Boeing Versus Airbus: The Inside Story of the Greatest International Competition in Business Hardcover - 2007

Summary

Excerpt

Chapter One

Being Number One


In the aircraft business, as in a Trollope novel, things are often not what they seem. In the 1980s, Boeing still reigned supreme. Its airplanes covered the market. Its product support was exemplary. Boeing was universally judged one of America's best and most admired companies, partly because its sales abroad of big commercial airplanes were the country's biggest export, and partly because it had learned to build these airplanes better, faster, and cheaper than anyone elso had done. "World-class" was Boeing's lofty but accurate characterization of itself.

The competition was barely visible. McDac had entered its steady but terminal decline, and in Seattle, Boeing's home base, Airbus was seen as just another in a long line of European wannabes that would stay in the game only as long as a consortium of governments remained willing to throw vast sums of money at a seemingly certain loser. Today, things have turned around. Boeing and Airbus are the sole suppliers of big airliners, but over many of the past twenty years, the two companies were moving in opposite directions. Boeing's multiple troubles, most of them self-inflicted, signaled an end to its dominance and pointed up Airbus's methodical rise.

Things had begun to change in the late 1980s. And it was no joke when, on April 1, 1993, Moody's downgraded Boeing's debt rating for the first time in the company's seventy-six-year history. Still, as late as 1990, Boeing held 62 percent of the market, McDonnell Douglas 23 percent, Airbus just 15 percent. Today it's very different. McDonnell Douglas is gone, having been absorbed by Boeing in August 1997. In 2004, Airbus outsold Boeing, and did so again in 2005.

Boeing's troubles were traceable partly to arrogance—a tendency to take the market for granted, to coast on its laurels—and partly to changes that developed in the corporate culture. These changes began to dull Boeing's feel for the game, a game in which the supplier must either take large risks with operating margins or make way for the competition. Then there is the legacy of obsolescence. So much is invested in existing systems that a Boeing or an Airbus cannot absorb the new technologies except in small bites. Nevertheless, whatever the cost, they must invest in these technologies, even while being manipulated in a way that drives down the cost of new airplanes to a point at which the financially strapped airlines can afford to buy them. "You can't win, you can't break even, and you can't quit," said Jean Pierson, a former CEO of Airbus, who understood the need to invest in research and technology.

The industry has produced few more interesting figures than Pierson. He is a legend. Experienced people at the Airbus offices in Toulouse agree that without Jean Pierson, who retired in 1998, there would be no Airbus. This is a people industry, even if it is technology driven. Those who succeed are individuals with vision and guts and a sure sense of their company's interests, as distinct from their own (or even those of their stockholders). Pierson defined the model of what it takes. He had the requisite vision, guts, common sense, and the personal force to persuade colleagues at Airbus to do things his way and to persuade customers—including wary, skeptical American carriers—to buy his airplanes instead of Boeing's.

Pierson was known as "the bear of the Pyrenees." He now spends some of his time in Nice and the rest in Corsica—in the mountains behind a small port not far from Bastia. He keeps a small boat there, a farewell gift from Airbus. And he does some indifferent fishing, not with tackle but with a string tied to his finger to which he attaches bait.

Pierson arrived as boss of Airbus in 1985, just when T. Wilson (the T is for Thornton, but he was known throughout the aviation world and beyond as "T"), a figure very like him in a number of ways, retired as Boeing's chief executive. Wilson, like Pierson, was a vivid, dominating, sure-handed leader. And just as Pierson's arrival marked the start of Airbus's ascent, Wilson's departure marked the start of Boeing's decline. The fortunes of Boeing and Airbus were both closely tied to the style and the aura of these two remarkable leaders whose paths barely crossed.

Each of them got on well with and had the respect of his opposite numbers in the airline and engine businesses, partly because they were both hands-on managers who knew airplanes from the wheels up. Both had been factory-floor guys who knew what was involved in the various blue-collar jobs. At Airbus, they say, Pierson would talk to employees in these jobs and then, based on what he'd learned, might say to his staff, "We are going to be ten days late in delivering this or that airplane"—meaning, "You guys better shape up right now or we will be paying heavy penalties for missing delivery dates."

Wilson would sit down with factory workers at lunch in the cafeteria and find out what was going on in their various operations; and then, if it was advisable, he would take up what he'd learned with the relevant managers. He wasn't Boeing's founder, but he was called "the founder" by some of his people. "He ran the company," says one former executive. "It did not run him. Wilson overrode the system whenever he had to."

