As you may have heard, the main airshow of the year just ended in Le Bourget, north of Paris. As usual, the latest planes were shown off (above, the Airbus A380 and the Boeing B777 Long Range), big orders were announced, and the two big aircraft companies continued their permanent war of words, which goes in parallel to their commercial war.
It's particularly hard to find honest assessments of the two companies, considering how the US media (and especially the WSJ and the NYT) act as the mouthpieces of Boeing whereas the European media (and in particular the French) just as clearly stand behind Airbus. Here's an attempt at balance (although, being French, I'm likely to be biased as well - but hey, you guys are there to set me straight).
The big story in recent years was Airbus's capture of the leadership of the market, with more plane delivered (see graph above), more orders, and the symbolism of the A380, the new big whale of air travel, which Boeing declined to compete with, being distracted by procurement scandals and abrupt leadership changes. But in recent months, the pendulum has swung back. Boeing's new 787 appears to be a real success on the market, helping Boeing capture clients back from Airbus (and possibly capturing the lead this year again in number of orders, for the first time in 5 years); meanwhile, Airbus has been hit by its own leadership issues because of Franco-German rivalries (to the effect that neither company had a CEO this week!), the A380 appears to be somewhat over budget and will be late by a few months for its first deliveries.
This has taken place in the background of an increasingly tense war of words between the USA and Europe about subsidies to the two companies. The USA initiated that new trade war last year, and it was widely expected to die down after the Presidential campaign, but it did not. At stake are the state loans for the launch of the A350, Airbus's proposed new plane to compete with the boeing 787. After several rounds of inconclusive talks (where at least the two sides agreed to keep talking), suits have been brough to the WTO (one each by the USA and Europe against the other), in what certainly will be the most contentious debate ever in that organisation. Both suits are likely to be won, which means that both sides will be found to be in breach of free trade, which will surprise no one, and will create a hell of a mess and not resolve anything...
To understand what the stakes are, it is interesting to analyse the discourse on each side:
- to Boeing, the 787 is the competitor to the A380, on the basis of their diverging (and in each case, self serving) prognoses on the future of aviation: Airbus expects a lot more air travel between big (and already overused) hubs (say Los Angeles to Mumbai), and the A380 is therefore an efficient way to use scarce airport slots. Boeing contends that the future belongs to "point-to-point" aviation, i.e. direct flights between smallet hubs (say Seattle to Bangalore), which require smaller - and most of all fuel efficient and cheap - airplanes. The B787 targets that market. But the important message by Boeing is that the A380 and the B787 are contemporary, existing planes, which were developped under the "old" rules (the 1992 US-EU agreement which allowed for public aid on both sides, State loans to Airbus for the development costs of the plane, military R&D contracts for Boeing) - but any new plane should forego any help - and that would of course apply to the A350.
- to Airbus, the A380 is an "old" project; it was the missing plane in Airbus's range of planes (Boeing already having the 747 for large planes); now that both manufacturers have the full range of planes, there is a level playing field and help can indeed be curtailed. That of course means that the 787 should be considered a "new" development, just like the A350, and that the same rules should apply to both.
The stakes are of course about how to treat the development costs of the A350, and the issue has been made all the more important that the B787 is successful and has required for Airbus to invest a lot more effort than expected in the A350 (initially, it was just an improved version of the existing A330, with a EUR 1.3 billion tag; now it's almost a brand new plane, with an investment closer to EUR 5 billion).
So what are the arguments on both sides?
- Boeing states that State loans to Airbus are a direct subsidy (they are paid back only if the plane is successful, which in effect provides that failure would be borne by the tax payers);
- Airbus retorts that the loans are provided on commercial terms and are transparent, whereas Boeing gets its support in more discreet ways, thanks to sweet deals with the Pentagon and subsidies for military R&D;
- Boeing responds that EADS, Airbus's mother company, is just as big a military contractor as Boeing, and also gets its own sweel military procurement deals in Europe;
- Airbus counterattacks with the subsidies that Washington State pays to Boeing to keep or expand its factories there, and the subsidies provided by the Japanese government to the Japanses subcontractors of the B787, which have been given a mojor development role;
- Boeing retorts that Airbus also gets local subsidies (and would get the same if it opened up a factory in Washington State);
The fact is, most of their arguments are true, and both manufacturers are helped by their respective governments because the stakes are simply too high, in terms of jobs, control of various technologies and military procurement and security of supply issues.
Beyond the PR wars, which are quite fascinating (for instance, the A380 is pretty much old news as far as all these issues are concerned, but it is at the heart of the PR battle today, with Airbus making a big deal of its first flight and demonstrations, and Boeing sniping happily about the delivery delays and cost overruns), the solution is actually likely to come from three other directions:
- Airlines, as the clients of the two manufacturers, have a very direct stake in having two competitive manufacturers for their plances. Having one of them become uncompetitive is not good news in the long run, as any lack of competition would make their future purchases more expensive and satisfaction of their specific requirements more difficult. It is very likely that a number of companies, especially now that they tend to pool somewhat their procurement via the loose alliances that have formed (Star alliance, oneworld, skyteam), have engaged in strategic purchasing to support Boeing when it was in a precarious position - for instance, Air France is the anchor customer of the new B777 LR, despite French government pressure to keep on buying Airbus only - it keeps Airbus on its toes and makes good business sense.
- meanwhile, the two main manufacturers of small jets, Bombardier of Canada and Embraer of Brasil, are slowly building up the size of their jets and will very soon be direct competitors to Airbus and Boeing for their smaller jets, the A320 and B737 families. As these planes still make 60% of the big plan market, it will be interesting to see how this new competition plays out; with 4 players, all the contentious issues associated with the current duopoly may fade;
- finally, both manufacturers are increasingly using contractors and subcontractors from the other continent, as well as from the rest of the world. When an Airbus has 50% European content and 30% US content, trade wars will make little sense. and both manufacturers have been developing their supplier networks quite extensively in recnet years, and also making sure that they have keen competitors for the main parts that are contracted out.
In the short to medium term, expect a lot of noise on two big issues, the WTO procedures and the coming tender by the Pentagon for its air tankers (which pits Boeing's 767 against Airbus's A330, andwas cancelled a first time when it became obvious that it had been illegally tempered to favor Boeing).
There's a lot more to the story, as befits a major industry where tens of billions of euros are at stake, and hundreds of thousands of jobs and control of highly sensitive technologies, but I hope this provides a fair background.
