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A NEW NO. 1? The rise of Airbus also has had an impact on Boeing's commercial-airplane division. For the first time, the European jetmaker will surpass Boeing in deliveries in 2003. Boeing lost the largest plane order in 2002 to Airbus -- up to 240 jets -- from European discount carrier EasyJet, which had previously bought only Boeing. And with United Airlines (UAL ) facing possible Chapter 7 liquidation and American Airlines (AMR ) teetering close to declaring Chapter 11, either outcome could mean more surplus aircraft on the market. That could drive production rates even lower.
What's more, Airbus' order backlog is larger than Boeing's -- 1,487 vs. 1,160 planes -- giving it parity with Boeing for the first time since the European consortium's creation 30 years ago. In fact, many analysts who follow the business believe Airbus is poised to supplant its U.S. rival as the No. 1 maker of commercial jetliners.
Part of the reason is that Airbus has been pumping money into the development of new airplanes, such as its 555-seat A380 mega-jumbo jet. Last year, Airbus directed 9% of its sales into research and development, compared with Boeing's 2.7%. The American company's last all-new airplane was the 300-seat 777 jetliner, which is based on early-1990s technology.
EXPORTING KNOWLEDGE. And another dynamic is at work: The new centers of airplane manufacturing are shifting from Seattle, Wichita, and Southern California to Russia to the Asia-Pacific region, the study's authors say. They point to generous transfers of U.S. manufacturing technology and subcontracting agreements that exchanged factory work for the sale of airplanes.
Take South Korea, which had virtually no presence in the sector a few years ago. In 1995, Hyundai obtained engineering and technical specs for building the wings of Boeing's 100-seat 717 airplane. Within two years, Hyundai had purchased state-of-the-art equipment and had successfully built wings for the airplane. Boeing's own equipment for building the same parts is 30 years old, the authors point out.
To Pritchard, that's evidence that Boeing is bailing out of the plane-making business. In an industry with high costs and low volume, offset agreements have been a mechanism to promote sales and shift production work to low-wage countries. "Direct offset agreements between airlines and aircraft producers are designed to transfer a segment of the manufacturing work to the buyer," Pritchard says. "They are prevalent where unit costs are high and sellers are desperate to make a sale."
"NOT COMING BACK." Russia and China are developing 70-seat regional jets, and other countries such as Japan, India, and South Africa are getting into aerospace subcontracting. It's possible that, 10 years from now, Boeing will continue to sell two product lines under its brand -- the 777 and the smaller 737, the study postulates. But gone will be the 717, 747, 757, and 767 jetliners.
What's clear, the authors assert, is that even if a plane bears the Boeing brand, the parts and even final assembly will likely come from another country. "We're foreseeing a radical shift in production of commercial aircraft from the U.S. to overseas," Pritchard says. "And it's not coming back."
Such a strategy could be positive for Boeing and its shareholders because aviation services and high-tech military manufacturing tend to have higher profit margins than the commercial business. But the price would be high -- the likely loss of an additional 20,000 high-skilled engineering and factory jobs in the U.S., the authors say, and the transformation of America's No. 1 exporter in dollar terms into a new kind of 21st century multinational that provides global services.
Copyright 2003, Bloomberg L.P.
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