Still, within a few months of those end-of-the-year defections to Airbus by Boeing carriers, the notorious Journal piece, and related blows to Boeing’s self-esteem, fortune pivoted abruptly in Boeing’s direction. Bitterly hard fought campaigns that pitted the 787 against Airbus’s A350 were won by Boeing, mainly because it was selling the best airplane and doing so very aggressively. In those spring months, Airbus was saying that Boeing’s commercial operations were once again being sharply run. And the 787 had a useful effect on the company’s entire product line, because it told the industry and the airlines that Boeing was still in the game.
The outset of the 787-A350 duel coincided with the worst of the strife and bitterness unleashed by bitter struggle between Boeing and Airbus and their governments over the subsidies Airbus got from its official patrons. All of this was happening at a time when both Boeing and Airbus were operating without chief executives. Boeing had cashiered Stonecipher, and Noel Forgeard was supposedly in transition from Toulouse to Paris—from Airbus to its parent company, EADS.
In winning the various campaigns, Boeing was now tearing a page from the Airbus playbook by making what are sometimes called “bad sales,” a term for selective transactions that cause pain because the seller earns little, if any, return. However, a bad sale that snares one of the other party’s customer airlines is usually seen as a strategic move and well worth the sacrifice. In losing sequential battles to Airbus for sales to low-cost carriers, some of them expected to buy its 737, Boeing had suffered a heavy blow. Then, Airbus experienced a similarly hard blow when Boeing began selling sizable numbers of 787’s to carriers that had been flying A330’s in the middle market and had been counted on by Airbus to buy its newer version, the A350.
In short, Boeing started turning itself around by not just building a better mousetrap but selling it at concessionary prices to airlines of possibly pivotal importance that might instead have bought the other party’s paper airplane. Boeing had altered its strategy, and apparently put behind it at least some of the problems that had been the talk of the industry. Some of the credit goes to Scott Carson, who took charge of the sales force and wasted no time in changing its attitude and lack of edge. “I told them,” he said, “‘We are now number two in sales,’ and I made clear that the company was number two in other ways.” The Wall Street Journal article, he said, “was right.”24 Carson is now in a position to impose still broader changes. In September 2006, he was selected to replace Alan Mulally and take charge of Boeing Commercial Airplanes. After thirty-seven years with Boeing, Mulally left to become chief executive and president of the ailing Ford Motor Company.
NOT VERY LONG AGO, Boeing had thought of itself—justly—as the greatest aerospace company the world had ever seen. Boeing’s operations were driven by an internal logic and a rugged integrity built on respect for itself and its product. Then Boeing began behaving as if it had lost those attributes, whereas Airbus behaved as it if had taken possession of some or all of them.
As noted earlier, things in this business are often not what they seem. For many years, Airbus had the advantage of being the underdog. It did not have the heavy legacy of product obsolescence—the legacy of a successful past. Boeing had a family of good airplanes built with dated methods and 1960s technologies. The new arrival could afford to be innovative and bold; and Airbus was all of that. As the 1990s wore on and Boeing’s troubles grew, the two companies seemed to have traded places. Boeing became the underdog, enough so that as recently as April 2004 a Seattle-based reporter could ask, “How did Boeing go from being ‘plane maker to the world’ to fighting for scraps?”25
However, Boeing’s Commercial Airplanes group has survived a procession of mistakes, predictably, and appears to be all the way back and then some in the business it turned away from in the early to mid-1990s. Moreover, those mistakes and the company’s eccentric management style tended to camouflage its strength. Sales of its new airplane in the early months of 2004 pointed up one asset that Boeing hadn’t squandered: its rich talent pool. Boeing’s aerodynamicists are as good as any. They were able to design a new and promising state-of-the-art LCA once their deeply risk-averse management and board made the seemingly counterintuitive decision to go ahead with the project.
