As always, the airlines wanted two suppliers competing head-to-head. If one supplier, in this case Airbus, hadn’t filled in the outline of its airplane, most of the carriers were willing to stand by until it did. So Airbus dribbled out the vital data, and the airlines on Boeing’s wish list waited, although not very long in most cases. They began by making clear their aversion to a warmed-over A330. Next, they snubbed a better version that would have a new wing and a few other enhancements. What the carriers wanted was an airplane they could advertise as “newer than new,” as “state of the art.” Airbus was scrambling to create something—ideally, a new aircraft of a size and capability close to that of the 787 but with fewer costly refinements. The stakes could hardly be higher, especially for Airbus. It had begun to take too much for granted.
FOR MOST of the past twenty years, a tooth-and-claw battle for the single-aisle-airplane market has held center stage in the Airbus-Boeing saga. It set Airbus’s A320 family against Boeing’s 737’s. The success of low-cost carriers such as Southwest and JetBlue in the States, along with easyJet and others in Europe, raised the stakes. For Boeing, an especially bad patch began in 1998, when British Airways, until then an unswervingly loyal Boeing customer, decided against the 737 and instead bought fifty-nine Airbus A320 and A319 aircraft, with options for fifty-nine more. (The A319 is a slightly smaller version of the A320.)
“There was a massive press,” said Christopher Buckley, an Airbus executive who tracked the event from the start. “The announcement was the lead story on the front page of the International Herald Tribune, probably the only time in history that an aircraft order has been deemed the top news item of the day in a major worldwide newspaper.”5
The most closely involved figure from British Airways was John Patterson, a senior vice president. “It was a strategic decision and more secondarily a customer services decision,” he said. “There had been a dreadful breakdown in relations with Airbus in the early 1990s, and we were worried that if we didn’t send a signal that we were prepared to bury the hatchet, we wouldn’t be able to generate competition between the two companies—Boeing and Airbus.”6
However, the senior management of British Airways, a group of eleven executives known as “the football team,” regarded the choice as so important that it wanted a face-off of the two airplanes. Boeing and Airbus agreed. According to Buckley, the face-off occurred in the spring of 1998, with the team present. “The Airbus candidate,” he said, “was an A319 flown into Heathrow by a Swiss charter carrier, and Boeing’s was a 737-700 awaiting delivery to a German charter. The Airbus team withdrew and allowed the BA people to look over the cabin of the A319 with the Swiss flight attendants showing them the storage bins and describing the comfort factors from their point of view. This relaxed approach compared to the Boeing sales team’s more aggressive approach seemed to work in Airbus’s favor.”7
That same year, JetBlue Airways also surprised all sides, especially Boeing, by choosing the A320 over the 737. In announcing the decision, David Neeleman, JetBlue’s founder and CEO, said, “The A320 aircraft allows us to offer wider seats, more legroom, and more overhead storage space than any other aircraft in its class.” JetBlue became the first low-cost carrier to begin life with a brand-new airplane.
Everyone, starting with Neeleman himself, had expected him to buy the 737, the airplane he knew best. His model was Southwest Airlines—the most successful airline, the biggest user of 737’s, and his former employer. “John Owen, our CFO, had been at Southwest and bought their 737’s,” Neeleman says. “We knew nothing about the A320. Our business plan mentioned only the 737’s.
“We went to Boeing. In Seattle, we offered a fair number. We didn’t expect to get the same deal—as good a deal—as others [older customers], but we expected to be within shouting distance. We wanted to shake hands on it that day.
“They said our price was too low, not an aggressive price. We then began talking with Airbus. The Boeing people smirked and said, ‘You will never buy those airplanes.’ And the Airbus people thought we weren’t serious and said we were using them as a foil [to drive down the price of the 737’s].
“We sent operating teams to airlines that were using both aircraft—United, America West, and BA. None of them was buying more 737’s. They were all moving toward A320’s. We went back to Boeing, and they came down in their price—came down below our first price.” It didn’t matter. JetBlue had decided to buy Airbus.
