Airbus and Boeing had reasons galore to be pleased with their work at the recent Paris air show as the orders piled in and new models gained ground
This year’s Paris air show saw an aerospace industry back on form with an amazing new aircraft, billions of dollars of order announcements and a healthy spat between the main rivals. Aided by a surge of new business, almost exclusively from carriers in the Middle East and India, both Airbus and Boeing had good reason to be pleased with their week’s work.
For its part, Airbus made good on its promise to fly the 550-seat A380 at the show, and give guided tours of the prototype’s triple-deck interior, which is packed with test equipment and water ballast tanks, to current and potential customers. The downside for Airbus chief Noel Forgeard was explaining to the likes of Singapore Airlines and others the delay in taking delivery of their new airliners. He was also unable to announce the industrial launch of the A350, a derivative of the A330 designed to fight back against Boeing’s fast-selling 787. The A350 launch is now expected to take place later this year.
The A380 even managed to log a new customer – Kingfisher Airlines of India, a start-up low-cost carrier owned by brewing giant UB Group. The carrier, which only began operating A320 services in May, committed to five A380s as well as five A330s and five A350s in a $3 billion order. Chairman Vijay Mallya says that the focus for these widebodies will be on the US market, led by the A380 on the Mumbai-New York route.
Alan Mulally’s trademark grin was even broader than usual. The head of Boeing Commercial Airplanes punched the air with both hands as Steve Udvar-Hazy, chairman of the world’s largest lessor ILFC, announced he was ordering Boeing aircraft again. The manufacturer racked up 148 orders at the show, including a mega-order from India’s Jet Airways. Mulally also confirmed that the first three years of 787 production is “essentially sold out”.
For some airliner types demand is indeed improving, translating into sharply rising monthly lease rates of 20% or more for the most popular types. But new aircraft prices have not followed suit – yet. “Although the market is recovering I haven’t seen a huge increase in prices as a result of demand,” says Udvar-Hazy, announcing an order for 20 737s and eight 777s. “The marketplace is very competitive and airlines are more interesting in the cost of ownership. Both manufacturers are under intense pressure to keep prices affordable.”
Cost control
Much of the pricing pressure from Airbus and Boeing has been on their supply chains. “Boeing took some very prudent steps after the tragedy of 9/11 to refocus its energies on looking more at unit costs and at more efficient ways of producing aircraft,” observes Udvar-Hazy. “It trimmed back production levels to accommodate compression in the airline business.” Airbus did not cut back to the same extent. “Airbus was more pursuing market share, and very successfully, I would say,” he says.
But after a couple of years of being beaten by a more agile and aggressive Airbus on several key campaigns, Boeing is fighting back. The company’s new sales chief Scott Carson instigated a sales and pricing review immediately on arriving from the company’s in-flight service provider Connexion at the turn of the year. This included involvement from all levels at Boeing – right up to chairman Lewis Platt – in the sales process, actively re-engaging with leasing companies, and fundamentally reviewing its pricing structure.
The price analysis showed that Boeing had been able to take more cost out of making aircraft than it had realised. Accordingly, Carson’s first move was to make a downwards “step change” in prices and pass some of the savings on to customers. “We looked at it again, it is helpful to have a new pair of eyes,” he says. The company has become more aggressive on discounts and creative deal packaging, but Carson stresses this will not be at the expense of profit margins. “I made a commitment to my boss that we will not do silly deals,” he states. Asked if Boeing had lost any campaigns due to Airbus doing silly deals, Carson answered definitively: “Yes, Iberia.” He was referring to the Spanish carrier’s order earlier this year for Airbus narrowbodies.
Boeing’s new approach has paid dividends, with important wins at stalwart Airbus customers like Northwest Airlines this year. Mulally claimed deals like this and the success of the 787 will help Boeing retake the sales lead for the first time since 2002, and he believed it will be able to sustain this lead for the next few years.
