Tags: Boeing | vs. | Airbus: | Sky | Wars | Heat

Boeing vs. Airbus: Sky Wars Heat Up

Monday, 06 December 2004 12:00 AM

For years both aircraft makers have been vying for commanding shares of the world’s commercial aircraft market, which Boeing has estimated will amount to about $4.7 trillion over the next two decades, or 2,127 aircraft (Airbus estimates 1,600; China Aviation Industry Corporation, another plane maker, says 1,295).

Even now the two companies are competing for the prized Chinese market, which, if Airbus wins out, would give the France-based firm a commercial lead in that market.

In the short term, however, both companies are racing to bring new aircraft to the market and, of course, are jockeying for the best position. That not only includes working overtime to secure orders for the new planes but also involves sowing some good old-fashioned uncertainty among potential customers.

For its part, Boeing is racing to get its new medium-haul super-fuel-efficient 7E7 Dreamliner to market, its first model since it rolled out the 777 in 1990. The company, according to BusinessWeek, is hoping the 7E7 will help it regain the No. 1 spot among global commercial aircraft makers.

Airbus, on the other hand, is banking on its super-jumbo long-haul double-decker A380. According to reports, nearly 130 of the aircraft have been sold worldwide so far.

Boeing, meanwhile, says several airlines have shown “strong interest” in the 7E7, and the company could make 200 sales by year’s end.

“Airlines are worried about not having the 7E7 because its lower-cost structure gives it a 20 percent competitive advantage,” Mike Grady, a vice president of Smiths Aerospace, a British avionics supplier, told BusinessWeek.

The major problem, as Boeing sees it, is -- and always has been -- Europe’s subsidization of Airbus, to the tune of billions of dollars in guaranteed government loans.

According to Boeing, Airbus has the ability to develop airplanes risk-free because under terms of its loans, Airbus doesn’t have to repay them in full if sales of financed aircraft fall short of sales forecasts. Airbus says that has never happened, but Boeing contends the deal still gives Airbus an advantage because it is akin to a financial safety net -- conditions under which Boeing does not operate. If its aircraft fail to sell, that comes directly out of Boeing’s pocket.

Though the two aircraft makers have sparred for years over the issue of subsidies, Boeing has never pushed the issue hard, for fear of losing European customers -- some of which are flag carriers of nations providing loans to Airbus.

But this latest rift could get ugly. According to a European Union briefing paper, BusinessWeek reports, the EU “plans to fire back with complaints that Boeing obtains billions in benefits and tax breaks in the U.S. and foreign countries where Boeing suppliers receive government aid.”

Should Airbus lose its government loans, company execs say, there will have to be a similar disparity forced upon Boeing.

Besides economic warfare, there is a bit of psychological warfare under way as well.

Boeing is playing the game by even mentioning the subsidy issue. In doing so, it is attempting to signal to the market that Airbus could lose its loans, which have accounted for one-third of the company’s development costs of new planes since 1992.

While Airbus already has repaid $6.5 billion in loans, the EU says it still has $5.2 billion outstanding.

Airbus has hinted that it could rework its A330 aircraft, which is similar in most characteristics to the new Boeing jet, and get it to market before Boeing can launch its Dreamliner. It could do so for about $2 billion, an amount Airbus readily has on hand.

That has led, some say, to a delay in orders for the 7E7, even though analysts predict that a reworked A330 realistically could not get to market until about three years after the 7E7’s debut.

The latter strategy could be working. Industry insiders said they were surprised when Boeing did not make any sales of its Dreamliner at the Farnborough Air Show in Britain in July. And, says BusinessWeek, on Aug. 25 Singapore Airlines, Ltd. “delayed indefinitely a decision on ordering the 7E7 or the A330.”

Boeing was counting on early Asian orders because airlines in that part of the world are generally on sounder financial footing than U.S. counterparts.

Boeing may just decide that now is the time to turn up the heat on Airbus regarding subsidies since the European plane maker now commands more than 50 percent of the market.

Harry Stonecipher, Boeing’s CEO, has already attacked a 1992 bilateral agreement under which Airbus received billions in government loans. At the Farnborough show, he argued that the deal gives Airbus an unfair advantage, one made worse by Airbus’ market share.

“They ought to be able to build [new aircraft] with their own funds,” Stonecipher argued. “Why don’t they go out to the banks to get it?”

U.S. trade officials agreed and requested a meeting in Brussels to ask that the pact be scrapped. But Agence France-Presse reported Sept. 17 that the EU rejected the request to get rid of the subsidies.

“It would be difficult for us to tell Airbus that we would not give them any support when Boeing has just received big subsidies,” Arancha Gonzalez, a spokeswoman for Trade Commissioner Pascal Lamy, said. “We are taking this issue very seriously because after the massive support received by the [Boeing] 7E7, you can imagine that Airbus is not very happy,” she added.

What’s next? Perhaps a trip to the World Trade Organization, where disputes involving the United States rarely go Washington’s way.

“We’d prefer negotiations rather than litigation,” a spokesman in the U.S. Trade Representative’s office told BusinessWeek.

Judging by the EU’s rebuff of the U.S. request, it may come to the latter.

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For years both aircraft makers have been vying for commanding shares of the world's commercial aircraft market, which Boeing has estimated will amount to about $4.7 trillion over the next two decades, or 2,127 aircraft (Airbus estimates 1,600; China Aviation Industry...
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Monday, 06 December 2004 12:00 AM
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