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Gaining Altitude

European consortium Airbus Industrie proved it could more than withstand Boeing's competitive full-court press. Now it's aiming even higher: leadership of the world's commercial aircraft market.

February 28, 1999|JAMES FLANIGAN | TIMES SENIOR ECONOMICS EDITOR

TOULOUSE, France — The challenger is gaining on the champ. Airbus Industrie, the European commercial airplane producer that is owned by companies from four nations, wrote up nearly as many aircraft orders last year as perennial world leader Boeing Co.

It was an impressive demonstration that Airbus has more than withstood a competitive full-court press by Boeing in the 1990s, notably including the 1997 acquisition of the only other real competitor in the plane-building business, McDonnell Douglas.

That dramatic move figured to cement the Seattle company's dominance of commercial aerospace. But the opposite has occurred.

Airbus has made inroads with longtime Boeing customers, such as American and United Airlines, British Airways, All Nippon Airways and Korean Air Lines. It is currently battling for an order from Scandinavia's SAS, a longtime Boeing client.

And Airbus has set its sights even higher. The company hopes to seize global leadership in commercial aircraft by launching the next big jumbo jet sometime in the coming decade--a bold bid to supplant Boeing's venerable but aging 747.

Industry experts give the Europeans a good chance.

"One thing is clear: Airbus is here to stay," said Pierre Chao, aerospace analyst at the Morgan Stanley investment company. "It is run by smart, energetic guys. It makes good products. It is willing to take the right risks, and it has won the respect of the airlines."

The envisioned new jumbo aircraft, a 555-seat machine currently dubbed the A-3XX, would be the first of an entirely new family of airplanes for Airbus, said John Leahy, Airbus senior vice president and head of airliner sales.

Launch of the 3XX has been pushed back because there is no market for such a large plane today, but engineering and planning are continuing. And Airbus is signing agreements with aircraft subcontractors worldwide, such as Japan's Mitsubishi Heavy Industries, to invest in the plane's development, which could cost more than $12 billion.

Executives in Toulouse see historic possibilities. If the 3XX comes to pass, Airbus could displace Boeing as the prime contractor in global air transport--empowered to hand out export- and job-creating contracts in technologically advanced industries around the world. Boeing seized that valuable leadership role from Douglas Aircraft back in the 1950s with its launch of the 707, the first commercial jetliner.

Meanwhile, Airbus' order backlog is hefty, and the consortium is coming off a year in which--although it lost money as a consortium--it actually made money for its French, German, British and Spanish partners on some $13 billion in revenue.

"We've arrived," declared Leahy, reflecting the general optimism at Airbus' glass-walled headquarters near the Toulouse airport in southwestern France.

Of course, Boeing isn't exactly going away.

As it announced last week, the giant company, which last year had $55 billion in revenue, is launching a broad-based effort to get all its aircraft programs back to profitability after production stumbles and losses in recent years.

Those difficulties can be traced directly to Boeing's aggressive push in the mid-1990s to head off Airbus and snare 75% to 80% of the world's aircraft orders.

But Airbus pushed back, and one result has been a fire-sale environment, analysts say--price cuts of as much as 35% to 40% per aircraft. That means planes such as the Airbus A-320 or the Boeing 737, with list prices of about $35 million each, have been going for less than $25 million.

There can be little profit in such sales, as was confirmed last weekin a report that Airbus Industrie had lost $200 million last year because of price-cutting. The disclosure was issued by British Aerospace, the aircraft-manufacturing partner that owns 20% of Airbus and supplies the wings for its airplanes.

The other partners are DaimlerChrysler Aerospace of Germany and the French-government-owned defense company Aerospatiale, each of which owns 37.9% of the Airbus consortium; and Construcciones Aeronauticas, or CASA, of Spain, which owns 4.2%.

The structure of Airbus is as complex as its history.

It was founded in 1970 as a government-backed effort to preserve a European aerospace industry, after the commercial failure of the Concorde, the British-French supersonic aircraft. And the consortium remains a unique public-private hybrid, even as it today seeks a more conventional, investor-owned corporate structure.

Airbus' first model, the 250-passenger A-300, was heavily supported by initial sales to the French and German state airlines. Airbus made a breakthrough to the U.S. market with a subsidized sale to the old Eastern Airlines in 1975 and won orders from more than 80 airlines worldwide after that.

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