Wednesday, April 20, 2005

Boeing’s 787 is Shooting-down Airbus’ A350, recent events in the jetliner rules

From respected business magazines to online chat rooms, aerospace industry watchers are getting very excited about an order that has yet to be placed: Northwest Airlines is likely to order 18 Boeing 787s at a list price of about $2.1 billion. The 787, which was launched 15 months ago, has firm orders and commitments of 203 planes from 17 airlines all over the world, making it the best-selling commercial plane in history according to Business Week. So what’s the fuss with an order that is still under negotiation? The reason: Northwest is considered a key Airbus customer, having been the U.S. launch customer for the Airbus A320 and the first U.S. operator of A330-200s. Not only has Boeing seemed to win over Northwest, but has also won over another key Airbus customer, Korean Air, which ordered 10 Boeing 787s early in the week.

Given the lackluster performance of Boeing against Airbus in the last few years, the question becomes: is Boeing now ahead? If so, how long will it last?

Boeing is definitely back in the lead in the mid-sized airline market. That much is clear. Pushed by Airbus since late last year, A350 was supposed to compete against the 787. But so far, Airbus has one firm order of 10 planes, from a European airline. This is mainly due to the failure of Airbus to get a loan (known as launch aid in the industry), which could total $1.3 billion, to launch the all-new A350. At the request of Boeing, the United States started a trade dispute with Europe (walking away from a 12-year treaty) forcing the delay of the subsidy as well as forcing Airbus to proceed with a modified version of the A330 that cannot compete with the new 787 in terms of fuel efficiency and operating costs. Boeing claims the 787 burns 20% less fuel than jetliners of comparable size.

This is good news for Boeing as a whole. With the 787 selling so strong, and Airbus unable to compete with a comparable product, Boeing now expects to regain the #1 position in number of orders placed this year.

So how long can Boeing hold on to its #1 position? To answer this question, one has to decide which version of the future of the aviation industry one agrees. Boeing is betting heavily on mid-range point-to-point flights, which the 787 would serve best. On the other hand, Airbus says the future is with jumbo jets. To that end, it wants to build the 555-seat A380. Gauged by the numbers of orders Boeing has received on the 787, its version seems to have struck a cord in the marketplace. The A380 has garnered 149 firm orders and commitment and about 100 in options as of January 20, 2005. Airbus’ CEO Noel Forgeard expects the company to breakeven on the A380 in 2008 with the magical number 250 in 2008. In the early days of the A380, the sales were driven partly by the absence of the 787 (known as 7E7 initially).

Boeing understands full well the need to develop airplanes with efficient operating economics. The twin-engine, 230-seater 787 not only consumes less fuel but it also costs 10% less to operate than other jetliners its size. Boeing’s investment in technological innovations that allows it to manufacture highly efficient jetliners is critical in the current world environment characterized by rising fuel prices. Jet fuel comprises the second largest expense among airline companies. Improvements in jetliner fuel efficiency translate directly into cost savings for airliners. Boeing also seems to be ready to attack Airbus in the jumbo jet market with a newly modified 747-400 in answer to Airbus’ A380.

Although the threat of international terrorism remains, there is considerable demand for air travel around the world. New growth opportunities exist particularly in China and India. With high economic growth rates and a population experiencing rising incomes who can afford air travel; these two countries provide an attractive market for airline services in the future. As long as Boeing understands the shifting economic powerhouses and can continue to beat Airbus on fuel economy and price they will be able to deliver jetliners that can meet the needs of existing and new markets.
In the fiercely competitive jetliner industry, Boeing took advantage of its technical capabilities, financial deal-making abilities and political clout to beat Airbus this year in the mid-size airline market. The question of how sustainable Boeing’s strategy will be addressed when and if Airbus can answer the challenge. Airbus was ready to develop a brand new A350 to answer Boeing’s 787, but was stalled at market when funding was pulled. The battle now for Boeing seems to be more political than technological: if Boeing can prevent the World Trade Organization (WTO) form providing subsidies to Airbus, they may be able to beat their competition to market with better more technologically advanced jetliners for the next few years to come

Alexis Collins, Xiaolin Jeff Li, and Victoria Soriano


Blogger Terence Lee said...

Another blog favoring Boeing’s comeback. I think it is quite possible (likely, even) that Boeing books more orders than Airbus does this year, but so what? It will take several years of Boeing booking more orders to reverse Airbus’ substantial lead in backlog.

Airbus is not missing out on the point-to-point strategy. Its A330-200 has been holding its own and the A350 is likely to get the go-ahead in June at the Paris Air Show. Until then, orders are likely to be sparse (no airline is going to place an order for a plane not yet formally launched). It is hard to tell exactly how the A350 matches up with the 787 but Airbus publicly claims that its fuel efficiency is competitive (obviously size and range are comparable). After all, the A350 is going to leverage off the A330-200 (which was introduced as recently as 1998), use A380 technologies, and use the General Electric next generation engines originally developed for the 787. Airbus’ expectation is that it will capture about half of the market of 3,500 airplanes of this type.

What is true, though, is Boeing is missing out in the superjumbo category. Boeing has acknowledged that the superjumbo segment just isn’t big enough to support one offering from each OEM. The 747 Advanced, even if it is launched, is not designed to compete with the A380; rather, to extend the life of the aging 747 platform. In any case, the 747 Advanced has a projected market size of only about 100-200 planes. Just like Boeing dominated the top of the market for the last 40 years with its 747, Airbus is going to dominate the top of the market with its A380. True, the market is limited, but not a bad one to be in as a monopolist.

Overall, it appears to me that Airbus has outmaneuvered Boeing, and the competitive situation isn’t about to change.


3:24 AM  
Blogger Test Water said...

OK, I am no former aerospace industry analyst but am not afraid to stand by my group's "expert" opinion either.

So Airbus competes everywhere with equal focus? Anybody who knows anything about marketing as it is taught in b-schools in the last 20 years knows targetting. What makes Airbus think it can target all segments equally well, the delayed subsidies from the EU? You have got to bet your money somewhere, but not everywhere.

This is a battle of competing visions for the future, point-to-point or superjumbo. Airbus, according to the original comment, responds to the 787 with a modifed version of the A350. Boeing, we as know, is responding to the recently tested A380 with its modified 747. Nobody has a monoply in either segment. But each got an upper hand in their targeted segment.

The question is: whose version of the future will turn out to be true? Here is where our crystal got a little cloudy. Maybe Airbus, maybe Boeing, maybe both (in the event that both markets will be big enough). We can't tell which way things are going in 10 years, but right now we like what Boeing is getting, and we will applaud for it!

5:48 PM  

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