Boeing Versus Airbus

by John Newhouse

  These airlines could hardly think otherwise. LAX isn’t fully compatible with the A380 and won’t be for some unknown period of time, largely because plans to modernize a relatively decrepit facility and prepare it for the A380 became embroiled in a master plan that, besides being remarkably foolish and hugely expensive, was unresponsive to the problems at hand. The plan was inspired by former mayor James K. Hahn and, in effect, scuttled the previous mayor’s master plan, which was regarded as sensible.

  The Hahn plan’s price tag was $11 billion—the biggest of all airport projects ever, even though Hahn had pledged to cap airport growth at $78 million, another foolish notion. Denver spent $3.5 billion on the country’s newest airport. San Francisco spent $5 billion on modernizing its airport.

  “We couldn’t get the politicians focused in time and consequently will not be able to handle the airplane efficiently,” says Michael di Giralamo. Di Giralamo is highly respected and known in airport circles as LAX’s “go-to guy.” “We will be able to accommodate the airplane in terms of landing, taxiing, and parking,” he says. “But passenger service will not be at the level that airlines want. Some airlines will say, ‘Let’s put it somewhere else.’ The mayor [Hahn] said to me, ‘Why are they building it [the A380], and who needs it?’”35

  The Federal Aviation Administration is restricting operations of the A380 at LAX to one runway because it feels the airplane’s 261-foot wingspan requires runways to be 200 feet apart. LAX has four runways, one of which is 200 feet wide. The others are just 150 feet wide, and the FAA has expressed concern about wingtip clearance on parallel runways. The more serious concern on all sides, including that of the FAA, is the incidence of runway incursions at LAX. Among the corrective steps to be taken will be creation of a center taxiway and moving one of the runways. Environmental issues have held up work on the center taxiway.

  Airlines operating big airplanes such as the 747, 777, and the A340 out of LAX feel under more pressure there than they do elsewhere. Runway and taxiway standards are well beneath those of other hub airports. Work is under way to improve the taxiways, along with the concrete fillets that allow aircraft to turn corners. But most of the improvements won’t be completed until 2010. Work on the runways has been held up, again because of environmental issues. Expanding the holding rooms will take until 2012.

  The various problems that may discourage some carriers from flying the A380 into LAX could obviously hurt Airbus. “Airbus does not want to see the world’s biggest and most modern airplane flying into an airport that isn’t equipped to handle it,” says Frank Clark, executive director of Laxtec Corporation, an association of airlines that use LAX’s international terminal.36

  The question, then, is which A380 operators may decide that, despite the airport’s drawbacks, there is no better alternative. The region’s financial and international business sectors are concentrated in Los Angeles, as are the major ethnic population groups that travel long distances with some regularity. That explains why KAL, after hesitating, has decided to operate its A380’s from LAX.

  A380 users who decide against the airport could fly the airplane instead into San Francisco. The city has worked hard at being chosen to receive A380 operators and thereby begin to displace Los Angeles as the major gateway. Its new international terminal is ready. Four of the gates have been modified for the A380. Each of them has dual bridges that allow passengers to be disembarked and loaded rapidly enough to keep turnaround time within reasonable bounds.

  The runways at San Francisco are 750 feet apart, not enough to allow two A380’s to take off side by side but enough for one to leave alongside some other airplane. Besides the new terminal, which was opened in December 2000, the airport created two new parking garages, new freeway ramps, and two new employee parking garages. The other up-to-date feature is a light rail system that connects the terminals, garages, rental car offices, and a Bay Area Rapid Transit (BART) station that is located at the entrance of the international terminal. Bus and auto traffic on surface roads has been reduced.

  John Martin, the airport’s director, sees it as capable of competing with LAX. “Through passengers prefer landing here,” he says. “We have a much higher level of amenities, and are much more efficient. The customs service is a much better facility. We have better facilities in general, including better restaurants.”37

  Officials at LAX are cautiously optimistic that in the end A380 operators—most of them Asian—will conclude, or have already concluded, that access to the Los Angeles market must outweigh the clear advantages of flying into San Francisco’s airport. Many incoming travelers from East Asia would be unable to make the connections they require at San Francisco. Indeed, a great many such connecting flights out of San Francisco, especially those on Southwest Airlines, depart from Oakland.

