Tuesday, December 16, 2008

Can Airbus Keep Its Edge on Boeing?

Can Airbus Keep Its Edge on Boeing?

It has been a rotten year for Boeing's (BA) commercial jet business. Production glitches and a 58-day machinists' strike this fall have pushed its newest plane, the 787 Dreamliner, a full two years behind schedule. Archrival Airbus (EAD.PA) has pulled ahead in the race for new orders, logging 756 net sales this year, compared with 657 for Boeing. At the same time, Airbus seems finally to have untangled its A380 mega-jet's production mess. And the strengthening of the dollar against the euro has boosted Airbus' bottom line and helped the European planemaker regain some of its competitive edge.

All that, and yet the market for big planes looks worse than it has in years. Total orders this year are likely to be half the level in 2007, and some financially strapped airlines are canceling or delaying earlier orders. "Traffic is collapsing," says Nick Cunningham, a London aerospace analyst with Evolution Securities.

It's a perilous time—but it could be even more dangerous for Airbus than for Boeing. Airbus' A350, its planned competitor to the Dreamliner, looks to be falling behind schedule, too. The company had expected to settle on a detailed design for the A350 by October, but now that timetable has slipped into 2009 as the planemaker negotiates with airlines over specific design features. That makes it almost certain that the A350 won't enter service before 2014, at least 4 years behind the Dreamliner's delayed launch in early 2010.

Permanent Majority?

The danger for Airbus is that further slippage on the A350 will seal Boeing's dominance in the high-volume, richly profitable market for midsize widebody jets. "Boeing may be guaranteed a permanent majority," says Doug McVitie, an analyst with Arran Aerospace in Dinan, France. Already, the Dreamliner has racked up 910 orders, almost twice the 478 logged by the A350.

The strengthening of the dollar, which has risen almost 20% against the euro since the summer, certainly offers short-term relief to Airbus. When the dollar was sinking, the company noted that every 10 rise in the euro would knock more than $1.3 billion off its bottom line, because airplanes are priced in dollars but most of the manufacturing costs are in euros. Airbus has launched a series of cost-saving measures, known as Power 8, aimed at slashing more than $4 billion in operating costs.

But such savings will be much harder to achieve if Airbus has to trim production in a downturn, because fixed costs such as buildings and equipment will account for a higher percentage of total expenses. Airbus already has said it will postpone a planned increase in production rates, and CEO Tom Enders said last month the company could take "further action if the situation deteriorates." Evolution's Cunningham thinks production cuts are inevitable, as he predicts annual aircraft deliveries worldwide will fall as much as 50% from 2009 to 2013. What's more, the dollar is now weakening again.

Danger could also lurk in Airbus' seemingly healthy order backlog. For example, more than half of its A350 sales come from Middle East airlines and leasing companies, leaving it far more exposed than Boeing to a downturn in that region. Although Middle Eastern carriers such as Emirates Airline have expanded rapidly in recent years, many analysts contend the rate of growth was unsustainable even before the global recession hit. A slowdown could threaten orders from carriers such as Qatar Airways and Etihad Airways of Abu Dhabi, each of which has dozens of planes on order from Airbus.

Certainly, Boeing faces risks of its own. For example, it has more planes on order than Airbus does from financially weak airlines in India and China. And Boeing's problems with the Dreamliner have clearly helped Airbus by providing a textbook case of how not to build a new aircraft. Indeed, according to a recently leaked copy of an October 2008 report, "Boeing 787 Lessons Learnt," Airbus has assigned an "engineering intelligence" team to study the Dreamliner's woes in detail.

No doubt its Chicago-based rival is now gearing up for a similar exercise on the A350.

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