The Race To Rewire The Airbus Accounting Essay

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From the inception of the idea of any engineering or technological project development until its final investment decision and implementation, a good understanding of financing and accounting principles is essential. Such principles and their correct application will assist in all the stages of the project, including initial cost assessment and cost tracking during the development phase, financing requirements, budgetary planning and control, assessment of costs versus benefits, tax incentives and subsidies etc. An illustration of how accounting and finance interact with engineering and technology is visible through the design, development and construction of the Airbus A380.

The Airbus A380 is the largest passenger airliner ever built and the world's first full double-deck aircraft manufactured by the European corporation Airbus, a subsidiary of EADS, a large European aerospace corporation. Apart from being the largest, it incorporates the latest innovative advances in structures, aerodynamics, cabin design, engine integration, flight controls, aircraft systems, manufacturing techniques and extensive use of advanced lightweight composite materials. As a result, more than 380 patent applications were filed for the technologies developed for it.

Initially, Airbus, in its efforts to speed up the development and design work for its A380, it formed a Large Aircraft Division in 1996 comprised by experts from Airbus and its partner companies, including design and costing engineers and specialists in marketing, finance, accounting, production and product support. Their main task was to examine and evaluate the market potential and the industrial and financial basis for A380 in conjunction with setting the basic specifications of the aircraft.

They had conducted the most extensive and detailed market analysis and customer consultation process of commercial aviation ever undertaken (Babka 2006) in order to estimate demand for A380 aircrafts, projected revenue figures, costs and profits. It was therefore crucial prior to launching A380 to make use of accounting by estimating revenues, costs and profits since it is the key for planning and decision-making while at the same time it was the precursor of either the commercial success or failure of the project.

The Large Aircraft Division has also conducted several studies on the financial viability of the project and on its funding requirements. The investment of around $12bn for the construction of A380 was raised by using some of Airbus's own funds, via government subsidies in the form of repayable loans as well as through equity participation from other aerospace companies around the world. Hence, quantifying the funds that were needed, identifying the finance providers and obtaining their approvals were imperative for the decision to invest in the production of A380.

Regarding government subsidies, accounting identified the subsidies that were in place which aided the engineering implementation. Under the terms of the bilateral agreement of 1992 between the U.S. and the European Union concerning trade in large civil aircraft, the amount of such subsidies either direct or indirect are calculated using accounting figures. These subsidies are limited (pursuant to the agreement) to 33% of the total development cost for direct subsidies and 3% of the total annual revenues of the civil air transport manufacturing industry in a party's domain for indirect subsidies. (Gellman 2004)

In 2003, Airbus had also created the Component Design Build Team for A380 responsible for the delivery of aircraft components and systems, achieving quality and performance targets according to schedule and within budget. It was very important to monitor the budget and measure how well the project's actual costs equated to the planned amounts. This process was dependent upon the accounting of expenditures and their allocation.

Despite the fact that Airbus had created such a team structure which involved all functions in decision-making and planning right from the beginning, it had a very tight development timetable considered as over-ambitious, and had been caught out by trying to undertake development and ramp-up production in parallel. Airbus had not taken into account that the several radical innovations integrated in A380 would have resulted in boosting the development investment and delaying initial deliveries and sale receipts. (Gellman 2004)

The problem was attributed to the A380's scale and complexity which made uncertain both costs and delivery dates. Specifically, Airbus cited as the main underlying issues conspired to cause production problems, the complexity of the cabin wiring, its simultaneous design and production and the high degree of customization for each airline company. They have had a lot more changes than expected as a result of modifications or replacements to electrical systems - wiring harnesses that run through each aircraft - and structure after receiving feedback from bench-testing, flight-testing and customisation requests of airlines.

The consequences of these production issues were initial delivery delay of approximately 1 ½ year and cost overruns increasing development costs from an original estimated amount of $8bn to $12bn. The postponment of pre-delivery payments to Airbus linked with delivery delays and the working capital requirements linked to additional aircraft production lead-time resulted in strong deterioration in cash position and profitability from 2006 to 2010 (estimated until 2010). Therefore, this real world engineering experience revealed that such huge engineering projects and their handover from the development phase to production can be messy leading to negative financial effects on profit, costs, cash and financing needs.

Despite these short-term issues, with more than total 200 orders up to 2009 (delivered 25 aircrafts until November 2009) the long-term prospects for A380 look positive. With A380, Airbus has managed to achieve an increase in operator's return thanks to 15-20 per cent lower fuel burning than the competing 747-400, thus reducing direct operating costs per seat.

As illustrated above, accounting and finance coexist and interact with the engineering and technological aspects of the A380 project from its very beginning as with every other engineering project properly planned and executed. Experts from both fields cooperated in identifying funding requirements, evaluating market potentials, preparing budgets and monitoring them as well as estimating revenues and costs. However, since the exact performance and capability of the aircraft and its systems were only shown at the point of integration and flight test, the necessary modifications and configuration changes needed resulted in cost overruns that required urgent attention by both accounting and engineering experts. This was the outcome of not allowing for exceptional costs and time regarding new technologies built-in A380.


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