Anxiety in Seattle December 1999

This time last year there was a lot of commotion in Boeing over scrutinising programmes to see if they were creating or destroying value. Since then about the only decision of note has been to get out of helicopters. Boeing’s ageing cash cow, the 747, still trundles down the line at Everett, but at a rate of only two a month now, raising questions about how long it can continue to sell. Meanwhile, at the other end of the product range a dearth of orders for the ex- MD 95 (the only customers are AirTran and TWA) is raising questions about whether that can be continued.

Although it is called at the Boeing 717 it has nothing in common with the rest of the range, which is a key reason why Boeing lost at British Airways to the A318 which of course is a member of the highly compatible A320 family. The blunt truth is that Boeing is bound to hang on like grim death to the 717 programme, because the cost of cancelling would be high in the short term.

It would have to make compensation payments to a number of risk–sharing partners in the aircraft’s supply chain in the event of cancellation. This would have to be taken by Boeing as a provision against profits. And that might be just one provision too many for Wall Street.

Boeing’s recovery from its production chaos two years ago (when it made write–offs totalling $4bn) has been impressive. But this performance has been marred by the re–appearance of some quality problems, which surfaced in the same week as the EgyptAir crash, creating added unwelcome publicity.

The second blot on Boeing’s recovery has been the way Airbus is quietly eating its lunch in orders. Boeing still delivers two out of three aircraft, but now Airbus is landing two thirds of orders so far this year. Indeed, Airbus is quietly confident that its order backlog is now greater (in unit terms, if not in dollars) than Boeing’s, largely due to the good sales record of the A320 family.

Against this background of market slippage, a write–off against the 717 programme, running, as it would, into hundreds of millions of dollars, would put chairman Phil Condit under intense pressure. It would also dent Boeing’s stock price — Boeing’s stock has in fact outperformed the aerospace index but the index has been depressed by the gloomy condition of Lockheed Martin and Raytheon.

If this were all Boeing’s problems, it would be enough. But it also faces tough competition to the ageing jumbo — the 747 is now a 40–year–old design. On the one hand, the scaled–up and long range versions of the A340 are raking in orders, while Boeing’s 777 ultra- long–range has yet to find a single launch customer,which it was supposed to do months ago. On the other, for the first time a wholesale challenge to the 747 is really shaping up in Toulouse, after a decade of shadow boxing (including collaborative talks with the Airbus partners about a joint–venture very large aircraft, which Airbus now interprets as a stalling tactic).

Mumbo-jumbo

Anyone now seeking an indication that the A3XX will actually be built should keep his eyes trained on …Seattle. Now that the Airbus board is about to give managing director Noel Forgeard authorisation to offer the 550–650 aircraft to airlines at its meeting on December 8th, the signs coming from Seattle are significant. Boeing’s product planners are now boasting that they have a 747X which will undercut the new European offering in terms of direct operating costs. Given that Airbus is aiming to be one fifth cheaper than the 747–400, this is a bold claim for a derivative type.

Whatever the truth of these claims, Boeing is at last is taking the Airbus challenge to its monopoly at the top end of the jetliner market very seriously.

For several years it has been trying to pour scorn on the idea that there is a real market for an ultra–large carrier. Now it appears to accept that there is one for about 1,000 aircraft over the next 20 years, not much less than Airbus’s estimate of 1,200.

Airbus is seeking to line up about 40 orders, two years' worth of initial production, before it presses the button to proceed. French and German investment aid for one third of the package has been lined up, and British approval should soon be forthcoming. British Aerospace, is haggling with the British Treasury over interest rates at the moment; the Chancellor of the Exchequer Gordon Brown is pretty hostile and objects to the low Eurozone rate of around 4% that BAESYSTEMS (as it has re–named itself) wants on the repayable launch aid.

But no one doubts that the money will be forthcoming, easing the way to the launch. BAe has made clear it would take the wing manufacture work to Canada and Italy, where the local aerospace industry is hungry to join up with Airbus. BAe claims that by lending £500m ($825m) for the A3XX the British government safeguards 62,000 jobs and creates another 20,000. There is doubtless more than a small measure of propaganda in such numbers, but Prime Minister Tony Blair, for one, has got the message that aircraft manufacture is as mobile as car–making, where the car companies rake in non–repayable government grants before they modernise or extend their European factories.

Squabble in Toulouse

Of course, the year could not possibly end at Airbus without another internal squabble. This time it is over the job of the chief executive, Noel Forgeard. Aerospatiale/Dasa, owners of 80% of the consortium, now just want to treat Airbus as a subsidiary by putting M. Forgeard in charge of their combined Airbus division while he is still boss of the consortium.

BAe, unsurprisingly, objects because there are still asset valuations to be done and deals to be struck before Airbus changes from a consortium to a company. In particular, it is after more than a 20% stake in the Airbus company because its Airbus assets to go into the company pool are, it claims, more profitable than those of its partners. So it has taken over the traditional French role of delaying the conversion of Airbus into a Single Corporate Entity (SCE).

Some consortium people in Toulouse think that the Franco–German creation of EADS makes the SCE unnecessary. Airbus may well become simply a subsidiary of EADS, but first the British minority shareholder will have to be placated. Needless to say, the longer this wrangling goes on, the better it all is for Boeing, since conversion to an SCE could take at least $1.6bn out of Airbus production costs by improving its stock–turn and cutting working capital needs.