  AIRBUS’S CHIEF CONCERN isn’t the readiness of airports for the A380 but the readiness of the travel market. Skeptics abound. The turnaround time of an airplane that big, they say, could turn out to be two and a half hours. And who, they ask, would want to fly in such a huge aircraft? How could 550 or so passengers evacuate this huge double-decker, if it came to that?*2 And then, how will they all get out of an airport without interminable delays? Think of all those passengers retrieving all that baggage and navigating other potential shoals, including customs. Will there be waiting rooms large enough? And what about parking facilities?

  The argument for Boeing’s much-admired new airplane, the 787, is that the international route structure is “fragmenting”—jargon pointing to the fact that people would rather fly directly to where they want to go without having to stop off along the way at some hub airport. “Everything is fragmented,” says Alan Mulally. “Seventy percent of the people landing at Narita are not going to Tokyo,” he argues. “The same is true of O’Hare and Chicago. These people are trying to get to some other place. The congestion is in the hubs, not elsewhere.”38

  Boeing’s 787 and its still more recent Airbus counterpart, the A350, are aimed at this point-to-point travel preference, whereas the A380—twice their size—will be plying the hub-to-hub routes. The A380, its critics insist, was badly timed. The market won’t be ready for an airplane that big for perhaps a decade, they say. Airbus’s thinking, they continue, was rooted in the early 1990s, when the idea of flying very large airplanes between hub airports seemed to make great sense. What sells now, the argument goes, is frequency and fragmentation. Leisure travelers are likely to buy their tickets based on price, whereas the business traveler is able to choose convenience, even if that means paying more.

  Airbus is not connecting the dots, its critics maintain. It is the business traveler who pays the bill, they say. The issue is not how many people can be jammed into the airplane, but how much revenue they produce. The front end of the bus generates more revenue by a factor of five on a normal long-haul route, according to the A380’s critics. The spread, they say, is less on domestic flights.

  Pierson’s argument—that the A380 represents a natural evolution from the 747—has support, even among those who feel that its arrival is premature. So far, they say, the discussion has lacked perspective. Boeing and Airbus, they note, are both forecasting 5 percent annual growth in air travel. And that is 5 percent of a very big and rising number. Moreover, in the business plan for a new airplane, the company, whether Boeing or Airbus, will count on a production run of twenty or so years. But the point in that twenty-year cycle at which the airplane may be fulfilling the company’s hopes for it is rarely apparent. The A380 may be a decade away from meeting Airbus’s expectations. And it may be that only an enlarged version of the airplane will do that. It is capable of carrying 750 to 800 passengers. Indeed, its wing is optimized for an airplane bearing that kind of load.

  There is talk of a baseline, nonstretched all-economy A380 carrying between seven and eight hundred passengers; but the economics are not there, say the skeptics, because, again, it’s the pricier seats in the front of the airplane that pay most of the cos
ts of the flight. “This long-haul, ‘pack ’em in’ approach has been tried and it has failed,” says one airline industry analyst. “It’s not the bodies that matter, it’s the revenue.”

  Left to itself, the A380 might over time satisfy Airbus’s expectations. But it won’t be left to itself. Instead of talking the talk, Boeing, as noted, is developing the 747-8, an advanced version of its veteran jumbo. This airplane will be a better cargo carrier than the A380, and it can be sold for less. Boeing’s calculation rests partly on an assumption that the A380, with 550 seats, is too large and that its own 777 is a little too small for the big plane market. If so, the argument runs, an all-new 747 with 450-plus seats will be a good fit.

  Perhaps. Boeing is also keenly aware that the market for this version of the 747 will be limited, if only because it will be squeezed between the A380 at the high end and the 777 at the lower end. And the airplane will embody a thirty-five-year-old design. However, Boeing will be investing a lot less in its 747-8 than Airbus has already invested in the A380. Indeed, the real significance of the new 747 may be that every one that is sold will mean one less A380 sold.

