These planes, although obviously smaller than the A320’s, are a bit wider, hence more comfortable, and they have full-size overhead bins. They would be a good fit for JetBlue, provided a chunk of existing capacity—that is, the US Airways route structure—disappeared. That could still happen. But the merger buys time; roughly how much defies prediction.
JetBlue’s use of reserved seating was a major divergence from Southwest. Southwest, as always in full compliance with its low-cost model, was reluctant to shoulder the added expense of arranging for passengers to reserve their seats. Curiously, Herb Kelleher, unlike Neeleman, saw no reason to include this feature in what he himself insists on describing as “a customer-service business,” not an airline. That is expected to change, and it will. There is no indication that Southwest will emulate JetBlue’s added attraction—the twenty-four channels of DIRECTV.
Meanwhile, Southwest, without dispensing seat assignments or providing in-flight entertainment, has continued to outperform all other U.S. airlines in the ways that matter. In 2002, its market capitalization was $4 billion—more than all of the legacies put together. Three years later, the Southwest number had climbed to $11 billion, and the combined total for the legacies had slipped and was closer to $3 billion. Legacy airline stocks are ignored by long-term investors. Day traders are the only ones speculating on the paper that has been out there for years.
Adding insult to injury, the low-cost segment of the industry has experienced its biggest growth since 9/11. While the major carriers cut back, Southwest, JetBlue, and other low-cost carriers were boosting capacity. In March 2005, Southwest announced its intention to expand capacity by 10 percent without adding further employee head count.32 The announcement coincided with news that, because of rising fuel prices, four of the six legacy carriers were planning to freeze or reduce the number of seats on domestic flights, even though the planes were generally flying full.33
Some of the major carriers, notably United and Delta, have created smaller siblings built on the low-cost model. United’s is called Ted; Delta’s was Song, a short-lived match. It’s unlikely that a low-cost affiliate can mate profitably with any of the major airlines, given their bad habits and high cost structures.
The question arises: If Delta and United managed to bring down their costs, would either of them choose to create a low-cost affiliate? There is a long history of “low-cost airlines within an airline,” not one of which has stayed aloft for very long. Although JetBlue appeared to be Song’s role model, its revenue per passenger seat mile remained well below JetBlue’s. Its cost structure resembled Delta’s. Legacy carriers seem unwilling to accept that the cost advantage of JetBlue and Southwest is based on much more than not serving hot meals.
Hubert Horan, an experienced airline analyst, notes “the growing ability, across the economy, for new business models to rapidly overwhelm long-standing traditional models. Common examples include Home Depot [which rendered the local hardware store obsolete] and Wal-Mart [which overpowered department stores and other traditional retailers].
“Imagine Nordstrom feeling threatened and deciding to start a no-frills, low-price store across from Wal-Mart,” says Horan. “It would be a disaster. These things [the airline within the airline] are strictly the product of desperate CEOs who don’t know the first thing about the industry and who hire McKinzie to produce some type of magic solution.”34 According to Horan, Gordon McKinzie sold the Song and Ted projects to Delta and United even after other similar experiments, also inspired by McKinzie, had been tried unsuccessfully.
The legacy carriers hope, and some of them seem to believe, that the leaner cost structures of the LCCs will over time mature and level the playing field. That might happen, but if and when it does, some of those older airlines will have been done in by their costs, as well as by a severe capacity glut, punitive fuel prices that could go higher, and a thin revenue stream. Increasingly, they are being seen not as legacies, but as dinosaurs that will have to rediscover the evolutionary path or become extinct.
CHAPTER FIVE
Playing the Game
THE ROUGH-AND-TUMBLE BUSINESS in which Airbus and Boeing battle for every sale is strewn with traps. Nothing is certain until the contracts are signed. Often a senior Boeing or Airbus executive will reach what seems to be agreement with an airline customer. The chemistry is good, and there may even be a handshake. The winner retires later in the evening—usually much later, since the bargaining can take most of the night. He may then discover the next day or a day or two later that his company actually had lost. The customer might then say, “I liked the deal, but I was overruled by my board.” Chances are he wasn’t overruled, but instead used the deal that Party A thought had been reached to squeeze an even better one from Party B.