Chances are that the two companies will continue to trade places over periods of uncertain duration. The product line of one may seem to dominate, or come close to dominating, the other’s product line for a time before the market changes direction and shows a preference for some of what the underdog has begun to offer.
As for what may dictate the impermanence of advantage, it can be changes in one party’s corporate culture; these occur over a period of years and are not reversible overnight. It may be the greater willingness of one party to exploit a technology that is available to both. It may be just good luck, as one party accidentally hits on a product that is percisely what the market decides it must have. With its 787, Boeing showed a greater willingness than Airbus to exploit some advanced technology, and was then able to design a product that looked right to several airlines and later to the financial markets.
CHAPTER THREE
Folly and Hypocrisy
EVEN BEFORE AIRBUS lifted the curtain on the A350, Boeing had begun reacting to it, mainly by mounting a full court press against the launch aid for new airplanes that Airbus had received from governments in the form of subsidies. This meant trying to undo an agreement between the United States and the European Union (EU) that was reached in 1992. At the time, the administration of President George H. W. Bush had begun to worry about the American makers of large commercial aircraft. McDonnell Douglas’s fortunes were heading straight down, and even Boeing looked to be less robust and more vulnerable than in the past. Something, it seemed, might have to be done about insulating the country’s top export and the people who produced it from still greater adversity.
And that argued for clipping the wings of Airbus—setting a limit on the benevolence of member governments. There ensued an uphill and drawn-out negotiation between the Washington and EU bureaucracies that led to an agreement on subsidies in 1992. It provided that no more than 33 percent of the development costs of a new airplane could be covered by governments. Although Boeing wanted a lower percentage, its leadership privately described the outcome as a step in the right direction and supported it. Agreement to ban production subsidies also cheered Boeing’s leadership.
As seen at the time in Seattle, the agreement did cap the Airbus subsidies. And it defined them as loans repayable with interest provided that the airplanes were actually built and made some money. If not, the loans would be regarded as outright subsidies. Airbus would be required to repay the first 25 percent of development costs at “government rates,” the rest at commercial rates.
McDonnell Douglas went along with this odd brew, although reluctantly. It had pushed for an agreement that would have all but removed Airbus’s unique advantage. Instead, it got one that confirmed the right of European governments to continue to subsidize Airbus and thereby squeeze McDac. The agreement seems to have reflected Washington’s judgment that McDac was finished as a serious player in the airliner game. In any case, its net effect was to solemnize Airbus’s position as number two after Boeing. And it may have been the first time that the U.S. government had accorded other governments the right to subsidize their industries. In that sense, the agreement carried huge implications for U.S. trade policy.
A few weeks after becoming president, Bill Clinton traveled to Seattle. During a brief stopover in Detroit, he was asked about Airbus at a town meeting. “The Europeans are going to have to quit subsidizing Airbus,” he said. “I am not going to roll over and play dead.” Clinton was referring to the governments of France, Germany, and Britain.
Clinton was strongly drawn to this subject. Starting on day one of his presidency, he discussed it endlessly with staff, took any opportunity to bring it up with people who might have had some involvement with it, and collected relevan
t articles from newspapers and magazines. He not only carefully read but even underlined pieces from the Financial Times and the Economist. When the issue under discussion was Airbus subsidies, he pounded the table. For him, it didn’t seem complicated: Boeing required protection; it was America’s number-one earner of hard currency and number-one aerospace company. Airbus impressed him as a major threat to American competitiveness. He even talked about going to Congress to get the same subsidies for American companies competing with Airbus, but didn’t follow through; he doubtless assumed that Congress wouldn’t go along with any such move.
On February 22, Clinton visited Boeing facilities in and around Seattle. The company had just issued a startling announcement that it was laying off twenty-eight thousand people, or 20 percent of its workforce; Boeing was also slashing production of its 737, 757, 767, and jumbo 747 models by 47 percent over the next two years because of a dramatic falloff in demand from the enfeebled airline industry.
