Even Boeing Can’t Rise Above Global Price Wars
You wouldn’t know from appearances, but the proud aviation industry is suddenly like all other businesses in the world: forced by powerful customers, deflationary pressures and changing technology to become a hustling provider of discount merchandise, a Dell Computer of the skies.
In Boeing Co.’s current struggles you can see reflected the tensions of our time, from attempts to do more with fewer workers to the need to scramble after changing markets.
For the moment all is festive. At the Paris Air Show on Monday, Boeing is set to announce orders for its new 777 plane from a group of airlines that includes Cathay Pacific, Japan Airlines, All Nippon Airways and Korean Airlines.
A big order from Saudi Arabia for $6 billion worth of planes, made by Boeing and McDonnell Douglas, may be formally announced at Paris, the every-other-year event at which the aviation industry--once the spearhead of technology--gathers to celebrate itself and do deals.
The Seattle company is feeling triumphant: Last week, as United Airlines made the first commercial flight of the 777, Boeing forecast that $1 trillion worth of new airliners would be needed in the next two decades.
Investors shared the enthusiasm: Boeing stock rose to an all-time high of about $62 a share.
Yet rejoicing seems dissonant against a backdrop of layoffs and reductions in Seattle. Boeing will cut its work force by 12,000 this year, including early retirements. That will bring the number of employees to 105,000, from 161,000 only five years ago.
What’s going on? Suddenly power is in the hands of the customers, the world’s airlines.
A competition last March among Boeing, Airbus Industrie and McDonnell Douglas to sell 35 planes to Scandinavian Air System (SAS) tells you how tough it is out there. Boeing won the sale by discounting the 737 by 50%--selling for less than $20 million apiece planes that “list” for $35 million.
“I think Boeing was pricing strategically, to keep SAS as a customer or to freeze out McDonnell Douglas,” which might have launched a new plane, the MD-95, if it had won, said an aircraft executive.
SAS was not an isolated instance. The next deal to watch, say experts, is the projected purchase of 777s by International Lease Finance Co., the Century City-based aircraft lessor. The 777, a wide-bodied jet that carries more than 300 passengers, has a list price of about $120 million.
But concessions on financing and spare parts make aircraft deals more art than science.
And with surplus aircraft sitting in the Arizona desert and airlines putting Hushkits on old planes to make them usable longer, Boeing and everybody else is having to be artful these days.
That’s not to mention Russia’s possible entry into world markets with its Ilyushin planes. One big Ilyushin model could sell for $68 million--half the price of a 747. The Cold War is over, the new game is price war.
Airlines are demanding lower prices because passengers refuse to pay one dime more than they have to for anything. Air fares rose less than 10% in the last decade, even as U.S. passenger traffic increased 50% and overall consumer prices rose 42%.
But all that only means that aircraft manufacturing is a demanding business, not a lousy one.
Boeing’s response has been to rethink operations. It has negotiated long-term contracts with suppliers such as Northrop and Rockwell so there is less need of parts inspections and more collaboration on innovation.
The company also has reduced the number of jobs. This fall the International Assn. of Machinists and Aerospace Workers will ask for a contract with greater job security.
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And the union may find Boeing receptive if rules can be changed to allow workers to move easily among aircraft models.
That will be important because Boeing is reducing the number of models and parts. The new 777 ultimately will become a workhorse aircraft in the mid-range, covering 250 to 375 passengers. The 737, reformed in several new configurations, will be below that and the 747 above it. Over time, the 757 and 767 will be phased out, industry sources say--although Boeing is not talking about that.
The aim is to offer economy-minded airlines three basic models with many interchangeable parts and ease of maintenance. “It’s a bold step forward,” says analyst Nicholas Heymann of NatWest Securities, who has just completed a report on Boeing.
It’s also a trend. Airbus Industrie is attempting to achieve comparable efficiency among the German, French, British and Spanish companies that send the parts to Airbus’ automated factory in Toulouse, France--where only 1,500 people are employed.
This is not, as doomsayers about global industry often put it, “profits before people.” It is survival. “If Boeing had not cut its costs in the last few years, it would be in the red today,” says analyst Wolfgang Demisch of Bankers Trust Securities.
What is happening in aircraft is no different from any other business, high-tech or low. Prescription managers are driving down pharmaceutical prices; supermarket customers dictate that Coke, Pepsi and other consumer product companies run permanent sales.
Behind deflationary trends are computing and other technologies in which prices only go down.
And yet staying ahead is expensive. Boeing invested $5.5 billion to produce the 777.
Significantly, it is prepared to invest $1.2 billion in a venture that will help Asian countries produce a 100-seat jet. It needs to make sure of its place in tomorrow’s largest market.
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That’s right, largest. Asia will surpass North America as an airplane market within 20 years, says an Airbus Industrie forecast. North America may grow 3.5% a year in the next two decades, but Asia will grow 7% a year--and China’s market will grow 10% a year.
The implications are profound: Jobs in the United States increasingly will be dictated by export markets and by customers everywhere who, like today’s airline passengers, ask only for discounts. Truly, the Cold War is over, the new game is price war.
