Airbus (EAD) SAS is losing the staring contest with Boeing Co. (BA:US)
The European planemaker may have to rework its A350-1000 wide-body jet as cancellations mount and airlines criticize the design of Airbus’s alternative to Boeing’s 777. That gives Boeing some breathing room before it commits to a successor to the world’s top-selling twin-aisle airliner.
The pending decisions on the 777 and the A350-1000 show the risks in an industry whose products cost billions of dollars to develop and typically stay in production for decades. While Airbus and Boeing share a duopoly for single-aisle jets, the U.S. company holds the advantage in wide-body planes, which offer higher margins because they cost three times as much.
“Airplane development is one of the best real-life case studies in game theory,” said Carter Copeland, a Barclays Plc (BARC) analyst in New York. “These are big bets with long-life paybacks. Decisions about components, technology, production systems, all have an important bearing on the long-term profit profile of these programs.”
The A350-1000 was initially scheduled for delivery in 2015, before Airbus announced a delay in late 2011, saying it needed another 18 months to boost the performance of the largest member of the A350 line. Qatar Airways and Emirates, the biggest A350 buyers, have said they still aren’t content with the design, adding pressure on Airbus as Boeing plots what comes after its 777-300ER.
Boeing said it stands to benefit from Airbus moving first, because the rival product would help the Chicago-based company hone its response. The next plane probably will come at the turn of the decade and have a new engine, said Randy Tinseth, Boeing’s vice president for marketing.
“We’re in no rush to address that market,” Tinseth told journalists in Paris yesterday. “It’s better to have everything lined up for what we can do and when we can do it, understand what the competition will do and then move forward.”
Airbus Chief Executive Officer Tom Enders hands off the A350-1000 challenge tomorrow to Chief Operating Officer Fabrice Bregier, who becomes CEO as Enders ascends to lead parent European Aeronautic, Defence & Space Co. The transition will occur at EADS’s annual general meeting in Amsterdam.
The twin-engine 777 entered service in 1995, and has since been upgraded with the 777-300ER variant. That plane lists for $298.3 million and has a maximum range of 7,930 nautical miles (14,685 kilometers).
Buying at Discount
No A350s are flying yet. The first version, the mid-sized A350-900, is undergoing final assembly, with entry into service scheduled for the first half of 2014. The A350-1000 lists for $320.6 million. Airlines typically buy at a discount.
Airbus’s only wide-body model below the A380 jumbo is the twin-engine A330, which entered service in the mid 1990s. The jet has gained sales in recent years as an alternative to Boeing’s delayed 787 Dreamliner. The four-engine A340 variant was a commercial flop because it burned too much fuel, and Airbus ended the program last year after losing out to the 777.
The two planemakers have found themselves in a who-blinks- first standoff before. In December 2010, Airbus said it would offer new engines on its A320 single-aisle jet, jumping ahead as Boeing deliberated between engine upgrades on the 737 or an all- new narrow-body model.
Record orders for the A320neo variant forced Boeing to agree seven months later to outfit the 737 with new engines -- a pledge taken in such haste that the U.S. company’s board had yet to sign off on the plane that has since been dubbed 737 MAX.
The A320 was pivotal to the success of Toulouse, France- based Airbus in leapfrogging Boeing in 2003 for the top spot in global commercial sales, a position it has defended since. The wide-body market has been tougher to crack, leaving Airbus with an open flank in an area where Boeing earns its highest margins.
In the last five years, Boeing’s commercial airplane business has earned a profit margin of 6.5 percent on average, compared with 1.9 percent for Airbus, according to data compiled by Bloomberg. Boeing’s superior margins rest partly with its success in wide-bodies, which comprise half of all commercial plane sales in dollars.
“There’s a significant difference in pricing and profitability between wide-bodies and narrow-bodies,” said Richard Aboulafia, vice president of Fairfax, Virginia-based forecaster Teal Group. “The difference between Boeing and Airbus in commercial margins reflects that.”
No New Orders
Airbus suffered a setback in April on the A350-1000 when Etihad canceled seven jets, after already paring its order book in December. That left the Abu Dhabi state-owned airline with 12 A350s, less than half the number it originally agreed to take.
While Boeing celebrated the delivery of the 1,000th 777 in March, the A350-1000 has only 62 orders, compared with 368 for the smaller A350-900. The bigger plane hasn’t won a new order since 2008 and has only four customers. Airbus Sales Chief John Leahy said May 25 that there’s a dearth of orders because he has no delivery slots within a reasonable time frame.
“Our biggest constraint right now is production slots,” Leahy said when asked about the A350-1000’s lack of sales.
The A350 is Airbus’s first major program since the A380 double-decker entered service in 2007. Airbus is building the A350 from composite materials that are lighter and promise greater fuel efficiency, though they are less tried than aluminum and require more complex design and assembly.
Qatar Airways CEO Akbar Al Baker, who has an order for 80 A350s, including 20 of the largest variant, has publicly blasted Airbus for falling short with the design of the A350, demanding the company fulfill its contractual obligation.
“The aircraft is on the drawing board, we are not satisfied,” Al Baker said in a March interview. “They will need major improvement in range, performance, and fuel burn.”
Boeing is racing to keep up with 777 demand. The planemaker won 202 orders for the jet in 2011, more than any previous year, and is increasing production to 8.3 a month starting in 2013’s first quarter, from seven now.
The popularity of the 777 and Airbus’s struggles on the A350-1000 give Boeing flexibility to choose the best time when to upgrade the plane, Commercial Airplanes CEO Jim Albaugh told analysts at a May 15 meeting.
Albaugh said Boeing’s expectation is that the new 777 would have a wing made of composite materials along with new engines. Albaugh has said he expects Boeing to have a plan for a 777 upgrade to take the company’s board by year’s end.
Emirates President Tim Clark, whose airline is the biggest operator of 777s, said in an interview last month that he was eager to have a successor by 2019 and may order more than 100 over time. He also has said Airbus’s design changes and subsequent delays on the A350-1000 were unnecessary.
Boeing has a leg up on the design of the new 777 because of lessons learned from the design, production and customer feedback on the Dreamliner, which has composite-material wings and fuselage, said Howard Rubel, an analyst with Jeffries & Co. in New York.
“The more time they give thought to how to come up with some incremental and possibly break-through solutions, the better the 777X will be,” Rubel said.
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