Page one belonged to Clinton after a speech that he delivered to workers in the plant where Boeing makes its wide-body airplanes and where it was then developing the 777, the company’s first new airplane in twelve years; the plant itself was the world’s largest enclosed space and still growing. “I think you and I know, deep in our hearts,” the cheering audience was told, “that most of these layoffs, maybe not all because the airline industry itself has problems which are bleeding back on to you…but a lot of these layoffs would not have been announced had it not been for $26 billion that the United States sat by and let Europe plow into Airbus over the last several years. So we’re going to try to change the rules of the game.”
Apropos, the assemblage was told that Mickey Kantor, “my trade ambassador, will be closely monitoring the agreement which was finally made last year with regard to limiting European subsidies to Airbus to allow a level playing field.” Clinton also pledged $8 billion of investment in aeronautics research and development over the following five years.
Seattle’s economy, as Clinton judged it, was the most export-dependent in the country and the model for operating in a global economy. After the speech, he met privately with twenty or so notables from the intersecting worlds of the aircraft makers and the airlines. The main purpose of the meeting was to give him direct exposure to the plight of the airlines. No notes were taken. Frank Schrontz (then Boeing’s chief executive) and two of his colleagues, along with John McDonnell of McDonnell Douglas, represented the manufacturers; also on hand were the heads of most of the major carriers.
The Boeing position was that it didn’t want help from Washington, except in removing barriers to trade. Unlike the elated workers on the factory floor, management people weren’t cheering; they took what they heard at face value and didn’t fancy it. Boeing wanted no part of a trade war with Europe or any other part of the world. At the time, Boeing was selling more airplanes in Europe than Airbus was selling in America, or would be likely to sell in that market, which was still the biggest despite the weaknesses of the U.S. airline industry.
“He invited himself here, and he made two strong statements,” said one Boeing executive. “Our strategy was to get him back off the limb he was on. He was heading for strong action.”1
A few weeks later, Schrontz said that he had been “impressed with Clinton’s openness, his general understanding and willingness to do something about the problem. He went around the table, with everyone invited to make two- or three-minute comments. They were all over the map. He listened patiently. He asked good questions and seemed relatively knowledgeable on the issues. It was a useful discussion—a good start from my point of view. The key will be whether he can deliver.”
Asked about the Airbus subsidies, Schrontz said that he told Clinton during the meeting that matching subsidies was not the answer. “We will oppose that,” he said. “We don’t like subsidies. Also, we are in an awkward position. We still have sixty percent of the market. To say we need financial help rings hollow to a lot of people.”2 By then, Boeing was willing to concede a 30 percent market share to Airbus.
The 1992 agreement on limiting subsidies to airplane makers—the one that Clinton had seemingly threatened to undo—amounted to a truce between Washington and the European Union. For years, the Americans had railed against the putative $26 billion in subsidies that Airbus was thought to receive. What’s sauce for the goose is sauce for the gander, said the Europeans. They meant that the spin-off from the heavy American investment in military aircraft benefited the commercial programs of Boeing and McDonnell Douglas.
Each side exaggerated. The real number of subsidies that had paid most of the development and production costs of the Airbus family couldn’t be pinned down, but was thought to lie closer to $13 billion, leaving aside interest, than $26 billion.
If Clinton ever did contemplate changing the rules of the game, he thought twice about it. When Britain’s prime minister, John Major, and Germany’s chancellor, Helmut Kohl, paid their respective get-acquainted calls on the new president, they were told that he approved of the subsidies agreement. François Mitterand, France’s president, who came a bit later on a similar errand, probably heard the same thing. In a joint news conference that followed their meeting, Clinton was asked about his supposed hostility to the subsidies agreement. His problem, he said, lay not with the agreement but with the previous lack of federal support for America’s aircraft industry.
