Some people say that that the thousands of tourists who visit the plant in Everett, Washington, to see how Boeing aircraft are constructed have the impression that both the managers of the company and its workers are euphoric about the latest achievements of this industry. After a minor crisis during the 1990s, Boeing did not begin the 21st century on strong footing. In 2003, Airbus, the European manufacturer, pulled into the lead in the delivery of aircraft for the first time in aviation history. The U.S. manufacturer then began a difficult transformation process that is now beginning to bear fruit. At the end of 2005, it appeared that Boeing had beaten out Airbus in number of orders, although not the number of aircraft delivered. However, in January of this year, Airbus surprised the market by revealing a 38% rise in its orders during December. For the fifth consecutive year, that put it ahead of its competitor, with 1,055 aircraft compared to Boeing’s 1,002.
The terrorist attacks of 2001 precipitated shrinkage of demand for airplanes at a time when Boeing’s fading range of products faced competition from the more attractive offerings of Airbus. As a result, Boeing’s profits plummeted by 80% between 2001 and 2002. Nevertheless, during the last fiscal year, James McNerney, chief executive of Boeing, has straightened out the company, and its revenues reached $54.8 billion in 2005. Prices of its shares are once again rising and the volume of its back orders is continuing to grow. Despite the fact that it won a lower number of orders in 2005, the value of its orders was greater than that of Airbus, in part because Boeing’s prices are higher. In 2005, Boeing had a 48% market share, in terms of orders, and a 55% market share measured in revenues. The current number of orders outstanding is 2,177 for Airbus and 1,809 for Boeing.
Problems for Airbus
To some extent, Boeing’s newly dominant position is also due to the internal crisis at EADS headquarters, which owns 80% of Airbus’s shares. The other partner is Britain’s BAE Systems. According to Pierre Dussauge, a professor at HEC, the French business school, “The main disadvantage of Airbus is that it continues to be four companies merged into one, and they are working independently.” The company has yet to reorganize so that it integrates its four national components – namely, France’s Aerospatiale, Germany’s Deutsche Aerospace, Spain’s CASA (Construcciones Aeronáuticas Sociedad Anónima) and the U.K.’s British Aerospace. When it comes to managing EADS, “they are taking a lot of care” to make all four headquarters happy, while also taking into account the political implications in each country, says Dussauge.
“Boeing is much more integrated,” he adds. In recent years, it could also count on having another advantage: After losing its supremacy, “it was obliged to take more risks and innovate more.” The same process happened at Airbus during the 1980s, and it paid off two decades later in its leadership position. At the time, “Boeing was dominant and did not innovate much, while Airbus introduced most of the innovations in this sector.”
When Boeing realized it was in danger, “it took control of the situation, and now the 787 model is more innovative than the A-350, with which it competes,” notes Dussauge. Mike Bair, who directed the 787 Dreamliner project, says that he expects sales activity to continue at a “brisk pace” in 2006, and that more than 500 orders will be logged. Meanwhile, according to sources at Boeing, the A350 “makes obsolete” the A330 and A340 – which have between 240 and 320 seats. Yet the A350 has had a cool reception from the airlines, with orders running at a pace that is only one-third that of the Boeing 787. In addition, the Airbus is going to be remodeled because of criticism from several customers. In fact, Airbus’s declining credibility vis-à-vis Boeing has just become evident with Singapore Airline’s decision to order 20 Boeing 787s.
“Boeing has always been clear about the fact that the heart of its airplane business is midsize planes, and time has proven it correct,” says Richard Aboulafia, vice-president of Teal Group, a consulting firm. Airbus abandoned that segment of the market to move towards the A380 super jumbo, notes Dussauge. The European manufacturer bet heavily on the huge plane but its launch has been delayed for a second time, which has led to a steep decline in the price of its shares. Nevertheless, now that petroleum prices have shot up, Boeing’s aircraft are much more efficient at consuming energy, according to the experts. “The launch of the A350 – in response to the success of its competitor – demonstrates the extra validity of Boeing’s strategy and the sense behind the 787,” says Ronald Epstein of Merrill Lynch. “The only large challenge for Boeing is the 787. If it wins, Boeing could take over 75% of the market, which would be an almost mortal blow for the European manufacturer,” adds Aboulafia.
Sharing the Market
Dan Levinthal, a management professor at Wharton, says that “the 787 covers a larger part of the market — medium-range airplanes. In addition, with its new components – such as carbon [fibers] – it has been designed with fuel savings in mind. That is much more important than the exorbitant services that the A380 offers to passengers.” According to José Emilio Navas of the Complutense University in Madrid, “Boeing is betting on midsized jets and making them the standard for saving energy. Meanwhile, Airbus is developing new large-scale aircraft based on economies of scale in terms of the volume of passengers.”
