A Capitalist's Diary - Airbus's Big Win Over Boeing

Via Glenn Reynolds, Colby Cash discusses the success of the new Airbus A380:

One feels a little embarrassed at the "See? Europeans aren't entirely pathetic" part. And, after all, the A380 still does need to get off the ground. But in an age of exaggerated environmental and geopolitical anxieties, it is encouraging to see a feat of engineering and business flair celebrated without apology.

The advent of the superjumbo was a long time coming, much longer than anyone originally expected. The Boeing 747, currently the largest airliner in service, was first flown in 1969. It has, in other words, gone unchallenged since the year when man walked on the moon and wallowed in the mud at Woodstock. No one at Boeing, or anywhere else, ever expected the 747 to be the workhorse of the skies for half a century. The original design was created in an effort to win a U.S. military contract for high-capacity cargo lift, and was adapted to commercial aviation only after Boeing lost out. (Today -- this is one of history's wry little jokes, I suppose -- the U.S. military relies on modified 747s for airborne command-and-control, and there has been persistent talk of adapting the airframe for use as a cheap missile platform.)

I was initially turned off by the Euro leader's grandstanding during the rollout of the A380, but that feeling quickly turned into pure joy. As Colby Cash describes above, the new A380 owes its existence to the mechanisms of capitalism. In this age of oil dependency, the Europeans proudly stood in front the biggest commercial airplane that world has seen. And proud they should be; Airbus has shown Boeing a thing or two about how capitalism weeds out stogy-old ideas that refuse to change.

The August 2, 1999 (Vol. 140, No.3) issue of Fortune Magazine featured an article on Airbus titled "Blue Skies for Airbus." Said article revealed that Airbus was about to bet the company on a code-named, super-project called the A3XX. Not settling for their success in gaining market share from Boeing on midsized planes (100-115 passengers), they would attempt to go after Boeing's prized 747 maket. However, Airbus's recent success had a rough start as the company would emerge from what started out as the epitome of Euro buerocracy.

Airbus formed in the 1970's out of a partnership between four European companies: British Aerospace, DaimlerChrystler Aerospace, Aerospatiale (France), and Casa (Spain). They agreed to pool their resources and underwrite the costs of capital expenditures to design and manufacture their airplanes. However, according to Fortune, this group became "politicized, inefficient, and financially opaque." For example, the French almost pulled out of the design of the A318 because they didn't feel like they were getting what they deserved. To save the project, Fortune said, "some of the production of another plane, the A319, was moved from Germany to France." At this point, government loans were primarily responsible for keeping this wounded duck from being shot out of the sky; hardly the recipe for a successful company.

Years prior to this article, Airbus centralized their decision making authority and, through this new corporate structure, developed a shrewd business plan that would eventually leave Boeing reeling. They designed their next generation of mid-to-large sized aircraft to use the same parts as their smaller jets. Airlines, who operate with razor thin margins, would be able to spread their maintenance costs over an entire range of planes, instead of concentrating costs to planes of the same model. Airbus offered an economical alternative that was extremely attractive to the airline industry.

Their sales rapidly increased as a result and Boeing cried foul to the U.S. government. They argued that Airbus was "dumping" low cost, cheap planes into the market. Rightly, Washington decided this wasn't the case, and Boeing continued to lose market share. Boeing was now going head-to-head with a serious competitor.

The next battle in the commercial airplane industry turned into a debate over whether the market wanted "more capacity" or "smaller, but faster." Airbus, saw that the market for travel was increasing 5-10% a year and, with no signs of a letdown (in the pre-September 11th world), they figured that capacity at airports would be limited in the amount of flights that could take off and land. As demand for flights steadily increased, capacity would eventually cap the amount of travelers that could leave from a given point. Airbus hoped to solve this by increasing the passenger capacity with their future 555-seat passenger plane.

Boeing looked at another set of market data and decided that travelers desired to decrease their time in the air. Instead of going head-to-head by redesigning a double-decker version of the 747, they would try to develop a super-sonic commercial plane that would get travelers to their destination much faster. They would meet this demand with a cool, 21st Century-looking "Sonic Cruiser" (shown below), which Boeing said, "would change the way the world flies as dramatically as did the introduction of the jet age."

Looks pretty spiffy, however, as Apple figured out, cool and spiffy looking don't necessarily meet the needs of the market. The Travel Insider explains what Boeing's venture would realize:

What was this allegedly revolutionary new plane? Remember that the introduction of the jet age brought about a doubling in plane speeds, and a doubling of passenger capacities.

Alas, the Sonic Cruiser promised to fly merely 15-20% faster than a regular jet plane (at Mach 0.95 - 0.98), and would carry only 200 - 250 passengers (half as many as a 747), with a range of between 6,500 - 10,000 miles (similar to a 747). The plane was described as using about the same amount of fuel to carry a passenger as a 747 or 767.

The promise of a 15-20% increase in speed (15% faster than a 747, 20% faster than a 767) is not the same as a 15-20% reduction in travel time. 20 - 30 minutes of any flight is spent on the ground, taxiing to and from the runway. More time can be wasted with air traffic control delays. When planes are flying below 10,000 ft in the US they are limited to 250 knots maximum speed. Planes don't fly at full speed when climbing up to cruise level. On an 8 hour trans-Atlantic flight, the Sonic Cruiser would save about one hour - hardly a revolutionary change in flying time at all.

Furthermore, when you add in all the other factors that make up a total travel experience (driving to the airport, checking in, going through security, boarding the plane, disembarking at the other end, waiting for luggage, then traveling on from the airport to your final destination) there is as much as 5 or more hours of additional traveling time. A one hour saving on a 13 hour total travel experience is a negligible saving - sure, it is welcome, but it hardly 'changes the way the world flies as dramatically as did the introduction of the jet age'.

The Sonic Cruiser failed. It was a business, not an operational failure. Boeing cancelled this project and decided to play prevent defense with their latest, fuel-efficient 7E7. This plane will gain some traction in the market, however it is far from the revolutionary designs that Airbus implemented. Instead of responding to Airbus's successes with the fresh and revolutionary designs that were once a signature of their company, Boeing's response has been nothing more than snearing rhetoric. A good axiom in business is to remember that the market pays for results, not soundbites and cutdowns. Currently, Airbus is the company that is meeting market demand, while Boeing continues to wane by their refusal to change.

So, American capitalists should cheer this success by Airbus. When you have socialist leaders standing on a platform praising the A380, they are, maybe without their knowledge, really cheering the triumph of capitalism, which ultimately benefits us all. Even though these European countries subsidized Airbus to a large degree, Airbus's ultimate win came from the "invisible hand." If Boeing doesn't realize this, that same "invisible hand" will push them out the door.

Posted by 10 fingers 6 strings at January 22, 2005 09:10 AM | TrackBack