Airbus operations assessment
An Assessment:
The Operations and Strategy of Airbus Industries
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Introduction
At the time of writing, the two leading producers of large airliners in the world are the Airbus division of EADS and Boeing. Based on the material presented in the Slack et al case study in the final decade of the twentieth century, there was a perceived need for airlines with greater payload capacity than any currently in production. Boeing and Airbus both looked at the market and decided to approach in in somewhat different manners. Airbus made the decision to build a “super jumbo” that evolved into the A380. Boeing made the decision not to attempt to develop, market and build “super jumbos” but to concentrate on designing and engineering “smaller jumbos” that would be able to operate out of existing airport facilities while improving on the payloads and performance of the then existing jumbo jets.
Boeing made the decision to produce the new aircraft in their existing corporate structure and facilities. Airbus decided to form a new internal organisational unit, the “Large Aircraft Division.” This resulted in further complexity in their already complex management organisation and corporate communication operation. The result was years of delay in product delivery, billions of Euros of incremental costs and unhappy customers. This in no way resulted in diminution of product quality. The first company to actually take deliver of an A380, Singapore Airlines, was pleased with the airplane, as were the passengers that flew on it. (Slack, N., Chambers, S., Johnstone, R., 2010)
The objective of operations management is the effective use of a company’s resources and activities to deliver the output of a company to its customers. Operations reach from the concept of supply chain management to the organisation of manufacturing activities to the actual deliver of the finished product to the end user. The concept of operations management includes a wide variety of responsibilities including, but not limited to, materials management, production planning, scheduling of a variety of items, inventory management, transportation/logistics management, purchasing/procurement management, supply chain management, and quality control management. Operations management is daunting in an activity as complex as developing designing and building anything as complicated as a jumbo airliner. Realistically, management of this sort of activity does not imply eliminating problems, but resolving them quickly, efficiently and economically. This is the real world test of management capability (Sox, 2011)
- a) Assess the role of systems and operations management at Airbus and its integration within the business.
The problems described in the case study of Airbus are actually typical of the sort of problems that can arise in any project as technically challenging as building an A380 from an idea into a functional airliner. What is not apparent, but is likely part of the problem as presented is that there was a systemic failure to design an integrated operating system for the Large Aircraft Division. There is no way to document this failure externally, but the description of the problems and the lengths of time required to resolve them indicates that the first step of systemic management design was either omitted or poorly performed.
The so-called transformation model clearly exists in this situation. The simplistic basis of the transformational model is inputs to the transformational process to the outputs. A feedback channel from outputs back to the inputs stage, and from outputs to the transformation process and transformation back to inputs connects all these stages. In short there must be continuous simultaneous communications between all three stages of the management model.
The inputs obviously include physical material, but also include concept, design, engineering, and manufacturing planning and facilities. There are two basic classes of transforming resources, staff and facilities or people and things. (Galloway et al, 1998) In the case of aircraft construction the inputs are materials and human energy. These are transformed in the facilities based on plans created by the human element and the output is an airliner.
What this part of the project actually examines is the strategic choice of Airbus to create a new division to create a new product, the very large aircraft. The basis of the decision was an attempt to produce an aircraft that could produce low costs per seat mile or kilometre and high fuel efficiency per pay load ton-mile or ton-kilometre. In an Economist article in late 2007, just shortly prior to the first commercial flight of the A380 from Singapore to Sidney Australia, it is stated that the wingspan of the A380 is almost the size of a football pitch, and the aircraft has two levels of searing so the airport gate needs two levels of aero bridges. The total investment of the Sidney airport to accommodate the huge airplane is in the millions of pounds. What this implies is that only some airports, those that anticipate a number of movements of very large aircraft will make the investment necessary to physically accommodate them. (Economist, 2007) Singapore, Sidney, Heathrow and John F. Kennedy can accommodate the A380. The other New York airports cannot meet FAA design standards for the A380. In the United States only eight passenger terminals can accommodate the giant plane. This is based on an article published in 2007 and some additional airports may have joined the list, but probably not many considering the time required to build or remodel the facilities and the costs involved. The same problems of airports that can accommodate the huge aircraft are global, not limited to any particular nation. What this implies is that the A380 simply cannot fly to many destinations as it cannot embark and disembark its passengers at the terminals available.
While this project was in preparation there was a news item concerning an airline “fender bender” between and Air France A380 and a much smaller (operated by Comair for Delta) Bombardier CRJ7 jet. The wing of the A380 hit the smaller aircraft that was on an intersecting runway. While such accidents are not uncommon and usually result in no injuries and only nominal amounts of damage, if any, they normally are not even reported. This does highlight the problems of accommodating the huge size of the A380 even in facilities designed to handle them. The Wall Street Journal article that this is drawn from includes the statement, “The Port Authority of New York and New Jersey, which operates Kennedy, and other airports around the world, spent years and hundreds of millions of dollars fixing taxiways and terminals to accommodate the giant jet. They needed space for its 260-foot wingspan and places to load and unload two levels of passengers and their baggage. (Grossman, 2011)
From a marketing standpoint the A380 is simply not practical except to reach specific markets. Airline marketing is based on route structure and scheduling, and the size and carrying capacity simply make it too large for airlines to operate except on very heavy traffic routes between airports that can accommodate it. There is also the question of load factors influence on airline profitability. Even unfilled seats with a low seat mile costs can eat up airline profitability rapidly. (O’Connor, 2001) This is the problem the airlines face in utilizing A380s. They must purchase alternative aircraft to service the balance of their route structure. Boeing’s 787 and new versions of the 747 meet many of these needs and have ample capacity to service most routes. The underlying question from an airliner-marketing point of view is the number of A380s that Airbus can sell.