Neeleman was influenced by the nose-to-nose face-off that BA had conducted. Relying on that and other reviews of the two airplanes, he says, JetBlue considered the A320 to have been ahead in all the ways that mattered to his airline. He cited the wider seats and generally higher comfort level. “We bought the airplane for no other reasons than because it was the right product,” he says.
“Boeing,” he continued, “should have started over with the 737, incorporated the good features of the 777 and various Airbus products. It might have cost a billion dollars, but that would have been better than dealing with a twenty-year-old fuselage.”8 (Actually, it was a thirty-year-old fuselage.)
Opinion within industry circles was that Airbus prevailed in this case only because Boeing’s arrogance and tendency to take smaller players for granted alienated JetBlue’s team, starting with Neeleman. That view is openly shared by several Boeing people.
Boeing usually attributed an Airbus victory to a capability made possible by government subsidies to underprice Boeing. And that, in some cases, was the reason. An example was the sale of A319’s to the low-cost European carrier easyJet in October 2002. Christopher Walton, its finance director, says, “We began with the same view that other low-cost carriers had: Boeing’s 737 was the workhorse. Our thinking drew on the Southwest experience with the airplane. We evaluated the 737 and the A319, and after nearly a year we decided they were equal—different operationally in some ways but for our purposes equal. Since our business relies heavily on quick turnarounds, we had to be sure the A319 would fit our business model. It did.
“We put out a blind tender. Boeing didn’t seem serious until it realized that Airbus was a contender. [How could Boeing not have heard by then?] At that point, it was all about price, price, and price.” Walton confirmed what Neeleman and other airline people said about the wider body cylinder of the A320 allowing more comfort and bigger cargo bins. “But,” he said, “it was nonetheless about price.”9
An Airbus executive, now retired, confirmed that version. “This easyJet sale was very important to us,” he said. “We had to get over that hurdle—a low-cost operator that wanted to succeed like Southwest and fly Boeing 737’s. So Airbus did whatever it took to make certain that its price would be lower than Boeing’s.”10
By that time, Airbus and Boeing were widely assumed to be cutting their catalog prices for these single-aisle airplanes by 40 percent or more. Beyond that, there might be further concessionary pricing, depending on how important a particular deal was judged by one of the companies.
IN A BRIEF PERIOD spanning the last two months of 2004 and the first two of 2005, Airbus and Boeing made a great deal of news. A succession of campaigns lost to Airbus in the low-cost airline market led to a shake-up of the Boeing sales force in early December 2004. Toby Bright, the senior sales executive, was replaced by Scott Carson, a well-regarded manager who had held various key jobs within Boeing Commercial Airplanes.
Carson’s path, it seemed, would be uphill and strewn with obstacles, starting with Boeing’s disordered corporate culture and a management that in recent years had become skittish about the commercial aircraft sector. The company’s major operational problem had been too much bureaucracy, especially in its sales operations—one heard that in the United States, in Europe, and in Asian cities, including Beijing and Shanghai. “Boeing is too bureaucratic, much more so than Airbus,” says the vice president for China of a major U.S. company. “The Boeing sales force here is American, not Chinese,” he continued. “The Airbus sales force is Chinese
. So is mine. The Boeing guys say they have to go to Seattle in order to push internally for the right decisions.”11
“They fly in from Seattle,” says a senior Boeing vice president. “We don’t have nearly enough resident salesmen. And those we have in these places are more junior than they should be. If they are any good, the Seattle guys tend to cut them out.”12
On December 23, 2004, the Wall Street Journal led the newspaper with an uncommonly long, uncommonly severe, and very well informed piece on Boeing’s efforts to stay even with Airbus. It cited several of Boeing’s deficiencies, starting with its sales force and a deeply flawed approach to selling airplanes.13
The article created a huge buzz in industry circles and throughout the wider world of industry watchers. Harry Stonecipher, who was Boeing’s CEO and is now retired, reacted defensively, but he also told some senior Boeing people that the piece was mostly accurate—“about ninety-eight percent accurate,” he told members of his entourage.14
Several at Boeing joined in endorsing the Journal article. “It partially lifted the curtain on the company’s stunning incompetence in selling and marketing airplanes,” said one executive.
