Wirraway
29th Oct 2002, 17:12
Upstart Airbus threatens to leave giant Boeing in its jet stream
By David Bowermaster
Seattle Times aerospace reporter
(Part 1)
Walking beneath an Airbus Beluga transporter, it is hard to imagine such an awkward beast ever getting off the ground. To Boeing loyalists, it is equally hard to imagine Airbus ever displacing Puget Sound's largest employer as the world's top aircraft maker.
But, like it or not, Airbus has advantages that are enabling it to win hotly contested sales competitions and erase Boeing's dominant status in the commercial-airplane market.
Among the most noteworthy:
• A complete, unified and technologically advanced product line.
• A hefty research-and-development budget, boosted by European government loans, that has yielded steady innovation and new products.
• A cozy relationship with aircraft-leasing companies that has expanded Airbus' market while shielding its balance sheet from financially unstable airlines.
After beating Boeing for a 120-plane order from London-based easyJet earlier this month, Airbus appears to be on track to surpass Boeing in airplane production next year. That achievement is stunning for an enterprise that started out essentially as a European government jobs program 30 years ago.
Boeing supporters complain that Airbus thrives thanks to European government subsidies. True or not, those complaints are not preventing airlines from Dubai to South Africa from placing large orders with Airbus. Whether Boeing keeps pace with Airbus or falls behind its European competitor will depend on how quickly and adroitly Boeing responds to Airbus' strengths.
Aggressive product development
Lack of selection put Airbus at a disadvantage to Boeing for most of its existence. Until 1988, its only two planes were the 266-seat A300 and the slightly smaller A310.
But thanks to aggressive product development in the past two decades, Airbus has alternatives to every Boeing model and one plane under development, the 555-seat A380, that not only takes sales from the Boeing 747 but could carve out a niche all its own.
"Airbus airplanes are newer in design, and in most cases they are cheaper to own" than Boeing alternatives, said Ned Laird, managing director of Air Cargo Management Group.
Airbus has introduced four new product families since 1988 featuring nine airplane models. They include the A320, the narrow-body that competes with the 737, and the A330, which has done so well against the 767 that Boeing is considering launching a new airplane in the 250-seat category.
Boeing, in the same period, has introduced two new product families, the 717 and 777, while revamping its 737 offerings and upgrading aging models like the 747, 757 and 767.
Since the 717 was inherited from McDonnell Douglas when Boeing bought that company in 1997, the 777 represents Boeing's only all-new product family since the late 1970s.
In the past two years, Boeing has heavily publicized its efforts to develop new plane technology, most notably the high-speed Sonic Cruiser, but hasn't committed to a new jet.
Chairman Phil Condit said earlier this month the company needs to talk to more airlines and would not make a multibillion commitment to a new model until at least mid-2003.
Airbus' 'breakthrough plane'
Laird believes the success of the A320 family, which includes the A318, A319, A320 and A321, helped Airbus turn the corner and become a more formidable threat to Boeing.
"It's the breakthrough airplane, just as the 727 was for Boeing," he said. "It created the backbone for Airbus and gave them the (financial) resources to build new derivatives of the A300."
That view runs counter to conventional wisdom, since the single-aisle 737 family is easily Boeing's best seller. Indeed, Boeing has sold more than 5,000 737s since its inception, including 2,000 of the next-generation 737s.
But Airbus is gaining ground. In four of the past five years, airlines have ordered more A320s than 737s.
Airbus did more than mimic Boeing as it expanded its product line.
To appeal to airlines, it designed cockpits that are largely identical across every model.
"Airbus has taken the technological lead by offering a common cockpit configuration," according to a research report by Morgan Stanley aerospace analysts Tim Bennett and Alex Hunter. "We believe this is helping to consolidate Airbus' position with airlines operating a mixture of short-haul and long-haul aircraft."
Training pilots is a major expense for airlines. With common cockpits, pilots can move from a 107-seat A318 to a 380-seat A340 with a modicum of training. That is attractive to airlines that want the flexibility to switch flight crews from short hops to overseas journeys.
