Boeing Versus Airbus

by John Newhouse

  “Since 1976, we had been working on a new cockpit—flight management system—in the lab. It was fly by wire. It was being tested on the Concorde [the Anglo-French supersonic transport], where I was production manager. But only in 1982 did we decide that we were ready for fly by wire.”14

  Fly by wire is a system for moving an airplane’s control surfaces with electrical impulses transmitted by wire. It replaced the heavier standard system that did the job with cables and pulleys. The new electronic system, assuming it took hold, would allow computer-driven controls to handle an airplane and direct its course. The yoke, or joystick, would go.

  This was Airbus chutzpah. Fly by wire, although by then being used in combat aircraft, was wholly alien to the culture of airline pilots. The system would give them little to do aside from putting navigational points into the computer and pushing buttons on a small side stick that transmitted impulses to the aircraft’s flaps and ailerons.

  The decision to adopt such a radically different, if simpler, system was, to put it mildly, controversial. Bob Crandall, boss of American Airlines, told Pierson that because his pilots were opposed to the new cockpit, American couldn’t buy the A320, the new airplane’s designation.

  As for Beteille, he was not just fully committed to fly by wire; he wouldn’t support going forward with the A320 without building a new flight management system around it. “The fly by wire was all Beteille,” says Bob Alizart, Pierson’s former executive assistant and his friend. “He held up the decision on the A320 until there was something new and remarkable with which to challenge Boeing.”15 That would be the new cockpit.

  The bold venture was then held up for nearly three years, partly because none of the engine makers had a power plant that closely fitted the A320’s requirements. Beteille, according to Pierson, had to persuade GE to improve its CFM56 engine, which was to become one of the two most widely used engines for single-aisle airplanes, especially Boeing’s 737. But this improved version of the engine was made available to Airbus for the A320 at a time when Boeing 737’s were still being equipped with an earlier version.

  “We then inspired an engine that would compete [with the CFM56],” says Pierson. “It was a partnership arrangement between Rolls-Royce and Pratt [& Whitney]. So the fly by wire brought with it a lot of other new stuff.”16 In fact, the partnership Pierson cites included German, Italian, and Japanese companies. The consortium was christened International Aero Engines (IAE). And its first new engine, the V2500, would compete on roughly even terms with the vastly successful CFM56, the product of a partnership between GE and the French engine maker Snecma.

  But the more serious and intractable difficulty confronting Pierson and Beteille was about money—more exactly, about convincing the British and German governments to provide the launch aid that the project needed. The Germans gradually fell into line, but a few key members of Prime Minister Margaret Thatcher’s government were strenuously opposed to further enlarging this partnership with what they saw as European socialism. In the end, though, she ruled against them. Ruling the other way, she knew, would probably cost Britain its place in the Airbus consortium.

  The delays hurt. Pierson and especially Beteille had been counting on their new airplane, because it was state-of-the-art, to outperform Boeing’s 737 in the marketplace. It would—but years later, and only after the longest-lasting, most episodic and evenly balanced competition the industry has seen.

  The advent of the A320 was a turning point. Its importance to what has become of Airbus and Boeing can’t be overstated. A truly pivotal mistake lay in Boeing’s reluctance to replace the 737 with a new airplane. “Boeing should have killed this upstart,” says Alizart. “If Boeing had produced a clean sheet of paper the A320 would never have become Airbus’s bread and butter.”17

  The A320 embodied an array of technological advances that became common to the Airbus models that were to come. Just the fly by wire should have been a wake-up call for Boeing.

  Gradually, Airbus converted major users of the 737, some of whom had bought only Boeing aircraft, to the A320. It became Airbus’s stalking horse. By the late 1980s the A320 was giving Airbus market share, credibility, and cash, all of which Airbus leveraged and used to create the A330 and A340. And the A330-200, which entered service in 1998, killed a Boeing workhorse, the 767.

