Friday, March 31, 2006

Turbulence Ahead for Airbus

Just a few months ago, the European aerospace consotrium Airbus was riding high. It outsold rival Boeing in 2005, and booked more orders for new aircraft than its U.S. rival.

But the tables have quickly turned on Airbus, which relies heavily on government subsidies to compete with Boeing. Earlier this week, Airbus's biggest customer, a U.S.-based aircraft leasing firm, called for a major redesign of the A350, designed to compete with Boeing's new 787 Dreamliner. Without sweeping design changes, experts warn, the A350 will be unable to compete with the 787, which will enter service in 2008--a full two years before the A350.

And, if that weren't bad enough, Dubai-based Emirates Air has delayed an order for 20 Airbus A340 wide-body jets. Emirates is requesting changes in the A340 which will make it as fuel efficient as the Boeing 777. As Business Week notes, these public rebukes by key customers will likely have an major impact on Airbus's efforts to market its newest passenger jets. The result could be fewer orders for the Europeans, and an opportunity for Boeing to make up lost market share.

With the A340 and A350, Airbus is facing a pair of critical problems. A few years ago, the outsized A340 appeared to be more than a match for the 777, offering similar capabilities over profitable, long-haul routes. But with oil prices hovering between $60-70 a barrell, Boeing's more efficient 777 has become the preferred option in its class.

Ditto for the 787. The Dreamliner's fuel efficiency has already attracted 291 firm orders, while the A350 has only 100. In fairness, the A350 has only been on the market since December, while Boeing began taking orders for the Dreamliner almost two years ago. But the A350 is largely perceived as a "leftover," essentially an upgraded A330--while the Boeing entry is essentially a new design. According to one estimate, the A350 will win only 25% of its market niche, ceding most of that territory--and the profits--to Boeing.

For now, Airbus is sticking by its guns, and says it plans no design changes. But most analysts believe the European manufacturer will be forced to re-engineer both the A340 and the A350. If they don't their recent gains against Boeing will evaporate, and European governments will be forced to dig deeper to subsidize the operation.

One final note: a potential saving grace for the Airbus might come (ironically) from the U.S. military. The Air Force is currently searching for its next-generation tanker aircraft, and Airbus is making a serious bid for the contract. With Boeing in the doghouse over a recent contracting scandal, a 767 tanker for the USAF is no longer a slam dunk. Airbus is already offering a tanker version of the A330, and could (potentially) upgrade their proposal with an A350 air-refueler. The A350 would offer a substantial increase in fuel offload from existing tankers, as well as the 767. But it is unclear if the Pentagon is prepared to buy its new tankers from a foreign supplier--something it has never done before.

1 comment:

Wanderlust said...

spook86, your post raises an interesting point. Back in 2001, Boeing got hammered by the MSM and aviation press both ways on the Sonic Cruiser: when it was announced, the SC was viewed as a "distraction" and as a kind of "last-ditch attempt" to stop the hemmorhaging of customers and orders to Airbus; however, when SC was cancelled post-9/11 (memories are oh so short - all the US-based majors were facing imminent bankruptcy within a few weeks after 9/11, due to problems of their own making long before then), Boeing was criticized for not offering anything new, bold, or innovative (as the euro-loving MSM considers the A380 to be). But Boeing quietly converted all its research on SC towards a more conventional airliner that would have very little resemblence to the 777 and earlier classes except its familiar shape.

Five years later, the proof is in the pudding: Boeing has solidly moved its BCA division along the philosophy of economic, long-haul point-to-point travel, while Airbus is now reaping the fruits of its "bet the company" strategy with A380 that the MSM loved. The 777-200LR can fly from Sydney to London, nonstop, and do so while turning a profit for both Boeing and the majors. Meanwhile, A380 has to deal with limited sales, and limited terminals, due to its massive size. I recall numbers in the press of around 250 sales required to make the project revenue-neutral, and to date, I think there have been less than 150 firm orders.

Technologically, there is very little in "giant leap" innovation left for commercial aviation, the PDE engine notwithstanding. Until then, marginal improvements and refinements rule the day, in terms of weight reduction, reduced fuel consumption, and improved aerodynamics. And while anything is certainly possible, the market tends to act as both a brake and a leveler in terms of investment vs reward. In the end, the market doesn't give a sh*t about innovation for innovation's sake. It has to be dependable, replicateable, supported, and profitable.

As for the next generation tanker, I don't think Airbus will get the order, although USAF acquisition office has to go through contortions to prove that it's acting fairly. The tanker programme is no Dauphin (HH-65 helicopter that the Coasties use for SAR ops) in terms of cost, and any Senator or Congressman that allows so much money to go to Airbus for tankers, especially in the face of so many allegations of EU govt support of Airbus through zero interest loans, is going to have a difficult time come re-election.

I have been out of touch with my friends in Boeing's IDS for the past few years, but I can only hope their executive management has finally cleaned house.

Isn't it funny how when executives like Sears f*ck up with ethics on a grand scale, a company's response is to push ethics training down the throat of line employees?