  CHAPTER EIGHT

  A Challenge from Asia

  OVER THE PAST five decades, Boeing has been the country’s largest single exporter and earner of foreign capital, a major innovator of high-end technologies and a major user of them, the custodian of a tribal knowledge about designing and integrating the numberless systems and parts of which a modern airliner is made. No other American company has that knowledge. Elsewhere in the world only Airbus and Russian industry have it.

  For now, many would say. Boeing has elected to outsource a sizable body of knowledge. The greater part of its new airplane, the 787, is being built elsewhere, with Japan’s three major aircraft companies in the lead role. Boeing’s close and productive ties with them have at times raised questions, although never to the same extent as now. Has Boeing tilted the playing field against itself? Could these companies use what they have learned from Boeing to build and market their own large commercial aircraft? Indeed, has Boeing, in effect, ceased to be a maker of large commercial aircraft? And if so, why?

  The 787 program is stretching technology to its outer edge, starting with the wing, the smart part of any airframe—“the soul of the airplane,” as British aircraft people say. In the art of making wings for commercial aircraft, Boeing, as noted earlier, has had few peers. Now it has outsourced the wing of the 787, the first to be made partly of composite material, to the three Japanese “heavies.” They are also responsible for a section of the all-composite fuselage. And Boeing has licensed the design and manufacturing technologies involved in composite materials to the Japanese.

  Alenia of Italy and Vought Aircraft are producing the center and aft fuselage sections, along with the airplane’s horizontal stabilizer—in all, 26 percent of the structure. Boeing itself is supplying roughly 35 percent of it, including the vertical fin, the fixed and movable leading and trailing edges of the wing.

  Boeing and Airbus have always outsourced subcomponents and systems to suppliers. In the case of the 787, however, Japanese suppliers are acquiring so-called core competences, starting with wing technology and the new lightweight materials. A comment, possibly overdrawn, but increasingly heard, is that whoever acquires the manufacturing edge with these new materials will dominate the aircraft industry in the twenty-first century. Hence, critics say, Boeing is giving up its competitive edge by outsourcing the responsibility for producing major parts of the 787 with the new materials.

  “The 787 composite wing and fuselage structure are new technologies—untried on this scale even by Boeing,” says Stan Sorscher, a Boeing engineer. “Boeing developed much of the materials, manufacturing processes, tooling, tolerances and allowances, and other design features, which are then transferred to suppliers in Japan, Italy and elsewhere. Over time, institutional learning and forgetting will put the suppliers in control of the critical body of knowledge, and Boeing will steadily lose touch with key technical expertise.”1

  A great many industries save money by outsourcing jobs and tasks. In effect, they outsource to stay alive. Keeping an entire production line at home is no longer a sensible option. But the wide array of products built or assembled globally—cell phones, hard drives, hose clamps, or whatever—can’t be equated with the large jet airliner in terms of their complexity and national importance. In Seattle, one hears that a Boeing airplane is forty-five thousand pieces flying in close formation.

  Boeing, unlike Airbus, isn’t concerned with creating jobs, and its management appears unconcerned with what becomes of the specialized capabilities it is sharing and others it is generating. Outsourcing, as management professes to see it, is unavoidable, the best and perhaps the only means of holding labor and structural costs within financially stable bounds. There is something to that, although the larger reasons for outsourcing on a major scale have been advertised as gaining market access and also sharing the financial risks.

  The talk about market access and moving to cheaper labor markets is misleading. Also very important to Boeing is gaining entry to low-cost financing from the world’s second-biggest economy. Why else locate the wing supplier for the new airplane five thousand miles from Puget Sound? Briefly, this outsourcing is mainly about cheap money.

  There is no evidence, however, that Boeing is saving much money by outsourcing the 787’s wing or sections of the fuselage. Japan is not a cheap labor market. To the contrary. Neither is Italy. But the outsourcing does send a message to the unions that Boeing deals with. It says: “If you mess too hard with us, we can always outsource your job to another place.”

