Boeing Versus Airbus

by John Newhouse

  CONTENTS

  Cover Page

  Title Page

  Dedication

  Prologue

  CHAPTER ONE: BEING NUMBER ONE

  CHAPTER TWO: TRADING PLACES

  CHAPTER THREE: FOLLY AND HYPOCRISY

  CHAPTER FOUR: MARKET SHARE—THE AIRLINES’ ENEMY

  CHAPTER FIVE: PLAYING THE GAME

  CHAPTER SIX: MELTDOWN AND MERGER

  CHAPTER SEVEN: THE VERY LARGE AIRPLANE

  CHAPTER EIGHT: A CHALLENGE FROM ASIA

  CHAPTER NINE: MUDDLING THROUGH, MORE OR LESS

  Notes

  Acknowledgments

  A Note About the Author

  Also by John Newhouse

  Copyright

  To Symmie and to the memory of

  Hugo Young and of Warren Zimmermann

  PROLOGUE

  Back in the 1970s and early 1980s, four companies divided the turbulent business of making and selling passenger airplanes. One of them, the Boeing Company, was dominant. The other two big American players—the Lockheed Aircraft Corporation and the McDonnell Douglas Corporation—labored in the wake of their own mistakes. Lockheed’s were terminal, and McDonnell Douglas, known in the trade as McDac, hadn’t come to terms with reality. The reality was that a small European company called Airbus Industrie, generally known only as Airbus, had abruptly become not just a player but a mortal threat. Simply put, Airbus was eating McDac’s lunch.

  Although steeply uphill, this business has never lacked bold, entrepreneurial spirits. Many have tried, few successfully. Some of the high rollers never learned to read the market. The airplanes they built were too big or too small, or cost more to operate than airlines were willing to pay. Or the airline market might have moved on. Or the new airplane might have been mated with the wrong engine, or just been unlucky.

  An example of bad luck was Lockheed’s L-1011, a three-engine, wide-bodied airplane built in the late 1960s and also known as the Tristar. In its time it may have been the best of the double-aisle airplanes, probably the most admired by aerodynamicists. But the combination of bad luck and bad timing victimized the airplane and its maker. The L-1011 had lost $2.5 billion when it was retired in 1981.

  Suppliers of these large commercial aircraft (LCAs, as they are known in the trade) have goals that draw on spongy assumptions, political hubris, and industrial savoir faire. They mix great expectations with huge uncertainties. They grapple with uncertainty by dispensing smoke and mirrors. Every transaction becomes the most important until the next one.

  Reading the market is largely guesswork. An airline may plan to use a new airplane for twenty, possibly thirty years, but can’t predict how many times the market will change direction along the way. In market forecasting, the airline must guess what size bucket (the airplane) will be needed to carry an unknown quantity of sand (the passengers). The supplier guesses when to launch an airplane and must then continue betting that it’s one that will meet both the short- and long-term needs of the unforgiving market.

  The decision to build a new LCA alerts boards of directors and shareholders to impending deficits, big ones. Indeed, the costs of any such venture can amount to betting the company, literally. A single deal with one airline can determine the fate of an airplane on which billions of dollars have been invested. And the returns, if any, lie far ahead. The break-even point of a new program is invariably a made-up number and is rarely, if ever, pinned down.

  No airline will pay the list price for an airplane, if there is such a thing. The massive discounts offered to launch customers tend to establish the price, or come close to establishing it. The business is tougher than most, largely because it’s more about instinct and psychology than economics. When airlines feel confident about the future, they order airplanes. When they lose confidence, they stop buying. In good times, the airlines purchase too many airplanes, but all too often they take deliveries in the economy’s troughs, which always lie just ahead—when they may cancel or postpone deliveries. Timing is the key variable for buyer and seller.

