December 06, 2006
Boeing Ascendant, Airbus Reeling
Reader note: see update below from this morning's post.
The P-I has a thorough story today on another potential win for the Boeing Company, and corresponding blow to rival Airbus. One of the latter's longtime customers, Lufthansa, seems set to be the launch customer for the 747-8 passenger plane, a modernized version of the venerable 747 family of aircraft.
Most painful for Airbus is the fact that while the 787 has been crushing the stumbling A380 in sales, the two planes aren't in the same class. Boeing made a bet with the 787 that airlines would want a lot more mid-to-large size jets for frequent, direct flights than massive jumbo planes for hub-to-hub based travel. Boeing not only seems to have won that bet, but now is about to jumpstart its direct competitor to the A380 by launching with one of Airbus' best customers. Ouch.
The whole saga of competition between Boeing and Airbus the last several years is a fascinating story, with many a bloggable subplot, including debates over local tax breaks, government policy toward big business, union politics, outsourcing v. insourcing, etc. We in the Puget Sound area are blessed with a front seat view of such drama thanks to the prominence of Boeing's local airplane manufacturing and assembly operations. More blogging to come.
UPDATE: The original post above generated some good thoughts in the comments, including one theme from "Boeing pug" I've always found interesting: constant complaining from local Boeing critics, even during peaks in Boeing's fortunes, and often coming from rank-and-file workers inside the company (especially Machinists).
This is just one reason I'm going to blog more about Boeing more in the future. It's fascinating to see critics always go back to the usual cynicism that something is wrong with how Boeing does business. It never stops.
In the late '90's a robust run of Boeing orders led to a meltdown of the supply chain and shut down of the manufacturing line. That coupled with declining attention to customer needs and lack of new products nearly crippled Boeing, even before airline travel volumes plunged after 9/11. In that era there were real problems at Boeing's Commercial Airplanes division, which thankfully for this region were addressed.
Now, with a modernized business model and planes customers want, Boeing is kicking some serious Airbus butt. Both sides do well in the A320 and 737 category, but the 777 is crushing the A340 in sales. The beatdown in that latter class is so stark Airbus is likely to attempt several widely different variants of its still pending A350 model in a belated attempt to salvage the market the A340 used to serve. The problem is the A350 was first envisioned to replace the freshly obsolete A330, left in the dust by the 787's success. This airplane model jujitsu will be a sight to see since independent analysts question the ability of one model to cover two market segments. Yet, such contortions are a financial must since the segments of the airplane market served by the 777 and the 787, and Airbus' counterparts, provide the greatest nexus of profitability per plane coupled with volume of potential sales. To complicate all that for the coming development of the A350, Airbus' financial capacity is starkly weakened by continued delays - plus growing cancellation and postponement of orders - in the costly A380 program. And now, today's news tells us Boeing's competitor to the A380 is picking up steam too.
I note all that to say Airbus has been put on the ropes by Boeing reshaping the aerospace business model and by producing better products than its competitor. Congratulations to Boeing, for prudent management and innovative thinking. The "outsourcing" of work to manufacturing partners as a core element of airplane production for the 787 (and likely for future models as well) has been necessitated by high labor costs insisted upon by the Machinists union. Boeing made the right move to cut costs, which Airbus is struggling to match given its convoluted corporate governance structure and even more prevalent union power in Europe. And yet people still complain about Boeing's business model...or the tax breaks given to Boeing to keep commercial airline operations here...or the way they manage day-to-day operations.
It's all really one of the more entertaining trends in local political and business discourse. People have strong opinions about such things, such as for example regular public spats over the generous contracts given to the Machinists. All the more reason to blog about this stuff more as opportunities arise.
Posted by Eric Earling at December 06, 2006
09:28 PM | Email This
Don't go celebrating too quickly. John McCain and his allies in Alabama are doing everything possible to hand the Air Force Tanker contract to Airbus. For $600 million investment and 1000 jobs in Alabama, they are will ing to sell out the only industry in which the US still is able to dominate. Just what we need, an Airbus plant located in the US...
Boeing's tanker rival gets a boost
WASHINGTON - The Air Force has reversed course and agreed to drop criteria for a multibillion-dollar tanker contract that could have crippled the bid of an international consortium that wants to build the plane in Mobile, Ala.
Ken Miller, special assistant to Air Force Secretary Michael Wynne, said Tuesday that the Air Force would hold all bidders harmless from international trade disputes pending before the World Trade Organization.
