:: August 2002 Newsletter ::
There are many good places to watch the Farnborough Air Show. Bill, Teal’s Helmsman, likes the press center, where you can watch the full range of journalistic idiosyncrasies on display. Others prefer corporate hospitality chalets, where the lobster comes with your choice of dippin’ sauce and the wine floweth freely. But my recent experience indicates that the best place to watch the show is…Northern California. That’s where I went in a desperate bid to be as far as possible from the damp heat, security snafus, and logistical disasters that plagued that useless, news-free zone. But my sunny vantage point did afford ample opportunities to watch what people said, and to de-construct their many arguments. Permit me to share:
With airlines hemorrhaging cash and Worldcom execs-turned-consultants looking for cheap seats, you might be forgiven for thinking that the correct number of jetliners needed next year is zero. Well, any time’s a good time for a market share war, and Airbus says it’s going to build at least 300 planes in 2003, which means they just might out build Boeing, at least in terms of tail numbers. Boeing accuses them of flooding the market, resuming a price war, and basically worshiping Satan. But in truth, Airbus’s ’03 backlog looks reasonably good—only a handful of planned deliveries are for basket case airlines. United had already deferred its orders. Besides, originally Airbus had planned to ramp up to 400, so 300 isn’t too unreasonable.
Did I mention how I got to California, by the way? I slummed it on jetBlue, where I paid $266 round trip. It wasn’t any more or less comfortable than a typical coach class seat, and the much vaunted personal TV options comprise the crappiest selection of cable channels you can imagine (I was reduced to watching Tennessee Tuxedo on the Cartoon Network, over and over again on a three inch viewscreen one foot from my nose, while my wife looked on in horror).
But the point of that anecdote is that a lot of the new orders are coming from these discount carriers (jetBlue has 74 A320s on order, and these can be distinguished by their top mounted cable TV antennas, which look like badly stunted AWACS rotodomes). Southwest has been around for years, but the trend is belatedly increasing. Boeing’s biggest order by far this year was from Ireland’s Ryanair, and the two manufacturers spent much of Farnborough duking it out over an order from easyJet, another Euro discount carrier. And as these discount carriers expand, they are taking away traffic and profits from the majors. Yes, Air Tran is mopping up 717s, but it is also impacting American and Delta, two key 737 customers. The discount trend, in short, hurts the major’s recoveries, and their ability to take new planes.
Therefore, a lot of the latest new orders are effectively fratricidal, and are only serving to weaken the existing backlogs, not expand them. So we’re getting into crunch time. Both manufacturers can build whatever the hell they want in ’03, but after that things look grim. Unless the airlines make a miraculous recovery, the backlog will be backwash, and there are just about no new orders coming down the pike (I mean it this time).
Over at Boeing, the backlog for several key planes—notably the 747 and 757—is dangerously low. And times have clearly changed from ten years ago, when the company confidently launched the 777 in the middle of a downturn. I don’t think they’ll be doing much in the way of new product development for the next few years, and this will endanger their long-term market share.
The situation is quite different at Airbus, where the A380 is basically at the point of no return. Sure, Airbus will be able to continue its role as EADS cash generator through ’03, but what happens in ’04? Given anemic European defense spending, how does EADS keep making payments on the A380 development bill, without alienating shareholders?
Well, that’s where the US military market comes in. The old EADS strategy of small US Government sales (like the recent notable Deepwater victory) and under-the-horizon US industry purchases needs to give way to a grand slam. The new emphasis on this market is confirmed by the recent appointment of Northrop Grumman veteran Ralph Crosby as head of EADS North America. But the US Air Force won’t be buying Eurofighters anytime soon, which means that hopes for a really big deal revolve around Airbus widebodies—and lots of them—for special mission or tanking duties. And that’s when Boeing reaches for its revolver. In a fascinating exit interview with Defense News’ Vago Muradian, Boeing’s Harry Stonecipher said it was fine for EADS to play in the North American defense market (the two companies even gave a joint presentation at Farnborough on missile defense) but that Airbus should not be allowed in.
So that’s what it has come to. Boeing, with its numerous problems (the JSF loss, depressed space and airline markets, a legacy product lineup, and few hopes for new jetliners anytime soon), has one defensive card to play—the US military market. And it’s a strong card. The old argument over subsidies has been beaten to death, but Boeing can now say to Congress “look, if you buy Airbuses, it not only takes away jobs from guys who work on the our competing products, it also helps them fund a new program which will kill the 747, and throw more people out of work.” That’s a difficult argument to surmount, despite the obvious advantages of having EADS as a competitive force in this market.
The situation between Airbus and Boeing is fully explored in this month’s Commercial Jet Transports overview. We’ve also got updates of Nimrod, F-117, AB.139, SJ30, the Military Aircraft Inventory, and a bunch of Russian transports. Next month, we’ll visit the F-22, A400M, ATR, 767, AH-1, Tiger, and others. In the meantime, have a not too sweltering summer.
Yours, ‘Til jetBlue Makes Long Beach A Fortress Hub,
© Richard Aboulafia 1997-2006, All rights reserved.