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Airbus eats Boeing's jumbo
lunch
By John M Mulcahy
"We
think it is still too risky," a Korean Air official
commented when asked in 1999 about the airline's
attitude to the 550-seat Airbus A380, known then as the
A3XX. However, last June Korean Air reversed itself,
ordering five superjumbo A380s for delivery in 2007-09,
and taking options to purchase on another three. The
value of the order, assuming full retail for all eight
aircraft, is around US$2.2 billion.
Today Asian
carriers, looking at thousands of miles of empty ocean
to be crossed by growing hordes of passengers, are in
the forefront of delivering either solid orders or
options for the huge airplane, which measures 15 meters
wider from wingtip to wingtip than the Boeing 747-400.
Singapore Airlines became the world's first airline to
buy, taking 10 firm orders and 15 options. Malaysia
Airlines is expected to order six. Qantas has orders for
12 with another 12 on option, according to the Toulouse,
France-based manufacturer. Several Japanese airlines are
also said to be close to decisions on the A380. The
fast-growing air freight business, which is increasingly
delivering high-value electronics components from
continent to continent, regards the freight capacity of
the A380 as today as crucial.
The positioning of
Airbus has thus energized an industry that was facing a
dire future less than two years ago. Boeing's new focus
on the midsize jetliner market is also contributing. The
horrific events of September 11, 2001 in the US and the
subsequent war in Iraq have dramatically changed the way
the world looks at air travel. Security has been
tightened, and is likely to remain so, but passenger
numbers suggest that long-term growth can be expected.
It was hardly that way a four short years ago.
In 1999, with very few orders and little credibility in
the wide-bodied market, Airbus was ridiculed in some
quarters for attempting to take on Boeing's dominance.
Boeing was wary of building its own superjumbo because
it very nearly bankrupted itself to produce the 747 at
the start of the biggest expansion in air travel in
history. In the middle of Airbus's development of the
A380, the the collapse of the twin dotcom and equities
market bubbles emptied out the seats in business and
first class. The September 11 destruction of New York's
twin towers emptied tourist class as well.
Now,
however, Airbus's firm order book has since expanded to
129, with 70 options to purchase. The A380 has overcome
its initial skepticism and is now on track to replace
the Boeing 747 as the jumbo of the future. The value of
the firm order book is around $35 billion, based on the
A380's $270 million price tag. The development cost of
$10.5 billion could be amortized over orders of 200 at
around $52 million per aircraft. An order book of only
50 would carry a development burden of $200 million per
aircraft. As orders mount there is growing confidence
the A380 will succeed, and the diversity of airlines
already signed suggests the aircraft will be at the core
of commercial aviation for at least the next couple of
decades.
The precise nature of the risk Korean
Air was anticipating in 1999 is not known, but even the
Airbus official description of the A380 project invites
expectations of hubris. "The all-new A380 program,
launched in 2000, represents the culmination of the most
extensive peace-time engineering effort in history." It
does? Even by the standards of the sophisticated
self-promotion integral to the aviation industry
claiming the A380 to be a more significant engineering
feat than the Apollo moon shot or the Great Wall of
China is extravagant, but the fact is the Airbus project
is ahead of its commercial schedule.
Four years
ago conventional wisdom was that Airbus would need to
sell 250 of the huge A380 aircraft to justify its
existence. With the first 550-seater due to roll out of
Toulouse in 2006, Airbus now expects to deliver 1,200
A380s over the next 20 years. Assuming a median price of
$200 million, that translates to $240 billion. The
estimate of 1,200 as the total population of A380s over
the next 20 years is curiously close to the existing
population of commercial Boeing 747s. According to
Boeing's own figures, it has delivered 1,329 jumbos
since the first 747 was delivered in 1969. Given the
bigger capacity of the new aircraft compared with the
747, Airbus is aiming to supplant Boeing in this market.
FedEx is one of the few US carriers to signal
support for the new Airbus. The huge US courier company,
which has a fleet of more than 600 aircraft, has ordered
10 A380s and options for another 10 for its Subic Bay,
Paris, Anchorage and Memphis hubs.
Boeing has
sold more than 4,000 of its smaller, cheaper 737s, and
the A380 will register fewer sales than the European
company's fleet of smaller Airbus aircraft. However, the
prestige and brand benefit of dominating the wide-bodied
market, in addition to profits, has been an important
component of Boeing's competitive armory during the
lifetime of the jumbo. The European manufacturer is
clearly aiming to reverse its runner-up relationship
with Boeing, and in 2003 for the first time, Airbus will
deliver more commercial aircraft than Boeing. In 2002
Boeing delivered 380, and Airbus 303; in 2003 Airbus is
expected to deliver 300 and Boeing 285. That does not
irreversibly push Boeing into the number-two slot, but
Airbus is proving to be a tougher competitor than it was
in its formative years, and Boeing is on the back foot
for the first time.
