In keeping with the UK’s rain lashed summer this year’s Farnborough International Airshow was a drab affair for the commercial aviation industry
Yes, there was the usual corporate hobnobbing as aviation bigwigs chewed the fat over the industry’s future. Behind the scenes though the knives were out as usual as the industry’s big beasts – Boeing and Airbus – wage their ongoing war to preserve market share at a time when some airlines are either scaling back their ambitions or staying on the sidelines until the global economic climate shows signs of sustained improvement.
The war also reflects a narrower market focus by Boeing and Airbus as they look to reduce order backlogs stretching out to the back end of this decade and attempt to convince the airlines they’re up to the task of fulfilling delivery targets for the long-range 787 and superjumbo A380 respectively, after years of delays. In the case of Airbus owner EADS, for example, its initial $12bn budget for the A380 project has seen cost overruns in the billions and deliveries an estimated 25 percent slower than originally forecast.
Looking at numbers, Boeing and Airbus announced combined orders at Farnborough worth $52.5bn (at list prices) – Boeing confirming orders and commitments by airlines and leasing companies for 373 aircraft worth $35.6bn; Airbus unveiling orders for 115 aircraft worth $16.9bn.
Yet measured against the $94bn worth of orders racked up by the two planemakers at last year’s Paris Airshow (Paris and Farnborough alternate as annual venues) this year’s numbers were poor.
They also don’t take account of the heavy price discounting that has been a feature of the industry for some time as Boeing and Airbus aggressively look to close deals in what has become a buyer’s market. By some industry estimates these discounts may have been as high as 50 percent for preferred customers, especially where sales have been heavily contested.
Going forward, the gloves are already coming off in the single-aisle jets market, where Boeing’s 737 Max – due to enter service in 2017 – is pitted against Airbus’s A320neo, which is set for production in 2015.
With Boeing claiming the 737 Max will burn 13 percent less fuel than a conventional 737, and Airbus saying the A320neo is expected to save 15 percent more fuel than the A320, this market, given relatively high oil prices, is likely to be a fiercely contested one.
Boeing has already found itself on the back foot after unveiling details of the 737 Max seven months after Airbus provided details for the A320neo – a lag that helped Airbus book record narrow-body orders in 2011. At present, Boeing has orders for 649 Max aircraft, while Airbus has contracts for 1,454 neo jets.
As if a price war isn’t bad enough for the two industry giants the prospect of excess production of new planes – as they look to clear their backlogs – negatively impacting the value of older models on their books, is a very real one. This in turn could have the knock-on effect of undermining the ability of financiers to fund purchases of new plane purchases from the two companies.
While there’s little doubt for the need to continue driving down costs and reducing lead times the big question is how far are Boeing and Airbus are prepared to cut their margins as they fight their increasingly bitter war. It could end up being a bloody one.