  Ironically, McDac, or more exactly its founder, James McDonnell, blundered by refusing to build the very airplane—a small, twin-engine wide-body—that Airbus did build and that allowed this European upstart to acquire a foothold in the global airline market. The A300, as Airbus called its first airplane, was an ideal fit for a hole in the market that all the suppliers could see and that any one of them could have filled. But Mr. Mac, as he liked to be called (by family members as well as others), decided to compete with Lockheed by building not what the market wanted but his own three-engine wide-body. He called it the DC-10. It appeared indistinguishable from the L-1011 but was inferior in ways that mattered. Indeed, the DC-10, an ill-conceived and rather hurried project, was to acquire some notoriety. Building it was a foolish move. The market for these look-alike aircraft wasn’t there; predictably, they killed each other.

  They did more than that. Neither of the two companies would build another LCA, and at different speeds, each would abandon the commercial end of the business. McDac’s exit meant the demise of a truly great company, the Douglas Aircraft Corporation. At one time, it had been the most respected of LCA suppliers, and had the confidence of more of the world’s airlines than either Boeing or Lockheed. In the early days of the jet age, Douglas had been Boeing’s only peer, but the company’s leadership had also become steadily less rigorous and disciplined in holding down costs. By 1966 it had lost the confidence of its bankers and become a takeover target for Mr. Mac, who saw every reason to join his highly profitable military aircraft business with the world’s most illustrious LCA producer.

  The marriage never worked. Mr. Mac foolishly tried to bend Douglas to his ways of making and selling a very dissimilar product line. His ignorance, judgment, and timing—all three—took the venture straight downhill. Douglas had been the airlines’ preferred producer of propeller-driven LCAs, and its first jet-powered models—the DC-8 and DC-9—were revered, but Boeing had invested more heavily and judiciously in jet airliners and had begun to take control of a burgeoning market for them.

  AN EXISTENTIAL PENDULUM governs the fortunes of the companies that struggle to gain an edge in this unsteady business. At one time, the advantage might have drifted now to Douglas, now to Lockheed, now to Boeing. Then, in the years between 1985 and 2005, the gestalt changed. As the weaker players fell away, the focus shifted to a hardier but dissimiliar pair: mighty Boeing and the arriviste Airbus.

  For much of that time, Boeing held a commanding lead, its supremacy not really contested. Nevertheless, by the mid-1990s, if not before, the gallery could see this twosome’s fortunes start to converge, as Boeing, complacent and risk averse, became less committed to the fundamentals of its trade—building new and better models and treating airline customers with care. Airbus, on the other hand, was stressing the fundamentals, gaining credibility, making a dent in the market, and even beginning to scent blood. With the passage of not much more time, the seemingly fanciful notion of Airbus catching up with and even moving ahead of Boeing in market share acquired reality.

  In making airplanes of 150 or more seats, Airbus and Boeing controlled the market. Both had successful product lines. Together they constituted a maturing duopoly—an anomaly in this marketplace. Still, nothing stays the same for very long in this business. In just eighteen months, from January 2005 to June 2006, Airbus tumbled off the comfortable plateau it was sharing with Boeing. Its fortunes fell steeply, more so than Boeing’s had fallen during the decade in which it had lost the leadership role. The top tier of Airbus’s management had become nearly as complacent and risk averse as Boeing’s had been then. Moreover, Boeing had put on offer a new and highly innovative midsize airplane called the
787, one that might all but dislodge Airbus from the richest segment of the market unless Airbus acted swiftly to match its rival’s aggressive move. In failing to do that, Airbus is paying, and will continue to pay, a heavy price. That much had become clear by mid-2005.

  Not until one year later, at the Farnborough International Air Show, did Airbus management finally unveil a new midsize airplane, the A350, which was designed to compare favorably with Boeing’s 787. Airbus did have one new product on the market then, its superjumbo A380, but that airplane had been buffeted by production problems and was draining away financial resources.

