Airbus' A350: Flying into a Storm?

As plans for the new plane are laid out, a dispute is simmering between the U.S. and the European Union over government subsidies to jetmakers

By Carol Matlack

The race is on. At a Paris briefing on Oct. 7, Airbus laid out its plans to launch the A350, a midsize widebody jet that it plans to get airborne by 2010 to challenge Boeing's (BA ) fuel-efficient 787. The European planemaker, in hopes of turning down the heat on a simmering trans-Atlantic trade dispute, offered to forego government launch aid at least until the end of 2006, while U.S. and European officials seek a negotiated settlement to the subsidy issue.

Doing without launch aid for a year won't be a huge sacrifice for Airbus, even though loans from European governments have covered up to one-third of its aircraft-development costs in recent years. That's because the biggest costs are incurred in the last couple of years before a plane goes into service. For example, R&D spending on Airbus's new A380 megaplane was only $500 million in 2001 but soared to more than $1.6 billion last year as the scheduled 2006 commercial launch approached.


  For Airbus, a bigger challenge will be to dispel the image that the A350 is a hastily conceived catch-up project. Airbus has pulled ahead of Boeing in the global commercial-jet duopoly in large measure because of its ability to stay one step ahead of its U.S. rival on innovation. The European outfit introduced planes that were clearly more technologically advanced than older, competing Boeing models (see BW Online, 6/28/05, "Will Jetmakers Always Have Paris?").

Now the shoe may be on the other foot. Not much more than a year ago, Airbus was insisting that its A330-200 widebody, a 250-seater launched in 1998, could hold its own against the similarly sized 787 -- even though the latter will have a fuselage and wings made from lighter-weight plastic composite materials, sharply boosting fuel efficiency. But by late last year, as oil prices kept rising and orders for the 787 started rolling in, Airbus acknowledged it would have to develop an all-new plane.

Although details of the A350's design are still being finalized, current plans call for its wings to be made from composites but the fuselage from an aluminum-lithium compound. The A350 will come in two models. The smaller A350-800, with 253 seats, is to be launched in mid-2010 to compete with the 223-seat Boeing 787-8 model, set for launch in 2008. The larger A350-900, with 300 seats, is scheduled for launch by the end of 2010 to go against an older version of Boeing's 777.


  Airbus says it already has commitments from customers to buy 140 of the new planes, including a planned order of 60 by Qatar Airways announced at this year's Paris Air Show. Boeing says it has 174 firm orders for the 787.

Which planemaker's product is more efficient? At the Oct. 7 briefing, Airbus sales chief John Leahy said the A350's fuel costs would be 4% to 7% less per passenger than on the competing 787 models. "We have shown we're capable of not just matching but exceeding what they [Boeing] were doing," Leahy said.

But those figures aren't really a fair comparison, since each of the Airbus models will have about 30 more seats than its Boeing rival. Cost-obsessed airlines will only buy a bigger plane if they are sure they can keep the seats filled. Leahy might make better headway with some of the A350's other selling points: A more-spacious cabin interior and higher, more comfortable cabin humidity.


  Another question is whether the A350 will draw customers away from the strong-selling A330-200. Airbus, of course, says it won't. Leahy points out that even after Airbus announced its intention to build the A350, customers have kept buying A330s, with 42 orders placed so far this year, bringing the plane's order backlog to more than 180.

Tom Williams, the Airbus executive vice-president for programs, says it's unlikely any of those orders will be converted to A350 purchases because customers are eager to get the planes in service before 2010, when the A350 takes to the air. Over the long term, Airbus says both planes should experience plenty of demand, with the global market for midsize widebodies expected to total $3.3 billion over the next 18 years.

What about that nasty subsidies issue? Airbus Chief Executive Gustav Humbert says the company has obtained binding promises from European governments to provide loans to Airbus covering up to one-third of the plane's estimated $5.3 billion development cost.

However, he says Airbus would not make use of any such loans during 2006, so long as "credible progress" is being made on a negotiated settlement with Washington that could avoid a full-scale battle at the World Trade Organization. The U.S. and the European Union have filed complaints at the global trade body alleging unfair aircraft subsidies. "A negotiated solution is much better than to pursue the issues [at the WTO] in Geneva," he said.


  Humbert adds that any negotiated settlement would have to include concessions from Boeing on government aid it now receives. That would include $2 billion in loans that the Japanese government has promised to Japanese companies supplying major components of the 787. If a settlement is reached, Humbert says, Airbus could finance the A350 by using its own cash flow and contributions by industrial partners in other countries, including China, which is expected to provide up to 5% of the plane's finished value.

U.S. officials reacted skeptically to Airbus's offer to delay seeking government help. "We take no comfort from any offer to postpone the actual payment of the launch aid these countries have already promised," a spokeswoman for the U.S. Trade Representative's Office said. "The announcement of their commitment to back the A350 will affect Airbus's financing costs regardless of when they formally write the check."

Boeing issued a statement reiterating its position that European government loans to Airbus constituted a "market-distorting subsidy." A tough trade battle is ahead.

Matlack is Paris bureau chief for BusinessWeek

Edited by Phil Mintz

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