Another Turbulent Paris Air Show


By Stanley Holmes

SPECIAL REPORTFROM THE PARIS AIR SHOW

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Puddle-Jumpers' Bigger Pond

Boeing's Duel with Complacency

Air-to-Air Combat over Paris

Airbus' A350 Gets a Lift

Another Turbulent Paris Air Show

Once again, the Paris Air Show is the stage for international tensions and leadership turmoil as the world's aerospace elite gather today at Le Bourget. Ironically, these trade tensions and company power struggles are being played out against the backdrop of some impressive developments in aerospace technology.

The atmosphere is like it was two years ago, when the U.S. government kept most of its military planes home to protest France's opposition to the Iraq war. This year, the No. 1 issue casting a pall over this prestigious week-long gathering is the controversial issue of subsidies.

TANKERS, AGAIN. However, that brewing battle is just one of the undercurrents coursing through the show. There are more positive ones, including making collaboration and cooperation between U.S. and European defense contractors a priority.

European aerospace giant European Aeronautic Defence & Space Co. (EADS, which is the parent of Airbus), last week underscored that reality when it announced a partnership with U.S. defense company Northrop-Grumman (NOC). The two will team up when the Defense Dept. seeks new bids for a lucrative tanker refueling contract. Boeing (BA) had botched an earlier effort to secure the controversial $23 billion program to build 100 Air Force tankers.

But Defense is expected to give Boeing another chance to secure a tanker deal. Whenever that happens, Boeing will have to compete with EADS and Northrop.

MUSICAL CHAIRS. EADS and Boeing have something else in common as they arrive at the air show: Each is in the peculiar situation of being leaderless. In fact, EADS abruptly canceled its major press briefing here because the French and Germans have been tussling over who will run Airbus and EADS.

A resolution may be forthcoming, however. Following tense internal negotiations, French and German shareholders apparently have agreed that Airbus chief operating officer Gustav Humbert, a German, will become the next chief executive. This paves the way for former Airbus CEO Noël Forgeard to assume with Tom Enders of EADS the role of co-CEO.

Beyond such turmoil and tension, this year's Le Bourget is also showcasing some exciting new products. Airbus' mega, double-decker A380 jetliner is getting its first public debut. Boeing flew in its latest super-long-range version of its twin-engine 777 jetliner for static display and has been racking up orders for its new fuel-sipping composite airplane -- the 787 Dreamliner.

BURDENED BY OVERRUNS French aircraft maker Dassault is introducing a new business jet called the Falcon 7X that takes advantage of advanced flight controls called fly-by-wire. A small U.S. company, Aerion, led by American billionaire Robert Bass, is giving an update on its efforts to build the first supersonic business jet.

Unfortunately for Airbus, the world's largest commercial jetliner -- the 555-seat A380 -- has been plagued by weight issues and performance problems that have delayed the first deliveries by six months. While it's not unusual for new airplanes to have weight trouble, the delays and cost overruns have marred the debut of this otherwise impressive technological feat.

Even more worrisome for Airbus, the Toulouse (France)-based jetmaker hasn't sold a new A380 in a long time. That should change once the colossal jetliner enters service, but in the short term, it's a blow to the prestige of the company that has been known for racking up big batches of new airplane orders at Le Bourget.

FUEL MISER. By contrast, Boeing has been raking in the orders for its new 787 jetliner. Over the last six months, the composite airplane has amassed a total of 266 orders and commitments -- making it one of the fastest-selling airplanes in history (see BW, 6/20/05, "Boeing's Plastic Dream Machine").

Thanks to fuel-efficient engines, this 226-seat jetliner is 10% cheaper to operate, burning 20% less fuel than rival jets in the same category. Airbus was supposed to launch its A350 -- which is expected to compete directly with the 787 -- at Le Bourget, but Airbus execs have since decided to delay the launch for at least three months. The A350 has yet to win any airline orders (see BW Online, 6/8/05, "Rebound Delayed for Airbus?").

Unlike two years ago, the U.S. military is sending its top brass to Le Bourget as well as fighter jets and cargo planes such as the F-15 and the C-130J. Despite the subsidy dispute having the potential to break out into an all-out trade war between the U.S. and Europe, the theme among U.S. and European defense contractors is transatlantic cooperation.

HANDS ACROSS THE WATER. The potential partnership between Northrop and EADS and the acquisition by British defense company BAE Systems of U.S. defense supplier United Defense (UDI) underscore the more cooperative approach defense outfits are taking on both sides of the Atlantic. The main reasons: common security interests and a desire to be more efficient and cost-effective.

"We are working with industrial partners to develop global products for the global marketplace," says Robert Stephens, chairman and CEO of Lockheed Martin (LMT). "We are striving through our business strategies and our business practices to create and sustain a credible, open, and integrated transatlantic marketplace."

European companies could get a piece of some Defense Dept. contracts. Two programs that could include their involvement are the Army's Future Cargo Aircraft and the Personnel Recovery Vehicle, an Air Force helicopter program.

SHOTS AND VOLLEYS. The other military programs likely to garner interest here include the Unmanned Aerial Surveillance and Network Centric warfare systems. Advances in technology continue to improve the designs of UAVs -- pilotless airplanes that help gather information on the enemy. Such information will eventually be fed into a network to give commanders and war fighters instant data. One of the first attempts to create such a network is the U.S. Army's Future Combat System -- a multibillion-dollar program led by Boeing. The ambitious effort will connect tanks, military trucks, helicopters, fighter jets, and command centers with a speedy, reliable communications network.

But the dispute over Airbus subsidies likely will take center stage at Le Bourget. Government officials and executives from both Europe and the U.S. will try to influence public opinion as the U.S. government proceeds with its World Trade Organization case against the Europeans.

The U.S. contends that Airbus' ability to tap into cheap loans for up to one-third of the development cost of a new airplane constitutes an unfair subsidy and should be ended. The European Commission wasted no time retaliating, recently announcing it will pursue its own subsidy case against Boeing, alleging the U.S. jetmaker receives various subsidies in the form of tax breaks or defense research contracts.

GLOBAL FEUD? Plans by the Europeans to offer launch aid for the development of the A350 has intensified matters. Airbus estimates the cost of the A350 at about $4.9 billion. Boeing fears it will be unable to compete if the Europeans approve the loans. Airbus now controls more than 50% of the world market for commercial airplanes.

The outcome of the Boeing-Airbus dispute could ignite an all-out trade war with the potential to spread to other industries and threaten the global trading system. At the very least, it's certain to reshape the future of commercial aviation -- and the balance of power between Boeing and Airbus. Holmes is a Seattle-based correspondent for BusinessWeek


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