Just a few months ago, the Air Force said bidders would have to explain how financial penalties or other sanctions stemming from WTO disputes might affect their ability to execute the contract. The request was widely viewed as hurting a bid from the parent of European jetmaker Airbus SAS, which the United States says has unfairly benefited from European subsidies.
Airbus' majority owner, the European Aeronautic Defence and Space Co., has teamed with Northrop Grumman Corp. to build the refueling tanker in Mobile. Its main competitor for the contract - potentially worth more than $20 billion - is Chicago-based Boeing Co.
"Having that issue as a part of the (bidding) would have made it nearly impossible to compete," said Northrop Grumman spokesman Randy Belote. "We have consistently maintained that the WTO issue was difficult, at best, to resolve within the confines of the tanker acquisition program."
A Boeing spokeswoman declined to comment on the WTO issue.
The United States filed a complaint against Airbus with the WTO in 2004, arguing that subsidies from European governments gave the company an unfair advantage over Boeing.
The European Union retaliated with a countersuit claiming that tax breaks and other government incentives benefit Boeing.
Alabama lawmakers had protested the Air Force's decision to include the WTO criteria, meeting with top military officials to lobby against it. Republican Sen. John McCain of Arizona, an influential member of the Armed Services Committee, backed their cause, saying the military should not get involved in complex trade disputes and that doing so would reduce competition that helps hold down costs.
Rep. Jo Bonner, R-Ala., whose district includes Mobile, said he met with Air Force officials again Tuesday and was encouraged that the process would be open and fair.
"We obviously want good news in Mobile, but we're talking about one of the biggest procurements in recent times," he said. "As long as the process is aboveboard and transparent, then I think we can all have comfort in that."
He noted that the WTO question is not the only important factor affecting the contract. Some analysts have speculated recently that the Air Force may choose a smaller, less expensive plane, a move that could prove a better fit with Boeing's proposal.
EADS announced its decision last year to build the plane at Mobile's Brookley Industrial Complex, a former airfield, choosing the Gulf Coast port city over several other Southern cities. The $600 million plant could bring 1,000 jobs to the state, the company said.
The Boeing come-back against Airbus is indeed a great story of commerical, CAPITALIST success. It is particularly noteworthy given the huge government subsidies Airbus received since it launched many years ago.
But before WA congratulates itself too much, and as a small point of correction to Eric's last sentence in start of this thread:
Let's not forget that while final assembly is still done here, the 787 is manufactured all over the world. In fact the Tail Fin is the ONLY major assembly that is actually BUILT in WA:
The wings and a section of the forward fuselage are made in Japan, and the big center section of the fuselage and the horizontal tail feathers in Italy. Plus the rest of the fuselage is built in Witchita and Charleston SC.
For one pretty good overview, see:
So to an overwhelming degree Boeing's 787 operation in WA is a final assembly operation, with only minimal manufacture done in-state. I hope the new Legislature doesn't forget that example, if they start lusting after more revenue from the business community.... Microsoft and others in WA in the software business are an even better example: It's pretty hard to say the least for Boeing to ''pick up'' the 787 final assembly plant and move it elsewhere. But in large part everything Microsoft makes can be put on a disc and taken anywhere in the world:
Bangalore, Shanghi, etcetera.
I have been paying close attention to the long downward spiral of the Toulouse Goose for some time now. This is probably the most telling article on the subject. They are toast at this point, they will not be able to compete with Boeing unless taxpayer subsidies are greatly increased. However they run afoul of several trade treaties should they try this.
There is just something wrong with awarding a US military contract to a foreign company when there is a more than capable domestic producer. Clean up the shenanigans and get on with the Boeing contract for the freighter.
The US government should wait for the WTO decision on launch aid before awarding the freighter contract. If they lose the launch aid case, then change the laws and give Boeing the same deal that EADS gets. Boeing could then lower the cost of their freigter, and make the deal sweeter while thumbing their noses to the cheating euros.
Palouse, Clinton sold many military and technological secrets to the Chinese in exchange for campaign contributions when he was in office.
The making of planes pales in comparison.
6. Palouse: I though competition was a good thing? You advocate it with school choice, why not advocate it with Govt. contracts?
7. Swatter @ 5: Wow, that's a new one. Got proof? I don't see Bill or Hillary Clinton being tried for treason.
8. time for the state to take away Boeing's tax breaks! I really doubt they need it anymore!
9. time for the state to take away Boeing's tax breaks! I really doubt they need it anymore!
10. I though competition was a good thing? You advocate it with school choice, why not advocate it with Govt. contracts?
When I advocate school choice, I am not advocating that a Japanese company come here and open up schools to educate our children.