  Early in the new century, Boeing began reacting to the Airbus surge and its own stumbles in the marketplace by searching, especially in East Asia, for “strategic partners.” In return for aircraft sales in these countries, Boeing would allocate production and design work on its aircraft. In August 2002, an article in BusinessWeek said, “Condit sees globalization as a way to both expand sales to nations that sign on as manufacturing partners and to tap into cheaper labor markets.”2

  For a company as versatile as Boeing and as endowed with exceptional resources, the alternative to making airplanes is assembling them. And that is what Boeing is doing with the 787. “Systems integrator” is the term being used in Seattle and elsewhere within the industry to define the company’s current approach to the business. As practiced, it means shifting the financial risks to suppliers, especially those who, like the Japanese and Italians, are subsidized by their governments.

  Under the leadership of Phil Condit and then Harry Stonecipher, the company’s process of change accelerated; aversion to risk became embedded in Boeing’s corporate culture. Condit and Stonecipher had a strong aversion to a business that was so vulnerable to fluctuations in the economy and the airline market.

  The “first-tier” suppliers—Japan’s three heavies, Italy’s Alenia, and Vought—help to finance the 787 program, provide a chain of lesser suppliers, and build the systems. Boeing puts the systems together. “We are an assembler, an integrator,” said Condit.3

  In exercising its right as a first-tier partner to choose a second-tier supplier, Vought selected a German-based subsidiary of EADS, Airbus’s parent, to build the 787’s aft pressure bulkhead, a dome-shaped structural wall at the rear of the passenger cabin. “It’s not a surprise to Boeing,” said a spokesperson at that company.4

  Boeing sees itself, in the words of a senior vice president, as “an internationally networked virtual company.” That is Boeing’s “answer,” he said, to globalization. “The emphasis is on electronic communication—doing business on a networked basis.”5

  The issue of sharing advanced technology with Japan has been around for roughly a quarter century, and for most of that time its focus lay in Washington. In 1983, a page-one story in the Washington Post by Dan Morgan cited transfers of sensitive military technology that, the story said, “have enhanced the technical capabi
lity of an already expanding Japanese aircraft industry [and lie] at the heart of a spreading controversy in Washington about whether the United States has given away information vital to its security and commercial competitiveness.”6 The issue, however, turned on military, not commercial, aircraft.

  The current controversy is a largely internal Boeing affair. It pits management against other sectors, especially the engineers. Not surprisingly, they take strong exception to the outsourcing of core components, since much of the work for which they would have been responsible has gone, and a great many jobs with it. That aside, many of them are convinced that the company has lost sight of its larger interests. Their worst-case scenario, in brief, envisages Japan designing airplanes and outsourcing some or much of the fabrication to Korea and eventually to China.

  In January 2006, Dominic Gates of the Seattle Times cited what he described as a bombshell dropped some months earlier by a group of Boeing engineers working on the 787 program. (This newspaper covers Boeing closely, and its reporting on the company is read closely by the aviation industry.) These engineers, veterans of the B-2 stealth program, told an internal investigator that data from B-2 bomber technical manuals had simply been copied straight into 787 technical specifications. Boeing managers, Gates said, were caught by surprise: “‘We all underestimated the amount of screening we need to do for military technology,’ said Walt Gillette, head engineer and president for airplane development on the 787.

  “‘It is our clear intent to make sure we comply with the law,’” Gillette said. But, Gates wrote, “the underlying issue is whether Boeing’s plan to outsource high-tech 787 composites manufacturing could put U.S. government technology in the hands of either enemies or potential future economic competitors. Yet Boeing’s internal response,” he continued, “suggests a reverse perspective: that the laws designed to protect military secrets create barriers to legitimate sharing of commercial technology, which executives see as essential in the globalized aviation marketplace.”7 It’s an argument that can be used to support Airbus’s contention that U.S. technology flows back and forth between the military and civilian sectors, with Boeing as the main beneficiary.