Early in 2005, Airbus decided to try to avoid hitting bottom in Japan. It was holding little more than 1 percent of the market there, and that share was heading toward zero. Airbus’s declaratory goal (probably romantic) was not just breaking Boeing’s monopoly in the world’s second-largest airline market, but gaining a half share by 2010.29
The prospects for Airbus in Japan are not good. The company won’t be selling A350’s to ANA or JAL; both are fully committed to Boeing’s 787. At the lower end—the single-aisle market—Boeing’s 737 will remain the aircraft of choice for both JAL and ANA. In June 2004, Ohashi announced that ANA would create a new low-cost airline. He withheld the details except to note that the aircraft to be used would be 737’s.
For some time, Airbus has professed to believe that in the end JAL, Japan’s largest long-distance carrier, would ignore the local pro-Boeing ambiance and buy the A380. Airbus’s calculation was that eventually JAL would see its competitors—Korean Airlines, SIA, and others—flying seven A380 flights in and out of Narita every day and would do the simple math: the cost of flying five hundred or so people on the long routes would be less with A380’s than with Boeing 747’s. So the question (Airbus thought) would not be whether JAL would buy the A380 but when. Then, toward the end of 2005, Boeing began offering the 747-8, a bigger and highly improved version of its own jumbo. This aircraft seemed capable of prospering in various Asian markets, including, most important, Japan’s.
IN 2004, people in the United States were averaging about 2.2 trips by air annually, according to Airbus calculations. The corresponding figures for China and for India were 0.05 and 0.02 trips, respectively. More people in India, it turns out, were traveling on the railways in a single day than they were by air in a year; the use of air transport in India works out to about 1 percent of air travel in the United States and other mature markets.30
That may be changing. In February 2005, the Seattle Times reported that “Indian airlines old and new are shopping for jets”; that “the Indian government is liberalizing aviation regulation and moving to rapidly upgrade airport infrastructure”; that “Boeing’s biggest handicap may be not having enough of the right jets available when the market wants them.” The article went on to report that air travel in India grew by 20 percent in the preceding year.31
This growth will nearly match and possibly exceed that of China over the next twenty years. India has a larger middle class than China, and is widely seen as the most underserved country by the airlines. “India is the hottest growth market on the planet,” said Richard Aboulafia, vice president of the Teal Group and among the most respected industry analysts. The market there is said to be growing at 25 percent annually.32 And, Aboulafia says, “India is also the better China. To sell planes to India, you don’t need to go through a state purchasing agency that makes drama queen pronouncements about not buying anything for a year. There’s no asinine talk of the need for a home-grown regional jet…just straightforward A320 and 737 purchases.”33
Still, not until recently was either Boeing or Airbus selling many airplanes in the Indian market. According to a Boeing strategy paper, Air India had ordered just thirty of the company’s aircraft between 1963 and 2005.34 But only a few months later, in January 2006, the paper was abruptly overtaken by Air India’s purchase of sixty-eight Boeing planes, including twenty-three 777’s and twenty-seven 787’s. The sale was an event, a major victory for Boeing, a hard blow for Airbus, especially since, a year earlier, the prior Indian government had seemed strongly in favor of buying the equivalent Airbus models.
Left to itself, Air India might very well have decided in Boeing’s favor, but it wasn’t left to itself. Boeing benefited from a strenuous campaign led by senior players in the Bush administration, starting with the president, aimed at persuading India’s government to steer the deal toward Boeing. There is nothing uncommon about deploying this sort of influence; major commercial transactions are increasingly linked to side deals arranged by officials. France’s Jacques Chirac did much the same for Airbus, mounting a similar full court press; five members of his cabinet and thirty CEOs traveled with him to India. Airbus then sold sixty single-aisle aircraft to Indian carriers.
