May 12, 2006
Airbus Loses AltitudeBy Thomas Lifson
The largest and most technologically sophisticated companies in the world rarely surrender to the competition and admit they have made a poor decision about what to produce. That's why the leak�of Airbus' latest product plan is so significant. A state—supported Europrestige standard—bearer is grappling with the realities of the marketplace: the opinions and desires of customers really matter. There is both good news and bad news here for fans of competitive capitalism.
We are still far from seeing a newfound devotion to the teachings of Adam Smith among the continental Europeans who seek to challenge American dominance of high technology in the world economy. And Airbus has not yet stood—up and publicly announced its decision to back down from a bad product. Most important, the European plane—builder�is not giving up its�old ways of tapping taxpayers to fund�its dreams of civil aviation gloire.
The result is a temporary boost for the prestige of Boeing and a further lead in the next few years of airliner wars. But the longer—term consequences could be devastating.
As I have been chronicling� here at American Thinker,�Boeing and Airbus, the two companies that uneasily share dominance of the world market for civil jetliners, are locked in a massive bet—the—company struggle for superiority and ultimately for survival.
Airbus chose to spend its product development euros on designing and building the world's largest jumbo jet, the A—380 double—decker long range transport. Although delayed, the A—380 is scheduled to enter service later this year. Initially buoyed by a very large order from Dubai—based Emirates Airlines, and a smaller but significant order from Singapore Airlines, the A—380 has enjoyed less success in generating new orders than Boeing's rather different bet on the future market for long range airliners, the B—787 Dreamliner.
The Dreamliner's principal marketplace virtues are twofold. It will be extremely fuel—efficient due to extensive use of lightweight new materials in place of old fashioned aluminum, and it is sized as a medium jumbo, about 300 passengers. This allows the Dreamliner�to be used on so—called point—to—point nonstop services, such as Minneapolis to Paris. Planes as big as the A—380, which can hold more than twice as many, are limited to routes between major hubs, such as New York to London or Los Angeles to Tokyo.
But the order book for the Dreamliner filled—up while the A—380 (which still lacks a corresponding non—numeric name — my suggestion is 'Bratwurst' in honor of the chubby cylinder shape of�its fuselage) relatively languished after the first burst of launch orders. It turns out that rather few airports are equipped to handle such a big plane, and there is no visible outcry among the traveling public for the privilege of connecting in a major hub if nonstop service exists as an alternative. Then there is small matter of loading and unloading such a large plane in a reasonable amount of time, not to mention the thrill of being number 700 in line for customs and immigration processing and baggage pick—up.
Airbus responded by announcing a revision of its existing A—330 airliner to compete with Boeing's all—new 787. They called the new model the A—350. But the airline industry reacted badly to Airbus' warmed—over midsize offering. Very few orders rolled in. Some industry leaders even went public (a very unusual move in this clubby industry) with their dissatisfaction, warning Airbus to re—think the bad idea. Few airlines making their own decisions want to invest hundreds of millions of euros or dollars in a me—too version using older technology.
Airbus tried to finesse Boeing with an updated competitor because it had committed so much to the Bratwurst, whose development demanded both huge sums of money and a huge commitment of technical resources. In a bet—the—company competition, they had bet on a loser. Just as decades earlier with the Concorde supersonic airliner, the Europeans were seduced by the desire to outdo les Americains with something better, something those boastful and all—too—successful Yankees couldn't match.
Normally, when you and I make a losing bet, we must live with the consequences. But not so Airbus.
The leaked plans indicate that the Toulouse—based plane maker plans to scrap the announced A—350 plan, and replace it with a brand—new design, using the next generation approach Boeing applied to the Dreamliner. This is estimated to cost $10 billion or more in new development funds.
For a purely private company to add such costs onto the sizable sunk costs of the Bratwurst would be difficult indeed. Lenders usually want some indication that their funds will be returned eventually, with interest. Having already staked many billions of euros on the superjumbo, a me—too version of the Dreamliner vastly increases the commercial financial risk for Airbus and its principal owner, European aerospace company EADS.��
But Airbus has a series of sugar daddies, the governments of the countries where Airbus produces aircraft and components. They have in the past proved eager to advance 'loans' for aircraft development�that don't have to be repaid if the venture fails. This dramatically lowers the risk for Airbus in doubling down its bets against Boeing, which has no such access to loan forgiveness.
Given the fast pace of technology in the airliner business, companies are constantly challenged to identify new opportunities for improvement, and then to take deep breath and commit to actual products which will require years to develop, test, and build in commercial quantities. These bet—the—company decisions carry a mortal hazard for Boeing, but not (under current loan forgiveness arrangements) for Airbus. Thanks to its sugar daddies, Airbus can bet wrong and survive, as it has just demonstrated.
Buyers of medium—sizes intercontinental jetliners are on notice that the Airbus entry will be delayed, so Boeing has an advantage, although its production capacity is already sold out for at least a few years. But Airbus will have the follower's advantage of learning from Boeing, and of tapping brand new technologies. It's A—320 single aisle twin engine jet carved out a very respectable market niche from the previously dominant B—737 in just such a fashion. There is a real chance the new A—350 will do the same to the 787 Dreamliner once it is on the market, though Boeing will not stand still.
Unless, of course, the United States government is able to bring a successful case to the World Trade Organization that forgivable loans courtesy of jobs— and prestige—hungry governments constitute an unfair trade practice.
Airlines and the traveling public have a powerful interest in keeping civil aviation a competitive industry. An uneven competition where one side bets the company and loses, while the other side bets the company and gets subsidies, will not provide such a foundation for future progress.
Airbus has made a first step toward acknowledging the importance of market forces. It and its sponsor governments should follow up by limiting their new product development efforts to projects which can be supported by purely commercial sources of finance. Europeans, like the rest of the world, will benefit from a truly competitive marketplace. Once Boeing bets and loses, and the bureaucrats are in charge of the future of civil airliners, look for prestige and impracticality to once again motivate bad decisions�for future generations of airliners.
Thomas Lifson is the editor and publisher of The American Thinker.