Airbus Revving Its Engines for Challenge
Airbus, the only remaining commercial challenger to the domination of world aviation by the looming Boeing-McDonnell Douglas colossus, at first seems like a flying European version of a horse designed by committee.
The wings are made in Britain, fuselage sections in Germany, nose and cockpit in France, forward doors and tail fins in Spain, wing slats in Belgium, and, depending on the model, the jet engines may come from a suburb of Cincinnati.
The parts are airlifted in cavernous transports nicknamed Belugas for final assembly in Toulouse, France, north of the Pyrenees, or in Hamburg, Germany.
“They’re not a single entity, they are a collection of companies,” said Max Kingsley Jones, commercial aviation editor for Flight International, a London-based trade publication.
Indeed, it is a carefully choreographed manufacturing ballet that perhaps represents postwar Europe’s greatest commercial success in pooling technology and know-how across borders. Yet even before last week’s announcement of the Boeing merger, a debate raged over Airbus’ future--and how soon it should shed the consortium status and strong government ties that have helped it succeed.
Now some Airbus principals are saying just the opposite: that the emergence of an even more powerful Boeing justifies a revival of European government subsidies to enable Airbus to compete. Their reasoning is that the new Boeing will, in effect, benefit from U.S. government subsidies because so much of McDonnell Douglas is given over to defense work for the Pentagon.
And last week, the European Union warned that it planned to investigate the proposed merger of the two U.S. giants to determine if it would give Boeing undue dominance over Airbus. A possible response: refusing to let Boeing sell planes in Europe, or officially reopening the debate over Airbus subsidies.
Whether Airbus, now facing a much bigger U.S. competitor, gets renewed help from its hometown governments remains to be seen. But with or without it, the brash Old World consortium, owned by French, German, British and Spanish companies, declares it is on course toward boosting its world market share from 31% to 50% by 2000--and has set itself the task of supplanting the venerable Boeing 747 with a new, larger jumbo jet.
The onetime upstart from Toulouse has proved that it must be taken seriously. Airbus, formed in December 1970 with the seemingly quixotic goal of building a civilian aeronautics industry practically from scratch to take on the Americans, has become the industry’s No. 2 player in just a quarter of a century.
Now, for every two airliners of 100 seats and up that its merging U.S. rivals have been selling, Airbus Industrie sells roughly one, making it the world’s largest producer of commercial aircraft after Seattle-based Boeing. Every month, 10 new Airbuses fly out of Toulouse and Hamburg, whereas Boeing is turning out 22 aircraft.
Airbus claims to have firm orders for more than 2,200 aircraft to date; to have delivered 1,468 to airlines including U.S. customers America West, Northwest, United, Federal Express and American; and to have an order backlog worth $46.4 billion that will keep its assembly lines humming for the next 4 1/2 years.
Airbus Industrie, the company doing the planning, testing, marketing and after-sales service for this multinational line of airplanes, does it all with just 2,182 employees. Manufacturing and assembly are carried out at 15 separate plants employing 30,000 people.
Now Airbus is talking with airlines about an ambitious scheme to build the biggest airliner in the world, a double-decker “superjumbo”--known for the moment as the A-3XX--capable of carrying as many as 900 passengers.
With a mix of brashness and sly digs that has long characterized their exchanges with Boeing, Airbus executives promise that the Boeing 747 and its updated versions, for the moment the world’s highest-capacity aircraft, will soon be obsolete.
“I’d suggest that Boeing remove itself from the market because there will be no more place for derivatives of old planes,” John Leahy, an American who is Airbus Industrie’s marketing chief, told reporters during the Farnborough air show in Britain in September.
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When news of the proposed Boeing-McDonnell merger arrived this month at Airbus headquarters in Toulouse, it was hardly a shock. The buzz in aerospace circles for a year was that such a fusion was under discussion.
McDonnell Douglas, at any rate, was no longer regarded by Airbus as a genuine competitor: By last month, its share of the commercial market had fallen to 5%, Airbus calculations showed, and the St. Louis-based manufacturer had nothing in its line to compete with mid-size planes such as the Boeing 757 and Airbus A-300.
“More and more, the airlines were telling us, ‘It’s between you and Boeing,’ ” Philippe Jarry, Airbus vice president, said in a telephone interview. “So I wouldn’t say the world has changed. The battle will be tough, but it’s been tough since 1970.”
The moral drawn in Toulouse from the demise of an independent McDonnell Douglas, in fact, seems to be that Airbus must even more resolutely push ahead with its plans to challenge the 747.
“What has happened shows that if you are not present in all areas of the market, as McDonnell Douglas was not, you are a dead man,” Jarry said.
In Europe, the proposed joining of the two U.S. aerospace giants highlighted differences on how quickly Airbus needs to streamline itself and be reconstituted as a private company to be able to make rapid decisions and respond more quickly to market trends.
“Airbus Industrie and its partners must come to agreement as soon as possible on an optimal structure that would allow Airbus to effectively face the American competition as an integrated European enterprise responsible for its production, costs and results,” German economics minister Guenter Rexrodt said after the announcement of the Boeing-McDonnell deal.
The French, though, downplayed the need to take any swift action. “We don’t all have the same interests, and we especially do not want to weaken Airbus,” said a spokesman for Aerospatiale, the French partner in Airbus.
Airbus is an “economic interest group,” or consortium, under French law, owned by Aerospatiale (37.9%), Daimler-Benz Aerospace of Germany (37.9%), British Aerospace (20%) and CASA of Spain (4.2%).
It has affiliated suppliers in the Netherlands, Belgium and Italy, and does enough sourcing in the United States (including jet engines from General Electric’s Evandale, Ohio, plant) that it claims to have spent more than $10 billion at 800 U.S. companies in 40 states in the last six years.
