Aircraft Builders Jostle for Future Business
Asian involvement grows; can anyone finance a 'superjumbo'?
TWENTY-FIVE years ago, American firms controlled more than 90 percent of the world commercial-airplane market. Europe's civil-aviation industry was close to ruin.
To European governments, the stakes involved much more than jobs. Europe wanted to maintain a presence in an industry tied closely to national pride, technological leadership, and military security.
By creating and subsidizing the Airbus Industrie consortium, European governments achieved that goal.
Now Asian nations want to do the same thing. And Airbus is struggling to protect its hard-won share of the market.
At the Feb. 6-11 Asian Aerospace exhibition in Singapore, Chinese and South Korean companies stepped up calls for an Asian consortium, which would produce its own line of medium-range jets known as Asian Express. Aerospace firms from Singapore and India, as well as a Western partner, could be included. The Asians want into the business for the same reasons Germany and France don't want to be driven out of it. Japan just announced its own feasibility study for a 100-seat jetliner.
The result, observers say, will be a mix of cooperation and competition with Western manufacturers that will slowly make production of the world's most complex machines more global.
Western companies, though they may be sowing the seeds of future competition, are lining up to get involved.
''They would rather cooperate with them than fight 'em,'' says Bill Whitlow, an aerospace analyst at Pacific Crest Securities in Seattle.
Boeing Company and McDonnell Douglas Corp. of America, as well as Airbus partners Daimler Benz Aerospace of Germany and Aerospatiale of France, are bidding for a role in Asian Express.
''Asia is where growth in the market is coming from, and growing economies want to see their industries take a larger role in international civil aviation,'' says David Martin, a spokesman for Seattle-based Boeing. ''Boeing clearly understands that if it's going to be an international player, it has to look at doing more work outside the United States than in the past.''
Pooling financial risks
In addition to opening markets, global cooperation can spread the risks in an industry where the development cost of a new jetliner is measured in billions, but only a few dozen planes may be sold in a given year.
Consider the case of the ''superjumbo,'' the plane that many analysts say is needed but would cost some $8 billion to $15 billion to develop.
Such a jet would seat 600 to 800 people, compared with 400 or so for today's biggest jetliner, the Boeing 747. The new plane would be welcome in Asia's congested airports and British Airways says it wants to buy them for Atlantic routes.
But who can afford to build it?
The question is especially vexing for Airbus, which is now seriously hampered by its lack of a jumbo plane.
Closely contested contracts in Singapore and Malaysia totaling $16.7 billion were recently awarded to Boeing because the Airbus A-330 does not match the seating capacity of the Boeing 747, airline spokesmen said.
''What's driving our move to the jumbo is the Asian market,'' says John Leahy, senior commercial vice president of Airbus, based in Toulouse, France.
In recent years, Airbus has captured about 30 percent of the jetliner market, Boeing about 60 percent, and St. Louis-based McDonnell Douglas about 10 percent. But Boeing has done even better recently, winning 70 percent of 1995 orders. In part that's because it has the largest airplane.
''The long-term future growth of the industry will inevitably require larger aircraft,'' says Chris Avery, an analyst at Paribas Capital Markets in London. ''Airbus can't afford to vacate that strategic area, and now faces a growing imperative in that range.''
Airbus shares this assessment. It predicts that 800 aircraft with 500-plus seats will be sold over the next 20 years - at $200 million apiece.
Boeing and some Airbus partners considered jointly developing the costly jet, but the talks ended last year.
''Boeing has decided that that market is not there ... to pay them back for that investment,'' says Mr. Whitlow. He says airlines increasingly want to fly long-range direct flights on thinly traveled routes, such as Atlanta to Munich, rather than focus so much on traditional routes such as New York to London.
As Boeing hesitates, Airbus wants to push ahead on the superjumbo.
Recently, French transport minister Bernard Pons said that French, British, and German ministers have given informal backing to Airbus partners for a new plane that would seat 500 to 600 and fly nonstop from London to Sydney.