When Jean Pierson’s tenure in Toulouse began, about 40 percent of the airline market lay in North America. As Airbus was then—a new, foreign, and untested player—it wasn’t likely to make much of a dent in that market, although it had created a separate organization in New York. Its chairman was Alan Boyd, an accomplished and universally respected figure. In every job Boyd had held, whether chairing the Civil Aeronautics Board or becoming the first U.S. secretary of transportation (to name just two), he left behind a vast circle of admirers and well-wishers. People liked working for him and with him. And he knew the aircraft industry’s rough terrain better than most.
Boyd and Pierson were a good fit, although stylistically very different. Boyd, who is now retired and living in northern Florida, was lowkey, unflappable, and analytical. Pierson was a dynamic and, indeed, vivid figure. It would be hard to find a chief executive in his or any other business with more expressive body language. And it would be hard to find one who exuded a more acute mastery of the details of this endlessly demanding trade. Like most European aerospace executives, past and present, Pierson has a strong command of English, although richly accented.
In April 1985, shortly after taking over, Pierson visited the New York office. “It was on the twenty-first floor of a building in Rockefeller Center,” he recalls. “This was a tower. I’m a factory-floor guy. There were no Americans there, except for Alan. There were just Germans and French there.
“This was my first visit, but it was clear to me we were going nowhere. I said to Alan at dinner, ‘Either we end this operation now or we become aggressive. First, we have to get out of this tower and go somewhere else. We need a product support center. Let’s build an integrated U.S. operation and hire one hundred people—all Americans—and give this operation an American face.’”1
He says now that he had wanted “an authentic American presence, not some transplanted Gauloise-smoking Frenchmen” (that is, people very like himself). “We looked at Miami and someplace near Atlanta,” he continued. “Finally, we chose a location around Washington, near Dulles Airport. We would have good air service there and plenty of land. There were lots of subcontractors nearby. It was a good compromise, although we did locate our pilot training center in Miami. Yes, it’s a world market, but each village has its own character. I decided to put sales and marketing people in a place who had the color of the village. That was priority one in the U.S.”2
Alan Boyd then recruited seven young Americans whom he and Pierson hoped would be able to sell Airbuses. Each was given an airline to pursue. One of the seven was John Leahy, a former Piper Cub salesman, who rose quickly—“like a rocket,” says Pierson. Leahy soon became vice president for sales in North America, and, as noted, Pierson brought him to Toulouse in 1996 as vice president for sales. Leahy, too, may be en route to becoming a legendary figure. “John Leahy is the most formidable aircraft salesman I’ve ever met,” says Richard Branson, of Virgin Atlantic, who has bought several planes from him.3
“He is the best airplane salesman in memory,” says John Rose, chairman of Rolls-Royce aeroengines. “Boeing has no one like him—no one with the talent and obsessive drive to sell airplanes.”4
Alan Boyd, who hired Leahy, sa
ys, “He is a great salesman. He will not take no for an answer. He has an excellent mind but is not tolerant of those who are less acute than he.”5
Within the company, Leahy is widely described as friendless but much admired and relied upon. Some of the people who like him least feel that his contribution to Airbus nearly matches Pierson’s. Although his rapport with Pierson was never strong, they were a formidable team. Pierson says, “I might tell him, ‘We can’t sell the airplane beneath that price, but do everything else you have to [that is, make concessions], and I will take care of the board.’”6
They became known as “big John and little John,” and they are configured accordingly. In selecting Leahy for the top job in sales, Pierson knew he would upset an Airbus partner, British Aerospace. However, BAe, as it’s known, had not been a great success in running the sales operations. What it was very good at was building wings.
“Only he [Pierson] would have put an American who spoke no French in that job,” Leahy now says. “He saw it as a chance to change the politics of the organization. And he did. The company now runs itself in English. And we got the market share in Europe up to the market share we had developed in the U.S.”7 (This was an allusion to the remarkable spurt in sales to U.S. airlines after Leahy took control of the American operation.)
