Airbus Has a Lot Riding on New Jumbo as It Seeks to Jettison No. 1 Boeing
Airbus Industrie is about to make the riskiest gambit in its long war against Boeing Co.--betting against tough odds that it can build the world’s biggest jetliner and supplant its American rival as the No. 1 commercial jet builder.
The European consortium could announce this week at the Farnborough Air Show in Britain the first firm orders for its all-new, 550-seat airliner known as the A3XX, officials say. Already several airlines have publicly stated interest in buying the double-deck flying behemoth but none have plunked down the hard cash to begin the program.
Airbus officials won’t formally launch the airplane program until they receive about 50 firm orders. That could take until the end of the year. But it is crucial for the Europeans to turn “public interest” into a firm sale.
A senior Airbus partner executive said, “We’re having really high-quality discussions with eight airlines” that include extensive negotiations on pricing, scheduling and other contractual issues.
“It looks like it’s a better launch situation than we’ve ever had before, which is remarkable for a big aircraft,” the executive said. “I don’t think it will take long.”
For Airbus, an announcement by one of the interested airlines could break years of suspense over its on-again, off-again quest to build a jetliner bigger than Boeing’s 747 jumbo jet. Long regarded as the queen of the skies and a monopoly cash cow for Boeing, the humpback 747 is the only jetliner that can carry more than 400 passengers.
New aircraft development is a make-or-break deal in the aircraft industry, offering the potential to overturn leadership or provide a quick exit from the business. Boeing became dominant when it beat Douglas Aircraft to the punch in launching the first jetliner. Lockheed’s gamble on its L-1011 nearly landed the company in bankruptcy and was the last commercial aircraft the company ever developed.
If the A3XX is successful, the European plane maker for the first time in its 25-year history would surpass Seattle-based Boeing as the world’s leading builder of commercial jets. The Europeans have been doggedly chipping away at Boeing’s 60% market share and last year sold more airplanes than Boeing.
The key to supplanting the U.S. aerospace giant, though, is winning the market for jumbo airplanes--a sector Boeing has protected and one it won’t give up without a fight.
“This is a big deal for both of them,” said Joseph Campbell, an aerospace analyst for Lehman Bros. “For Airbus, its investment in the A3XX is greater than the sum of all investments it has made. For Boeing, the success of blunting the A3XX will determine whether it can maintain its dominant share” of the world’s commercial jet market.
To prepare for the A3XX project, Airbus--a consortium of four big European aerospace companies, DaimlerChrysler Aerospace of Germany; Aerospatiale of France; BAE Systems of Britain; and CASA of Spain--has spent at least $600 million designing the new airplane.
To attract financing from the capital markets, it has been transforming its corporate structure. The Airbus partners have merged to form the European Aeronautics Defense and Space Co., which owns 80% of Airbus. BAE Systems, formerly British Aerospace, controls the other 20%.
EADS, as the company is called, is the world’s third-largest aerospace group after Boeing and Lockheed Martin. On July 10, EADS began trading its shares on European stock exchanges, offering a 30% stake to investors in hopes of raising $3.3 billion. So far, investor reaction has been lukewarm. EADS closed Friday at 18.1 euros in Paris, or about $17 a share. It has fallen from its initial offering price of 19 euros, or about $17.90 a share.
Airbus officials contend they have an airplane design that would perform better than Boeing’s 747 jumbo jet. The four-engine A3XX would hold between 550 and 800 passengers, depending on the version. It would carry at least 140 more passengers than the Boeing 747-400.
The plane would cost $12 billion to develop--some experts say as much as $20 billion. It would be up to 15% cheaper to operate per-seat than the 747. List price, which airlines rarely pay, is $240 million.
Assuming Airbus launches the plane by year-end, many experts anticipate the first test flights would be in mid-2004, and the first aircraft would be delivered in the fall of 2005.
For Boeing, such a launch could be devastating. The 747 jetliner, which costs airlines about $180 million, accounts for one-fourth of Boeing Commercial’s profits and one-fifth of its airplane sales. The jumbo jet is a veritable gold mine in an otherwise low-margin, insanely competitive industry. If sales of the A3XX take off, those profits dry up.
Boeing’s main counter-strategy is the possibility of a $4-billion investment in a stretched version of the 747 that would carry about 500 passengers. Depending on customer interest, the larger 747 could be launched in 2005. Boeing officials, who say demand for such a large plane is limited, have threatened to slash the price of the 747 to win potential A3XX customers.
A 747-stretch could spoil Airbus’ investment by robbing it of only a small portion of the market. By some estimates, Boeing would need to take only 20% of the super-jumbo segment to saddle Airbus with losses.
“We do and always have anticipated they will launch and build this airplane,” said Mike Bair, Boeing Commercial’s vice president for marketing. “The marketplace will ultimately decide, and we are very comfortable with our position.”
Boeing is challenging the technical claims of the A3XX, raising doubt about its proposed weight. One of the critical factors in airplane design is the aerodynamic principle known as “lift over drag.”
If the Airbus numbers are wrong and the A3XX fails to meet its advertised weight-performance targets, the plane won’t fly as far as promised or will burn more fuel to reach its destination. Such issues are closely scrutinized by the airlines and are considered deal breakers.
Airbus spokesman David Venz acknowledges that engineers have not come up with any “radically new” technologies or design that would vastly improve the performance of the A3XX over the 747. But the combination of more seats and incremental technical advances such as using lighter composites throughout the fuselage will contribute to the lower operating costs, he said.
Airbus faces other tough hurdles. The U.S. government could attack Airbus for receiving government-backed financing to pay for one-third of the development cost for new aircraft. Boeing says the subsidized loans amount to unfair competition. Airbus counters that Boeing and other U.S. aerospace companies receive indirect subsidies from Pentagon and NASA research and development contracts.
Perhaps the biggest hurdle for Airbus is the market itself. Boeing calculates that demand in the next 20 years for jetliners in the 400-passenger-and-up category will amount to fewer than 400 airplanes. Demand is rising for smaller jetliners that have more flexibility to haul passengers from one city to another, bypassing the big and congested airport hubs.
For the Europeans, the case to build the A3XX is clear. Civilian air travel will continue to grow into the new century by about 5% a year. They see a need for about 1,500 large aircraft over the same time period, including 300 freighters.
“We clearly see the need for a bigger airplane to start carrying all of those people because there is not enough concrete and sky to cram more airplanes into,” Venz said.
Airbus has told analysts it must sell 240 jets to break even, though officials decline to specify a time frame. Campbell of Lehman Bros. said Airbus must sell 150 planes by 2010 for the program to succeed.
Campbell concedes that securing orders for 150 airplanes “is a very challenging goal” for Airbus. To reach it, Airbus would have to launch a passenger and freighter version at the same time.
Other analysts contend that Airbus is courting financial disaster if it launches the airplane now. Demand for large aircraft, they say, is not strong enough to justify building a costly new jetliner.
“There’s no denying the upfront, immediate demand,” said Richard Aboulafia, an aerospace analyst for Teal Group. “But it’s the medium term, sustainable demand that has me worried. I don’t think Airbus has been in the extremely terrible position of watching an all-new plane suck fumes.”