''Leaving our major competition with a monopoly position is extremely dangerous,'' says Mr. Leahy of Airbus. ''It gives Boeing the ability to cross-subsidize and develop package deals'' in which the high profits on large jets allow Boeing to discount smaller planes.
But Boeing isn't selling planes like hot cakes for that reason alone. It has aggressively cut costs and jobs, and aims to pare expenses by 25 percent again in the next few years. It also has moved to buy more parts abroad in deals that help win purchases from national airlines.
Ties to Asia growing
''Today, we build about 50 percent and buy about 50 percent of our parts; we are changing that mix to 48 percent built and 52 percent bought,'' especially in Asia, says Boeing's Mr. Martin.
Such partnerships by Boeing, McDonnell Douglas, and others are helping to fuel the growth of Asian aerospace firms, which need contracts and expertise from outside their own countries.
Pratt & Whitney, the jet-engine unit of United Technologies Corp., announced Feb. 12 that it would be majority owner of Chengdu Engine Company, a new maker of engine parts in China. And McDonnell Douglas just announced it would buy wings for one of its planes from South Korea's Hyundai.
Global partnerships are more popular with American shareholders than they will be with European taxpayers, who initially financed the Airbus venture on the promise of jobs at home. Even for Boeing, outsourcing stirs labor unrest.
Moreover, Western companies are cautious about sharing precious design knowledge with potential rivals. But head-to-head competition from Asia remains many years away.
''We don't think Europe and America have to worry yet about an Asian Airbus,'' says an Airbus spokesman. ''Both Airbus and Boeing have been extremely careful about how much know-how they make available to partners.''
Of more immediate concern to Airbus is the superjumbo.
Boeing can edge its product line upward by designing a bigger wing for the 747, allowing it to seat perhaps 500 people. That would cost more than $1 billion, but far less than an all-new plane.
Some analysts say Airbus can't finance a large jetliner without breaking the terms of a 1992 US-Europe agreement limiting government subsidies (repayable ''loans'') to 30 percent of development costs for new planes.
Job 1 for Airbus is ''being competitive with the planes that they have'' rather than developing a new one, says Paul Nisbet, an analyst at JSA Research in Newport, R.I.
''I just can't imagine investors loaning Airbus that kind of money,'' adds Whitlow.
Still, Airbus officials can't forget about the $16.7 billion of business lost to Boeing in Singapore and Malaysia. A decision by Airbus to go ahead on a superjumbo will require agreement from the four consortium partners - Aerospatiale of France, Daimler-Benz of Germany, British Aerospace, and CASA of Spain - as well as from governments.
''It's up to us to make the political powers realize that the positions you win in this business are not cut in stone. We got there because Europe needed an aircraft manufacturing industry,'' says Robert Alizart, Airbus's vice president of corporate communications. ''You don't succeed by just picking fruit off a tree that is planted. You always have to develop in this business.''
To succeed, Airbus needs a tighter corporate structure, with centralized management, analysts say. On Feb. 5, Daimler Benz chairman Juergen Schrempp said Airbus needs a common identity and a ''management with bottom-line responsibility.'' Airbus officials expect to recommend reorganization plans later this spring. A tighter management structure would also help Airbus direct profits into new development efforts, rather than back to consortium partners, and facilitate cost-cutting.
The extent of direct European subsidies and of indirect US subsidies for commercial aircraftmakers has been hotly disputed on both sides of the Atlantic.Government support for the full line of eight Airbus models has amounted to $26 billion in subsidies, essentially interest-free loans, according to a study done for the US Commerce Department.Airbus disputes this number, and insists that US indirect support for the commercial jet industry is even more significant, because of the close link between military programs and the commercial aircraft. Boeing's 747, for example, was initially developed as a military transport.
And subsidies remain common to much of the industry worldwide, including the competitive market for small jets with 100 or fewer seats. Boeing has not tried to enter that market. But if Boeing becomes the Western partner for Asian firms, that could change, since the first project would be such a commuter jet.