An airline that wants to buy just three or four airplanes is in the enviable position of pitting Airbus against Boeing in what can resemble a life-or-death struggle. How, then, given the stakes, could Boeing’s management tolerate such weakness and disarray in its sales operations? If Harry Stonecipher could acknowledge the validity of the Journal article, why hadn’t he done something about the problems it described?
Or, more to the point, why hadn’t Alan Mulally fixed some of these problems? He had been president and chief executive of Boeing Commercial Airplanes since 1998, and before that had been a senior vice president of the company for many years. Starting in 1999, Airbus overtook Boeing in annual orders; it booked more orders in 2001, and beginning in 2003 has delivered more aircraft.
Asked if he had considered firing Mulally, Stonecipher said, “Yes. Sometimes it’s hard to get Alan’s attention. We had a come to Jesus session. I got his attention.”15
The article had quoted the aircraft industry’s preeminent buyer of airplanes as saying, “Boeing’s senior management is going to have to roll up their sleeves and really get competitive or they will be strengthening the perception they are conceding the market leadership to Airbus.” The voice was that of Steven Udvar-Hazy, founder and boss of the International Lease Finance Corporation (ILFC), the biggest buyer of both Boeing and Airbus aircraft.
Those Boeing executives who applauded the Journal piece deplore their company’s insistence on referring decisions to committees. “It’s not that way at Airbus,” one of them complained. “An Airbus guy can get an answer immediately and rarely has to bring in one of the top guns. Also, the Airbus people have more authority because they are higher-level guys. Customers can raise a question with Airbus and get an answer immediately. Its people have easy access to the top management. The Boeing process is very complicated.”16
THEN CAME THE LOSS of another “all-Boeing airline” to Airbus. It was Air Berlin, also a low-cost operator, and Germany’s number-two airline; it had built its business around Boeing’s 737. Air Berlin’s CEO, Joachim Hunold, spent eleven months negotiating with Boeing in an effort to get some flexibility in the price. “Boeing,” he says, “never thought we would go to the competition and they took us for granted. That’s a dangerous thing to do when your competitor is so strong.”17
Commenting on the lost deal, Stonecipher said, “The long and short of it is we are not engaging with the customers. We don’t seem to have a strategy.” He also noted that Boeing had done “a couple of stupid things and treated the airline’s CEO in such a way that it headed him in the wrong direction.”18
The list of deals won by Airbus and lost by Boeing was an impressive and lengthening one. Boeing was losing, in part at least, because the airlines’ management in many, possibly most, cases felt as if it had been taken for granted. The company suffers from what one of its executives calls “residual arrogance.”19 An equally appropriate term for this tendency would be “persistent denial.”
In a competition involving two airplanes with little to choose between them, winning is likely to depend on strict adherence to first principles, one of which is paying unstinting attention to the customer’s interests, large and small. Another is finding the right moment in the campaign to cut the price of your airplane. In the Air Berlin campaign, as in so many others in recent years, Boeing neglected both these principles.
According to the Journal article, Joachim Hunold, “fed up” with Boeing, “flew to Airbus’s headquarters in Toulouse…[and] after a 90-minute meeting over lunch with top executives…shook hands on a $7 billion deal for up to 110 single-aisle planes.”20 (They were A320’s.) One also heard this version of events from disaffected Boeing people.
However, it doesn’t square with Airbus’s better-informed account, one that comes much closer to portraying the ups and downs in a not untypical sales campaign. An executive in Toulouse who was directly involved in the Air Berlin deal says, “Sadly, I have never known a deal just to ‘fall into our lap.’ The Journal article missed out on the eighteen-plus months that we had spent marketing the A320 family at Air Berlin. Back in early 2003, we began to sense that Boeing was treating Air Berlin as a captive customer who wouldn’t even dream of ever changing from their 737-800’s. We steadily worked on our relationships with the airline’s management, and also on convincing them that the A320 could be a very real alternative.