Regarding the future, Navas predicts that “there will probably be a fierce battle between the two companies, and it will be hard for one side to score a clear victory. Nevertheless, in recent years, Airbus has attained a clear advantage over Boeing.” Levinthal criticizes Airbus’s strategy for not adjusting to economic trends or putting more trust in growth in the number of passengers on each flight, which is something necessary if the A380 is to be successful. “There was a lot of pride in the European Union about the fact that Airbus was going to defeat Boeing by providing the largest airplane in the market. The company pursued this higher status without taking economic trends into account. The [A380] aircraft was designed to provide a luxurious flight experience at a time when low-cost airlines are having success,” notes Levinthal. One must also think about the higher fuel consumption of these aircraft given their size, and the fact that very few airports in the world were designed to accommodate this super jumbo. “Airbus will continue so long as governments continue to support it and sponsor it, but Boeing will make money and will clearly win this round.”
According to Dussauge, “Airbus had the support of the governments that participate in EADS, so it managed to offer more favorable prices. In addition, during the 1980s and 1990s, there was not so much pressure on the company to make a profit. Nevertheless, Boeing did not receive any help and its prices are better adjusted to its real costs.” Once the European consortium had achieved its goal of being market leaders, it began to receive additional assistance, and greater demands were made on it to show strong profitability. In addition, notes Dussauge, problems of coordination among the companies that comprise EADS led to the A380’s delay. The companies failed to agree on the number of components that needed to be made in each country, which led to an imbalance in components for assembling the aircraft. The aviation sector “is a duopoly that is going to fluctuate,” says Dussauge. He believes that “no great changes can take place in the sector, in which a balance is going to be maintained between the two manufacturers. When one company rises, the other will go down and vice versa. But neither one is going to disappear.”
Wharton management professor Mauro Guillén has a similar view, although he says that new competitors could appear. “Airbus and Boeing are two companies that depend on subsidies. It is very risky to design and manufacture airplanes, but we all need them. Airbus has better technology, although Boeing has recently made up some of the gap. Given the fact that there is no room for three manufacturers, the best thing would be a balance between the two; that is two, each with about 50% of the market. The most interesting thing now would be if Asia creates a consortium that competes with them. China is still far from being able to compete, but it won’t be too long before it tries.”
“Instead of competing with similar models, the two manufacturers have to gradually develop a range of products that complement each other in terms of function, so that they don’t get into a downward price war that hurts them both. Each company must position itself with respect to the other,” says Dussauge. Both Boeing and Airbus cover the entire range of commercial aircraft; with the development of the A380, Airbus has crossed the border into the jumbo category. Airbus can also boast that is has the largest “bird” in commercial aviation, while Boeing can boast that it has designed the world’s best-selling aircraft, the 737. Over the past year, sales of the 737 have gone beyond the historic barrier of 6,000 orders. Still, Boeing has a product catalog that is “more diversified,” since around 50% of its sales are derived from the military sector. For EADS, this segment barely represents 20% of total revenues.
According to Dussauge, the prospects for both companies are affected slightly by the pressures on governments to place orders for airlines from their countries. However, Dussauge says that this factor is not decisive. “The disadvantage of having only one supplier is that the airline is in a dependent position, and will not get the best price.” Nor can an airline compare the benefits of that model with those of other models. The logical result is that every airline tends to buy from both manufacturers, although “it continues to be a political market.” The position that an aircraft company occupies can also have an influence on purchasing decisions. For example, conditions are now more favorable for Boeing “because its prices are better,” and because its aircraft consume less fuel and employ more advanced technology.
Nevertheless, Dussauge stresses that the reaction of market observers “is exaggerated” when it comes to talking about the ranking of the two companies. If Boeing aircraft are now having so much success, it can be assumed that they will be considered classical planes within three or four years. Over that period, Airbus will have reacted by developing new aircraft that are more sophisticated and consume even less fuel. It is a cyclical market, says Dussauge.
Growth of the Sector
Although conditions for airlines are not currently at their best, the aviation sector is booming. According to data from Boeing, over the next 20 years, the number of passengers will grow at an annual rate of 4.8%, while air cargo traffic will grow by 6.2%. To deal with that growing demand, aircraft manufacturers will sell around 25,700 aircraft, which will cost 1.75 trillion euros ($2.1 trillion) through 2024. As a result, the global fleet of aircraft will double from 16,800 planes to 35,300 planes, according to Boeing.
Demand for aircraft will be largely cornered by aircraft that have only aisle; these smaller aircraft will represent 58% of all orders. An additional 22% of orders will come from midsize aircraft that have two aisles. Sixteen percent of all orders will be regional airplanes, and only four percent will be jumbos, such as the 747 and the A380. This means that the success of Airbus’s star model could be more limited, when you take into account the problems they face, given the number of orders already made by the airlines.
Nor will it help that Noel Forgeard, managing director of EADS, has been implicated in a scandal. He has been accused of taking advantage of privileged information to sell a portion of his company’s shares before its stock price plummeted with the announcement of the latest delay in the A380. The scandal has also made it clear that there are political figures within EADS. It has come to light that Dominique de Villepin, France’s prime minister, and José Luis Rodríguez Zapatero, Spain’s prime minister, own 5.4% of EADS’ shares through [their ownership in] Sepi, the state-owned holding company which reports to Spain’s Ministry of Economics and the Treasury.