The new Airbus aircraft is
significant for various reasons, perhaps mostly because
it is the first serious challenge to Boeing's virtual
ownership of the wide-bodied long-haul passenger jet
market. In the 1970s, 1980s and for much of the 1990s,
anyone who traveled across the Pacific or the Atlantic
stood a good chance of flying on Boeing's extraordinary
747, which transformed the economics of commercial
aviation. Carrying 400 passengers, with room for
extensive first and business class cabins, the jumbo
could operate at substantial profit on busy long-haul
routes. Fares plunged and the democratization of global
travel commenced in earnest. Up to the 1990s, longhaul
was the jewel in the crown of international airlines,
with short routes operating at breakeven or worse, and
seen as the "penance" payable by airlines for the
benefits of the longer routes.
No-frills
airlines such as Southwest, Ryanair and Easyjet have
changed the short-haul landscape, and with it the
equipment requirements. For such operators, short-haul
aircraft must be capable of exceptional fuel economy and
low maintenance costs, as well as quick turnaround.
These operators are not the target market for the Airbus
A380, but they are undoubtedly in Boeing's sights.
Boeing itself is curiously reticent about its
own position in the wide-bodied market. Does Boeing
think so little of this market segment that it is
prepared to abdicate its rule in favor of Airbus? That
seems uncharacteristic of Boeing. What seems more likely
is that, like the general public, Airbus did not believe
an alliance of traditional competitors - France,
Britain, Germany and Spain - could successfully
cooperate to complete "the most extensive peace-time
engineering effort in history". Boeing is also subject
to intense pressure from conservative board members, who
believe the company should maximize returns from its
existing commercial fleet and to shift the balance of
its business towards the defense, aerospace and finance
activities.
Faced with aggressive spending by
Airbus - estimates of the A380 cost range as high as $20
billion - Boeing executives have been forced to
concentrate on the 7E7, the replacement for the 777.
Even in that segment the Boeing board has set tough
targets, requiring the 7E7 to be designed for no more
than 40 percent of the cost it took to develop the 777,
and built at no more than 60 percent of the earlier
model's cost. It is partly to meet these criteria that
Boeing has, in effect, put to tender the manufacturing
location. Cities such as Charleston, South Carolina, and
Savannah, Georgia are bidding for the 7E7 plant, as is
Everett, Washington, Boeing's existing home. Boeing is
seeking a 10,000-foot runway, proximity to a deep-water
port and (as yet unquantified) tax advantages to commit
to a site for its new aircraft. Washington state is not
resting on its laurels, and has introduced a $3.2
billion aerospace tax-incentive package, which lays down
a marker.
But the attention surrounding the 7E7
conveniently camouflages the deceleration in Boeing's
progress, especially regarding competition from Airbus.
Boeing has been applauded for its fiscal discipline in
recent times, and its buoyant share price reflects this
recognition. But there is also concern that Boeing is
not making the investment necessary to keep up with
Airbus. While the public relations surrounding the 7E7
project is designed to reassure its admirers that Boeing
has not succumbed to Airbus's advance, and that it is
ahead of the design curve, not everyone buys this
version. "Boeing should be trying to leapfrog Airbus the
way that Airbus leapfrogged them," is how it was put by
Steven Udvar-Hazy, chairman of International Lease
Finance Corp, the biggest aviation leasing company in
the world.
Boeing supporters have held out hope
that an extended version of the 747 could be a guerilla
fighter in the superjumbo war. However, the Boeing
response to the Airbus assault now seems to be under
deep cover, and unless a credible alternative to the
A380 is launched soon, the US company will have ceded
the large aircraft market to Airbus.
When talk
of the successor to the jumbo first surfaced,
conventional wisdom maintained that airports could not
support even larger passenger jets. Now there is the
Airbus A380, which has a wingspan of 80 meters. The
space between gates on finite terminals was going to
have to grow. Anyone trapped at a busy international hub
in peak-season would probably still concur that airports
are already at capacity and wider airplanes would cut
into the number of planes that could be at the same pier
at the same time.
But consider the response of
Heathrow, the busiest airport in Europe, and one of 60
international airports preparing for the launch of the
A380. The British Airport Authority (BAA) has launched a
$720 million program to prepare for the A380. Work
needed for the 2006 launch of the new Airbus includes
strengthening and widening runways; expanding taxiways;
and development of a completely new pier to deal with
the larger aircraft. Heathrow currently operates an
average of 1,250 flights a day, and BAA estimates that
10 percent of Heathrow's movements will be A380s by
2016.