As of May 2010 the company had only sold 202 aircraft, and had generated a single order since the maiden commercial flight of the A380 in 2007. This is less than half the number of aircraft required for Airbus to achieve breakeven based on what may be optimistic estimates of the B/E by analysts. The dearth of order since the early days of the project and the declining production of airplanes which are rolling out at less than one a month down from one a month is further indication of the weakness of the program. In a quotation from the Bloomberg article on which this is based, Richard Aboulafia, vice president of Teal Group, an aerospace analysis company says, “The A380 is best regarded as a $25 billion write-off and an act of industrial irresponsibility.” It is against this background that the balance of this project is based.
- b) Explain how the Airbus information systems and operations management should be updated to support and improve their business efficiency.
The material in the case study highlights a number of internal problems in the airbus operation that stem directly from the area of operations management. The problem can be summarised as political. There was and presumably still is constant internal competition between the “French Airbus” and the “German Airbus.” The first duty of operations management is to make decisions, and if the various national and political components of the company are in conflict it is obvious that the final result will represent some sort of compromise similar to the one that resulted in camels as horses designed by a committee. The study quotes one insider as saying, the ‘underlying reason for the mess we were in was the hopeless lack of integration [between the French and German sides] within the company’. It also makes clear that the highly fragmented structure of the company that makes it difficult for it to compete effectively with Boeing.
The enormous complexity of the company is made clear in the EADS Registration Document for the year 2009 in the section 2.1.4 entitled “Measurement of Management’s Performance”, which requires almost 5 pages of tables and fine print to avoid any real answer to the question. The results are presented in an EBIT format (Earnings before Interest and Taxes). A few pages later the following definition of EBIT as interpreted by EADS is presented. “EADS uses EBIT pre-goodwill impairment and exceptionals as a key indicator of its economic performance. The term “exceptionals” refers to such items as depreciation expenses of fair value adjustments relating to the EADS merger, the Airbus combination and the formation of MBDA, as well as impairment charges thereon. It also comprises disposal impacts related to goodwill and fair value adjustments resulting from these transactions.
Based on this rather interesting discussion of financial reporting EADS had “”EBIT” of -€322 million in 2009, €2,830 million in 2008 and €52 million in 2007. The “losses” on the A380 program somehow are not completely reflected or the profitability on the other operations of Airbus commercial which showed an EBIT Loss of €386 million in 2009, a profit of €2.306 million and no profit or loss for the year 2007. (EADS Registration Document 2009, 2010)
A complete overhaul of he “system” that produced these published results should be the first order of business. It is unclear if this is simply an incredibly complex accounting and reporting system or a deliberate attempt by corporate management to conceal the company’s real results.
If the accounting system that produced the results above is endemic of the operations management of the company, the entire system is in need of a total overhaul and revamping. It is difficult to see how anyone can manage a company whose various parts are, if not in competition, at least not exchanging information efficiently. The underlying function of operations management is coordination of the various elements that make up an organisation. At Airbus the A380 is assembled of parts that come from German and then mated to wings shipped from the United Kingdom to which are attached four engines built either in the UK by Rolls Royce of in the US by Engine Alliance, a combination of Pratt & Whitney and General Electric. In view of the fact that each wing is almost 30 meters in length the underlying complexity of the supply chain can begin to be envisioned. If there is not careful coordination, it is easy to picture a fuselage seventy-two metres long siting on the production floor waiting for its wings or its engines or both. (Airbus, no date) Any serious discussion of the details of the parameters of a management control system for EADS or Airbus is clearly beyond the parameters of this project. The first step would undoubtedly be to make changes that would drastically alter the corporate culture and promote cooperation in place of competition within the structure.
In terms of management disciplines the most appropriate would probably be Business Process Engineering (BPM). The emphasis in this approach is an examination of the end-to-end process and radical or breakthrough improvement. The process that is probably least appropriate is so called lean management that is focused on synchronised operations based on demand to identify waste. TQM or Total Quality Management is usually associated with W. Edwards Deming and focuses on quality and quality and process improvement. This is obviously of critical importance in the production of aircraft, but not the underlying problem at Airbus. Six Sigma is in many respects a refinement of the TQM approach that expands it to every methodology, product and process in the organisation. It might be considered as a second step to follow the BPM or even integration into the BMP approach to the operation of Airbus.
