's not a one-man show. By the very nature of the business, there is a lot of attention on the company, the product, on me, but that's not the reality. There is a very strong corporate culture in Airbus which is made of innovation, attention to customers, and I would like to say it is true that my responsibilities are huge. I feel myself extraordinarily well supported by the Airbus community.
CNN: From the outside looking in, this is a classic pan-European project. Does it feel like that to you these days -- that this is a project without boundaries -- or has Europe for a businessman like you become one big economic space?
NF: Totally, 100 percent. The Airbus company is totally unified. We have a unique management team. I think we've made huge progresses in the integration of Airbus, and I answer your question without any reservations, yes. Maybe with one caveat: it is not a political flagship for Europe. Airbus is a commercial company, privately-owned and listed on the stock market, and the project is totally commercial
CNN: You feel no pressure from political administrations that this project must be successful?
NF: Well, I think they all expect it to be successful, but I'll tell you that the Airbus team and myself, we do not need external pressure to deliver a success.
CNN: Okay, so give us a sense of the way the relationship with Rolls Royce works and the importance of that relationship and how you went about developing that relationship to get to the point that you're at now?
NF: We have two engines. We leave the engine choice up to the airlines. One of the possible choices is Rolls. There is a possible alternative choice which is what they call the Engine Alliance, which is a joint venture of GE Aircraft Engines and Pratt and Whitney. And both Rolls Royce and Engine Alliance have won about half the market each. Now with each of those we have very close relationship.
CNN: Do you seek some price guarantees, because it's the airlines that buy the engines and that must be written into the full cost of the design of the A380?
NF: Generally an airline will buy their frame from us and then run a competition that sometimes may take a few months longer than the frame competition. So to ensure the best conditions we love competition between engine manufacturers.
CNN: We want to get a sense of the potential complications that a project like this has, when its wings are made in one place, its fuel injection in another, the issue of transportation of the various parts...
NF: It's not new. All Airbus airplanes, by the way all Boeing airplanes as well, are designed and manufactured in various places. For instance, our competitor does a lot, it's not a secret, in Japan or in Italy, or in parts of the United States different to their final assembly site. We have always done the same. There is nothing new except that the airplane is so big that the parts cannot come by airplane, and so we had to resolve those infrastructure difficulties to get the things to Toulouse by ship and barge. So, it's a minor disturbance. It has required a lot of work it's true. But aircraft components are not heavy, so the transport is not very onerous. I think we are more concentrated now on bases than our competitor is because we're what you describe as intra-European. Our competitor is less concentrated in its base, the U.S., and more looking for work outside the U.S. borders.
CNN: You suggested that there is a degree of pad in the weight of the plane, which has crept up, and you managed that without any problems. I was wondering how much pad there was, whether it is in the budget and how much pad there is in the timeline? You have said you are confident you have hit the timeline. How much room for maneuver is there?
NF: We do not anticipate any necessity for an additional budget. I don't know what I can tell you. In any project of this kind, the CEO keeps some contingency for himself. I am ok with the contingencies I have. On weight I am okay because finally the performance is delivered. The last aspect of the schedule is that we shall fly in the first quarter of 2005, so this is okay. We anticipate entry into service in the second quarter of 2006. Maybe at the beginning of the program we saw it at the beginning of the second quarter, maybe today we see it more at the end of the second quarter.
CNN: My final question would be what sort of characteristics you looked for in the management team on the A380? If you were writing your autobiography now and you thought about what had gone into putting this team together and how you have created a champion team, what would they be?
NF: First, a champion team is a very good description, because that's the name of the guy responsible for the project -- Charles Champion. I have always tried to build success on people, individuals, so of course we look for good competence, good engineering competence, good experience, experience of management in terms of cost controlling and also leadership. You know, to overcome the very numerous difficulties of such a program, you need to have people with a strong character who never surrender, who always go further and who inspire spirit and faith in their colleagues.