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Showdown at 30,000 Feet

By Stanley Holmes Regular visitors to Farnborough International Air Show are accustomed to the dogfight between U.S. aerospace giant Boeing and European rival Airbus Industrie as they battle for new aircraft orders. But with airlines losing billions because of the recession and the traumatic shock of the September 11th terrorist attacks, this air show may be remembered less for the amount of new business generated and more for how the two jetmakers respond to the continuing airline industry slump.

By that measure, Boeing and Airbus continue to follow distinctly different flight paths. With the air show opening on July 22 in southeast England, the collapse of the commercial jet market has been more painful for Boeing. The Chicago-based company has been forced to slash production by half and to cut nearly 30,000 jobs from its commercial airplane division in Seattle. It now plans to deliver about 380 aircraft this year and between 275 and 300 jets in 2003.

Airbus, so far, has cut back on overtime, eliminated contract workers, and postponed plans to raise production by 50%. But layoffs? Not here, Airbus execs say. The Toulouse (France) jetmaker plans to deliver 300 airplanes this year and about 300 in 2003, and it has secured 95 orders for its new 555-seat A380 superjumbo jetliner. Company officials have suggested that they could raise production rates in 2004. For the first time in the two rivals' contentious and combative 30-year history, Airbus could surpass Boeing in aircraft deliveries next year.

"FIGHTING VERY HARD." What's more, Airbus execs may be playing the spoiler in this year's biggest aircraft deal. Boeing appeared to have won a $6 billion, 120-jet order from low-cost carrier EasyJet for 737 airliners. The British carrier had been planning to announce the order at Farnborough. But it now looks like Airbus might grab part of that business, according to people familiar with the competition. "We are fighting very hard to get this deal," says Airbus Chief Operating Officer Gustav Humbert. "There is no reason Boeing should have all of this market." Boeing officials couldn't be reached for comment.

One brighter spot for Boeing: Low-cost carriers such as Ryanair and EasyJet will account for more than 50% of the 400 to 450 aircraft orders expected to be announced this year. The no-frill flyers, which include West Jet, JetBlue, and industry granddaddy Southwest Airlines, have been the only profitable carriers during the protracted industry slump. And Boeing has dominated the discount market.

As a result of strong 737 sales, Boeing is leading with net orders of 134 vs. Airbus' 104. But Boeing's success is a mixed bag. Smaller-jet production means lower overall value in terms of dollar amount and fewer profits. The shift to smaller jets is starting to hit Boeing's bottom line. In its second-quarter conference call on July 17, Boeing said the airplane mix in the future would tilt even more heavily toward smaller jets.

MOTHBALLED FLEET. With the exception of the A380, the big-jet market remains soft. And Boeing and Airbus likely will have to console themselves with slim pickings. No sizeable jumbo-jet orders are expected to be announced at Farnborough. Boeing recently won an order for nine twin-aisle 767s from Russian carrier Aeroflot. But Airbus appears set to nab an order from Aeroflot for 18 medium-haul Airbus A-320s (see BW Online 7/19/02, "Boeing and Airbus Land Aeroflot"). Plus, Airbus has grabbed a deal for 12 long-haul A330 jetliners with Dutch carrier KLM.

It's still unclear whether the worst of the airline crisis is over. Ten months after September 11, more than 2,000 jetliners are still parked in an American desert, a stark symbol of airline overcapacity.

Some say a cyclical recovery, led by stronger passenger traffic in Asia, will clear the picture in a year. Or it may take a radical restructuring of airline business models that creates more opportunities for low-cost carriers to spur recovery. In the meantime, "gloom best describes the outlook for commercial airliners," writes Merrill Lynch aerospace analyst Byron Callan, in a recent research note.

FEWER CUSTOMERS? However, a protracted slump in the North American market could hurt Airbus worse than Boeing. Even though the American planemaker has the larger share of the U.S. market, Airbus' U.S. customers are in worse financial shape. Two of its top clients, United Airlines and U.S. Airways, have applied for some of the largest share of the $10 billion federal loan-guarantee program. And U.S. Airways, along with another Airbus customer, AmericaWest, have been threatening to declare bankruptcy for some time. "We'll probably see some U.S. airlines go belly up," Airbus' Humbert says. "So, it's not over."

The European company does have an edge with its controversial A380, however, which is stealing market share from Boeing. Earlier this month, Federal Express confirmed its order for 10 of the flying behemoths -- the first U.S. carrier to sign up for the all-new megajet. Worse, unless Boeing enlarges or massively upgrades its venerable 418-seat 747, it appears Airbus is going to take over the lucrative 400-seat airplane market.

After all, the real money is in bigger aircraft, a fact Boeing has quietly known ever since sales of its 747 took off in the late 1970s and became its cash cow. Humbert says the first A380 is scheduled for delivery to Singapore Airlines in 2006 and expects no changes to the program. He also says Airbus will secure at least two Asian customers this year and is confident that Boeing's largest 747 customer -- Japan Airlines -- will be one of the new A380 customers.

HOW VIABLE? Then there's the fate of Boeing's Sonic Cruiser. The 250-seat jet would fly just below the speed of sound and cut travel times by about one hour for every 3,000 miles flown. That would slice about two hours from the New York-Tokyo route.

However, it appears now that airlines are rejecting the concept of speedier flights because the operating economics of the futuristic-looking jet remain too high, say industry insiders. In mid-July, Boeing Chairman and CEO Philip M. Condit acknowledged questions about the Sonic Cruiser's viability in today's slumping airline market. But he stopped short of ruling the program dead (see BW, 7/29/02, "Boeing: A Flight to Safety?").

The bigger question is whether Boeing is willing to take the financial risk of building an innovative new jetliner -- whether the Sonic Cruiser or some other advanced model. Many industry experts never believed Boeing was serious about the Sonic Cruiser. They merely considered it to be a marketing mirage aimed at masking Boeing's decision to kill a proposal to build a slightly larger and more modern version of the 747 that would have gone head-to-head with the A380.

RADICAL ALTERNATIVES. Dropping the Sonic Cruiser could hurt Boeing's reputation, however, because the company's executives had gone to great lengths in supporting the concept. "A lot of people couldn't believe that Boeing would be so confident about something that might not work out," says Richard Aboulafia, aerospace analyst for consultants Teal Group. "I can't believe their credibility won't take a hit."

Boeing is also considering an all-new conventional aircraft to replace the slow selling, 250-seat 767 jetliner. It would transfer some of the new technologies developed on the Sonic Cruiser to this new conventional aircraft and make it lighter and cheaper to construct. And Boeing is considering even more radical alternatives such as a "blended-wing" aircraft.

Without a new product, Boeing has the popular-selling 777 airliner as its only true competitive advantage. Sales of the aging 747, 757, and 767 have slowed to a trickle. Even the strong-selling 737 model faces stiff competition from the Airbus A320 family. In the absence of a technological leap, Boeing may have to reconsider its new-product strategy.

NO "GAME CHANGER." One problem with building derivative models -- as Airbus has shown -- is marketing. Derivatives, which are upgrades of existing models, offer no competitive advantage, and the manufacturer ends up cutting deals. "There is a lot of uncertainty at Boeing," Aboulafia says. "Without a game-changer, they may have to rethink derivatives."

Meanwhile, Airbus is more than halfway to securing the 250 orders it needs to make money on the A380, and it's creeping ever closer to splitting 50% of the world's aircraft deliveries with Boeing. More than one exec on European soil at this year's Farnborough Air Show has to be thinking seriously about the future of world's largest commercial planemaker back in the States. Holmes, who is Seattle correspondent for BusinessWeek, is in Farnborough covering the air show

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