June 20, 2005
Airbus, Boeing and riskBy Thomas Lifson
Airbus and Boeing have been fighting over the market for civilian jetliners for over three decades. As Airbus, a subsidized multi—national offspring of French firm Sud Aviation, grabbed market share, other firms suffered. Along the way, long—established American manufacturers such Lockheed, Douglas, and even Fokker of the Netherlands, have fallen by the wayside (withdrawing to defense work, merged with Boeing, and shutdown via bankruptcy, respectively), leaving the market in the hands of two mega—rivals.
It has long rankled Boeing and its partisans in the United States government (which buys lots of military equipment from Boeing) that Airbus enjoys a seemingly endless claim on the treasuries of the European nations backing it. Airbus, for its part, points out that Boeing's defense work underwrites a lot of research of value in the airliner market, and that local governments offer subsidies for worker training, factory expansion, and road work serving factories.
Boeing and the American private sector aerospace manufacturers refer to projects like Boeing's Dreamliner 787 as "bet the company" decisions, with no irony intended. Airbus, on the other hand, with its claim on the public treasuries of France, Germany, the U.K. and Spain, seems to be able to face market failure with no such consequences. In the face of Boeing's sales bonanza for the Dreamliner, Airbus cavalierly scrapped its previous plan to update its existing A330 and announced it would produce a brand new plane to compete with the 787. It seems to expect that its sponsors will cough up the requisite billions and billions of euros in a way that the private capital markets never would. You see, if Airbus does not attain profitability on an airliner, the "loans" which European governments advance to it do not have to be repaid.
But in the months running up to the Paris Air Show, traditionally the biggest event of the year for sales of airliners, Boeing was outselling Airbus, having bet on the strategy of producing "smaller" long range jets — those which only seat between two and three hundred passengers, while Airbus bet billions and billions of euros on its 500 to 800 passenger intercontinental behemoth. Meanwhile, suddenly—disclosed delivery delays have both raised questions about Airbus's technical mastery of its complex new machine and sparked humiliating public squabbling and finger—pointing among its national units in Germany and France.
After facing humiliation upon humiliation at Boeing's hands this year, Airbus is suddenly declaring 'victory' based on the sales it announced last week in Paris. Airbus claimed 261 jetliners sold in Paris, 115 more than Boeing announced. And for the year, with the Paris totals swelling its order book, Airbus now claims sales leadership for the year to date.
But not everyone is convinced that Airbus in general and the A380 in particular are winning acceptance by the world's most important major airlines. A closer look at the order book reveals that a huge share of the orders Airbus has booked are from airlines which don't exist yet, or which appear to be planning enormous expansion while enjoying tiny domestic markets.
India has recently liberalized its aviation industry, and two brand new discount carriers, not yet flying, have placed huge orders with Airbus. IndiGo Airlines ordered 100 airplanes from Airbus, while Kingfisher Airlines added an order for 15 aircraft (at $3 billion) on top of existing order for 13 aircraft announced previously. Vijay Mallya, the beer tycoon who has founded Kingfisher, and who is often compared to Virgin Atlantic's Richard Branson, boldly proclaims no worries over his carrier's future:
But others are not so sure. India's aviation infrastructure is sadly in need of massive public investment in order to be able to handle the vast amount of new traffic the new airplanes would generate. While the Indian economy is very healthy and growing rapidly, this may not directly translate into such infrastructure investment in time to handle the anticipated air travel bonanza.
To be fair, Boeing also has a considerable number of orders from India. Jet Airways, a premium service carrier, not a discounter, has ordered 10 77s and 10 737s, while also ordering 10 A330s from Airbus. Long—established flag carrier Air India has ordered 50 planes from Boeing in late April, prompting complaints from Airbus that its A380 was not even considered in competition with Boeing's much smaller Dreamliner.
The biggest orders for the A380 itself have come from a fairly narrow range of airlines. Emirates alone accounts for 64 orders, more than half of the announced total of 116 orders for the A380. Emirates is a very successful airline, based in the Persian Gulf. Following a strategy similar to that of Singapore Airlines (another big A380 customer), Emirates emphasizes lush cabin service and is not afraid to discount coach fares, while using its home base as a major hub. Emirates transports passengers from many destinations in Europe, Africa, and the Middle East onward to Asia and Australasia (and vice versa) after a plane change in Dubai. Geographic logic favors this hub, and Emirates' track record for excellent service makes its chances for success arguable. Even in the face of such a monstrously huge order with a tiny domestic market.
But many factors have turn out correctly for it to be able to pay off the at least 20 billion dollars (probably much more) its orders now place in its accounts payable column. The same could be said of IndiGo, Kingfisher, and a lot of other airlines which are currently filling the Airbus order book. Luck, hope, and no small amount of bravado power these purchases.
And this raises the most fundamental point about the asymmetrical warfare underway between Boeing and Airbus. If Boeing writes a huge order with an airline which defaults, Boeing has to scramble to find private sources of capital to replace the anticipated cash flow, and to finance cut—rate sales, or even parking the unused aircraft in the Mojave Desert (or Persian Gulf) with the tail painted white. Airbus, on the other hand, can go to its state sponsors and say, 'Oops,' and never have to pay back the funds advanced to it as ostensible loans.
The airline industry, and its supplier, the airliner manufacturing industry, is a very, very volatile business. When one member of a duopoly is able to write risky ultra—large orders with little fear of drastic financial outcomes if things don't work out well, the other competitor is at a severe disadvantage. One bets the company while the other bets other people's money.
Industry sources tell me off the record that Airbus is heavily discounting A380 sales, to the point where it is losing a lot of money on every copy of the plane it is now selling. If true and subject to documentation, this could lead to the largest—ever dumping complaint in the history of the World Trade Organization. It would also mean that Airbus, far from being able to pay off its many billions of euros in R&D expense on the A380, will incur further billions in cash losses, even if its customers turn out to be able to pay their bills.
Indirect support for the theory that Airbus may be living on borrowed time as well as borrowed money comes from Boeing. Suddenly, and unexpectedly, Boeing Commercial Airplanes CEO Alan Mulally has announced that
A revived 747, even if it doesn't take that many orders away from the A380 could lead to further pricing pressure, just when the airplane finally gets established, after all the early orders are filled. If Airbus continues to hemorrhage billions of euros, its deficit—ridden state backers, facing WTO troubles, may or may not be able to pony up to bail it out. The European voting public has been displaying increasing testiness over the dreams foisted upon them by their elitist rulers.
Perhaps Airbus may have bet the company, after all.
Thomas Lifson is the editor and publisher of The American Thinker.