Keeping an eye on the long term

Boeing and Airbus, suppliers of planes to the world’s largest airlines, are both reacting to the short term business outlook. But both insist that they remain firmly focused on a regional market that could be worth $50B over twenty years.

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By  David Ingham Published  November 7, 2001

Gloomy short term outlook|~||~||~|As airlines around the world cut back flights and routes, it’s inevitable that the world’s largest supplier of airplanes, Boeing, will feel the heat. As a result, the company recently confirmed that between now and the end of next year, it will lay off 20-30,000 people, around a third of its workforce.

In terms of production, the company had planned to deliver 530 planes this year and will deliver 520, says Paul Dubeck, sales director, international sales, Boeing. It’s next year that the pinch will really be felt, when production is likely to be cut to around 400 planes.

Although there have been no outright cancellations so far, either in the Middle East or worldwide, (late October,) customers are deferring deliveries. “Customers are very concerned and we’re going to have to try to react accordingly,” says Dubeck.

Boeing’s major rival, Airbus, is also responding to the current market climate, but hasn’t had to take quite the same drastic steps. According to David Velupillai, regional manager for press relations, the company had been on an upward tear before the attacks, winning share from its rival. As a result, it won’t have to cut back, but will have to put the breaks on a planned expansion of operations.

“We have frozen hiring except in specific areas and we’re freezing production at its current level, which we would have increased otherwise,” says Velupillai. The company is now looking at delivering about 330 aircraft next year, with the flexibility to adjust downwards or upwards by about 10%.
||**||No regional cancellations so far|~||~||~|
There’s some good news from the region for both companies. At the time of going to press in late October, neither had received any cancellations from regional customers.

Emirates Airlines is still scheduled to take on ten more 777-300s from Boeing, five of which will arrive next year, Dubeck says. Airlines in Oman, Egypt and Yemen also have more planes coming soon.

“Our customers in the Gulf and the Middle East continue to support the commitments they’ve made with us,” says Dubeck. “They’re going to take all their airplanes on time as they had projected.” (Editor's note: Emirates this week announced a $15 billion fleet acquisition programme,which was divided between Airbus and Boeing.)

Prior to the September 11 attacks, Boeing and Airbus had already been locked in a pricing war. Regional airlines expecting further price cutting by two desperate manufacturers might be disappointed, however. “The reason we’re making so many employees redundant is that we don’t build airplanes that customers cannot take or do not want, thereby further expanding the capacity glut in the market and thereby causing a further downward price spiral,” explains Boeing’s Dubeck.

Airbus is less specific on the issue of pricing, saying only that the company is against turning airplanes into commodities. “There is no doubt that with less business in the short term, there will be even more competition,” says Velupillai. “Still, it is very important to buy the best airplane for the job.”
||**||Long term product plans|~||~||~|
Despite the bleak short term outlook, both companies say their long term airplane development plans remain unchanged after September 11. The nature of what they plan to develop couldn’t be more different, however.

Airbus is focusing its R&D budget on developing the A380, which will be the largest airplane ever built when it comes to market in 2006. It will hold over 550 people, but whilst it can take 35% more passengers than current airplanes it has 50% more floor space. Airlines can use the remaining space to add ‘value add’ features, such as gyms or reclining seats for high end passengers.

Beoing is taking a different approach. It will continue to enhance its range of 7X planes, and will not develop a new bulk airliner, saying there isn’t enough demand for a plane like the A380 to cover its development costs. Boeing will instead focus its development efforts on the ‘Sonic Cruiser’, which will carry 250-300 passengers at near Concorde speeds over distances of up to 9000 miles.

Its aim is a simple one: to make high speed, long distance travel affordable for more passengers and profitable for airlines, something Concorde couldn’t do. Dubeck insists that Boeing’s ability to develop such a product is not in question, despite the industry slowdown. “A long time ago, Boeing developed a budgetary process whereby we set aside funds for corporate development, corporate citizenship and other things of that nature,” says Dubeck. “Notwithstanding the short term, those are long term initiatives.”

The debate over whether there is enough demand for the A380 to justify its development has been rekindled by the current falloff in air travel. Dubeck repeats Boeing’s line that there is very limited demand for a ‘super jumbo’ like the A380. Better, he says, to have smaller planes that are easier to fill, with the Sonic Cruiser serving the high end market.

“If you look at today’s environment, big airplanes are not being filled,” Dubeck argues. “The difficulty with a larger airplane is that you may have lower cost per seat, but the cost per trip is still fairly significant and if you can’t fill it you’re in trouble.”
Dubeck says just such a thing happened during the Asian financial crisis of 1997, when rapidly growing airlines were suddenly unable to fill their 747s. “They were happy they had 777s or smaller airplanes,” he says.

Airbus rejects that view, of course, citing the long term outlook for traffic. “We’re not going to start delivering it until 2006 and our business is very long term,” says Velupillai. “The need for the A380 is long term.”

Emirates Airline shares Airbus’s view. “We believe in the 380 and we will continue with our orders for the super jumbo,” says Mike Simon, corporate communications director, Emirates Airlines. “We’re buying the A380 because it’s a very economical plane and we’ll hopefully reduce seat cost by about 20% per passenger.”
||**||Long term business outlook|~||~||~|
As for when things will pick up again, both Airbus and Boeing refer to the 1991 Gulf War, the airline industry’s last big moment of crisis. Then, it took around eighteen months for traffic to return to pre-war levels. Yet both admit that there are so many unknowns this time around. “We’d like to see something similar, but it may take longer,” says Dubeck.

According to Airbus’s annual ‘Global Market Forecast’, Middle East and North African airlines will buy around 620 aircraft of more than 100 seats between now and 2018. The market is predicted to be worth about US $50 billion and, despite the current turmoil, that is where Airbus’s sights are firmly focused. “We’ll be competing keenly with Boeing and our goal is to win more than half that market,” says Velupillai.||**||

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