Trouble in the air

The Airbus/Boeing battle for supremacy continues, with setbacks on both sides, says George Paloczi-Horvath

The European Commission’s apparent victory over Boeing’s planned $15bn (£8.8bn) merger with McDonnell Douglas (MD) is not one that Airbus, Boeing’s European rival, can afford to crow over, as it will not materially reduce the scale of the challenge it still faces.

The underlying strength of Boeing’s commercial position means Airbus must redouble its efforts to establish itself as a centralised, limited company, especially if Airbus ever wants to realise its aim of a 50% market share.

The trouble is, all the signs from Paris are that the French socialist government will not quietly accept the hard-nosed policy imperatives of their German and British partners in Airbus. The result could be more time wasting and a slippage to the consortium’s declared aim of setting up Airbus plc by 1999, especially if the French try to exclude the French manufacturing sites devoted to Airbus work from the plc.

This is on top of backtracking by the French over ownership of Aerospatiale’s Airbus manufacturing facilities. It had been understood that under an agreement between the partners in January to set up a limited liability company, the new plc would take over ownership of all Airbus manufacturing facilities, but this question has been reopened by the French who now want these sites to supply the plc without being owned by it.

Analyst HSBC James Capel says that ‘attempts to improve Airbus’s profitability are reliant not only on volume increases but also on a change of status to a plc’. James Capel believes ‘Airbus’s change of status is inextricably linked with European defence restructuring’ as it will be tied in with the future of the Airbus partners’ primary relationships in the military field.

The latest setback to the hope of an Airbus plc came last month when French defence minister Alain Richard said he wanted Aerospatiale to be kept in the public sector. Though Richard was referring specifically to the French government’s hope for a merger between Aerospatiale and privately-owned combat aircraft maker Dassault, his statement does not bode well for the Airbus modernisers.

When Jean Pierson, Airbus managing director talked in June of ‘the brutality of the competition’ and how the Boeing-MD merger was an attempt by ‘an already dominant player to force Airbus to remain a marginal competitor,’ he was deliberately downplaying his consortium’s impressive strengths.

That said, Boeing remains a very powerful competitor. Prior to the merger, Boeing supplied around 64% of airliners in use world-wide. When the merger with MD is completed, the new Boeing will be the supplier of about 84-85% of the world’s airliners, or nearly nine out of 10 new aircraft, worth an annual turnover of $50bn.

Though MD’s share of the newbuild civil airliner market is small, there are still more than 3,000 MD airliners flying, representing a major spares market in itself.

The accepted wisdom of much of the financial world was that the commission’s deal with Boeing to let the merger through was either a pyrrhic victory or meaningless in terms of reducing Boeing’s dominance. On paper, the deal seemingly met the commission’s three main concerns.

These were, first, dealing with the potential spillover of benefits from the MD defence business to Boeing’s commercial aircraft business, specifically from patents obtained under US government-funded contracts.

Second, the commission wanted to curb the market impact of the acquisition of MD’s commercial aircraft business, and third, it wanted to stop the controversial 20-year exclusive supplier agreements between Boeing and three US airlines, American, Delta and Continental.

While Boeing apparently gave way on all three points, the concessions were illusory, according to Chris Avery, aviation analyst at Banque Paribas.

‘I agree with US analysts in a nutshell: there is no material affect on Boeing. The perception that Europe won is incorrect,’ he says.

The concession on exclusive supplier deals which have now been abandoned is meaningless because ‘the nature of civil aerospace is such that removing the term “exclusive” doesn’t change the economic intent’, Avery believes. Put another way, US airlines which were always going to choose Boeing will still do so in future, with or without an exclusive supplier agreement.

As for the deal on patents obtained under US government-funded contracts, Avery warns that ‘the interesting question will be what (Boeing) technology doesn’t make it to patents now – and no one will be able to prove that’.

One concession may mean something. Boeing has said it agreed ‘to not unduly interfere with actual or potential relationships between its suppliers and other commercial aircraft manufacturers’.

European competition commissioner Karel van Miert says that this concession was important to Airbus ‘because Boeing could have used its dominant position in order to pressure its suppliers not to cooperate with Airbus’.

Central to Airbus’s hopes for a strong future is its proposed A3XX family of ultra-large, long haul airliners – bigger than the 747 jumbo – seating anything from 555 or more passengers in its initial version. Later members of the family might seat up to 1,000 people.

Airbus is talking to around 20 airlines about what they want from such an airliner before formally launching what Pierson said will be a $9bn project. He may have deliberately understated the cost, as one industry source puts this at nearer $12bn. Pierson said at the Paris air show in June that Airbus was ‘now in a position to accelerate and close this discussion this year’.

He and his colleagues had better hurry up, as the signs are that Boeing could go back on its decision to abandon its proposed stretched versions of the Boeing 747, the 747-500X and 600X, and leave the new ‘super jumbo’ market to Airbus.

The Engineer has heard that Boeing is now working on further developed versions of these 747 variants, which are not simply reruns of the previous design ideas.

Though Boeing is finishing work on a stretch of the 757 airliner and is shifting all available engineers on to a 767 stretch, the company has the cash to work on the new 747 designs, as Boeing announced last month that it has $8bn for new development programmes.

That money could even contribute to Boeing launching its own super jumbo airliner project as opposed to a stretched 747. Asked if Boeing was working on a completely new extra large aircraft, an industry source says: ‘If they are doing one, it’s in the skunk works at Boeing’.

The original ‘skunk works’ was the name of the Lockheed Martin facility where the stealth fighter was secretly designed and built and where all that company’s ‘black’ – totally classified – military projects are performed. All large US aerospace firms like Boeing have their own skunk works for military and civil work. Boeing could keep such an aircraft secret if it wanted to.

If Boeing launches such a project, this would be a reversal of the company’s position of only last March, when Bruce Dennis, Boeing’s marketing vice-president, said: ‘The market demand just isn’t there right now for an airplane larger than our 747 jumbo jet.’

But Dennis added the significant caveat that Boeing would continue to study the market and ‘if the potential develops for that size of airplane, we’ll be ready with an excellent design’.

In the 1997 edition of Boeing’s Current Market Outlook, Dennis said that Boeing believes that over the next 20 years ‘the smallest market segment is 747-size or larger airplanes, which are projected to total 18% of the dollars invested in new airplanes, or 1,180 airplanes’.

That same Boeing assessment presented a bullish view of the overall world market over the next 20 years, predicting that airlines will add around 16,160 airliners to their fleets, worth more than $1.1 trillion.

In its own latest global market forecast in March, Airbus presented a similar view. Airbus believes there is a market for almost 16,000 new airliners over the next 20 years. Discounting aircraft either already on order, the real market for new airliner sales is for 13,500 aircraft worth approximately $1.1 trillion.

The most controversial point in Airbus’s forecast, with which Boeing has publicly chosen to disagree – at least for the time being – is the market for extra large aircraft.

Airbus says that in addition to smaller aircraft ‘the airlines will also need 1,440 aircraft above 400 seats. Although representing only 9% of the demand in terms of aircraft units, this represents a quarter of the world demand by value.’

Airbus may be exaggerating the size of this market, but in the view of the consortium’s non-French partners at least the estimate serves the purpose of concentrating minds on the importance of creating an Airbus plc.

The battle of the merger was characterised by unnecessarily condescending and intemperate language on both sides.

It also highlighted another key point: just how disastrous a trade war over aircraft could be for Britain, as a major supplier of airframe structures and engines to Airbus and Boeing. British Airbus suppliers like BAe and Rolls-Royce will be hoping that the A3XX can be launched before the next angry trade spat with the US.