TWELVE YEARS LATER, in the spring of 2004, Boeing decided to pick a fight over the subsidies agreement. Airbus had moved ahead of Boeing and had to be regarded as fully capable of financing its products without governmental assistance. The U.S. government threatened to withdraw from the 1992 agreement and file a complaint against Airbus in the World Trade Organization (WTO). Then it did withdraw.
Spokespersons on one side tended to caricature the other, describing the competition as joined at the hip with government, with treasury doors wide open. Each side tended to inflate those of its arguments that had core elements of validity. The level of humbug rose.
As in 1992, Airbus argued that Boeing, too, drew on government support in launching or improving its airplanes, but did so more indirectly. Airbus people, along with bureaucrats in various European capitals, somewhat overstate their case. They persist in declaring that U.S. military technology literally flows back and forth between one side of the house, defense, and the other side, commercial. Technology is fungible.
Europeans watch the U.S. military establishment deploy state-of-the-art military platforms that they cannot or will not try to match. And they take careful note of NASA’s research in aerodynamics and the benefits it can offer America’s aerospace industry. But Boeing can say correctly that the product of some of this work may become available to all sides, including Airbus. Indeed, Airbus has at times turned NASA-based research into innovative improvements in its aircraft, while Boeing stood by and watched. (Its mind-set stubbornly cautious then, Boeing appeared to be telling itself that if it isn’t broken, don’t fix it.)
Airbus can also draw on the military programs of its parent company, EADS, although this base is much smaller than that of its American counterpart. Spending on military hardware in the European Union probably equals a third of the Pentagon’s equipment budget. More important, the U.S. military spends roughly five times more on research and development than the Europeans.
In May 2005, the Chicago Tribune, Boeing management’s hometown newspaper, published a heavily researched article under a banked headline that read “Arming for Trade War: Boeing Sleuths Seek Proof of Improper Subsidies to Airbus Series.”3 The headline notwithstanding, the piece was a balanced account of how the parties draw support from official entities, both national and regional. “Boeing,” it said, “developed evidence of billions of dollars more in infrastructure projects and other public support that the company contends give Airbus a competitive advantage.” That argument is credible.
The article argued that “the EU could find that its case [for receiving lau
nch aid] is tough to make…. Airbus has jumped from a 30 percent market share in 1992 to 50 percent of commercial-aircraft deliveries today, so Airbus would be hard-pressed to prove any harm.” The piece didn’t note that what actually helps Airbus more than subsidies is the infusions of capital from member states to the EADS ownership.
However, the piece sided with Airbus on one of its major contentions: “Airbus claims of U.S. research subsidies will not be easy for Boeing to shake. A visit to NASA’s research center in Langley, Va., illuminates how Boeing directs and carries out NASA research and also benefits from the findings. [The research center is actually in Hampton, not Langley.] Boeing has used Langley virtually as a proprietary research laboratory. At Boeing’s urging, scientists there have researched lightweight composite materials, high speed–aircraft wing design and other subjects. Much of that technology made its way into the 787, a highly efficient plane made mostly from carbon-fiber composites.”
Actually, only about half of the 787 will consist of composites, and a great deal of Boeing’s knowledge of composites derives from its experience with the B-2 stealth bomber program. Moreover, Boeing does on occasion pay for the use of one of NASA’s wind tunnels and understandably regards the data gained as proprietary.
On June 7, 2005, just a week before the Paris Air Show began, the Pentagon’s inspector general released a 256-page report that appeared to support the argument that Boeing’s influence within the U.S. military establishment lay somewhere between remarkable and excessive. The report’s focus was the proposal to lease modified Boeing 767’s to the air force as refueling tankers. “We all know that this is a bailout for Boeing,” wrote Ronald G. Garant, an official of the Pentagon comptroller’s office, and then deputy undersecretary of defense Wayne A. Schroeder. According to the Washington Post, the IG’s report provided “an extraordinary glimpse of how the Air Force worked hand-in-glove with one of its chief contractors…to help it try to obtain the most costly government lease ever.”
Boeing Versus Airbus Page 6