Like Pierson, Wilson had an intuitive feel for his company's larger interests. He knew that Boeing had the world's greatest commercial aircraft franchise. He would do whatever it took to protect that. He never liked diversifying if it meant moving the company onto ground it knew less well or not at all. The point is best illustrated by anecdotal evidence. For example, Robert R. Kiley (an American who in 2001 would become the surprise choice to take over management of the London Underground) had a remarkable encounter with Wilson in 1975, when Kiley had just been named chairman and chief executive officer of the Massachusetts Bay Transportation Authority (MBTA).

The MBTA had recently bought new trams, or streetcars. These vehicles had been supplied by Vertol, at the time a subdivision of Boeing, which had acquired it in 1960 (nearly a decade before Wilson took on major responsibilities). Kiley recalls the new equipment "as having quickly become a big and constant problem—a horror story. It was sleek looking and very high-tech, too much so. The doors were a special problem. They had about a thousand moving parts, some of them electronically driven. The press reaction was awful. We intended to sue Boeing.

"One Saturday morning," Kiley continues, "I was alone in my office in Boston, and a guard downstairs called to say that a man named Wilson was there and wanted to see me. When I discovered it was T. Wilson, Boeing's CEO, I went down and brought him to my office. He was upset about what had happened, noting how sorry he was not to have stopped this move by Boeing into a technology it knew nothing about. He made clear his feeling that Boeing should not stray from the business it knew. He said, 'Mr. Kiley, my only interest is preserving my company's good name. I'll do whatever you want us to do.' He offered, in effect, to fix the trains or, failing that, repay the MBTA's investment—about $45 million in mid-1970s dollars."1

The trams, which had never worked, couldn't be fixed, and so Boeing repaid the MBTA. For the company, it was the sensible and cost-effective solution to the problem. Not so long after Wilson stepped down, Boeing began to ignore the lesson it had learned with the MBTA: to keep the company focused on the business it knew best.

Boeing had prospered by concentrating on product development and the customer, assuming, correctly, that doing so would best protect shareholder interests. Movement away from these priorities was slow, but within ten years of Wilson's departure, Boeing had changed direction.



Airliners, like T-shirts, come in different sizes—small, medium, large, and extra-large. But they have more variety than T-shirts, because the suppliers build each of their products into families; in turn, the family members, the airplanes, vary somewhat in size, range, and other characteristics, the better to fill each of the airline market's crevices.

The low end of the market is covered by two single-aisle airplanes, Boeing's 737 and Airbus's A320. They are roughly the same size, seating up to 190 people. Both are exceptionally successful, having exceeded the most optimistic forecasts of their respective companies. The 737 is older and has been steadily improved over the years. But the A320, a newer, slightly larger, and more comfortable aircraft, is outselling the 737, not least in the low-cost market that Boeing had monopolized. In December 2004, the surge in orders for A320's from low-cost carriers caused Boeing to shake up its sales force and replace its chief salesman, Toby Bright.

The biggest revenue earners are airplanes with 200 to 300 seats. For many years, Boeing had this so-called middle market largely to itself with the 757, a long, single-aisle airplane, and the double-aisle 767. The narrower and less comfortable of the two, the 757, could seat up to 239 passengers, while the more popular 767 carries 218 to 304, depending on the version. The extended-range version of the family became the most profitable of all Boeing aircraft (a distinction widely but wrongly thought to belong to its 747 jumbo). This airplane's other distinction lay in becoming the first long-range, transatlantic, twin-engine airliner. It was quietly followed by the Airbus A310, which was less popular.

Then, in the mid-1990s, Airbus moved aggressively into this Boeing fiefdom with the A330-200, a new medium-size airplane that quickly became very popular with airlines as a vehicle for moving both people and cargo. The heavy demand for the A330-200 drove Boeing out of the middle market, the richest segment. In October 2003, it announced that too few orders for its single-aisle 757 had dictated a decision to end production of the aircraft by the end of that year; the news foreshadowed serious job cuts. As for the 767, its days, too, were clearly numbered.

Between these middle-sized vehicles and the high-end jumbos lay a hole in the market for which Boeing and Airbus began competing vigorously in the 1990s. Boeing entered the fray with the 777, a high-quality and very popular airplane. The 777 in a standard configuration seats between 300 and 370 passengers. Its launch customer, United Airlines, began flying it in 1994. Airbus's counterpart aircraft in this market, the A340, began life commercially a bit earlier, with Air France and Lufthansa, in March 1993.

