The Hint Of An Updraft

In the Sonora Desert, 30 miles northwest of Tucson, more than 150 used airliners--from DC-9s to 747 jumbo jets--stand parked in rows in a 2,000-acre storage facility. In Everett, Wash., Boeing Co.'s vast assembly plant is scaling back production to two 747s a month, down from five in 1992. Outside Minneapolis, Northwest Airlines Inc. officials have decided not to buy new aircraft: Instead, they'll retrofit their oldest, noisiest planes to meet stringent new antinoise regulations that take effect by the year 2000.

These are hardly good signs for aircraft makers, whose business has been in a tailspin since 1991. Still, many in the industry think they're now seeing early signs of an updraft. Europe's Airbus Industrie expects world passenger jet orders to reach 200 this year, up from fewer than 100 in 1993. Manufacturers already are scrambling to win a few megadeals: $5 billion from China, $6 billion from Saudi Arabia, $6 billion from Singapore. And Boeing, which dominates the market with a 60% share, sees more orders ahead.

FEELING POOR. It expects peak production of more than 700 commercial aircraft a year in the late 1990s, 40% above current levels. Its reasoning: It thinks the world economy will grow 3.4% annually through the year 2000, and it notes that U.S. and European airlines will have to replace noisy, aging planes with quieter ones. "We see this inevitable need coming down the rails like a freight train," says Boeing Vice-President Richard L. James. Airbus, the No.2 producer, with 30% of the market, is also bullish: It sees 700 world deliveries in 1998.

To some carriers, suppliers, and analysts, such predictions are mainly blue-sky. Engine-maker Pratt & Whitney, for one, thinks aircraft sales will reach only 11,000 units over the next two decades, below Boeing's estimate of 14,000. That reflects doubt that the financially strapped airlines can afford big new investments. U.S. carriers--which have lost $12 billion during the past four years--may edge into the black this year, but many European and Japanese airlines won't. And if Boeing's projections are right, airlines will need $49 billion of financing a year to buy all the new planes. "Where in the good Lord's name are the airlines going to get that much cash?" asks analyst Nicholas P. Heymann of NatWest Securities Corp. Indeed, Boeing considers used aircraft its most worrisome competitor. "If it's cheaper for airlines to operate and maintain an older, inefficient airplane than to finance a new one...they'll continue to do it," says Boeing CEO Frank Shrontz.

"RUNNING LIKE CRAZY." His strategy is to cut design and manufacturing costs and offer new, efficient planes cheaply enough to get airlines to buy. Boeing has trimmed cycle time--from start to finish--on its 737 from 18 months to less than 12, with an ultimate goal of 6 months. And it is developing new, more efficient 737s, which it hopes to offer at the same $35 million price of current models. "Even though Boeing is the market leader, they're running like crazy, like they think they're behind," says Peter Aseritis, aerospace analyst at CS First Boston. "It's going to pay off in spades." He sees a 38% drop in Boeing's profits, to $765 million, this year--but a sharp rebound, to $1.87 billion, by 1997.

Airbus is trying a similar strategy. "We're setting aggressive cost and cycle-time reduction targets," says Adam Brown, its director of planning--but Airbus may find it hard to slash expenses: It's a government-backed consortium of French, German, British, and Spanish companies, which tend to divvy up work pork-barrel style. "The ability to wring out costs is the antithesis of what Airbus is all about," says NatWest's Heymann.

Of the big manufacturers, McDonnell Douglas Corp. may be flying into the roughest weather. Its production has fallen from 50 planes per quarter in 1991 to 7, it had more orders canceled than booked last year, and it is unable to spend heavily to develop new planes. So, unlike Boeing and Airbus, Douglas--which believes that the industry's climb will be slow--is pushing retrofits. It wants to equip aging DC-9s with new, quieter engines, new avionics, and refurbished interiors. So far, however, it has no takers. Its hottest prospect, Air Canada, decided last month to lease 25 new Airbus 319s instead.

The U.S. and European requirements for quieter planes will help spark demand, but so will changes in the market. Many of the strongest airlines are in Asia, where robust growth, except in Japan, is fueling a boom in air travel. Carriers such as Air China and Singapore Airlines need jumbos to cross the Pacific and to fly to Europe. Boeing expects the jumbo jet share of sales to rise from 22% now to 30% during the next two decades.

POINT-TO-POINT. At the same time, manufacturers expect higher demand for smaller jets. As China and others develop their infrastructure, they'll need these for regional travel. In the U.S. and Europe, meanwhile, the trend is to focus on heavily traveled short-haul routes--especially for smaller, more efficient airlines. Southwest Airlines Co., the most profitable in the U.S., flies only 737s, Boeing's smallest narrowbody. Others are beginning to imitate Southwest's point-to-point strategy, relying less heavily on congested hub-and-spoke systems. As shorter routes gain traffic, airlines can justify replacing commuter turboprop planes with small jets.

None of the Big Three manufacturers--Airbus, Boeing, or Douglas--now offers a plane with fewer than 100 seats, a niche dominated by British Aerospace PLC and Fokker. But Douglas hopes to launch a 100-seat version of its MD-90. And Boeing is considering its first 70-to-100 passenger jet. Boeing will work closely with manufacturers from Japan, who produce major parts of its 767 and 777, and from China, also a key supplier.

Boeing's move is partly defensive. Japan's producers, such as Mitsubishi Heavy Industries Ltd., have been looking into production of their own small jet, dubbed the YSX. If Boeing teams up with them instead of competing, it thinks it can create a new small jet that would share parts and pilots with the 737. "We want to make sure we have Boeing products in every segment of the market," says Robert L. DeVore, director of product strategy analysis.

Still, the best strategy for boosting sales may be to cut costs. That way, whenever the market recovers, plane- makers will be ready for takeoff.

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