Salesmen stuck with a mundane commodity product must look with green-eyed longing at the airliner market. What could be further from the stack it high and sell it cheap philosophy of the discount warehouse? There could be more in common than they might imagine according to John Leahy, the soft-spoken North American who has headed the Airbus sales effort for the last five years.
Since arriving in Toulouse, Leahy says that a large part of his task has been to push home the argument that all airliners are not the same. And if Airbus is, at least for the moment, riding slightly higher in the saddle than its US rival then he believes it has something to do with getting that message across.
The tale starts back in mid-1994 just as Leahy was taking up the reins as senior vice-president commercial. Airbus was already starting to crow about drawing level with Boeing on order intake and managed to emerge a couple of aircraft ahead thanks to a last-minute piece of business at the end of the year. The fact that industry orders were arguably the worst on record may have made the feat less impressive. But it appears to have been enough for a full declaration of war from Seattle.
Ron Woodard, then heading Boeing's commercial aircraft business, claimed that its European rival would be back below the 20% mark within the year. "And you know, he was right," says Leahy, recalling that in 1995 the consortium's order share promptly collapsed as Seattle "cranked up production and cut price".
Airbus was "caught a little flat-footed" but then started to fight back. So began a discounting battle which has marred profits for both manufacturers during what should have been a glittering boom. A good part of the market dynamics over the last five years can be explained, believes Leahy, by Seattle's push to dominate on cost and volume.
"If you can fix in the minds of the buyers that airliners are commodities then all that matters is price," says Leahy. "If all airliners are the same, why would you want to pay more and wait two years?."
Boeing's strategy had its logic. The company had, and still has, a vastly larger installed customer base than Airbus. It also had the capability to produce over 400 aircraft a year. Airbus had, at the time, barely reached half that number. Leahy argues that the new technology of the Airbus fly-by-wire A320 family against the then ageing 737 range also narrowed Boeing's options.
Finally, there were good odds that a major integrated UScorporation would be able to cut costs more decisively than a European consortium jointly owned by four different companies and potentially hamstrung by national politics.
Ramp-up pains
As it transpired, the gamble went too far. Boeing's production ramp-up proved too aggressive and the promised 25% cut in costs - against which future discounts had been pledged - failed to materialise in the ensuing struggle to get deliveries back on track. By last summer Woodard was on his way and Boeing had signalled an end to discounting, raising its list prices by 5%. Airbus swiftly followed with 3%.
The extent to which the production problems hurt showed up in Boeing's 1997 results. One of America's most consistently profitable corporation's posted a loss. The chastened group climbed back into profit last year as the commercial aircraft business crept into the black, and forecasts healthier margins this year. And Boeing is on a pledge to shareholders to continue running the business for profit and not market share.
Keeping pace with the discounting has hurt Airbus too. Although the consortium has never given out profit information as such, figures from the partners suggest that the consortium lost around $125 million on its aircraft sales in 1998. The loss is less dramatic than it looks. Despite the loss at the consortium level, the four Airbus partners appear to have made money on the manufacturing contracts that they carry out within their own national companies. So the Airbus operation as a whole would probably still show a profit.
These wafer thin margins are hardly enough for either manufacturer in what was otherwise a record year. Airbus sales soared past the $13 billion with deliveries at an all-time high of 229 aircraft. Boeing's commercial aircraft unit, including the former McDonnell Douglas operation at Long Beach, turned in sales of $36 billion after outputing 559 airliners. It will hit a dizzying peak of 620, before the brakes are slammed on and numbers for 2000 fall to 480. By then Airbus plans to have climbed to the 315 mark on its way to what it hopes will be an output of around 350 aircraft per year. "The long term industry trend is for 700 deliveries per year and we're investing to get about half of that," says Leahy.
The gap has already visibly narrowed in terms of order intake and backlog. The A320 family and 737 are already virtually tied, although the gap on widebody volumes and values still remains thanks in part to Boeing's as yet unchallenged position with the 747-400.
Commanding a premium
The consensus is that prices have indeed harden since last summer, but Airbus is anxious for more. "We're seeing some firming in the market but not as much as we would like," says Leahy. He adds that the much-vaunted end to discounting is less clear out in the market than it is in newspaper columns.
What Leahy makes abundantly clear, is that Airbus sees the lull in the price war not as an opportunity to gain market share but to command the premium which the consortium believes that its products deserve.
Although difficult to detect from the published price lists, Leahy says that a premium already exists. He now would like to see the gap widen. "People are paying more for our aircraft, but as the shareholders remind me, they're still not paying enough."
Aircraft, he argues, are "machine tools for the airline industry" and should be valued as such - on their performance and ownership costs, not purchase price. In this battle, Airbus is playing heavily on one key advantage - the commonality across all of its fly-by-wire aircraft. Essentially that gives the same handling for its A330/340 widebodies as for the A320 family of single-aisles - Airbus abhors the label of narrowbodies.
Such commonality offers the vision of crews working almost seamlessly across an integrated fleet, without that awkward hump between "narowbody" and widebody. Admittedly the use of such commonality has been a little slower in practice than in theory, but the potential for productivity gains and more acute matching of capacity to demand are there for anyone signing up for an Airbus fleet. That, he says, is not true across the mix of Boeing types, dismissing talk of standard cockpits.
Having already adopted fly-by-wire in creating the 777 family, he forecasts that Seattle will eventually have to address the issue on its narrowbody range. It is Airbus's guess that some time within the decade, the next reincarnation of the 737 will be a radical new design. Rumours already surround a replacement for the 767.
For its part, Airbus is in the process of topping and tailing its own range. At the bottom end is the A318, proposed to take the single aisle family down to 100-seats. With 80 commitments from ILFC and TWA(and others pending), Leahy says that a full launch is due "in the very near future". First deliveries are pencilled in for 2003.
He rejects speculation that the aircraft will be a loss leader forced on a reluctant Airbus to keep in step with Boeing. However, insiders admit that the loss of the SAS deal four years ago for the lack of a 100-seater made a big impact on thinking at Toulouse. The A318 should reduce that vulnerability and could even help Airbus hold a firmer line on prices elsewhere in the single-aisle range. Effectively it would be able to offer a dedicated 100-seater rather than being tempted to discount on the 124-seat A319 purchase price to win the business.
The experience with the A319 itself has proved that shrinking the range can work - despite some obvious distaste from purist engineers. Airbus admits that it grossly underestimated demand for the the aircraft. It was launched on a business case of 415 orders over 15 years. In fact, the A319 has romped past the 550 order mark in little over five years.
Big game hunt
But the real big game is to be hunted at the top end of the range, as Airbus finally prepares to take on the 747-400 with its A3XX family. The pricing scenarios are worked out and the development work is on track and the says Leahy. What has so far delayed the project by two years is the fact that customers are not yet ready, particularly in crisis-hit Asia . Leahy will go back to them with proposals by the end of the year, but first deliveries would not be before 2005 at the earliest.
Airbus must, at the same time, see through its transformation from consortium to stand-alone company. That remains caught up in the politics of Europe's aerospace/defence restructuring and even the most optimistic estimates suggest it is unlikely before mid-next year. The restructuring is not an "absolute requirement" for an A3XXlaunch but more than one partner has made no secret that it would help.
Neither is a resurgent Boeing likely to stand idly by as Airbus completes a launch into its most lucrative, added-value market. For certain, it will be an interesting time to be in airliner sales.
Source: Airline Business