“At this show you will have sensed a new vigour and vitality in the Boeing company,” says Carson. “Boeing has made a definitive cultural change in the way it is selling airplanes,” adds Udvar-Hazy. That includes bringing the lessors, some of its most important customers, back into the fold. “We used to view them as competitors to us, but we’ve made a commitment to re-engage them as partners,” says Carson. The new approach makes leasing companies the sixth sales category alongside the five regional sales areas. The initiative has already paid dividends: ILFC returned to the table for existing Boeing models and is in final negotiations to buy 787s, while Singapore Aircraft Leasing Enterprise ordered 20 737s in March.
Indian orders
In addition to ILFC and GECAS bolstering their order books, the bulk of the 450 aircraft show orders, worth $45 billion at list prices, were from fast-growing markets like India, the Middle East and Asia-Pacific. Aside from Kingfisher, established Jet Airways and start-ups IndiGo and Paramount Airways were among those from India reaching for the cheque book at the show.
However, just as in the Gulf, questions are being asked about where all the capacity will go in India, and whether it can be filled profitably. But pent-up demand in India is high. Elsewhere, not all executives are too optimistic about market prospects. “AirAsia obtained critical mass at a time when finance and fuel were cheap,” says chief executive Tony Fernandes, signing engine support deals at the show. “The airline industry is sexy – investors look at it and want a piece. Now that fuel prices are up and it is no longer a buyers’ market for aircraft it is not so easy.” A recent search for more 737s proved fruitless with lease rates too steep, he said. The inability to add a couple of aircraft will damage its revenue growth explaining why the carrier recently issued a profit warning, he adds.
As the aircraft market tightens, there will inevitably be upward pressure on prices. “This depends on the market and on the behaviour of the two competitors in the marketplace,” says Carson.
As Boeing blossomed, Airbus too came out of the show as well, or maybe even better than could have been expected considering the problems it brought to Paris. As well as postponing the industrial launch of the A350, the row over government loans for the A350 that forced this delay, and the continuing boardroom wrangles at Airbus majority shareholder EADS, meant that the European consortium came into the show on the defensive.
While there were some uncomfortable moments, with the normally unflappable Forgeard occasionally flapping at press conferences, Airbus still managed to notch up some $33.5 billion worth of business at the show, including 280 orders and commitments and 40 unannounced orders for the A320. Despite the delay to the A350, Airbus racked up 125 commitments for the new type at the show, making up some ground on the 787. Airbus openly admits that it has allowed Boeing a head start in this crucial market segment, but says it should have around 200 orders by the end of the year. There will still be some further catching up to do, with Boeing having 266 firm orders and commitments for the 787 by mid-June.
Airbus could, of course, boast the highlight of the show in the shape of the A380, which was a real show-stopper during its daily seven-minute flight routine. Explaining the reasons for the delays of up to six months in the first batch of deliveries was one of Forgeard’s uncomfortable moments. “Maybe we were a little bold in signalling our internal targets without buffers,” he admits, saying that the manufacturer always knew that the schedule would be “tight”. The resultant backlog will take two years to clear.
A380 delays explained
The delays are the result of redesigns from the battle to reduce the aircraft’s weight, and issues around electronic cabling, partly resulting from the fact that airlines have asked for more complex cabins than Airbus envisaged.
Forgeard also had some difficulty on the issue of government loans, given the healthy overall financial position at Airbus. Forgeard said he was obliged to make use of the most attractive financing available to safeguard the interests of his shareholders EADS and BAE Systems. He made clear that the reason for the A350 delay was the breathing space it would give both sides in the dispute to reach an amicable settlement.
He could still afford a wry smile over widely held suspicions that the dispute is in part at least a blocking move by Boeing to delay the A350. “It is probably a coincidence that it comes at just this point in time,” he says.
At the close of the show these intense rivals put their competitive urges behind them, at least for a while. Earlier in the show Mulally had invited Forgeard to tour his 777 on display in the static park. The Airbus head took up the offer and reciprocated by showing Mulally around the A380. “Man, it’s big, and we know big airplanes,” Mulally said after his tour. “It’s a terrific airplane.” The tour and temporary truce over, Mulally and Forgeard returned to their chalets to resume the sales battle.
MARK PILLING AND COLIN BAKER IN PARIS
Source: Airline Business