Among the issues at play was nuclear technology. In July 2005, President Bush agreed to sell civil nuclear technology to India, thereby reversing a policy that had been in place since India’s test of a nuclear device in 1974. Much of the foreign policy community in Washington, including former government officials and members of Congress, strongly opposed the move, arguing that India is not a signatory to the Nonproliferation Treaty and does not accept internationally agreed safeguards designed to prevent the diversion of these technologies. Although the deal may greatly weaken efforts to prevent proliferation, Chirac lost no time in supporting Bush’s initiative.
Boeing and Airbus both acknowledge having underestimated the Indian market. It is expected to add 5 million passengers between 2005 and 2010. In 2005, Jet Airways had an initial public offering that was sixteen times oversubscribed. Its founder and chairman, Naresh Goyal, thinks that between 2005 and 2010 Jet Airways’ revenue will triple. “It should be around $3 billion,” he says. India “is a captive market. No other country…has so many nationals living overseas. Also, last year [2004], eighteen million people traveled into and out of India, and the Indian carriers’ share was under twenty-five percent. So more than seventy-five percent of the traffic goes to foreign airlines into and out of India. We can change that.”35
Although some financial analysts feel that Jet Airways is rushing its expansion, Goyal, an exuberant character, is not expected to change course. His goals include raising Jet Airways’ service standards to the lofty levels of two carriers—Singapore Airlines and Cathay Pacific Airlines—that he regards as the world’s best. “I can tell you,” he has said, “that nobody has ever seen the kind of things that we are planning.”36
India’s low-cost carriers are thriving; they are described as “democratizing” air travel. They offer flights for the cost of a first-class rail ticket, thereby cutting a one-day train journey from, say, Bangalore to Delhi to two and a half hours. Still, the number of Indians traveling by air in a year—15 million—is the same number estimated to go by train in a day. “A small percentage of that [train traffic] going into airplanes is just going to phenomenally increase the growth,” Dinesh Keskar, Boeing’s sales chief for India, told the Seattle Times.37
In a brief period ending in 2005, a number of mostly no-frills Indian carriers were launched. They included Kingfisher, Indus Air, East West, GoAir, SpiceJet, Air One, and Visa Air. First on the scene was Air Deccan, which has offered fares as low as $11 and provides service in the hinterlands as well as connecting big cities. G. R. Gopinath, the carrier’s founder and co-director, has said, “I didn’t want to connect just Bombay and New Delhi. I wanted to link across the country, leave my footprint.”38 Other no-frills start-ups lie in the wings.
Kingfisher started a trend, first with personal in-flight entertainment systems and then with special valets at the airports it uses. “The passenger will not have to worry about lugging his baggage as the special valet will take care of his luggage from the point of his arrival at the airport,” says Girish Shah, the airline’s general manager for marketing. The service, he added, “is not limited to our passengers. [It] also helps passengers of rival airlines in handling their baggage.”39
Naresh Goyal’s high opinion of SIA and Cathay Pacific is widely shared. “SIA’s management is very professional,” says Paul Kiteley, Airbus’s senior vice president for customer affairs, Asia. “When buying an airplane, they make a thorough evaluation, and that process becomes a reference point—a stamp of approval within the industry. The process is very precise and very tough. They are very demanding—the people who run the process.
“The SIA cabins,” he continues, “are always very attractive. They have the latest seats and in-flight entertainment, including video on demand—a huge array of audio and v
isual. The cabin crews are very well trained. No one ever complains. It is a consistent service throughout the fleet. They retire the young women early. SIA is not required to keep those who are no longer young.”40
Kiteley takes a similar view of Cathay Pacific’s service, which he deems “extremely well run and very consistent.”41 He and others also give high marks for service to Emirates Airline, which was created in 1985 by the government of Dubai and uses SIA as a model. Emirates is one of the world’s fastest-growing carriers. It claims to have received two hundred international awards for excellence and to take passengers to “destinations in Europe, the Middle East, the Far East, Africa, Asia, Australasia, and North America.” These include nonstop flights between the United States and Dubai and between Sydney and Dubai.