Word from Seattle, Boeing's traditional
home, is that the A380 is addressing a market segment
that will not be the most important for aicraft
manufacturers in time to come. The Seattle Times, in a
recent comment on the competition with Airbus, made this
observation: "The dream scenario for the 7E7 (Boeing's
new midsize offering) is that it leapfrogs Airbus
technologically and that Airbus will be so financially
committed to the superjumbo that it won't be able to
respond."
A realistic prediction of the outcome
of the battle between Boeing and Airbus, or wishful
thinking from the US giant? The commercial aviation
market is the ultimate in long commercial games, with
products now in advanced development unlikely to play a
direct role in the market for 10 or 15 years.
Boeing's posture at present seems to suggest it
does not see a benefit in attempting to upset Airbus's
A380 plans, but will concentrate on developing the next
generation of technology, the 7E7, which grew out of its
experimental Sonic Cruiser, an ill-fated high-speed
smaller aircraft that the company ultimately decided not
to build. Derivations of this design eventually led to
the 7E7, now anointed as the flagship for Boeing's
fortunes. There are many benefits to the 200-250
passenger 7E7, including fuel-saving design and
materials aimed to meet the needs of the highly
profitable, new-generation shorthaul carriers, such as
Southwest in the US, and Ryanair and Easyjet in Europe.
It is thus clear that the battle over the
superjumbo appears to have been won by Airbus, but that
is by no means the last shot in the battle with Boeing.
There is more than sour grapes to Boeing's focus on the
midsize market. Any manufacturer able to meet the
long-term needs of the low-cost, short-haul market will
be in tune with passenger trends and the economics of
the aviation industry well into the 21st century.
Airbus's job is not done, either. Even within
Europe the A380 has not met unqualified support.
Lufthansa, the German flag carrier, has had executives
making the case both for and against. In March 2000
Stefan Lauer, an executive board member of Lufthansa
Cargo, was direct: "I do not see the need for this
aircraft." Three months later, Lufthansa's CEO, Juergen
Weber, had this to say about the Airbus A380: "The
future belongs to this plane."
British Airways
was right when its commercial director Carl Michel said
in 1999: "I don't believe in being the launch customer
for anything ... the A3XX so far seems more political
than rational." He may well have been referring to
Britain itself, which is likely to benefit by 100,000
jobs for the A380 project. It is improbable that any
elected British politician would be so churlish (or
politically suicidal) as to oppose the A380 when 400
British companies are receiving Stg7.5 billion in orders
relating to the Airbus super-jumbo. British Airways is a
public company rather than a state entity, and as such
will make its own fleet decisions, but the investment in
British airport infrastructure to accommodate the new
aircraft will undoubtedly increase pressure on BA to use
these aircraft from its home base.
Commerce can
solve many things. The preferred Boeing argument - US vs
European jobs - has been undermined to a considerable
degree by Airbus's sourcing policies. The company claims
that 40 percent of its $5.5 billion annual procurement
budget is spent in the US. "Using US Commerce Department
figures, that dollar amount translates in Airbus support
of 120,000 American jobs," Airbus says.
It would
still be a brave US airline that placed a firm Airbus
order, though, especially with Boeing working on the
midsize 7E7 for short-haul routes. While Boeing offers
its 7E7 and its own version of the Super Jumbo, known as
747-X, as a counterpoint to the adulation being heaped
on the new Airbus behemoth, it is apparent that the
Seattle manufacturer, which established and owned the
jumbo aircraft market, is losing part of its lunch.
But there is little doubt the new-generation
large aircraft market has captured the imagination, as
the jumbo did 30 years ago. These huge aircraft will
have a profound impact on passenger and cargo aviation.
Emirates Air are planning to carry up to 650 passengers,
although the general specifications provide for a
passenger complement of 550. The improved logistics of
an enormous hold have not escaped courier giant FedEx,
and it is likely the huge plane will be coveted by
airlines throughout Asia, battling to provide profitable
services but low fares.
Comments made by US
analysts illustrate one side of the saga which has
pitted Boeing's complacency against Airbus's hubris.
"There will be 747s serving the world in the year 2070,"
said one commentator, although current orders are few
and far between. In direct contradiction, another
analyst expressed doubt about Boeing's proposal to
extend the 747 as its contribution to the superjumbo
market. "The disadvantage (of a re-designed 747) is a
psychological one. Customers are afraid of another
Oldsmobile. They want to buy something that has a
relatively useful product cycle. Boeing can't guarantee
that (the 747) will be in production in 2010. The 747 is
a big question mark."
The market is judging, and
current order books suggest that Airbus will own the
superjumbo market by 2020, unless Boeing pulls something
other than a reworked 747 out of its hat. Indications
are that Boeing has no such intentions, and will mount a
pincer movement by attempting to squeeze Airbus in the
midsize market. The long battle continues.
(Copyright 2003 Asia Times Online Co, Ltd. All
rights reserved. Please contact content@atimes.com for
information on our sales and syndication policies.)
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