- c) Evaluate the role of Soft Systems Methodology in analysing and defining the business requirements of Airbus.
The systems in Airbus probably are not appropriate subjects for soft systems analysis at the present time. The company needs to redefine itself and its mission first, and then devise a structure and approach to achieve its defined goals. Soft systems methodology is based on CATWOE or Clients and customers, Actors, Transformation, Worldview, ownership and Environment. All of these are areas that need to be addressed at Airbus, but are not critically related to the underlying “nuts and bolts” of the operational problems of a very sick company. In the real world Airbus has two very troubled programs the A380 Jumbo program and the A400M military turbo-prop program that was apparently recently saved by the European Union nations that originally ordered the planes to cover €3.5 billion of cost over runs required to rescue the overdue and over budget project. (SPEIGELONLINE INTERNATIONAL, 2011) This was clearly a political situation that is far outside the SSM approach to management improvement.
The question of formulating the roots of the management problems are described in another SPIEGELONLINE article entitled, “Bad Blood between German and French Executives at EADS. The Wikileak quoted the US Consulate in Toulouse’s farewell report as observing “…Aircraft manufacturer Airbus suffered from “an insular, Balkanized corporate culture found at all levels.” (SPEIGELONLINE INTERNATIONAL, 2011) The same wire also contains the statement, “It’s not hard to come away with the impression of a company under siege.” This is not the conventional model of a company that can employ soft systems methodology to resolve its problems.
The CATWOE approach is based on a going company that wants to improve internally and has time and resources to commit to a long-term process of reinvention. This is not the case at Airbus. The situation is critical, and the underlying losses on the A380 and A400M have not been addressed in a realistic manner. The English partner, BAE, has already divested in holding in EADS and it appears from various news articles that Daimler of Germany would like to do the same. This is not a picture that supports long-term solutions.
- d) Analyse the people, technology and organisational issues involved in improving the operations at Airbus.
The first question above is which people, the French or the German people? This immediately returns to the ownership questions and corporate control issues alluded to above. The Wikileaks cables discussed above in the SPIEGELONLINE article refers to the leadership changes in the company as being like musical chairs in the boardroom. It also refers to the “Brits” as “schizophrenic” and the then French CEO as an “over ambitious maniac.” The parent company is registered in the Netherlands but subject to regulation in addition to the Netherlands in France, Germany and Spain. This appears to be true for Airbus, but as it is part of EADS the situation is not particularly clear.
The organizational issues are probably best addressed by a TMSS (Transnational Management Support Systems) approach as espoused by Professor Sean Eom. This approach looks at a multiplex architecture of management support systems that include DSS (Decision Support Systems), ES (Expert Systems) and EIS (Executive Information Systems). This addresses both the technical level of communications between executives in diverse geographical locations that must coordinate very complex elements such as the material supply chain for an airliner manufacturing operation and the integration of a number of complex manufacturing programs such as the various Airbus commercial aircraft in the A300 series.
The underlying issue is a resolution of the structure and management problems that are undermining the entire company.
Summary and conclusions
What is clear throughout this project is that the problem of Airbus and EADS are inexorably intertwined. It is almost impossible to approach the question of Airbus without reference to EADS. The inescapable conclusion is that the entire company, both parent and subsidiary, are almost incredibly mismanaged. The underlying decisions, particularly the A380 program, are poorly thought through, and management seems incapable of either dropping the project and accepting the resulting losses, or finding a way to rescue it. The company’s other aircraft have been selling well, and the backlog, particularly in view of the recent global financial crisis, is more than acceptable. The real question is how to bail out a company with the millstones of the A380 and the A400M projects pulling it down. The recent reports of the bailout of the A400M is probably good news, but few of the details are available and it appears that the participants are scaling back orders, so the long term outcome remains in question. It has been an accepted fact in the aircraft industry that any major new program such as the A380 or Boeings situation in the early days of the 747 are a form of “you bet your company” on the outcome.
The likely outcome will be bankruptcy of EADS/Airbus and a rescue of the viable portions of the A300 series by a “new company”. There really does not appear to be a likely way of restructuring and re-staffing the existing organisation.
References
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EADS Registration Document 2009. (2010) Leiden, The Netherlands.
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Eom, S. (1994) Transnational Management Systems: An Emerging Tool for Global Strategic Management.” Advanced Management Journal, Volume 59 No. 2 Recovered 11/04/2011 from:
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O’Connor, W. (2001). AN INTRODUCTION TO AIRLINE ECONOMICS (6th ed.). Westport CT: Praeger.
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Slack, N., Chambers, S., Johnstone, R., (2010) “operations Management 6th Ed. Harlow. Pearson
Sox, C. (2011) “Designing and managing business operations” University of Alabama. Recovered 11/04/2011 from: http://www.cba.ua.edu/omms
SPEIGELONLINE INTERNATIONAL, (07/04/2011) “A400M military Transport Plane Saved in Seville.” Recovered 12/04/2011 from: http://www.spiegel.de/international/business/0,1518,755721,00.html
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