  “All of our big turning points were in the U.S. market,” said Gerard Blanc, Airbus’s executive vice president for operations.18

  THE PERIOD between 1985 and 1998 was one in which Airbus rose and Boeing held steady. Together they killed McDonnell Douglas. For most of that time, Boeing chose to regard Airbus as an annoyance but not a serious threat. But Airbus, unlike Boeing, was telling itself that technology matters, and so do new products. In a book about Airbus, Stephen Aris wrote: “What impressed companies like Northwest Airlines, who placed a $3.2 billion order for the A320 in 1986, was not the number of computers on board, but the numbers the technology could deliver in terms of operating and seat mile costs.”19

  The battle for the single-aisle market had been launched a year earlier. Besides the fifteen A320’s that American Airlines had bought, Pan American had bought sixteen, with an option for another thirty-four. But the Northwest order is worth pausing over because it showed how the game between airframe makers is played—how it is never over until it is definitively over. The order was notable, first, because the key figure was Franz Josef Strauss, who was then chairman of the Airbus executive committee. Strauss, who was among the consortium’s strong and formative figures, had been West Germany’s minister of defense and had served for many years as the leader of the Bavarian wing of the country’s Christian Democratic political coalition. Like Pierson, Strauss was a vivid and dominant personality, and they got on very well.

  Recalling the Northwest buy of A320’s in 1986, Pierson says, “I was in my office and Strauss called. That was an event. ‘Come to Munich tomorrow,’ he said. ‘Steve Rothmeyer,’ he said, who is a good friend of mine, is going to be there. [Rothmeyer was the chief executive of Northwest.] He’d been invited to come for hunting. I checked with [Alan] Boyd, who said the A320 was of interest to Northwest.

  “There had not yet been any negotiation, and we started the talks. And there were other talks. In the end, we shook hands on one hundred Northwest options for the A320. There were difficulties then with the British, who said our price was not high enough. I then called the chairman of BAe. ‘This is the first strategic deal in the U.S.,’ I said. ‘You have convinced Mrs. Thatcher to give you money [the launch aid that France and Germany were also providing], now you can tell her about this.’ So BAe came along. I’d have resigned if anyone had blocked this deal.”20

  “The Northwest deal was of enormous strategic importance for us,” recalls Alan Boyd. “Northwest had been a Boeing customer. Boeing had provided Northwest with all kinds of credits.”21 Northwest became Airbus’s first big American customer, and was also the first of John Leahy’s major conquests; it was he who did the heavy-duty negotiations on the deal.

  No one expected Boeing to yield this home turf without reacting, and according to Leahy, Frank Schrontz reacted by sending an order form to Steve Rothmeyer that left blank the price being sought. Rothmeyer, again according to Leahy, told him that it was all over; he had made his decision.

  Rothmeyer’s version differed in the details. “Yes,” he said, “I did make the deal with Airbus, and yes, Boeing did come back after the deal had been made, saying, in effect, let us try again. We weren’t being competitive. They wanted to offer a better price. But the call was not made by Frank. And it wasn’t made to me, but to one of my executives.”22 Clearly, the level at which the call was made hardly mattered.

  Rothmeyer chose the A320, he said, because he was “buying a clean sheet of paper. The fly by wire appealed to me a lot. It was very attractive. And there were a lot of other things in the airplane—the galleys, the lavs suited the configuration Northwest wanted. It performed very well with either o
f the two engines, and we were offered a very good price on those. But the commonalty was a special feature. We were intending to buy A330’s and A340’s, so the commonalty was important.”23 These larger and a bit younger siblings of the A320 shared many of its features, including the cockpit. This commonalty in the Airbus family is known to have tilted a number of sales campaigns toward Airbus.

  The febrile overspending by airlines no longer bound by federally imposed restraints reached a peak in the late 1980s. Would it last? In late September 1990, Frank Schrontz and Philip Condit, executive vice president and general manager of Boeing’s commercial airplane group, told the editorial board of the Seattle Post-Intelligencer that the cascade of new orders had slowed but that the company’s order book looked solid for the next two years.24

  Within those two years, each of the big three carriers—American, United, and Delta—scaled back orders of Boeing aircraft. And all three announced that they were reducing capacity—a step without precedent for any one of them. Europe’s airline market was soft, too, mainly because the costs associated with Germany’s unification had weakened all of Western Europe economically. In that woeful market, not even Boeing could shrug off a customer’s decision to stretch out orders for new equipment, cancel orders, or elect to buy equipment from the competition if the price was right.