Hank Queen, vice president of engineering and product integrity at Boeing, conceded that differences in Boeing's cockpits, caused in part by the large time gaps between major development programs, trouble some airlines.
"Every one of our six airplane models have different flight decks, except the 757 and 767," Queen said. "Every time (airlines) acquire a new member of (the) family, they also acquire extra costs that go with that, because they have to train a whole new set of flight crews to go with that airplane. And they're not really available to fly any other airplane."
Consequently, Boeing is working to expand training and support services that can lower airlines' overall operating costs, Queen said.
$10 billion in government loans
One reason Airbus was able to introduce so many sophisticated new products in such a short time is its formidable research-and-development budget, which has received considerable — and controversial — assistance in the form of low-interest government loans with extremely long repayment schedules.
Those loans have not only allowed Airbus to catch up to Boeing but also to build product and balance-sheet advantages that will last for years.
Since Airbus' creation, the company has received more than $10 billion of government loans to develop new aircraft, according to Morgan Stanley. The entire cost of the A300 was financed by government-backed loans, and 90 percent of the follow-on A310 was picked up by France and Germany.
A 1992 bilateral agreement between the U.S. and the European Union limits such government aid to no more than 33 percent of a plane's development cost. It also allows Boeing to receive indirect U.S. government support in the form of contracts from NASA and the Department of Defense.
Yet nearly half of the loans extended to Airbus in the past three decades are being doled out currently to help fund the creation of the A340-500, A340-600 — which was recently delivered to its first customer, Virgin Atlantic Airways — and the A380.
Indeed, in the case of the A380, Airbus has received $2.5 billion in government loans plus another $600 million in indirect subsidies — 29 percent of the estimated $10.7 billion development tab.
None of that money must be repaid until Airbus begins delivering planes to customers in 2006, and the repayment period will extend for 15 years.
Airbus' research-and-development expenditures for the A380 alone will peak at roughly $1 billion in 2002 and 2003 before declining to $100 million in 2007. Airbus' overall research-and-development spending this year is on track to hit nearly $1.4 billion.
Boeing Commercial Airplanes, by contrast, spent $177 million on research and development in the third quarter, an annual rate of $700 million, or roughly half that of Airbus.
Complaints about Airbus' government loans are an old story, said Philippe Camus, chief executive officer of Airbus parent company European Aeronautic Defence & Space (EADS.)
On a recent trip to Seattle, Camus claimed Boeing's government support is much more generous than anything Airbus receives. "Boeing is clearly backed and supported by the government of the United States — a superpower," Camus said. "We are a European company, with no single European government to support us."
Boeing has a different view.
"Airbus and its parent company, EADS, has received and continues to receive more than $30 billion worth of cash advances from European governments to launch new products, at interest rates lower than what a comparable commercial borrower receives from private lending institutions," the company said in a statement, citing a 1990 Commerce Department study that asserted Airbus had by then already received $25.9 billion in government aid. "Boeing privately finances development projects. This reality allows Airbus to pursue business in ways that Boeing cannot."
(part 2)
Better than extending credit?
The financial crisis buffeting U.S. airlines has exposed a related, if perhaps unintentional, Airbus strength.
In 1968, McDonnell Douglas created a finance division to help its customers fund their aircraft purchases. After Boeing bought McDonnell Douglas, it renamed the division Boeing Capital and invested billions of dollars to build it into one of the company's hot growth sectors.
The strategy produced big payoffs when airlines were chalking up huge profits in the 1990s. But it is backfiring as aircraft values plummet and airlines' balance sheets fill with red ink.
Boeing took a $250 million charge against third-quarter earnings because of troubles with Boeing Capital's portfolio, and more troubles could follow if United Airlines files for bankruptcy; United is Boeing Capital's largest customer, with $1.3 billion in loans.
