Boeing battles back

2003 has been a particularly bad year for Boeing Commercial Airplanes, as the US manufacturer has fallen behind Airbus in both sales and deliveries for the first time. However, the company is optimistic about the future, convinced that its 7E7 will revive its fortunes.

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By  Neil Denslow Published  November 5, 2003

I|~||~||~|The last few years have not been kind to Boeing Commercial Airplanes (BCA). With the global aviation industry in crisis, the company has had to shed thousands of jobs and slash its deliveries as new orders have plummeted. Even more galling though, is the fact that 2003 looks set to be the first ever year in which Boeing has trailed Airbus both in terms of sales and deliveries. However, despite this the company is optimistic about the future, confident that the 7E7 will return it to the number one spot.

Boeing and Airbus have both suffered from the global aviation slowdown, as most carriers are buying fewer planes and selling off old ones. This state of affairs is, of course, due to the fact that a list of issues, including the global economic slowdown, 9/11, the war in Iraq and SARS, are causing people to fly less. Indeed, in the 40 years up until 2000, annual travel figures only ever declined once, when the first Gulf war hit passenger numbers in 1991. 2003, by contrast, threatens to be the third consecutive year of declining travel.

“The world usually grows around 5% a year in terms of travel, so even though this looks like a small issue in the grand scheme of things, this travel decrease is huge to the industry,” says Alan Mulally, president & CEO of Boeing Commercial Airplanes.

Boeing Commercial Airplanes has responded to the global slowdown by cutting its production and laying off staff. It expects to deliver 280 commercial aircraft this year — and between 275 and 290 next year — down from 382 last year, and 527 in 2001. In this time, BCA has also laid off 35 000 employees leaving it with a workforce of 55 000.

“The most important thing we needed to do was reduce production because we had too many airplanes out there and no demand,” says Mulally. “We are doing this for our customers, because if you put out too many airplanes, it just delays the [industry’s] recovery,” he adds.

However, aside from the global slowdown, Boeing has also been hit by Airbus’s growing success. This year, the European plane-maker expects to top Boeing’s delivery total for the first time ever by rolling 300 planes off its production line. “2003 has been a bad year for manufacturers in general… [but Boeing] has under-performed Airbus, which makes it a particular bad year [for BCA],” says Tim Coombs, managing director, Aviation Economics.

Airbus is breaking into a number of markets that were Boeing strongholds. For instance, the US manufacturer has had a stranglehold on the low-cost sector with the 737, but this year Airbus has secured sizeable orders from both JetBlue and easyJet. In the Middle East, Airbus has also scooped up the lion’s share of orders. At Paris, it announced large purchases from both Qatar Airways and Emirates, including EK’s order for 21 A380s with two more on lease. Emirates did agree to lease 26 777-300ERs, but the European manufacturer has had much more success in the region of late. “It’s clear that Airbus is taking a growing share of the fleet numbers in the Middle East and Gulf region, particularly through Emirates,” notes David Paddock, vice president, SH&E.

Airbus has secured this lead both regionally and globally through a combination of factors. The one most noted by Boeing, at least, is pricing, as the European manufacturer is widely seen as operating on wafer thin profit margins. “It’s hard to tell [exactly], as Airbus isn’t as transparent as we are, but we sure hear a lot of rumours,” says Mulally.

“I don’t think their [Airbus’] margins are that big,” agrees Michel Merluzeau, senior research analyst, Frost & Sullivan. “I think they are pretty much placing aircraft just for the sake of placing aircraft.”

However, Airbus denies that its operations are unprofitable. “Our return on sales is quite competitive with Boeing’s and better than Boeing’s return on sales if you take R&D out,” John Leahy, COO of Airbus, recently told Reuters.

Research is a huge investment for manufacturers however, particularly for the A380, where Airbus’s costs are reported to have risen from an initial estimate of US $4 billion to at least $12 billion. However, as the list price for the A380 has not reflected this increase, analysts see it as further evidence of the pressure on Airbus’s margins. “The A380 R&D costs for Airbus have tripled over the years, but their actual reported price for the aircraft has not tripled. You would have to postulate from that alone that their margins on A380s are shrinking or they are being forced to sell an even larger number of aircraft to justify the overall programme,” comments Paddock.

||**||II|~||~||~|Airbus’s future success depends on the A380, while Boeing is similarly reliant upon the proposed long-range, mid-size 7E7. Both companies are heavily investing in their new champions, which are based on radically different models of air travel. The A380 will be used to support hub-and-spoke networks, while the 7E7 envisages a future of point-to-point travel.