  In July 1992, Boeing was shocked when United—its biggest and most reliable customer over the years—bought fifty narrow-bodied airplanes, said to be worth roughly $3 billion, from Airbus. United was choosing between Boeing 737’s and Airbus’s newer A320’s.

  Conversations between Airbus and United about the A320 had been going on for three years. “We were flying it in Toulouse in 1988,” recalls Gordon McKinzie, who was manager of United’s new technology division. “It was competing against the early versions of the 737—the 200 and 300.” The idea of choosing Airbus over Boeing was a sobering question for United. “We spent a lot more time looking at the A320 than we did the 737, because that was a known quantity,” says McKinzie. “We had to look at the likely maintenance costs, the costs of spares, the infrastructure we’d have to build around a fleet of those airplanes. It would mean getting new parts and adjusting to suppliers we hadn’t dealt with.”25

  In talks with United, a delegation of twenty or so Airbus people was closeted for twenty days in a motel outside Chicago. They represented the marketing, finance, engineering, and sales divisions. John Leahy was probably the key figure. The sessions lasted most of the night, with the back-and-forth usually recessing at about 2 or 3 a.m., at which point some of the Airbus people would work through the rest of the night preparing talking points for the next day. The talks would resume at 7 a.m. “It was all about what they wanted and we were willing to give them,” recalled Clyde Kizer, who was then president of Airbus Product Support. “It wasn’t complicated but was very tough.”26

  Airbus had often competed for United’s business, but had never before won an order. “We had grown weary of being used to drive down the price of Boeing airplanes,” said Alan Boyd. “And we said as much to Steve Wolf [who was then United’s chairman]. ‘What do you want?’ we asked him. ‘Fifty airplanes,’ he said. The terms were agreed on. Boeing then made a bad situation worse by deploying heavy guns—United board members—against the management’s decision. But Wolf told Boeing it was all over. It was a huge precedent and a blow to Boeing’s vanity.”27

  Frank Schrontz demurred. “For a customer like United, that would have been a very desperate activity for Boeing,” he said. “If asked by a board member, I might tell him what I think, but no board member asked me.”28

  A fine fuzz obscures many details of this episode. Airbus and Boeing offered conflicting versions of what happened, and United’s management was reluctant to talk frankly about the tactics it employed to drive down the cost of the new airplanes. And drive them down it did. Just how far down and how many sweeteners the winning side—Airbus—provided wasn’t clear. What actually goes on between airframe suppliers and their all but financially prostrate customers is the stuff of legends and sets their business apart from any other.

  Probably no one has figured in more crucial transactions than Pierson, not least Airbus’s breakthrough with United. Although the terms of that deal were reached in Chicago, it had to be approved by United’s Wolf and Airbus’s Pierson; they had agreed to do so in Toulouse.

  But, Pierson says, Boeing and, more interestingly, GE had other ideas. “Steve Wolf was on his way to Toulouse via Paris and was passing the night at the Crillon hotel,” Pierson recalls. “Frank Schrontz and Jack Welch called him there separately and proposed selling him the 737 with the CFM56 engine [the GE engine], with an additional discount of $500 million, provided Steve canceled his trip to Toulouse. Steve told me about the phone call. He came to Toulouse, and we closed the A320 deal after lunch.”29 Pierson says that Welch called him and denied ever making the offer to Wolf, or even calling him. But Steve Wolf confirmed Pierson’s account of this affair in every detail.

  “They made a strong tactical mistake, knowing Steve Wolf,” said Pierson. “I was determined and so was United. Schrontz was just doing his job, but I was furious with Welch because his engine, the CFM56, was also an A320 engine.” So why, then, did Welch try to help Boeing? “Welch’s motivation was as simple as Jack is,” said Pierson.30 He meant that with the 737, GE had a monopoly—it was flown only with the CFM56 engine, whereas A320 customers had a choice of that engine or the V2500, which had been jointly developed by GE’s main competitors, Pratt & Whitney and Rolls-Royce. Airlines relish having options; engine companies relish exclusivity, although they don’t often get it.