Airbus has been happy to provide customer financing to close deals, but it has done so to a lesser extent than Boeing.
Airbus had $3.5 billion of financing exposure on its books through the first half of 2002, and new commitments this year are expected to total $1.2 billion.
Boeing Capital's portfolio mushroomed to $11.5 billion at the end of September, up 44 percent from the same time a year ago.
"We've chosen as part of our strategy to deal primarily with leasing companies that are investment grade, with better credit ratings than either us or Boeing," said John Leahy, chief commercial officer of Airbus.
"Our goal is to use other sources of funds, to use the leasing companies, use export credit agencies (to finance aircraft purchases)," Leahy continued, "not to pound our chest and say we're proud of the fact that we're increasing our exposure to financing aircraft by billions of dollars a year."
Opportunities remain for Boeing
Each of these factors helps explain how Airbus has seized the momentum from Boeing.
But, as Boeing well knows, the airplane business is highly cyclical, and things change quickly.
For Airbus to maintain the pole position, it must avoid several pitfalls.
It must prove it can keep its costs low enough to make money despite the cut-rate prices offered to easyJet and other recent customers.
It must keep the A380 on schedule and find a way to lure additional customers now that it is no longer offering incentives to launch customers.
It must also prove that its refusal to deeply cut staffing and production levels since Sept. 11, as Boeing has done, will not damage its finances in an extended downturn.
There is also plenty Boeing can do to regain the edge. Successful introduction of a super-fast Sonic Cruiser, or a highly affordable 767 alternative, could put Boeing technology back in the lead.
Continued manufacturing innovations, such as moving assembly lines, could slash costs and enable Boeing to sell planes more cheaply and more profitably.
And Boeing can leverage its biggest remaining advantage, the huge fleet of Boeing airplanes flying today, by plunging deeper into maintenance and support services.
Airbus may have drawn even with Boeing in annual orders and deliveries, but of the more than 16,000 planes flying today, nearly 70 percent have Boeing roots.
David Bowermaster: (206) 464-2724 or [email protected].
Copyright © 2002 The Seattle Times Company
By David Bowermaster
Seattle Times aerospace reporter
(Part 1)
Walking beneath an Airbus Beluga transporter, it is hard to imagine such an awkward beast ever getting off the ground. To Boeing loyalists, it is equally hard to imagine Airbus ever displacing Puget Sound's largest employer as the world's top aircraft maker.
But, like it or not, Airbus has advantages that are enabling it to win hotly contested sales competitions and erase Boeing's dominant status in the commercial-airplane market.
Among the most noteworthy:
• A complete, unified and technologically advanced product line.
• A hefty research-and-development budget, boosted by European government loans, that has yielded steady innovation and new products.
• A cozy relationship with aircraft-leasing companies that has expanded Airbus' market while shielding its balance sheet from financially unstable airlines.
After beating Boeing for a 120-plane order from London-based easyJet earlier this month, Airbus appears to be on track to surpass Boeing in airplane production next year. That achievement is stunning for an enterprise that started out essentially as a European government jobs program 30 years ago.
Boeing supporters complain that Airbus thrives thanks to European government subsidies. True or not, those complaints are not preventing airlines from Dubai to South Africa from placing large orders with Airbus. Whether Boeing keeps pace with Airbus or falls behind its European competitor will depend on how quickly and adroitly Boeing responds to Airbus' strengths.
Aggressive product development
Lack of selection put Airbus at a disadvantage to Boeing for most of its existence. Until 1988, its only two planes were the 266-seat A300 and the slightly smaller A310.
But thanks to aggressive product development in the past two decades, Airbus has alternatives to every Boeing model and one plane under development, the 555-seat A380, that not only takes sales from the Boeing 747 but could carve out a niche all its own.
"Airbus airplanes are newer in design, and in most cases they are cheaper to own" than Boeing alternatives, said Ned Laird, managing director of Air Cargo Management Group.
