Europe’s high flyer launches jumbo attack on rival Boeing

Date: 23/07/1998

Bruce Barnard
TWO of the world's bitterest industrial foes are preparing for a propaganda battle in the English countryside which risks escalating into a trade war between Brussels and Washington.

The deadly rivalry between Boeing and Airbus is a regular feature of the air show circuit, but this year's event at Farnborough in September promises to be the most acrimonious to date.

The bitterness stems from Airbus' decision to press ahead with plans to build a super jumbo jet with 555 seats which will break Boeing's lucrative monopoly in the market for aircraft with more than 400 seats.

The move will mark a turning point in Airbus' long campaign for global parity with its Seattle-based competitor. Last year it took just over 40% of the market.

But Boeing claims there is no economic rationale for the Airbus project, insisting there is not a sufficiently large market to justify the investment.

It also pours scorn on the 7.2- billion-ecu figure Airbus has put on its development costs, saying the final outlay will probably be twice as much. Boeing last year dropped plans to build its own 600-seat jet.

The companies have very different ideas of how airlines will respond to changing market conditions over the next 20 years.

Airbus reckons carriers will order bigger planes both to keep pace with the explosion of long-haul traffic and reduce the number of flights at congested airports, especially in Europe.

But Boeing believes that airlines will instead take advantage of liberalisation of the global industry to increase the number of flights, using small and medium-sized planes.

However, Airbus has no qualms about its super jumbo project, provisionally named A3XX.

It is raising the finance, bringing in outside partners from Europe and Asia, and talking to more than a dozen major airlines about the design of the plane.

It recently signed a second memorandum of understanding with two American aero-engine manufacturers, General Electric and Pratt and Whitney, to complement an earlier agreement with Rolls-Royce.

Airbus says the A3XX will be launched in 1999 and enter into service in the third quarter of 2004.

Industry analysts believe the plane will enable the European consortium to offer more attractive deals to airlines. The company claims that its rival has used its jumbo monopoly to reduce prices of smaller planes in package deals: something Boeing denies.

Airbus' confidence about the A3XX risks antagonising the US politicians who have always portrayed the firm as the spoilt child of European governments.

They claim that state subsidies helped Airbus rise from nowhere to capture a significant share of the world market and are likely to be used to help it break into the jumbo sector, which accounts for a further 15% of global sales.

Washington and Brussels thought they had buried the dispute over subsidies with a bilateral accord in 1992 capping direct aid at 30% of development costs and limiting indirect handouts. But in truth, the deal only resulted in a phoney peace, with both sides suspicious of each other's compliance.

The US still suspects the EU will never miss an opportunity to rein in Boeing, a spectacularly successful American icon.

There was irritation at the White House and anger in the US Congress a year ago this week when Competition Commissioner Karel van Miert laid down conditions for Boeing's 10.8-billion-ecu-plus take-over of rival planemaker McDonnell Douglas.

The EU-US accord has survived, but the question of subsidies is never far from the surface.

The British government's initial reluctance to provide finance for a new Airbus programme at the beginning of the year revived the slanging match between Airbus and Boeing executives.

The European industry feels it was short-changed in the EU-US deal. Some officials portray it as a victory for Washington because it set strict and enforceable limits on direct aid to Airbus while the ceilings on indirect (military) support to the US industry are much harder to police.

Airbus officials never tire of pointing out that the Boeing 707, Boeing's first passenger jet, began life as a KC135 military tanker financed by American taxpayers and the Boeing 747 was spawned from a design for a large freighter for the US Air Force.

Business is booming for both companies. Boeing booked 568 orders last year valued at 38.5 billion ecu while Airbus bagged 460 worth 26.6 billion ecu.

Between now and 2017, Airbus forecasts that airlines will order some 13,600 new planes valued at around 1 trillion ecu, or 54 billion ecu a year.

Airbus is not waiting for the A3XX to draw level with Boeing. It is already chipping away at its US rival's monopoly in the 300-400 seat long-range market.

It is developing two new aircraft, the A340-600 which carries up to 380 passengers and competes with the Boeing 777 and earlier versions of the 'classic' 747, and the 313-seater A340-500.

Airbus is on a roll after winning several high-profile contracts this year which have helped narrow the gap with its rival. The European consortium scored a big breakthrough earlier this month when US Airways ordered up to 30 A330 planes in a 3.3-billion-ecu deal which made it the first American carrier to buy an Airbus wide-bodied aircraft with 'fly by wire' all-electronic cockpit. The contract with the fifth-largest US carrier helped Airbus to claim 52% of all aircraft orders in the first half of the year, edging Boeing into an unaccustomed second place.

Airbus dealt another blow to Boeing earlier in the year when it plucked a 3.6-billion-ecu order from several Latin American carriers which have in the past been faithful customers of the US company.

Meanwhile, Airbus is poised to book its first order from one of the world's biggest airlines which has, until now, always bought Boeings: British Airways.

Some industry analysts say Airbus' good fortune resulted from disarray at Boeing as it struggled to ratchet up monthly production from 18 aircraft in mid-1996 to 47 in the second quarter of 1998 to keep pace with exploding demand. It was forced to make provisions of 1.4 billion ecu last year, resulting in a net loss of 160 million ecu - its first in 50 years.

Boeing's decision to increase the list price of most of its aircraft by 5% this month and its refusal to chase market share at any price have also benefited Airbus.

Major feature on plans for Airbus and its rivalry with Boeing.