RichardAboulafia.com 

:: May 2005 Letter ::

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Dear Fellow Rememberers Of Things Past,

Six AM, Plainview, Long Island, New York. I wake with a bloodcurdling scream, as is my custom whilst visiting my ancestral prefab postwar subdivision home. Whenever I stay here I’m visited by countless regrets, the endless litany of blunders, stupidities and cringe-inducing mistakes that comprise people’s lives. My dad is selling the house, and this is my final chance to relive these horrors in an evocative setting. The new owners will hopefully take custody of my old nightmares.

I’m particularly haunted by things I should have said, but didn’t. Example. In 1998, I visited Airbus Hamburg. They were doing very well, with impressive market share gains and a growing product line. But the A3XX (A380), I told a group of typically alert and respectful Germans, looked like a very bad idea. Then, one of the Germans respectfully asked why it mattered. Boeing Commercial, infected with Chronic Bottom Line Obsession Disease courtesy of McDonnell Douglas, was resting on its laurels and coasting off into the sunset. So why not just launch the A380, seize a little extra market share and destroy Boeing’s 747 profits? If there was short-term sluggishness, Airbus could accept that until the jumbo segment grew into a lucrative market that they dominated. Where’s the harm in that?

Hmmmm, I thought, looking like a particularly curious and friendly deer, gazing into the halogens of an oncoming Mack Truck. I was stumped for an answer. They had me with that one.

As the years went by, I learned to live with the A380, like a million pound albatross roosting in the corner. Those Germans seemed to have a point. While I didn’t see the market or believe in the program economics, perhaps the A380 made some sense. After all, Airbus’s parent companies were heading for full privatization; why not face that future with a complete product line? It would reinforce their commonality argument, and they could tell investors that the new private company wouldn’t need to spend on new jetliners for years to come. Return on investment simply wasn’t the highest priority for these folks. Besides, it wasn’t like Boeing was doing anything useful.

But then it came to me, at six AM, producing that scream (one of several that morning, according to my wife). After watching the 787 use the A350 to mop the floor, it finally registered: “Because,” I should have told them seven years ago, “you might need the cash for new product development if Boeing starts hitting back in a more relevant market segment.”

That’s the problem. Airbus’s strategy was great, as long as Boeing politely cooperated by staying quiet and horizontal. But the 787 appears to be working. April saw a dizzying blitz of wins, with announcements (or rumors) from Air India, Air Canada, Korean, and Northwest. Predictably, these 787 wins produced a knock-on effect, with dozens of new 777 orders as well. Le Bourget could see the 787 with twice as many orders as the much older A380. Worse, the proposed A350 might be nowhere.

The order quantities are less important. What matters is that these orders aren’t coming from the usual Boeing clients—Japan, AMR, Continental, etc. They’re coming from Airbus customers, the very ones that might appreciate a mid market plane with an Airbus cockpit, one that helped maintain existing Airbus fleet values. And strangely, India, a fast-growth, high density, long-range market, has no interest in the A380.

The current A350 could get orders tomorrow (Emirates might come through—they plan to transport most of humanity by 2025; why not add another plane to the mix?). With or without a launch order, the derivative A350 could be a mistake. But Airbus’s decision to go with a derivative might not have been a choice. The burden of A380 development, and imminent industrial restructuring in Europe, likely prevented Airbus from finding cash for something new, something that could stop the 787 on equal terms.

When viewed in this context, that WTO complaint starts to make some sense; it might have been a way for Boeing to protect the 787 by making Europe think twice about funding an all-new A350. The WTO complaint might now be irrelevant—it did its job when Airbus went with a derivative A350. If Airbus cancels the current A350 and asks for launch aid for an all-new A350, it would be a deeply embarrassing moment for Europe.

About Boeing. I would be remiss by not pointing out the sheer difficulty of creating the technically ambitious 787. Big questions: operating economics, performance goals, production costs, and of course schedule. Boeing has a great track record in jetliner design, but that was before the McDonnell merger, back when BCA ran the show and didn’t have to worry about begging for resources. Back before they outsourced engineering work to anyone with a coin-fed pay-to-play CAD/CAM monitor. Boeing also needs to execute in the midst of serious corporate leadership issues (White smoke over Chicago—new Boeing CEO; Black smoke—not yet). And their defense side is pressured by high-risk net-centric programs and a Senator with a chainsaw and a grudge.

In fact, as the 787/777 orders were pouring in, Boeing’s defense side was clobbered by a jarring array of setbacks affecting JTRS, FCS, C-130 AMP, and SDB (this isn’t just alphabet soup; this is Boeing’s future revenue). Strangely, Europe’s defense side is getting its act together (Eurofighter, A400M, tankers, NH 90, etc), just as Airbus takes a hit on the chin. Is there some law of nature that prevents aerospace companies from firing on both cylinders at once?

Executing the 787 with all of that going on will be difficult. But if Boeing succeeds in delivering the 787 as planned, and if the current middle market ordering trends continue, Airbus is in serious trouble. Boeing could leverage 787 technology to rejuvenate the 747 and launch a composite 737 replacement. This would leave Airbus with a badly diminished market share and a marginally relevant leviathan with tanning salons and great duty free shopping. But then again, it isn’t like nobody warned them….

Next month will see updates of the regional and trainer aircraft markets, plus the A340, A400M, T-6, Huey, LCA, ALH, and Tornado. Have a scream-free month.

Yours, Proustianly,

Richard Aboulafia

 

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