It is overly simplistic to say that the two companies’ fortunes totally depend upon a direct battle between these two network types, as both offer a range of products that serve both needs — the A340, for instance, supports point-to-point networks, and the 747 clearly relies on the hub-and-spoke model. However, given the sums the two companies are investing in their new flagship aircraft, and how much they are focusing on them, it is clear that which of two manufacturers ends up on top will largely depend upon which of these network models grows the most.

“There is no question that we are going to have a mix of hub and spoke, and point-to-point,” says Merluzeau. “Opinions vary though, over how much is going to be hub-and-spoke and how much is going to be point-to-point.”

Boeing seems to have taken a more cautious approach than Airbus by developing the 7E7 rather than an A380-style superjumbo. While airlines buying the A380 will need to attract many more passengers and invest in new infrastructure in order to make the plane viable, the 7E7 will be an obvious and direct replacement for many aircraft currently flying that are nearing their retirement. “People using 757s, 767s, A300, A310, and, to a lesser degree, A330s, are not going to replace these aircraft with A380s,” says Merluzeau.

“Most of the 757s and 767s out there are approximately 15-20 years old, so they have another 5-10 years left of operational service left. This is right in time for the 7E7 to capture that market. Is Airbus going to have a [competing] product at that stage? I seriously doubt it,” he adds.

The clearest sign of the 7E7 of replacing some Boeing’s existing products is the decision to stop production of the 757. Boeing announced the move last month after Continental Airlines converted six orders for 757-300s to 737-800s instead. The US airline still has 11 757s on order, but with only seven others left on Boeing’s order book, BCA decided to end production.

“This decision reflects the market reality for the 757, as well as the growth in range and seating capacity of our next generation 737 family,” says Mulally. “Over the long term, the increased capabilities of our newest 737s and the potential of the 7E7 will fulfil the market served by the 757,” he adds.

The 7E7 may eventually also replace the 767, which is also low on orders. Boeing has still to finalise a controversial order from the US Air Force for 100 767s that will be used as fuel tankers, and this is the only major order for the 767 currently on the scene. “If that tanker deal had not happened, the 767 production line would be at nowhere near full capacity,” notes Paddock.

The decision to end production of the 757 and, possibly, the 767, reflects the current troubles in the aviation sector, as airlines are looking for more cost effective and smaller planes. The decision also looks like a signal that BCA is going to go ahead with the 7E7, which means airlines can be confident that the project won’t be scrapped like the Sonic Cruiser.

“We all expected the 757s and later the 767 to go away, so there is really no surprise in the decision, and it’s actually a good decision, as it helps finalise the introduction of the 7E7 to market,” says Merluzeau.

Getting the 7E7 onto the production line is critical for BCA, as it can’t afford to cancel another project that it has invested heavily in. Failing to start production would not only represent more wasted R&D spend, but also lead to a loss of face and a further loss of confidence in the manufacturer.

“They should not have another situation like the Sonic Cruiser where they identified a market opportunity and then withdrew it,” says Paddock. “This creates a certain amount of criticism in the marketplace from your operators, investors and competitors,” he adds.
However, the interest that the 7E7 is already generating among airlines, including Emirates, should mean that it will it be produced. Furthermore, the fact that the 7E7’s potential market is so much larger than the A380’s means that BCA should be able to re-take the lead from Airbus in terms of deliveries. “Anything that happens in the next five years is only temporary, and Boeing can reverse that situation once the 7E7 is introduced,” predicts Merluzeau.

Yet, while re-gaining the lead from Airbus is a key measure of success for BCA, the company, and the industry in general, would be better off if both manufacturers returned to the levels of production that were seen a few years ago. This, however, is largely out of Boeing’s and Airbus’s hands, as demand for new planes will only return when people start travelling. Passenger numbers will only pick up though, when the world becomes more secure and the global economy starts to recover.||**||

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