  On June 14, 2006, those problems suddenly escalated into a full-blown crisis as Airbus announced a six-to seven-month delay in the delivery schedule for the A380. The problem, it seemed, was installing 310 miles or so of wiring in the right places, notably in the in-flight entertainment systems and kitchen galleys. The announcement came as a nasty shock to customers of the A380, who had expected deliveries of the huge airplane to begin in the first half of 2007. These airlines had already experienced a similar delay the previous year, one that had cost Airbus tens of millions of dollars in penalties. The company’s announcement on June 14 was coupled with a warning that its operating income would fall by $625 million each year between 2007 and 2010.

  The blowback this time was far more serious, and the ripple effect much wider. EADS (European Aeronautic Defense and Space Company), Airbus’s parent company, saw almost $7 billion in market capitalization disappear on the day following the announcement. And while EADS’s shares fell by 26 percent, Boeing’s rose 6.5 percent on the New York Stock Exchange. Some potential A380 users, besides demanding compensation for the delays, threatened to cancel orders.

  Questions about the A380’s future and whether it had one were immediately linked with larger, far more complex issues involving management and company strategy. Airbus’s central problem, and the crippling one, is a jerry-built corporate structure that is aimed at satisfying the narrowly focused political interests of the company’s French and German stakeholders. In order to balance these interests, the structure seems to require two chief executives and two chairmen. Not surprisingly, this dual management arrangement has over the years become steadily less functional and less competent. Airbus is unlikely to compete again on even terms with Boeing unless it can substitute a simple, straightforward managerial structure for what it is saddled with now.

  CHAPTER ONE

  Being Number One

  IN THE AIRCRAFT BUSINESS, as in a Trollope novel, things are often not what they seem. In the 1980s, Boeing still reigned supreme. Its airplanes covered the market. Its product support was exemplary. Boeing was universally judged one of America’s best and most admired companies, partly because its sales abroad of large commercial airplanes were the country’s biggest export, and partly because it had learned to build these airplanes better, faster, and cheaper than anyone else had done. “World-class” was Boeing’s lofty but accurate characterization of itself.

  The competition was barely visible. McDac had entered its steady but terminal decline, and in Seattle, Boeing’s home base, Airbus was seen as just another in a long line of European wannabes that would stay in the game only as long as a consortium of governments remained willing to throw vast sums of money at a seemingly certain loser. Today, things have turned around. Boeing and Airbus are the sole suppliers of big airliners, but over many of the past twenty years, the two companies were moving in opposite directions. Boeing’s multiple troubles, most of them self-inflicted, signaled an end to its dominance and pointed up Airbus’s methodical rise.

  Things had begun to change in the late 1980s. And it was no joke when, on April 1, 1993, Moody’s downgraded Boeing’s debt rating for the first time in the company’s seventy-six-year history. Still, as late as 1990, Boeing held 62 percent of the market, McDonnell Douglas 23 percent, Airbus just 15 percent. Today it’s very different. McDonnell Douglas is gone, having been absorbed by Boeing in August 1997. In 2004, Airbus outsold Boeing, and did so again in 2005.

  Boeing’s troubles were traceable partly to arrogance—a tendency to take the market for granted, to coast on its laurels—and partly to changes that developed in the corporate culture. These changes began to dull Boeing’s feel for the game, a game in which the supplier must either take large risks with operating margins or make way for the competition. Then there is the legacy of obsolescence. So much is invested in existing systems that a Boeing or an Airbus cannot absorb the new technologies except in small bites. Nevertheless, whatever the cost, they must invest in these technologies, even while being manipulated in a way that drives down the cost of new airplanes to a point at which the financially strapped airlines can afford to buy them. “You can’t win, you can’t break even, and you can’t quit,” said Jean Pierson, a former CEO of Airbus, who understood the need to invest in research and technology.

  The industry has produced few more interesting figures than Pierson. He is a legend. Experienced people at the Airbus offices in Toulouse agree that without Jean Pierson, who retired in 1998, there would be no Airbus. This is a people industry, even if it is technology driven. Those who succeed are individuals with vision and guts and a sure sense of their company’s interests, as distinct from their own (or even those of their stockholders). Pierson defined the model of what it takes. He had the requisite vision, guts, common sense, and the personal force to persuade colleagues at Airbus to do things his way and to persuade customers—including wary, skeptical American carriers—to buy his airplanes instead of Boeing’s.

