Whatever else the Airbus and Boeing year-end figures may have revealed, there is one fact that remains inescapable. The market for large civil aircraft is now a straight fight between two fairly evenly matched manufacturers. Conventional economics suggests that companies in such a duopoly should be able to command healthy prices and high margins. So far, that has not been the case, but will it come?
Competition authorities on both sides of the Atlantic clearly fear that it might. Troubled by the price rises, (albeit modest) pushed through by Boeing and then Airbus during the middle of last year, investigations were launched after suspicions of collusion or worse.
The fears are probably wide of the mark. Airbus went so far as to suggest that the real message was that there were too many competition officials with too much time and too little to do. There is little evidence that the price rises were concerted even if welcome on both sides. As one antitrust lawyer involved in the case remarks, just because two people think the same way doesn't mean that they are conspiring.
Neither was there any suggestion of customer complaint. Boeing privately admits that there was some groaning from airlines rushing to meet the mid-year deadline for discounts. But an insistence on sticking to list price hardly amounts to sinister price fixing.
A more plausible explanation is that Boeing abandoned its no-holds fight to retain a dominant market share and Airbus breathed a sigh of relief. The year-end returns were accompanied with further signs that the mutual aggression may be cooling. Boeing talked about "financial health" and Airbus of "improving profitability". The traditional bickering was largely missing.
And then there were the figures, pointing to the fact that the two manufacturers are increasingly evenly matched. Even assuming no major shocks, it may take another four or five years before Airbus finally draws close on delivery volumes, but it is headed in the right direction.
If the two manufacturers are beginning to come to terms with life in a more even duopoly, then it may be that rather than any illicit collusion which is worth watching.
It was, after all, the fact of a classic market share battle that kept discounts so high for so long. As the Avitas consultancy points out in a recent paper, while Airbus could initially grow at the expense of a waning McDonnell Douglas, once that buffer had effectively disappeared, it became a zero sum game between the remaining two. What Airbus gained Boeing had to lose and so the fight intensified.
Avitas also suggests that the fight was intensified by Boeing's best-price "exclusive" deals with the likes of American Airlines which effectively set a price floor below which it could not go. Assuming that Airbus has a shrewd idea of where that floor lies it could pitch its own prices to win in key competitions. Boeing too may have seen its chance to dominate before Airbus restructured into a powerful standalone commercial company.
The fact remains that these factors appear to be losing much of their force. If so, the question then is: will the conventional market economics finally begin to take hold?
The prospects for a new entrant, or the threat of one, to keep markets orderly seems a long one. Few industries in the world have taller entry barriers, higher risks and longer range returns. The regional jet manufacturers, led by Bombardier (self-styled as the third force in civil aircraft), may be tempted to edge further into the mainline market, especially if prices start to look more attractive. But a full-blown challenge seems remote indeed.
New product offerings could still be a cause of fierce fighting around the outer reaches. The 100-seat market appears ready to hot up with a contest among the Airbus 318, Boeing 717 and others. More interesting is the prospect at the other end of the scale. Airbus still holds ambitions (strategic as much as economic) to break into the market above 400-seat, until now a Boeing monopoly with the 747. Analysts have long been predicting a swift tactical price cut from Boeing if and when the Airbus A3XX finally makes it to launch.
Given that Boeing is fabled to have somewhere above 30% margins at present, that could be severe. However, the downside would seem to be the need for firmer prices elsewhere in the range.
Perhaps the best hope for a long-term balance is the old standard of supply and demand. Prudent buying by customers should at least ensure that prices remain realistic and, who knows, a little capacity constraint could do everyone some good.
Source: Airline Business