Predictably, these minijumbos—the 777 and the A340—became minifamilies of aircraft with varying ranges and other features. Each of the two product lines flourished for a time, until the 777 began to take control of the market. It is judged marginally more comfortable than the A340 (and most other aircraft, too) and is believed to have slightly lower operating costs. In most ways that matter, the 777 is much the better airplane.

More important, the 777, in its early standard version, may have trailed the A340, but Boeing had thoughtfully begun to design and build an extended-range member of the minijumbo family before Airbus got going with a similarly long-range A340. This meant that the competitive edge in what became a highly profitable market for the longest-range versions of these big airplanes belongs to Boeing.

The market's extra-large segment—the high end—has belonged to Boeing since the late 1960s, when it built and began selling the 747, an airplane that was two and a half times larger than the 707, the next-biggest LCA. Thirty years later, Airbus, perhaps unwisely, chose to overtake and even oust Boeing from this market by building a new and even bigger airplane. This superjumbo, the A380, had been scheduled to begin its commercial life with Singapore Airlines, the launch customer, in the spring of 2006. But Airbus, aware that the airplane couldn't meet performance guaranties, pushed the delivery date back to the fall of that year, and then was obliged to postpone it for a few additional months. The airplane's prospects were becoming unclear.



During that small window in the mid-1980s when T. Wilson was disengaging from his company and Pierson was taking charge of his, Airbus swiped Boeing's playbook. It set about building families of airplane types that would span the entire market and demonstrate a stronger commitment to staying even with technology creep. Boeing was still covering the low end of the market with the 737, a 1960s design, and the high end with the 747, a model of the same vintage. Most of Boeing's production methods not only lagged behind those of Airbus but were traceable to the era of big World War II bombers.

Starting in the 1980s, Boeing's arrogance began to coexist with a concern that it was losing its edge, that it was no longer as good at making airplanes more productively than the competition. Its concern about itself deepened. It began to take the threat from Airbus more seriously, while still avoiding risks of the sort it had once taken and that had accounted for its success.

Airbus had started to exude confidence. The talk from Airbus people was reminiscent of Boeing engineers' and senior executives' talk when there was no serious competitor. Airbus then became a metaphor for how Europe could compete successfully against the best and most successful of American industries. And that alone is a big, possibly historic, reversal of attitude. Not long before, European suppliers had been known for making aircraft that were short both on market appeal and on reliable product support.

Airbus wasn't launched because some person, or persons, had an original and creative idea. Instead, its origins reflected the deep anxiety of Britain, France, and Germany, each of which wanted to preserve its aircraft industry. No one of these industries was any longer strong enough to compete with American companies, and the Europeans saw this multiparty approach—the still nascent European idea—as the only way.

As for Airbus, until recently it was seen by its American counterparts as bearing the stigma of being French (it's centered in Toulouse) and, worse, socialist—just another jobs program built upon government subsidies that made possible the development of all the new aircraft. Moreover, given Airbus's apparent reliance on direct government support, American companies used to tell themselves that this oddly configured new prayer would be slow-moving and unable to match the standards of, say, Boeing. This line helped to breed complacency in Seattle. Boeing people didn't look beyond, or contest, their own dogma. Even now, one can hear Airbus described dismissively by some current and former Boeing staff as "just socialism."

Describing Airbus as a jobs program is simplistic. Europe's aerospace industry has traditionally performed that role while producing equipment ranging in quality from acceptable to high.

Media reviews

"An incisive primer of compelling interest to anyone who wants to understand the history of an industry that bumbles through the turbulent space where politics, national pride and serious money collide."
--James Pressley, Bloomberg

"A must-read for anyone looking for a glimpse into the white-knuckled world of the commercial airplane business."
--Stanley Holmes, BusinessWeek

"Vivid, Impressive . . . Newhouse conveys the exciting, anxiety-ridden nature of an astonishingly high-risk business."
--Wendy Smith, Newsday

"There is no better commentator on this sporting struggle than John Newhouse."
--The Economist

"An incisive primer of compelling interest to anyone who wants to understand the history of an industry that bumbles through the turbulent space where politics, national pride and serious money collide."
--James Pressley, Bloomberg

"A must-read for anyone looking for a glimpse into the white-knuckled world of the commercial airplane business."
--Stanley Holmes, BusinessWeek

"Excellent . . . The author paints a picture of a fiercely competitive industry that eliminates participants who misread the market."
--Booklist