Boeing and Airbus have long battled for control over our skies
but the recession has brought them down to earth. So who is
winning the race in the new economic landscape?
By Richard Northedge
Boeing and Airbus have long battled in the skies for supremacy of the world’s aviation market but the global recession has brought both airplane manufacturers down to earth. The U.S. company and its European rival have seen new sales collapse and old sales cancelled or deferred by airlines unable to fill seats.
At least Boeing has coped with recessions before, says Nick Cunningham, aerospace analyst at London stockbrokers Evolution Securities. “It has done it many times. It’s been living with cycles since the second world war,” he says. The European consortium was still building its portfolio of planes during the 1990s downturn and thus had no fat, he argues, while the 2001 U.S. terrorist attacks stopped its installing capacity that would now be excessive. “Airbus has not dealt with a recession before and 9/11 meant its production increases were nipped in the bud.”
Until the millennium, Boeing was the constant winner of the battle to supply the world’s airlines, but the Airbus 380 then started taking sales from Boeing’s 737 and the European group took the lead. The American group was back ahead on orders in 2006 and 2007 however, but since the credit crunch struck, Airbus has been ahead in a fast-shrinking market. Compared with 1,413 orders in 2007, Boeing sold just 91 planes in the first nine months of 2009, and while Airbus sold 123, its fall was almost equally dramatic.
Last November, executives of both companies gathered at the Dubai Air Show, manning pavilions and ready to take orders. Dubai World was about to default on its debt however and they discovered they could not rely even on the Middle Eastern market that had seemed an oasis in the sales desert.
Boeing Vice President Randy Tinseth admits: “We saw a drop in air show attendance. We did see a bit of order news but clearly this year, Dubai Air Show was not about a huge glut of airplane orders. It has been more about building and growing our relationships here in the region.”
On the Airbus stand, Chief Operating Officer John Leahy sold 10 A320s to Yemen’s state airline while Ethiopian Airlines ordered 12 A350s. “We had a good air show but our industry is not out of the woods yet,” admits the American. “There will be a difficult winter ahead of us but spring may not be far away.”
Signs of that cold winter came when U.S. Airways deferred for two years its receipt of 54 A320s and A330s, the South African government cancelled an order for eight A400Ms and Malaysia delayed delivery of its order until 2016.
But if the industry’s marketing men look gloomy, the production managers have never been busier. In the first nine months of 2009, Airbus delivered 399 planes and Boeing 375 – three or four times the numbers of new orders but both companies are working through pipelines of precrunch orders. Boeing admits it had oversold aircraft and can thus luckily absorb cancellations into its production schedule.
Airbus boasts an orderbook of several billion euros and Boeing several billion dollars – in Boeing's case it is about five times its annual sales – but that reflects not only airlines’ future demand but production problems that delayed deliveries. The 525-seat A380 came into service a year late in 2007 but the first flight of Boeing’s equivalent, the 787 Dreamliner, is not yet ready for commercial service.
Strikes and a shortage of engineers delayed Boeing by two years and Cunningham says: “It still has an accelerated test to get through and they may hit more issues so there could be one or more rounds of delays.”
Tinseth explains: “Clearly, assembly of the 747-8 freighter has its challenges. Not only is it significantly larger than the 747-400, it incorporates a new wing design, new engine and new avionics. In fact, approximately 70 percent of the total weight of the airplane is in new materials and components, so it’s been a steep learning curve.”
There are problems in Europe too though. “Airbus still has issues with getting the A380 into a sustainable rate of production,” adds Cunningham. It needs to raise production at its Toulouse plant in France to two planes a month – though prevent creating overcapacity when demand falls. Boeing has decided to maintain 747 production at 1.5 a month, deferring the increase to two a month for two years even though that loads more fixed costs onto each plane, contributing to $1 billion of extra costs. That pushed Boeing into loss during 2009 but profits at Eads, Airbus’s parent, have halved too and Finance Director Hans Peter Ring admits: “The A380 costs are still higher than expected and in 2009 the A380 programme has faced both production instability and customer requests for delivery postponements.”
Ring’s biggest problem, however, is the currency that separates his company from Boeing. Building planes in strong euros but selling them in weak dollars has squeezed margins. Airbus prices have been cut but Boeing has held back increases too and America’s largest exporter is helped by the devalued dollar. Ring is cutting staff to reduce costs but concedes: “The question of a prolonged weakness on the dollar remains our biggest challenge on profitability”.
Cunningham declines to adjudicate on which company is winning the battle, saying: “Nobody wins in an extremely serious recession”. Yet if the battle is not settled in the air, on the shop-floor or at trade shows, it could be resolved by lawyers at the World Trade Organisation.
The two companies have been squabbling since the last recession over the other’s use of government subsidies. Boeing objected to the trade arbiter about Europe’s aid for Airbus and the Europeans retaliated with accusations that U.S. military contracts subsidise Boeing. In late 2009, after 14 years’ deliberation, the WTO confidentially delivered separate draft rulings on the two companies’ cross-complaints and these should be released in mid-2010.
The outcome could be explosive and financially critical for two companies struggling against recession. But while both sides are hopeful of winning, there will be a further wait before the prize can be claimed. “The litigation is expected to continue for several years,” admits Eads.
Edited by Ian Armitage
SOURCE: Manufacturing Digital Magazine