Holding on to market share in either sector would not be easy. Airbus first had to show that it could support its products reliably. “No one thought Airbus could build a competent and comprehensive product support system,” Pierson recalled. “So we had that to overcome. It is the unglamorous, nuts-and-bolts part of the business.”8
Before Pierson took over, product support was a less than consuming affair for Airbus. According to Clyde Kizer, who was then Airbus’s executive vice president for product support in North America, “there was no twenty-four/seven in France, or Britain, or Germany. Airline customers who complained were told at least once by senior management in Paris that if they ‘operated equipment the way we told you to operate it, you wouldn’t have these problems.’”
In 1992, Kizer ran a survey of U.S. airlines aimed at showing which manufacturer had the best product support. “Boeing,” he said, “came out first, GE second, Pratt third, and Douglas fourth. There was no number five. Airbus was judged so bad we were listed sixth.”9
In Toulouse, Pierson put Gerard Blanc, who became executive vice president for operations, in charge of product support. “We were not well rated,” said Blanc. “I had no experience. We were being hit on the head by the airlines. There was skepticism about our professionalism and the promptness of our reactions.
“We had to change the mind-set of our people. ‘A problem will have to become an opportunity,’ I said. ‘I will be happy only when five airlines which I select give us an unsolicited vote of confidence.’ It took a while, but we got them.”
Blanc talked about the difficulties. “We Europeans,” he said, “do not have this sense of service that the Americans and Asians have. It is a service mind-set that we lack. Maybe it is cultural. Maybe it is education. We didn’t seem to have a natural talent for it.”10
The advent of Pierson at Airbus coincided with a transfer of power at Boeing. T. Wilson, who had steered the company for sixteen years, was succeeded by Frank Schrontz, a capable and widely respected figure whose background and style bore little resemblance to his. Wilson was plainspoken, often earthy, and throughout his forty-two-year career with Boeing lived in the same house that he had purchased in the late 1940s while employed as a junior engineer.11
Wilson had succeeded another towering figure, William Allen, who spent forty-seven years with Boeing and is probably best remembered for his decision to build the 747. Making that move amounted literally to betting the company, and indeed, building the 747 very nearly did kill Boeing. Many years later, Boeing executives still spoke of the awesome but excruciating experience of creating what seemed an outrageously large airplane, one that none of the airlines needed or that very few were interested in buying; an airplane whose principal requirement—an engine strong enough to power it—didn’t exist and might not become available, at least not in time to meet Boeing’s delivery schedules with customer airlines.
As the weight of the new airplane grew steadily, so did the thrust requirements, so much so that Pratt & Whitney, the engine maker, couldn’t keep up. Wings will break if they don’t have the weight of the engines to hold them down. So Boeing had to put blocks of concrete on the wings in lieu of the engines that should have been there. In short, for a time Boeing confronted the prospect of rolling out the world’s biggest gliders instead of the first jumbo airliners.
In trade talk, Bill Allen was “being sporty”—risking a lot in order to keep his company ahead of market trends and the competition. His successor, T. Wilson, was a kindred spirit. Boeing’s performance during the Allen-Wilson years was a primer on how to succeed in this exigent business.
Frank Schrontz was selected to succeed Wilson by Wilson himself, not by a committee. He was a lawyer and had spent part of his career in the Pentagon, first as an assistant secretary of the air force and then as assistant secretary of defense. In these jobs he drew high praise. His interests were always wide-ranging; he was active in a variety of civic and charitable organizations.
As Wilson’s heir apparent and then his successor, Schrontz might have been described as better suited to a subtly changing and more worldly environment, one in which a seat-of-the-pants decision by the leader on a complex issue could be frowned on by the board. Partly because of his Washington experience, Schrontz was judged capable of giving his somewhat insular company a more international outlook, which in turn might help in the global marketplace. (He demonstrated his feel for that and more by helping the Clinton administration bring about APEC—Asia-Pacific Economic Cooperation.) Moreover, he was well liked, within and beyond his company: “a real gent” was a phrase often used to describe Schrontz. And he injected some discipline into various company operations that lacked it.
