Airbus vs. Boeing: Rumble over Tokyo
Back in 1990, when All Nippon Airways and flagship carrier Japan Airlines Co. ordered the first Boeing 777 jetcraft, Boeing Co. pulled out all the stops to celebrate the sale. The aircraft giant brought together hundreds of guests, including government officials, top executives from both companies, and their wives, for a bash at Tokyo's Imperial Hotel. The assembled partygoers were wowed by the centerpiece of the gala. For the affair, Boeing had built a three-quarter scale model of the first plane it had ever made, the wood-and-cloth B&W. It's the type of gesture--a bow to history--that impresses the Japanese. Now Boeing hopes it can impress them again, this time with a real plane--a superjumbo jet--that will serve to protect its long-standing dominance of the country's commercial-aircraft sales.
For nearly 50 years, Boeing and Japanese airlines JAL, All Nippon, and Japan Air System have had a fruitful business relationship, thanks in part to the aircraft maker's deference to Japanese customs. Boeing's planes now account for 84% of Japan's commercial fleets, the world's third-largest national air market after the U.S. and China. From 1970 to 1998, JAL alone spent $14.4 billion on those planes. But that lead is now under fierce attack from Boeing's archrival, Airbus Industrie. Japan has become the key battleground as the European aircraft consortium seeks to launch its superjumbo A380 jet, which can hold 555 to 800 passengers. The Airbus offensive will force Boeing, which recently announced it will move its headquarters out of Seattle as part of a major corporate overhaul, to fight like never before.
Airbus isn't waiting. It's expanding its small Japanese office and making allies at Japanese businesses. The company has already shown that it's willing to offer steep discounts. Some early buyers paid 40% off the A380's $220 million list price. Quality planes and aggressive business practices like that have lifted Airbus' worldwide market share over the past five years from 21% to almost 50%. Airbus already has A380 orders from Singapore Airlines and Qantas Airways, two other Pacific Rim carriers. If the Japanese buy the A380, Airbus will become the regional and likely worldwide leader in the market for big jets. It would also make Airbus, not Boeing, the world's undisputed No. 1 commercial jetmaker.
So far, Boeing seems to be holding Airbus at bay. Airbus has sold only 61 jets in Japan--and none to flagship carrier JAL. Still, over the next 20 years, Airbus says Japan will need 600 new planes, 180 of them with 400 seats or more. The European company argues that superjumbos will be indispensable for carriers that serve congested airports such as Tokyo's Narita. And while the A380 is considered a tough sell because of Boeing's decades-long dominance and the country's faltering economy, some Japanese carriers say they are seriously considering it. Airbus Sales Director John Leahy insists that "this aircraft is a natural for Japan."
HIGH-STAKES PLEA. Boeing's counteroffensive moved into high gear in March, when Alan Mulally, recently named CEO of Boeing's Commercial Airplanes, led a team of executives to Japan to persuade longtime customers to stick with Boeing. It was an unusual trip because Mulally, widely considered a candidate to be Boeing's next chief executive, rarely makes sales calls. But these stakes were high. Not only was Boeing's market share at risk, but it had a self-imposed deadline to meet. Unlike Airbus, it could not spend $10.7 billion to develop a new superjumbo. Wall Street was eyeing its finances closely after costly production snafus three years ago. So Boeing opted for a stretched, 520-seat version of its 747 jumbo--the 747X--that would cost $4 billion to develop and sell for about $200 million. Boeing promises to deliver the 747X by 2005, a year earlier than the first A380s are expected to ship. But to make that date, Boeing says it must have its first sale by August. As Mulally crossed the Pacific, Boeing had yet to find a single buyer.
The battle goes beyond jumbo jets. Boeing also fears its Japanese customers may be tempted to buy more small Airbus jets if they like the A380. And smaller long-haul jets, Boeing execs believe, are the key to future sales. The 300-seat Boeing 777, for instance, can fly 10,200 miles nonstop, eliminating the need for the hub-and-spoke system that brings jets into crowded airports such as Narita. This alternative--"fragmentation" in airline jargon--is already common across the Atlantic. Flights between, say, Detroit and London needn't stop in crowded New York. Last year, Mulally says, Boeing sold a record 117 of its 777s worldwide, confirming the soundness of its strategy. "We think the center of the market will be 777- and 747-size airplanes," he says.
Mulally concedes that some carriers can use superjumbos, but he thinks fewer than 500 are needed worldwide. Airbus' Leahy pegs the number at twice that. Airbus already has orders for 66 of its A380s. Mulally says the surging orders for Airbus' A380 reflect the company's price-cutting, not real demand. It's another reason Boeing didn't rush into the superjumbo race--though it has been forced to play catch-up.
Still, Boeing may be right about the long-term market for superjumbos. Airlines "won't pay for capacity they don't need," says Richard L. Aboulafia, an analyst at Teal Group in Fairfax, Va. "Flying deadweight through the air is a pricey proposition." Some analysts also back Boeing. "The 500-seater is a niche," says Byron Callan, Merrill, Lynch & Co. aerospace analyst. "I'm more comfortable with the way Boeing looks at how air travel will evolve over the next 10 to 15 years."
Now that the superjumbo battle has been joined, Boeing is going all out to get Japanese orders for its 747X. A week before Mulally's trip to Tokyo, other Boeing execs were already there, lining up local contractors for the unbuilt plane. They reached a tentative agreement with Mitsubishi Heavy Industries to build the 747X wing in Japan. Boeing is also lobbying the Japanese government to name the 747X a "national project," the designation it got for the 767 and the 777, parts of which were also made in Japan. That could slash $1 billion from 747X development costs.
Airbus' could also be slowed by the sour Japanese economy. Airlines are cautious about buying--JAL probably won't have a major fleet expansion until 2003. But the Japanese are keeping their options open. "We don't need that size of a plane right away, but there's a chance we will need it in the future," says Masaru Onishi, JAL's senior director for corporate planning. He says growing congestion at Japanese airports could force JAL to reconsider the A380. "Boeing tells us there'll be no demand for superjumbo aircraft, but we're not so sure."
WEAK TIES. That's good news for Airbus, which is still learning Japanese ways. In a country that values personal relationships in business, Airbus had only a tiny office in Japan until April. Onishi, the JAL executive, says of Airbus' Leahy: "He doesn't seem to understand our particular needs very well.... If he were to pay us a visit more often, perhaps that wouldn't be the case." Leahy vows to do better. In a bid to gain entree to Japan's business community, Airbus has signed an agreement with trading company Mitsui & Co., which brokered jets for McDonnell Douglas until Boeing bought it in 1997.
But Boeing has been nurturing its relationship with the Japanese since 1953. After a JAL Boeing 747 crashed in Japan and killed 520 people in 1985, the company admitted partial responsibility and for years sent executives to Buddhist memorial rites for the victims on the disaster's anniversary. And it helps that both Boeing and McDonnell Douglas are longtime Japanese defense contractors. "It's probably the most important bilateral relationship we have in the world," says Boeing's Larry Dickenson, senior vice-president for Asia sales. In the battle of the superjumbos, that may be Boeing's ace in the hole.
By Stanley Holmes in Seattle, with Chester Dawson in Tokyo and Carol Matlack in Paris