Look Out, Boeing

Airbus is grabbing share, but can it make money this way?

There's a ton of bad news in the commercial jet business these days--but most of it seems to be coming from Boeing Co. (BA ). Orders for Boeing planes have dropped by almost half this year. Boeing unions are up in arms as the company cuts production in half and slashes 30,000 jobs from the 93,000-strong workforce that makes commercial aircraft. On Oct. 16, Boeing said its third-quarter earnings fell 42% to $372 million, as sales of commercial jets sank 25% to $6.1 billion compared with the same quarter last year. "The downturn is severe," Boeing Chairman and Chief Executive Philip M. Condit said in a conference call.

Yet while Boeing nurses its injuries, archrival Airbus is forging ahead. On Oct. 14, Airbus announced that low-cost British carrier easyJet Airline Co., formerly a loyal Boeing customer, would buy 120 Airbus A319s, with an option for 120 more. "It hurts to lose this one," a Boeing insider concedes.

The deal brings Airbus orders this year to 276, compared with 186 for Boeing. Most analysts expect that Airbus will deliver nearly 300 planes next year, just surpassing Boeing. Only three years ago, Airbus was delivering fewer than half as many planes as its U.S. rival.

Airbus is feeling pain, too. Sales are expected to slump 5% this year, to $19.2 billion, with operating profits sinking as much as 30% to $1.1 billion. But in contrast to the massive job cuts at Boeing, Airbus has laid off only a few hundred employees this year. And there's no mistaking the air of excitement at Airbus headquarters in Toulouse, France, where construction crews are hard at work on a factory where the newest Airbus plane, the 555-seat superjumbo A380, will be built. It's set to roll off production lines by 2006, ending the Boeing 747's hammerlock on the market for the biggest aircraft.

All that's in the future, of course. Right now, the easyJet deal gives Airbus a coveted ticket into the fast-growing discount airline market that Boeing has dominated with its efficient 737. Meanwhile, Airbus sold 54 of its midsize A330 and A340 planes last year, not far behind the 69 orders booked for the competing Boeing 767 and 777. "We have successfully attacked the three bastions of our competitor," Airbus CEO Noel Forgeard says.

Clearly, Airbus is gaining altitude over Boeing. But at what price? The easyJet sale, described as a "stunning deal" by the carrier's CEO, Ray Webster, raised fresh questions about whether Airbus is sacrificing profitability for market share. Although terms weren't disclosed, most analysts believe Airbus slashed at least 40% off the A319's $50 million list price, and threw in sweeteners such as a promise to cover any added operating expenses caused by the changeover to Airbus. Those concessions could weigh heavily on Airbus if airlines don't pull out of their slump soon, and other customers decide to cancel or delay their orders.

Still, Airbus was especially eager for the deal because until now, it has been frozen out of the European discount-airline business. Only a few months ago, Boeing offered generous discounts to snare an order of up to 150 planes from Irish carrier Ryanair (RYAAY ). But the even bigger easyJet deal, along with earlier sales to U.S. no-frills carrier JetBlue Airways Corp. (JBLU ), gives Airbus bragging rights on both sides of the Atlantic.

What's more, as the easyJet deliveries begin late next year, Airbus will be able to cushion itself against politically difficult job cuts. That prospect looms large because the aviation business won't begin recovering before the end of 2004. Airbus is predicting about 300 deliveries in each of the next two years. Without easyJet, analysts think that number would drop below 275 in 2004. "The apparent desperation to win this contract seems indicative of the industry's parlous state," says analyst Charles Armitage of Merrill Lynch & Co.

Airbus bristles at such criticism. "The contract is profitable," Forgeard says of the easyJet deal. He says Airbus is on track to boost its operating margins to 10% by the end of 2004, but most analysts think the company will be hard-pressed to meet that target. For now, though, the markets are rewarding Airbus for the easyJet deal. Shares in the European Aeronautics Defense & Space Co., which owns 80% of the unlisted Airbus, climbed 11% after the agreement. Airbus accounted for 64% of EADS' $30 billion in sales last year, and nearly 100% of its profits. Investors are relieved that Airbus won't provide easyJet financing, and that the carrier will make a relatively generous 20% upfront payment.

Another worry is the A380. True, Airbus has booked 95 orders for the superjumbo--it probably needs 250 orders to break even. But A380 development costs weigh heavily on Airbus' bottom line, with more than $1.2 billion slated for research and development spending next year. Combined with the discounts given on the easyJet deal, that could put a big squeeze on profits.

Still, Airbus has reasons for optimism. It's a surprisingly lean and flexible operation, with only 45,000 workers, compared with slightly more than 60,000 who'll be left at Boeing's commercial division after layoffs. Airbus, to avoid being ensnared by tough European anti-layoff laws, hires a lot of temporary workers, accounting for as much as 15% of its workforce. Airbus earlier this year said it has cut the equivalent of 5,000 jobs by dropping temporary and part-time workers. Suppliers say Airbus farms out far more work to subcontractors than Boeing does. "When the economy is down, it's the contractors who lay off," says Jean Luminet, head of European aerospace operations for Goodrich Corp.

Airbus' product line is also a strong point. Because most of its aircraft were introduced in the 1980s and '90s, they boast technological advances such as digital flight controls, and passenger-pleasing features like wider cabins. Moreover, Airbus cockpits and other features are standardized, so that pilots can easily switch from one Airbus model to another, giving airlines added scheduling flexibility and reducing pilot training. Boeing has an assortment of planes with fewer design similarities.

One of Boeing's most urgent tasks is to revitalize its product line while cutting costs. It failed to find any buyers for a stretch version of the 747 it offered to match the Airbus superjumbo, and its proposal for its high-speed Sonic Cruiser has drawn so little interest that it could be scrapped. With cash flow slumping now, probably the most Boeing can do is hold on until better times. "They have to make money with what they've got, despite shrinking market share," says Richard Aboulafia, an analyst with Fairfax (Va.)-based Teal Group. Looks like the bad news isn't over yet.

By Carol Matlack in Paris, with Stanley Holmes in Seattle

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