But Wilson would have been a very hard act for anyone to follow. Most of the senior people whom Schrontz inherited had judged Wilson the complete leader, their polar star. Perhaps inevitably, some of these retired “Boeing heritage” people—those who had been with the company in smoother times—now recall the start of their company’s decline as having coincided with the end of the Wilson era.
The company didn’t change overnight, however. The shift in leadership had a lot to do with personal style. Schrontz was considerably more cautious than Wilson. He was also a more formal and distant figure.
The Boeing Commercial Airplanes group regarded itself—and described itself—as a company of engineers; most of the people who mattered at that time were engineers. Schrontz was not an engineer, but it was often said of him that he could think like one. According to John Hayhurst, a former senior vice president and member of the executive council, “He could get excited by the hardware, and he had a command of details. And he was courageous. It was Frank who stepped up and launched the 777.”12
It was also Schrontz who stood accused by some colleagues of waiting too long to launch this minijumbo. But Schrontz’s timing on the 777 launch was vindicated by events. Although Airbus’s own minijumbo, the A340, began life first, Boeing leapfrogged its rival by investing enough time, energy, and resources in the longer-range and more profitable version of its 777, thereby allowing the airplane to enter service well in advance of Airbus’s counterpart.
Schrontz worked very closely with Dean Thornton, who became president of the commercial airplanes group in February 1985, at the same time Schrontz was appointed the chief executive. Both were from Idaho, and they had attended its state university at the same time. Thornton was an accountant by formation, but he too could think like an engineer, was very comfortable with the patois of engineering, and was highly regarded at all levels of a company that had exacting standards. Thornton, like Wilson, was blunt and direct, and he probably resembled Wilson more closely tha
n any other contemporary.
Among various demanding jobs that Wilson gave him was serving as vice president and general manager of the 767 division when the airplane was developed and brought to the market. In that role, Thornton dealt directly with the Japanese heavies, the first time the three were subcontractors on a Boeing program. (In 1969, Mitsubishi Heavy Industries contracted with Boeing to build carriage kits for the 747.)
It was, of course, Schrontz who became the focus of complaints about steps that seemed to stray from standard Boeing practice. “Frank did things in a new way,” says Stanley Little, who for many years was vice president for industrial and public relations. “It was a new style, more cautious. Things would be on hold. And lots of questions were asked about why we were doing what we were doing instead of having us just doing it. Things got proceduralized.”13
Some operations became more proceduralized, probably because they had to be. Schrontz and Thornton had to start coping with the effects of airline deregulation that were beginning to take hold. The regulated environment had been easier on all parties, except for the air traveler. An airframe maker knew that a portion of his costs could be passed on to the airline, which in turn could pass on its higher costs to the passenger, provided the Civil Aeronautics Board approved the increase in price of a given fare.
The industry model was changing. At some point not far off, the airlines would have considerably less money to spend on acquiring new equipment. It would take another five years or so before that point was reached, but the handwriting was on the wall.
Boeing’s new leadership, like Airbus’s, was focused on the changes under way in the airline market. Boeing was telling itself, “This is going to be a commodities marketplace now. We’ve got a full product line, which will let us concentrate on revamping the factory floor and cutting costs.” Briefly, the focus in Seattle began to switch from products to process. It wasn’t that way in Toulouse. Airbus didn’t have a product line, and Pierson and a few of his colleagues were thinking about new airplanes, less about process. Pierson and Roger Beteille—who, as noted, was regarded as a founding father of Airbus and, for quite a while, Europe’s foremost aerodynamicist—wanted to build a new single-aisle airplane. “Beteille was convinced we should do it,” Pierson recalls, “provided the airplane brought with it a lot of new things. He wanted a clean break with Boeing’s 737 and Douglas’s DC-9 in aerodynamics. He wanted some carbon fiber [hence, less weight] and a new flight management system.
Boeing Versus Airbus Page 11