Airbus has introduced four new product families since 1988 featuring nine airplane models. They include the A320, the narrow-body that competes with the 737, and the A330, which has done so well against the 767 that Boeing is considering launching a new airplane in the 250-seat category.
Boeing, in the same period, has introduced two new product families, the 717 and 777, while revamping its 737 offerings and upgrading aging models like the 747, 757 and 767.
Since the 717 was inherited from McDonnell Douglas when Boeing bought that company in 1997, the 777 represents Boeing's only all-new product family since the late 1970s.
In the past two years, Boeing has heavily publicized its efforts to develop new plane technology, most notably the high-speed Sonic Cruiser, but hasn't committed to a new jet.
Chairman Phil Condit said earlier this month the company needs to talk to more airlines and would not make a multibillion commitment to a new model until at least mid-2003.
Airbus' 'breakthrough plane'
Laird believes the success of the A320 family, which includes the A318, A319, A320 and A321, helped Airbus turn the corner and become a more formidable threat to Boeing.
"It's the breakthrough airplane, just as the 727 was for Boeing," he said. "It created the backbone for Airbus and gave them the (financial) resources to build new derivatives of the A300."
That view runs counter to conventional wisdom, since the single-aisle 737 family is easily Boeing's best seller. Indeed, Boeing has sold more than 5,000 737s since its inception, including 2,000 of the next-generation 737s.
But Airbus is gaining ground. In four of the past five years, airlines have ordered more A320s than 737s.
Airbus did more than mimic Boeing as it expanded its product line.
To appeal to airlines, it designed cockpits that are largely identical across every model.
"Airbus has taken the technological lead by offering a common cockpit configuration," according to a research report by Morgan Stanley aerospace analysts Tim Bennett and Alex Hunter. "We believe this is helping to consolidate Airbus' position with airlines operating a mixture of short-haul and long-haul aircraft."
Training pilots is a major expense for airlines. With common cockpits, pilots can move from a 107-seat A318 to a 380-seat A340 with a modicum of training. That is attractive to airlines that want the flexibility to switch flight crews from short hops to overseas journeys.
Hank Queen, vice president of engineering and product integrity at Boeing, conceded that differences in Boeing's cockpits, caused in part by the large time gaps between major development programs, trouble some airlines.
"Every one of our six airplane models have different flight decks, except the 757 and 767," Queen said. "Every time (airlines) acquire a new member of (the) family, they also acquire extra costs that go with that, because they have to train a whole new set of flight crews to go with that airplane. And they're not really available to fly any other airplane."
Consequently, Boeing is working to expand training and support services that can lower airlines' overall operating costs, Queen said.
$10 billion in government loans
One reason Airbus was able to introduce so many sophisticated new products in such a short time is its formidable research-and-development budget, which has received considerable — and controversial — assistance in the form of low-interest government loans with extremely long repayment schedules.
Those loans have not only allowed Airbus to catch up to Boeing but also to build product and balance-sheet advantages that will last for years.
Since Airbus' creation, the company has received more than $10 billion of government loans to develop new aircraft, according to Morgan Stanley. The entire cost of the A300 was financed by government-backed loans, and 90 percent of the follow-on A310 was picked up by France and Germany.
A 1992 bilateral agreement between the U.S. and the European Union limits such government aid to no more than 33 percent of a plane's development cost. It also allows Boeing to receive indirect U.S. government support in the form of contracts from NASA and the Department of Defense.
Yet nearly half of the loans extended to Airbus in the past three decades are being doled out currently to help fund the creation of the A340-500, A340-600 — which was recently delivered to its first customer, Virgin Atlantic Airways — and the A380.
Indeed, in the case of the A380, Airbus has received $2.5 billion in government loans plus another $600 million in indirect subsidies — 29 percent of the estimated $10.7 billion development tab.
None of that money must be repaid until Airbus begins delivering planes to customers in 2006, and the repayment period will extend for 15 years.
