Boeing’s Coup Fuels Global Rivalry Among Aircraft Firms
Boeing dramatically raised the competitive stakes in the world aircraft industry Monday, introducing another new aircraft model as part of a $22-billion sale to United Airlines.
United ordered 34 and took options on an additional 34 Boeing 777s, a large twin-engine aircraft that will compete against the McDonnell Douglas MD-11 and the Airbus Industrie A-330/340 in the market for long-range jets. All the aircraft sell for about $100 million each and seat between 300 and 400 passengers.
The launch of another model will give Boeing five distinct families of aircraft, filling virtually every segment of the large jetliner market and closing in on a niche that the two smaller producers have exploited in recent years.
Although the huge sale was far from a crushing blow to McDonnell Douglas, the smallest and weakest player in the international aircraft industry, it exerts additional pressure on the firm to keep pace.
“This launch closes in the walls around McDonnell,” said Jack Modzelewski, aerospace analyst at Paine Webber. The firm’s Douglas Aircraft unit builds commercial aircraft in Long Beach.
For Boeing, the development of the new jet will be expensive--analysts say it could cost $3 billion to $5 billion--but the payback could be significant.
“The 777 is a new cash cow for Boeing in the making, though it won’t get there until late in the decade,” said Robert Paulson, a McKinsey & Co. aerospace expert. “If Boeing can achieve in the 1990s what it had in the 1980s with the 747 aircraft, then that can be meaningful. It will make Boeing stronger.”
Boeing believes that the market for the 777-type of aircraft will be among the most significant until past the turn of the century. The United order for 34 aircraft and spare parts is worth about $4 billion--a sum that would double if the options for another 34 planes are exercised. The $22-billion figure cited by United for the combined purchases of 747s and 777s includes the effects of future inflation, without which the sale would be worth about $16 billion.
The Seattle-based aerospace firm is projecting that 42% of all jetliner deliveries, measured by dollar volume, will be in the 777-category of aircraft--roughly a market of $260 billion over the next 15 years.
“Boeing’s goal is to capture 55% to 60% of that,” a company spokesman said.
If Boeing fulfills that prediction, competitive and financial pressures could increase on McDonnell Douglas, which offers only the MD-11 and MD-80/90 models, has no new family of jets in development and lacks the financial strength of Boeing.
McDonnell has 173 firm orders and 202 options for its MD-11, a respectable backlog worth about $37 billion. It has succeeded in part because the MD-11 was launched long before either Boeing or Airbus introduced their models.
The loss of the United order would have been far worse for McDonnell if it had not built that backlog by securing massive orders from Delta Airlines, American Airlines and the leasing firm GPA, analysts said. Moreover, the United loss was not unexpected.
“United has always been a strong Boeing customer and I guess we tried hard and we are certainly disappointed, but I don’t think we are surprised,” Robert Hood, president of the Douglas Aircraft unit of McDonnell, said in an interview Monday.
“I would be the first to admit that the 777 is a good airplane, but . . . we still think we have the right airplane for long-range routes,” Hood said.
The 777 will initially have a 4,800-mile range versus 7,000 miles for the MD-11. A later 777 model will extend its range to 7,600 miles. But Hood noted that the aircraft will be powered by two engines and suggested that there is still a “mystique” about flying long transoceanic routes with just two engines. The MD-11 is a three-engine jet.
The 777 and MD-11 will compete closely in their passenger capacity and overall weight capacities.
The longer range 777 will seat 300 to 320 versus a seating capacity of 323 for the MD-11. The shorter range 777 will seat 360 to 390, Boeing said. The long-range 777 will have a gross takeoff weight of 590,000 pounds, versus 602,500 pounds for the MD-11.
Modzelewski said the 777 will offer superior fuel economy, in part because it will be powered by two engines and have newly designed wings.
Boeing’s latest advance is considered less of a threat to Airbus, a consortium of European companies, because Airbus’ government subsidies limit the financial harm done by the loss of sales to Boeing.
“We were told that we lost out because our price was too high, clear and simple,” said Airbus Industrie spokesman David Vance. “One person involved with United told us that our plane offered better fuel burn. But I guess the overall price wasn’t low enough to beat Boeing.”
The Boeing board must still authorize the formal launch of the 777, which is scheduled for Oct. 29. Additional orders are expected shortly, including one from All Nippon Airways and at least one other Asian carrier.
British Airways is expected to make a big order and said it is “considering its options,” with all three manufacturers in the running. However, the airline is “pretty well committed to Boeing,” suggested Paul Turk, an airline analyst with Avmark Inc., an Arlington, Va., consulting firm.
Meanwhile, experts warned that the competitive shape of the industry could radically change in a deep recession and with continued increases in jet fuel prices.
Paulson, the McKinsey expert, said 30% of the large backlog accumulated by aircraft makers in recent years could evaporate, creating serious problems for McDonnell Douglas.
Indeed, the Air Transport Assn., an airline trade group, said Monday that U.S. airlines face a $10-billion boost in the cost of jet fuel in the final quarter of 1990 and will post a cumulative $1-billion loss.
“The airline industry has never lost that much in an entire year,” Robert J. Aaronson, the association’s president, said in a speech prepared for delivery in Montreal.
HOW THEY STACK UP The three biggest aircraft producers are each offering a new model. Here is how the planes compare.
Airbus Industrie Boeing 777 A330 Delivery May, 1995 Sept., 1993 Range (statute miles) 4,800 4,750 Seating Two classes Two classes 360-390* 335 Fuselage diameter 20 feet, 4 inches 18 feet, 6 inches Wing span 197 feet, 156 197 feet, 10 inches feet with inches optional folding wingtips
McDonnell-Douglas MD-11 Delivery Nov./Dec., 1990 Range (statute miles) 7,810 Seating Two classes 250-405 Fuselage diameter 18 feet, 7 inches Wing span 169 feet, 6 inches
*United’s order is for 363 seats, 38 in first class, 325 in economy SHIFTING AIRCRAFT MARKET SHARE
1958-1988 1989 1990-2005 Boeing 55.6% 56% 49% Douglas Aircraft 24.5% 21% 18% Airbus Industrie 15.4% 4.% 3% Other 4.5%* 19% 30%
*Airbus began manufacturing planes in 1971 SOURCE: ESG Aviation Services DETAILS OF THE DEAL This is schedule for delivery of Boeing 747-400s and 777s to United Airlines under Monday’s agreement, which involves up to 128 aircraft with a total value of $22 billion. Firm orders ($11 billion)
Year 747-400s 777s 1994 4 1995 4 11 1996 5 9 1997 4 12 1998 4 2 1999 3 2000 3 2001 3 Total 30 34
Optional orders Total of 64 aircraft (30 747-400s and 34 777s) between 1998 and 2004 for $11 billion Source: Boeing Co., United Airlines