With its extensive route system, Emirates also stands accused by other carriers of siphoning off their traffic. It can do so, they say, because of hidden but heavy subsidies it receives from Dubai’s leadership. A widely held but as yet unproved charge is that Emirates is spared having to pay for much of its fuel. Rival airlines see Emirates as being used to make an international hub of Dubai, its airport serving a huge region also served by less-well-off European carriers.
The loudest outcry against Emirates is made by Qantas. Australia lies at the end of the route system. Travelers have to want to go there, and Qantas has developed the most profitable routes serving Australian cities. Efforts by Emirates and also by SIA to gain access to these routes have provoked Australia to raise the “national interest” issue. In August 2005, Peter Gregg, the Qantas CFO, used a keynote address to the Asia Pacific Aviation Summit to do that much and more.
“State-controlled carriers like Emirates and Singapore Airlines,” he said, “benefit from an aggressive corporatist approach by their governments that is aimed at promoting growth through their hubs. Among the advantages this bestows are favorable accelerated tax regimes and lower cost of debt financing, by virtue of their near-sovereign risk status, that make it cost-effective to continually acquire aircraft to keep their fleet age down and to increase capacity.
“Moreover, Emirates,” he continued, “as an instrument of an oil-based state, has an additional advantage when oil prices are high. That is because…the higher revenues from oil help to offset any additional costs incurred by the airline.”42
In February 2006, the Financial Times carried a page-one piece on the vaulting ambitions of the Emirates’ government under the headline “Dubai Spreads Its Wings into Aerospace.” “Dubai,” the piece said, “plans to channel $15 billion into aerospace manufacturing and aviation services, aiming to make the Gulf emirate a leading force in the global aerospace sector within a decade.”43
The struggles between Boeing and Airbus in 2005 to get the better of each other in crucial Asian markets provided some of the most intense moments in the quarter-century period during which they had competed head-to-head. Boeing won each of the battles that mattered most. December was a pivotal, all but climactic month. It began with a order from Cathay Pacific for twelve 777’s, plus options for twenty more. Then came the pitched battle over a sale to Qantas, with Boeing’s 787 matched against Airbus’s A350.
Over a period of forty or so years, Qantas had been a “Boeing airline.” Then, in late 2000, Airbus broke Boeing’s hold by selling twelve A380’s to Qantas, with an option for twelve more. “Airbus made an unrefusable offer,” said a senior Australian official. “Qantas couldn’t say no and maintain its credibility with its board.”44
Five years later, Boeing regained the upper hand, but only after a frantic back-and-forth, hour-by-hour tussle in which, as the Financial Times noted, “best and final offers were followed by even better best and final offers. The Qantas board, summoned last week to make the decision, was unable to make the call, as the two aircraft makers further shaved their bids.”45 In the end, Qantas bought 115 787’s in a package worth $18 billion at list price and before the heavy discounts.
“We were low, but they didn’t want the A350,” said an Airbus official, sounding partly puzzled, partly awed.46 Within the industry, there was some speculation that what may have tipped the scales in Boeing’s favor was a continuing resentment by Qantas of the sale of forty-three A380’s to Emirates Airline. As Qantas saw this transaction, Airbus was, in effect, subsidizing Emirates by selling the huge airplanes at allegedly giveaway prices. More to the point, these are the airplanes that Qantas regards as being capable of cutting most heavily into many of its prize routes.
However, other more relevant issues lay closer to the decision by Qantas to buy Boeing. Its 787 had acquired more credibility in the marketplace; it was expected to be available sooner than the A350; there was a question about whether Airbus could develop the A350 within a reasonable period of time, given the drain on the company’s human resources, especially its pool of engineers, caused by the heavy commitment to the A380. Finally, Airbus was hurt by problems that some of its customers were having with the A340; it was being compared unfavorably with the 777, which had been exceeding its performance guaranties.
