The duelling duopolists February 2001

Both Airbus and Boeing were able to claim victory when announcing their 2000 order totals. Airbus achieved 520 orders compared to 476 in 1999 while Boeing won 589 (net) compared to 391 in the previous year

However, the leasing companies took an even larger share of the orderbook than in 1999 (51% at Airbus, 33% at Boeing), usually an indication of a peaking market.

In any case the role of the lessors may well be curtailed in the future. In late January the European Credit Agencies (ECAs) suspended their export guaranties for 85% of the price of Airbus products. They realised, rather belatedly, that they were in effect using European taxpayers' money to subsidise the finance costs of US giants like General Electric and AIG (parent of ILFC).

The new system of export guarantees will be much more closely targeted on airline customers. The evolution of the industry into a duopoly has not resulted in cosy collusion. Rather the opposite as both companies continue to fight vigorously for orders as well as preparing their legal counsels for inevitable antitrust suits. (Airbus almost seems to be going out of its way to provoke the US — the European Commission has just unveiled a report "European Aeronautics: a vision for 2020", which calls for €100bn of joint public/private R&D funding for the next two decades.)

Boeing must be relieved that its has finally halted Airbus' remarkable growth in market.

Boeing’s contribution to Airbus’s success

Back in 1995 the split in order between Airbus and Boeing was 18%/72%, then Airbus’s share jumped to 30% in 1996, to 46% in 1997 and 1998, before topping Boeing with 55% in 1999. Last year Airbus’s share was 47%, but the company excluded the 50 commitments to the A380, which will be included in next year’s total Boeing may have unwittingly made a major contribution to Airbus’s success as a consequence of the mega–flexi–orders it signed with American, Delta and Continental. Under these agreements the airlines were guaranteed the lowest prices to be offered by the manufacturer in return for exclusivity over a period of 20 years. Such deals were the main objection by the European Commission to the merger of Boeing and McDonnell Douglas in 1997, and indeed Boeing had to swear never to do them again to win approval.

However, since there were so many aircraft and so many people involved the price leaked out to, among others, Airbus. This meant that the Europeans in effect knew Boeing’s final offer price in any sales campaign involving narrowbodies. Were Boeing to undercut the deals it had offered the three US airlines, say by $2m per aircraft, then it would have had to pay that sum multiplied by the number of aircraft to the original buyers, a sum running into hundreds of millions of dollars. A very effective sales tactic for Toulouse. Accordingly, Airbus was in a position to win nearly every significant campaign in the aftermath of the exclusive deals. But last year Airbus began to run up against production constraints — it has only about half the capacity of Boeing — and hence was unable to commit to required delivery schedules. For example, this may have been a factor behind the loss of a narrowbody order for SAA.

Boeing is now hoping for a strategic error from Airbus, specifically that the A380 will turn out to be a $1, or at least an aircraft with too many low–yield seats on board. Airbus’s strategy will increasingly be tested by financial analysis as EADS comes under stock–market rather than political scrutiny. EADS’s pre–tax loss for 2000 is forecast by Morgan Stanley at $139m compared to a pretax profit of $3.6bn for Boeing.

Airbus’s main claim for the A380 is that 700–plus models will be sold over a 20 year period will justify its $12bn development costs and become a major profit earner for the company in its own right. But its secondary justification for the project is looking dubious. The argument is that with the A380 on the market Boeing will no longer be able to price 747s at a monopoly price high enough to subsidise sales of its other aircraft, so prices across the board should rise for the duopoly, helping to improve Airbus’s returns irrespective of whether it sells the requisite number of A380s. The cross–subsidisation effect was once important but lately the 747 has been contributing only about 26% of Boeing’s gross profit (Aviation Strategy, December 2000).

For its part, Boeing is limiting its investment spending to $4bn on enlarging and updating the 747. Its recent failure of to land an order for its stretched 747X from Fedex (which has instead ordered 10 cargo versions of the A380) was a very serious blow, as it had been relying on the order to kick–start its development programme.

Boeing has put one of its top product development engineers back down a level specifically to mastermind the 747X project, giving it the advantage of the best expertise in the company. It is particularly desperate to stop JAL, the biggest operator of 747s with a fleet of 108 aircraft, from opting for the new Airbus. To sweeten the Japanese Boeing has offered Mitsubishi Heavy Industries the role of designing and building the new wing for the 747X, a much more meaningful work–share than anything offered the Japanese in the past, even on the 777 where they make a third of the aircraft as sub–contractors.