“We made a fairly aggressive proposal in late 2003, which we then improved early the next year. Quite simply, I think Boeing misjudged the timing of when to make the right counterproposal—they just weren’t convinced that Air Berlin would go for Airbus under any circumstances. Air Berlin became exasperated with Boeing’s belief that there was no urgency to make any significant changes to their proposals.
“With much of our marketing and technical work completed, I strongly urged Joachim Hunold of Air Berlin…to come to Toulouse to meet Noel Forgeard and see if we could finalize an opportunistic deal. This is exactly what we did last May. We shook hands on a preliminary agreement.
“Knowing no definitive contract was signed, Boeing—completely caught by surprise—then did everything possible to win back Air Berlin. By October, their unit price for the [larger] 737-800 had actually become cheaper than our agreed terms for the A320. We had a very tough time hanging on to our deal and finally signing the contract [in November], but Hunold was a man of his word—he had shaken hands with us back in May, and despite some difficult negotiations, kept his side of the bargain.”21
For Boeing, this painful event virtually coincided with another, similar one. In mid-December, AirAsia, Malaysia’s low-cost airline and one that had been an all-Boeing carrier, announced that it was buying eighty Airbus aircraft. AirAsia is the leading low-cost operator in the Asia-Pacific region and is expanding rapidly. Airbus, explained Tony Fernandes, its chief executive, “ran a fantastic campaign, really proactive: they had to go out and win because we were a Boeing operator.”22
A month later, Boeing announced that it would take a $615 million pretax write-off, amounting to forty-eight cents a share. Nearly half of the losses arose from efforts to win a major military contract, while the rest involved various costs of closing the production line of the 717, Boeing’s smallest airliner.
In Toulouse on January 18, Airbus formally rolled out its A380. It was a major media event, which the French rather breathlessly characterized as the “Reveal.” Among the five thousand attendees who gathered before a football-field-sized hangar at the unveiling were France’s president, Jacques Chirac; British prime minister Tony Blair; German chancellor Gerhard Schroeder; and José Luis Zapatero, Spain’s prime minister. Chirac called the Reveal a milestone “on the path of European integration.”
Ten days later, China Southern, the country’s largest carrier, announced that it was buying five A380
’s, a long-awaited deal and one that Airbus saw as opening the huge Chinese market for its flagship. The deal was valued at $1.4 billion before discounts. Orders from other Chinese carriers were expected to follow. Nearly lost sight of was more good news—that China Southern was also buying twenty A330’s, bringing sales to Chinese carriers of this popular workhorse to fifty-six.
But Airbus’s news was obscured that day, at least in the United States, by another Reveal in the form of some even better, eagerly awaited news for Boeing: six Chinese airlines would be buying sixty 787’s, another deal that had been hanging fire for several months and one worth $7.2 billion, again before the heavy discounts that the Chinese are able to insist on. The importance of this announcement could hardly be overstated. The success of the 787 program was judged to depend partly on how many would be sold in the Chinese market, for which the airplane was always judged an ideal fit.
The strategic thinking of both Airbus and Boeing is driven by the Asian market, starting with China; most industry watchers assume that sooner rather than later China will become the largest market for both long-haul aircraft and those designed for domestic use. It is currently ranked number four. Apropos, Boeing’s good news became the occasion for the company to redesignate the 7E7 as the 787. But Boeing seems to have had another, possibly stronger motive for making the change and making it then. “Incorporating the eight at the time of the China order is…significant because in many Asian cultures the number eight represents good luck and prosperity,” said Alan Mulally.23
The good news from China didn’t altogether dispel doubts about Boeing’s business plan for the 787. On the very day that the big Chinese purchase of the airplane was announced, Boeing was still unable to declare that it had a signed an industrial contract with its various risk-sharing partners, the three Japanese “heavies” plus Alenia and Vought. Mitsubishi Heavy, the presumed prime contractor for the airplane’s wing, had not yet broken ground on the new plant in which the work would be done.
Boeing Versus Airbus Page 5