March 30, 2006
Airliner WarsBy Thomas Lifson
A momentous battle is taking place over dominance of the enormous market for commercial jetliners. Europe's Airbus and America's Boeing each seek to cripple their rival with better products, more attuned to the needs of the airlines and the flying public. The lead has passed back and forth between the two, with Airbus surpassing Boeing in sales and deliveries in recent years. But Boeing, playing a canny strategy, may have outwitted its rival. At least for the present.
The outward signs are somewhat prosaic. A seemingly routine announcement by Boeing that it will offer a stretch version� of its latest model, the 787. And a speech at an industry conference by the president of a leading aircraft leasing company.
To understand the meaning of these moves on the chessboard of the airliner business, some background information is in order.
A bet—the—company game
Few businesses can match the production of civil airliners for bare—knuckle competition. Great companies making beautiful, technologically masterful airliners have come and gone, leaving behind unemployed highly—skilled workers and massive manufacturing complexes gone to seed. Fly into Burbank, Long Beach or Columbus, Ohio and see the remnants of once—thriving aircraft assembly lines.
Governments directly and indirectly subsidize the jetliner industry, for the sake of jobs, technological advantage, and prestige. But in the end, managements 'bet the company' quite literally, and sometimes roll snake—eyes with their metaphorical dice.
In the market for large civil jetliners, only two companies remain: Boeing and Airbus. Each claims, with some justification, that the other enjoys unfair government subsidies. Boeing is able to fund much research courtesy of defense contracts, and receives incentives from local governments in the form of roadways and tax reduction when it locates its production facilities. Airbus is able to obtain funding for the launching of new models, and is relieved of the necessity of repaying these 'loans' if the new model is unsuccessful, lowering the risk of technological advancement, the key to success.
Airliner manufacturers have been playing a game of technological leap frog for many decades. More than 70 years ago, in 1933, Boeing advanced the state of the art in airliners by introducing the Model 247,� the first all—metal monoplane airliner, which was far faster and more comfortable than anything else on the market. It briefly dominated the skies, and gave United Airlines, then an affiliated company, a decisive advantage over rivals like American Airlines. United bought up the available delivery slots for the 247, leaving its rivals with inferior airplanes.
But the competition was not about to accept a permanent blow. In response, the Douglas Aircraft Company extended the advances pioneered by Boeing, introducing the DC—2, and then the DC—3,�in 1935. The rest, as they say, is history. The DC—3 design was elegant, rugged, practical, and enduring. The military version, the C—47 played a major role in winning World War 2, and its combat role lasted through the Vietnam War, when it served as an aerial gunship. Even today, DC—3s still fly in commercial service, albeit mostly as a nostalgic tourist vehicle.
A similar pattern occurred with the advent of jets. The first commercial jetliner, the Dehavilland Comet was beautiful and record—setting. But early models crashed, and improved models had to be introduced. Boeing, taking advantage of its development of an aerial jet tanker, the KC—135, introduced the Boeing 707, and dominated commercial aviation for the next four decades.
Airbus breaks in
In order to crack the commercial jetliner market, dominated by Boeing and its then—competitors Douglas and Lockheed, Airbus used low prices and generous financing, enabling sales to many airlines around the world, including financially shaky Eastern Airlines in the United States. Airbus exploited a new technology in its later A—320 model, sized to match the 737 family of two engine jetliners, the biggest segment of the market. Fly—by—wire, meaning that hydraulics and other mechanical controls were replaced by electronic wiring linked to electric motors via computers, had weight and performance advantages that were obvious to both pilots and management. It was a technological leap that paid off. Boeing waited too long to respond, and Airbus became a peer, and eventually grabbed a sales lead.*
But Airbus's larger models aimed at intercontinental travel have been less successful. The long range A—330 and A—340 models lacked a top—of—the—line superjumbo to rival the venerable Boeing 747. Boeing sales people could always point to the advantages of commonality in cockpit layout, spare parts stocks, maintenance, and other factors, in selling a package of airliners of various sizes, to meet all the needs of major carriers.