Debate on changing the structure of Airbus was going on six years ago. In July, the venture’s Oversight Council set the goal of drawing up a road map by the end of this year for transformation into a private company by the end of 1999.
The council met again Dec. 13, two days before the Boeing-McDonnell deal was announced, but it couldn’t agree on what to do. French lawmaker Robert Pandraud complained that the partners had dawdled so much they had “mortgaged the future,” but French aerospace executives disagreed.
“The current system has allowed Airbus, in 25 years of existence, to take 30% of the world market,” said Yves Michot, president of Aerospatiale, tacitly rejecting the German calls for quick reform. “Two thousand Airbuses will be flying by the year 2000, and there will be 3,000 in the year 2005.”
Though the consortium’s finances are a closely guarded secret, industry analysts say it has made a profit for the last three years, and they estimate it will earn about $500 million on 1996 revenue of $10 billion, up from $9.6 billion last year. (Boeing had 1995 sales of $19.5 billion, McDonnell Douglas had $14.3 billion.)
However, because Airbus sets the price for the goods and services it buys from its partners and other suppliers, some analysts say black ink at Airbus masks continued heavy losses at its owner firms, though they may get a share of the profits later.
“The French, and to some extent the Germans, seem to have the ability to accept phenomenal losses,” said Barnaby Weiner, an aviation industry analyst at Merrill Lynch in London. “They need to become more efficient. Either they go on and keep having losses or they restructure Airbus.”
For years, the aircraft maker was a rancorous issue in U.S.-European trade relations because of American allegations that it benefited unfairly from state subsidies. In 1990, a survey conducted for the U.S. Commerce Department estimated that Airbus had raked in nearly $20 billion in subsidies, including cheap loans, and that not a single one of its aircraft types--it now sells nine models ranging from 124 to 335 seats--was commercially viable without government handouts.
Last autumn, however, an analyst from a U.S. brokerage house found Airbus had become strong enough to financially fly on its own and estimated its worth at $15 billion to $18 billion. Going private, the analyst counseled, was the way for Airbus to raise the billions of dollars in private capital it will need to do battle with Boeing.
There may be another course, arguably more probable now because of the Boeing-McDonnell Douglas marriage: a return to subsidies.
A 1992 U.S.-European agreement puts a 33% cap on government underwriting of the development costs of a commercial airliner. However, the Europeans have long contended that Pentagon contracts are a form of indirect assistance to their American competitors.
Under the pending merger, Boeing, itself a filler of numerous Pentagon orders, would be absorbing a far bigger defense contractor. That is bound to increase pressure from Airbus partners on their governments for funds to develop new aircraft, which would help Airbus keep sales prices down.
Immediately after the merger was announced, Manfred Bischoff, chairman of Daimler-Benz Aerospace, Airbus’ German partner, insisted on “aid for technological research like that which our American competitor gets, but also subsidies equal to what they [Boeing and McDonnell Douglas] receive through big military projects.”
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During its quarter of a century in the marketplace, Airbus has pioneered in numerous areas, installing the same kind of flight deck on different models and innovating in the use of “fly-by-wire” controls, whereby the pilot operates a joy stick hooked to a computer that makes the actual decisions on what commands to send to the rudder, ailerons and other moving surfaces.
“Airbus has worked hard over the past 20 years to expand its product line and now has 120-seaters to 350-seaters,” Kingsley Jones of Flight International magazine said.
Now the European venture is poised at the final frontier of commercial aviation: to challenge Boeing’s monopoly on so-called “high-capacity” airliners.
It was 1969, when Richard Nixon took up residence in the White House and the 5th Dimension was singing about the Age of Aquarius, that the Boeing 747 first flew. The plane still has no rival, and according to industry sources, it has come to account for a third of Boeing’s profit.
It is that cash-generating monopoly that Airbus dreams of ending. Its surveys have shown that in the next 20 years, more than a third of the money spent on commercial airplanes will be for high-capacity craft.
In what has become an acrimonious debate, Boeing has concluded that the market will be much smaller and the costs of entering it far higher--$12 billion to $15 billion instead of Airbus’ estimated $8 billion.
Airbus and Boeing had joined forces for a feasibility study on a very large aircraft, but since have parted ways. Now Airbus is fine-tuning plans to construct a stretch version of the four-engine A-340, which could carry 376 passengers and would be similar in capacity to the original 747. But that would only be a stopgap until the superjumbo A-3XX can be produced.
Airbus executives predict a market for upward of 600 of the superjumbos, which could carry from 555 to 900 passengers depending on seat configuration. Though no firm program has been decided yet, entry into service is tentatively planned for 2003.
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The plane, Airbus predicts, would yield a staggering $280 billion in revenue over the project’s life span.
“It will be built,” stressed Jarry, who is in charge of market development for the aircraft. “We are looking as far ahead as the year 2050--there will be A-3XXs flying then. Have you seen whether in any book it is written that aircraft size should stop at the 747? No way.”
Whether the A-3XX ever takes off or not, cheering words for Airbus came last week from an unlikely quarter: the head of a major international airline that has never bought a single Airbus.
At a business luncheon in London, Sir Colin Marshall, chairman of British Airways, predicted that the Boeing-McDonnell Douglas fusion, if anything, would strengthen Airbus’ hand.
Boeing will now be tied up for at least 12 months as it tries to weld itself and McDonnell Douglas together, Sir Colin explained. And from now on, he predicted, with the elimination of the commercial aviation industry’s No. 3 company as an independent entity, airlines will always short-list Airbus on bids for new aircraft to keep the pressure on Boeing and competition strong.