  Pierson was known as “the bear of the Pyrenees.” He now spends some of his time in Nice and the rest in Corsica—in the mountains behind a small port not far from Bastia. He keeps a small boat there, a farewell gift from Airbus. And he does some indifferent fishing, not with tackle but with a string tied to his finger to which he attaches bait.

  Pierson arrived as boss of Airbus in 1985, just when T. Wilson (the T is for Thornton, but he was known throughout the aviation world and beyond as “T”), a figure very like him in a number of ways, retired as Boeing’s chief executive. Wilson, like Pierson, was a vivid, dominating, sure-handed leader. And just as Pierson’s arrival marked the start of Airbus’s ascent, Wilson’s departure marked the start of Boeing’s decline. The fortunes of Boeing and Airbus were both closely tied to the style and the aura of these two remarkable leaders whose paths barely crossed.

  Each of them got on well with and had the respect of his opposite numbers in the airline and engine businesses, partly because they were both hands-on managers who knew airplanes from the wheels up. Both had been factory-floor guys who knew what was involved in the various blue-collar jobs. At Airbus, they say, Pierson would talk to employees in these jobs and then, based on what he’d learned, might say to his staff, “We are going to be ten days late in delivering this or that airplane”—meaning, “You guys better shape up right now or we will be paying heavy penalties for missing delivery dates.”

  Wilson would sit down with factory workers at lunch in the cafeteria and find out what was going on in their various operations; and then, if it was advisable, he would take up what he’d learned with the relevant managers. He wasn’t Boeing’s founder, but he was called “the founder” by some of his people. “He ran the company,” says one former executive. “It did not run him. Wilson overrode the system whenever he had to.”

  Like Pierson, Wilson had an intuitive feel for his company’s larger interests. He knew that Boeing had the world’s greatest commercial aircraft franchise. He would do whatever it took to protect that. He never liked diversifying if it meant moving the company onto ground it knew less well or not at all. The point is best illustrated by anecdotal evidence. For example, Robert R. Kiley (an American who in 2001 would become the surprise choice to take over management of the London Underground) had a remarkable encounter with Wilson in 1975, when Kiley had just been named chairman and chief executive officer of the Massachusetts Bay Transportat
ion Authority (MBTA). The MBTA had recently bought new trams, or streetcars. These vehicles had been supplied by Vertol, at the time a subdivision of Boeing, which had acquired it in 1960 (nearly a decade before Wilson took on major responsibilities). Kiley recalls the new equipment “as having quickly become a big and constant problem—a horror story. It was sleek-looking and very high-tech, too much so. The doors were a special problem. They had about a thousand moving parts, some of them electronically driven. The press reaction was awful. We intended to sue Boeing.

  “One Saturday morning,” Kiley continues, “I was alone in my office in Boston, and a guard downstairs called to say that a man named Wilson was there and wanted to see me. When I discovered it was T. Wilson, Boeing’s CEO, I went down and brought him to my office. He was upset about what had happened, noting how sorry he was not to have stopped this move by Boeing into a technology it knew nothing about. He made clear his feeling that Boeing should not stray from the business it knew. He said, ‘Mr. Kiley, my only interest is preserving my company’s good name. I’ll do whatever you want us to do.’ He offered, in effect, to fix the trains or, failing that, repay the MBTA’s investment—about $45 million in mid-1970s dollars.”1

  The trams, which had never worked, couldn’t be fixed, and so Boeing repaid the MBTA. For the company, it was the sensible and cost-effective solution to the problem. Not so long after Wilson stepped down, Boeing began to ignore the lesson it had learned with the MBTA: to keep the company focused on the business it knew best.

  Boeing had prospered by concentrating on product development and the customer, assuming, correctly, that doing so would best protect shareholder interests. Movement away from these priorities was slow, but within ten years of Wilson’s departure, Boeing had changed direction.