As a consequence, Airbus determined that the world needed a new generation of superjumbos, and is introducing the A—380, which just this week was certified by US and European authorities as able to be evacuated�satisfactorily in the event of a crash, no small point when 700—800 lives could be lost in the event of a fire.
The A—380 still has a way to go before entering commercial service. Deliveries have been delayed, and rumors fly about problems with weight, performance guarantees of range and fuel consumption, and even unconfirmed dark talk of structural integrity issues. Utilizing the emerging technology of composite materials in place of aluminum on an unprecedented scale, Airbus faces complex technological problems.
Boeing, meanwhile, has bet its resources on a smaller—scale airplane, the 787 Dreamliner. The market for small—to—medium—sized planes, seating about 200—250 passengers, is much, much larger than for the superjumbos. Very few routes require flying 500 or more people all at once, and very few airports can handle such behemoths smoothly. Los Angeles Airport, for instance, has no gates capable of handling an A—380, while San Francisco International, with its massive new international terminal, expects to steal business away from A—380 customers like Singapore Airlines.
Passengers are not wild about crowding in and then unloading such planes. Lines at customs�processing alone are already daunting for 747 passengers. And business travelers prefer frequent flights, not one a day or two a week, as may be required by the larger passenger capacity of such planes. Superjumbos have compelling logic only in such airports as London Heathrow, Chicago O'Hare and Tokyo Narita, where runway capacity is very limited.
While Airbus seeks to deny Boeing the large profits from sales of the 747, a product whose engineering and tooling expense�has been largely amortized, Boeing has gone for the mass market. The Dreamnliner's promised performance is at least as economical per passenger mile as the A—380's, so Airbus faces a challenge in convincing airlines that it is worthwhile flying such an airplane. And the issues of using composite materials are somewhat less demanding on the smaller scale of the 787 than for the much heavier 380, where stress forces are more acute.
The latest round
In order to counter Boeing's advancement of the state of the art of composites and other fuel efficiency—enhancing features of the 787, Airbus offered an improved version of the A—330 long range twin—engine airliner, re—dubbed the A—350. The price for making incremental improvements was reckoned between one and two billion dollars, much less than the price of an all—new aircraft, and far less than the teens of� billions of� dollars for developing the 380 model. The A—350 was a spoiler, designed to steal away orders from the 787, primarily by convincing existing Airbus customers to stay within the family.
For its part, Boeing has announced its serious interest in doing the same sort of thing to the 747, once again updating the original jumbo with new technology, as has happened numerous times before.
Boeing's gamble on the mass market as the target of its technology leap appears to be paying off. The Seattle Times (a partisan in favor of Boeing, which employes many thousands locally) reported earlier this week:
Such blunt talk in public is rare indeed in this industry, where close relationships between manufacturer and customer are necessary.
Boeing's decision to stretch the 787 Dreamliner into a bigger airplane also represents a bolder move than the normal stretch decision. By enlarging the Dreamliner, Boeing is going to steal some orders away from its 777 model, which has established itself as an excellent airplane, but which is relatively young, and probably has not sold enough copies to pay back its development cost and generate significant profits.
Competition is getting very bloody indeed. Rather than allow Airbus to steal orders, Boeing will steal them from itself. This is known in business circles as cannibalizing your own products.
For its part, Airbus is in a very uncomfortable position. Already facing the possibility of a dumping case over subsidies and loan guarantees for the A—380, and with many of its European sponsor governments in severe fiscal distress, coming up with multiple billions of Euros' worth of new funds to make the A—350 a new generation plane will be difficult. Moreover, money aside, there are absolute limits on the time of its engineering resources. The A—380 has experienced technical difficulties. The challenge of a massive new product right now may be a bridge too far.
There are few industries more glamorous, technologically advanced, or more important than this one. There are also few in which the competition gets bloodier. For those of us who watch it as customers/passengers the drama doesn't get much better. But for the participants, it is stressful, to say the least,
The round now unfolding will provide all of us with quite an interesting story over the next few years. Stay tuned.
*Thanks to reader Scott Palmer for clarifying the timing of the fly—by—wire technology at Airbus.
Thomas Lifson is the editor and publisher of The American Thinker