In 2005, Airbus and Boeing sold more commercial airplanes than either had sold in any past year. Although unit sales of Airbus aircraft amounted to 52 percent of the market, Boeing captured 55 percent of the dollar value, according to Airbus estimates, largely because of its edge in the most lucrative segment, double-aisle long-haul airplanes. Indeed, Boeing may have created a hold on the market in Asia for these airplanes.47 In Seattle, the feeling, perhaps overly optimistic, was that Boeing had redrawn the competitive landscape. In mid-December, the company’s share price rose to $71.98, a historic high.
Neither Airbus nor Boeing expects its business to be equally gainful in 2006. But for both, the year 2006 began in much the way that the previous year had ended. Six months later, SIA, the industry’s bellwether, concluded a long negotiating process with the rival teams by choosing the 787 over the A350.
The betting is that Airbus will do what needs first to be done: make a strong effort to turn the A350 into a fully competitive program. That cannot be made to happen overnight. Far too large a part of the company’s resources had been committed to the A380. Sales of this superjumbo will continue to lag for some years, but sooner or later an expansive market may need an airplane of that size. In the 1990s, Airbus surged and gradually traded places with Boeing. The companies have now traded places again, at least in the market for double-aisle airplanes, but in the space of only one year.
CHAPTER NINE
Muddling Through, More or Less
ON MARCH 21, 2001, Boeing’s labor force and the city of Seattle were shocked to discover that the company’s headquarters would shortly be moved to the Chicago, Dallas, or Denver metropolitan area. Moving away from Seattle, Boeing said, would allow management to distance itself from commercial aircraft operations and put that division on a more equal footing with the military and space units.
Each of the three cities in contention worked hard to prevail, offering millions of dollars of tax breaks and other incentives. Chicago got the nod. The announcement was made on May 10. Boeing’s management and 250 or so employees would commence operations there on September 4.
The decision to move was driven by Phil Condit, who would say to insiders, “We don’t want to be off in a corner of America. We should be close to our customers and in a big international city.”1 Three days before the company told the world where its new headquarters would be, Harry Stonecipher was promoted to the position of vice chairman. He agrees that he and Condit wanted to improve customer access and adds, “They wanted to see Phil and me. We didn’t want to appear commercial-airplane-centric.”2
It’s unclear whether he and Condit may also have calculated that locating Boeing’s headquarters in a district that bordered the one represented by J. Dennis Hastert, the Speaker of the House of Representatives, might help the company. The proximity certainly didn’t hurt, as events—troublesome ones—would show.
Dallas had been fairly c
onfident of winning, given its tie with the new president, George W. Bush. Texas right-to-work laws were seen as another advantage. For Seattle, of course, the move created a painful wound. The Puget Sound area had been Boeing’s home base since it began life in 1916, and its importance to Seattle could hardly be overstated. Recent layoffs had already demoralized the workforce of seventy-eight thousand, and a downturn in the technology sector was hurting the city.
In looking back, a columnist for the Seattle Post-Intelligencer noted that “Boeing’s move…reflected a corporate mindset largely based on the General Electric/Jack Welch model, ‘we’re indifferent to what businesses we’re in, just so long as we make a lot of money in the businesses we are in.’ In order to coolly, dispassionately evaluate the businesses they’re in, Boeing corporate executives didn’t want to be physically close to any of them.”3
For Condit, the appeal of the GE model—a lean upper tier separate from company businesses—was probably encouraged by Stonecipher, who had been molded by Jack Welch. Airbus had already begun to worry about what it saw as an increasing convergence of Boeing and GE interests. For one of the two major suppliers of the engines used by Airbus and Boeing to be seen as favoring either customer was sure to sharpen tensions and suspicions that are always present anyway and often exaggerated. Stonecipher’s role fueled Airbus’s concern. He and Condit were seen as bent on changing Boeing’s corporate culture. Management would acquire values that infused GE’s methods.
“Taking a page from Welch’s playbook,” BusinessWeek noted, “Condit is making the three key operating units—commercial airplanes, military aircraft, and space and communications—accountable to tough new performance standards. He is giving the heads of those units new CEO titles and the freedom to run their businesses as independent companies.”4
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