  “There were several incidents when GE gave larger concessions on their engines for Boeing airplanes than for Airbus’s,” says Alan Boyd. “Airbus got that information from airlines, even though GE always denied it. Jack Welch was running the show then.”31

  The purchase by US Airways of 130 aircraft in the A320 family, with options for nearly 300 more, is a legend of another sort, although it, too, centered on Pierson and on Steve Wolf, who had moved there from United. It happened in October 1997, a year or so before Pierson’s retirement. The final moments of a typically laborious process occurred in Wolf ’s office, which was located in Arlington, Virginia, adjacent to what is now the Reagan National Airport. Pierson was accompanied by Jack Schofield, who was then chairman and CEO of Airbus North America. “We were close to the deal,” says Pierson, “close enough so that it seemed ceremonial.” But Wolf wasn’t ready to sign, and he imposed new conditions, says Pierson. First was accelerating the delivery schedule of the airplanes. Next, Wolf wanted an additional 5 percent discount on aircraft, spare parts, pilot training, and everything else associated with the purchase.

  On the first condition, Pierson recalls saying, “We will argue.” They then reached a compromise on the issue. Discussion then turned to the discount, at which point Pierson began slowly lowering his trousers and saying, “I have nothing more to give.” He then allowed the trousers to fall around his ankles. He had picked his moment carefully. The door to Wolf ’s office was open, and, Pierson says, “Not only Steve but people in his outer office could see what was happening.” Wolf, he says, “took the point, and I said to him, ‘Now you can tell those people that Pierson never said no to your chairman.’”32

  Schofield says, “Pierson had lost a lot of weight. Doctor’s orders. His bulky outline had narrowed. When he said, ‘I have nothing more to give,’ Wolf said, ‘Pull up your pants. I don’t need any more money.’”33

  If Airbus hadn’t gotten Boeing’s full attention before, it did so now with the sale to United, an airline that hadn’t bought a non-Boeing airplane since 1978. Clearly Boeing wouldn’t remain competitive at the low end of the market, a key segment, unless it did something about the 737, an older, less comfortable, less technologically advanced airplane than the A320. Replacing the 737 with a clean sheet of paper impressed most Boeing people, senior and junior, as the o
bvious answer to the A320.

  However, the company was then engaged in building the 777, possibly the best of the jet era’s passenger aircraft to date. It was a highly innovative and, as it turned out, very expensive airplane, more so than it had to be. The cost overruns were not only high but higher than anyone in the company imagined they could reach, partly because of mistakes and partly because Boeing was doing some things differently. It adopted Airbus’s computerized fly-by-wire system but with a mechanical backup. It offered optional folding wings that, by reducing the wingspan, would allow the 777 to use existing airport gates and taxiways. (None of the airlines took Boeing up on the folding wings version.) Boeing used more composites in the 777’s structure than it had done in the past.34

  Boeing estimated the development costs for the 777 at $4 billion, although the real number was probably close to $14 billion. It then read, or misread, what seemed to be the handwriting on the wall: the cost of developing new products—at least in Boeing’s case—argued for a recess from the company’s core business, competing in the market with state-of-the-art aircraft. It would be an extended recess, lasting until the decision was taken late in 2003 to build the 787.

  So it came to pass that a self-anointed “company of engineers” provoked and exasperated precisely its best aircraft makers, along with numerous senior executives, by building derivatives of the 737 instead of a new airplane. Boyd E. Givan, who was senior vice president and chief financial officer throughout most of the 1990s, says, “Once the 777 was certified and delivered in 1995, it became clear we wouldn’t have any new products. Instead, we did derivatives of the 737—the 700, 800, and 900. ‘Derivatives Are Us,’ as in Toys ‘R’ Us,” he said bitingly.35