Airbus' research-and-development expenditures for the A380 alone will peak at roughly $1 billion in 2002 and 2003 before declining to $100 million in 2007. Airbus' overall research-and-development spending this year is on track to hit nearly $1.4 billion.
Boeing Commercial Airplanes, by contrast, spent $177 million on research and development in the third quarter, an annual rate of $700 million, or roughly half that of Airbus.
Complaints about Airbus' government loans are an old story, said Philippe Camus, chief executive officer of Airbus parent company European Aeronautic Defence & Space (EADS.)
On a recent trip to Seattle, Camus claimed Boeing's government support is much more generous than anything Airbus receives. "Boeing is clearly backed and supported by the government of the United States — a superpower," Camus said. "We are a European company, with no single European government to support us."
Boeing has a different view.
"Airbus and its parent company, EADS, has received and continues to receive more than $30 billion worth of cash advances from European governments to launch new products, at interest rates lower than what a comparable commercial borrower receives from private lending institutions," the company said in a statement, citing a 1990 Commerce Department study that asserted Airbus had by then already received $25.9 billion in government aid. "Boeing privately finances development projects. This reality allows Airbus to pursue business in ways that Boeing cannot."
(part 2)
Better than extending credit?
The financial crisis buffeting U.S. airlines has exposed a related, if perhaps unintentional, Airbus strength.
In 1968, McDonnell Douglas created a finance division to help its customers fund their aircraft purchases. After Boeing bought McDonnell Douglas, it renamed the division Boeing Capital and invested billions of dollars to build it into one of the company's hot growth sectors.
The strategy produced big payoffs when airlines were chalking up huge profits in the 1990s. But it is backfiring as aircraft values plummet and airlines' balance sheets fill with red ink.
Boeing took a $250 million charge against third-quarter earnings because of troubles with Boeing Capital's portfolio, and more troubles could follow if United Airlines files for bankruptcy; United is Boeing Capital's largest customer, with $1.3 billion in loans.
Airbus has been happy to provide customer financing to close deals, but it has done so to a lesser extent than Boeing.
Airbus had $3.5 billion of financing exposure on its books through the first half of 2002, and new commitments this year are expected to total $1.2 billion.
Boeing Capital's portfolio mushroomed to $11.5 billion at the end of September, up 44 percent from the same time a year ago.
"We've chosen as part of our strategy to deal primarily with leasing companies that are investment grade, with better credit ratings than either us or Boeing," said John Leahy, chief commercial officer of Airbus.
"Our goal is to use other sources of funds, to use the leasing companies, use export credit agencies (to finance aircraft purchases)," Leahy continued, "not to pound our chest and say we're proud of the fact that we're increasing our exposure to financing aircraft by billions of dollars a year."
Opportunities remain for Boeing
Each of these factors helps explain how Airbus has seized the momentum from Boeing.
But, as Boeing well knows, the airplane business is highly cyclical, and things change quickly.
For Airbus to maintain the pole position, it must avoid several pitfalls.
It must prove it can keep its costs low enough to make money despite the cut-rate prices offered to easyJet and other recent customers.
It must keep the A380 on schedule and find a way to lure additional customers now that it is no longer offering incentives to launch customers.
It must also prove that its refusal to deeply cut staffing and production levels since Sept. 11, as Boeing has done, will not damage its finances in an extended downturn.
There is also plenty Boeing can do to regain the edge. Successful introduction of a super-fast Sonic Cruiser, or a highly affordable 767 alternative, could put Boeing technology back in the lead.
Continued manufacturing innovations, such as moving assembly lines, could slash costs and enable Boeing to sell planes more cheaply and more profitably.
And Boeing can leverage its biggest remaining advantage, the huge fleet of Boeing airplanes flying today, by plunging deeper into maintenance and support services.
Airbus may have drawn even with Boeing in annual orders and deliveries, but of the more than 16,000 planes flying today, nearly 70 percent have Boeing roots.
David Bowermaster: (206) 464-2724 or [email protected].
Copyright © 2002 The Seattle Times Company