I would have less of a problem with Airbus competing for this contract if they were not being subsidized by the EADS member countries. Tax breaks for building facilities or manufacturing domestically are not in the same league as the launch aid that Airbus is getting.
Airbus takes on much less of a risk with its new planes. If it was Boeing that had gone the route of Airbus with the A380, they would be in far deeper trouble and might not have been able to recover. Airbus can just move on to the A350 thanks to the launch aid, and while they will be down for a little while, they will come out of it just fine.
Swatter, I'm not concerned about the technology aspect of it. More of a patriotism argument. It's kind of like your local police driving Hondas. Leaves a bad taste in my mouth. Maybe patriotism in this realm is dead, and I'm just old-fashioned. I would like to think not.
11. Of course, Boeing has sold out its manufacturing capability; most of the 787 is manufactured overseas for assembly in Everett. In the long run, this will not pay off for them, as anybody can assemble an airplane, but making those composite fiber parts is the hard part, and Boeing has given the intellectual property to foreign companies.
12. I think if "anyone can assemble an airplane" that there would be alot more than two major players in the entire world.
Plaouse @ 10: I am not advocating that a Japanese company come here and open up schools to educate our children.
What's wrong with a Japanese company funding charter schools? They're likely to hire well qualified American teachers. What if they provide better results than the American charter schools? You're for competition, but as long as it's American based competition. Can you be any more of a hypocrite here?
Where you been, CATO? I thought it was pretty common knowledge.
Bush would never go after another President. He is and was too nice. It's something the far left never figured out. From day one he was more on your side than the conservative side he claimed to be from.
Look at Bill Gertz from the Washington Times in the Clinton era from about 1994 till about 2002 (took that long before his sources dried up). He had a mole that kept on giving. Very well documented in his articles and books.
I try to buy my cars American, but there is too much quality difference. The SUV is American, though. The American corporations have preyed on our patriotism to buy horrible American cars over the decades and never tried to compete. So, I say the heck with them. If they don't want to compete, then why should I waste effort in trying to buy American?
15. There is just something wrong with awarding a US military contract to a foreign company when there is a more than capable domestic producer
Hey, military uses Italian Berettas for their main sidearm, and the M16 rifle and M240/249 SAW is now made by Faberique Nationale of Belgium (Colt has the contract for the M4 for now). Both Beretta and FN had to open plants in the US to get the contracts, but they are foreign companies, so this sort of thing isn't unheard of.
16. You're for competition, but as long as it's American based competition.
Yes, and I am proud of it. It's unfortunate that more people are not. This country could use a little more nationalism, instead of globalism.
MikeH, I am not opposed to all military contracts for foreign goods, however when we are talking about one in the billions like the freighter deal, there should be a very good reason to choose a foreign company over a domestic one. Considering we are bringing a case to the WTO against this foreign company, I do not think it's justified to choose them for anything.
Swatter, we own two American cars, one of them having over 100,000 miles, and it replaced another American car with over 150,000 miles. The US automakers were behind the curve with hybrids, but there are plenty of good quality autos from the Big 2. But that is really ancillary to the point - I still do not think government fleet vehicles should be foreign cars. Our tax dollars should be going towards supporting American businesses.
Cato - I'm sorry if you can't see the difference between defense and other contracts. Even for the Iraq war, whether you are for or against it, there was talk of the foreign provider of ammo stopping the sales because they disagree with the war. The US should NEVER
outsource her defense to others that can use it against us. The last thing I would want to do is give the French that power! AirBus would give the French that power.
That is the reason to keep defense procurement domestic.
But if you are pro-choice for abortion, why are you not pro-choice for schools? Both are funded by the government? What were you saying about hypocrite?
18. How sick is our government; only complete morons can conceive of doing what is going on. Is it not enough that our current trade deficit is running about a trillion dollars a year? How much more deficits would be enough for the idiots to do something to stop it. Why would the DOD, which requires SECRET clearance for most of its work, would allow foreign companies to bid on the tanker contract?
19. Oh, I feel the same way Palouse... it doesn't feel right that the US military would consider awarding such a huge contract to Airbus. But, they have awarded huge contracts to foreign companies (or at least their American subsidiaries) before, so it wouldn't be unheard of. I would feel a lot better about it if the planes were built on US soil instead of in Europe.
20. The WEA will only give up their oportunity to indoctrinate your childeren when we pry them from the grasp of their cold dead fingers. This is what it is all about, they see your childeren as their's to experiment on and to brainwash.
Right said Fred @ 17 - I'm all for competition among abortion doctors both foreign and domestic.
As for schools, I believe that a separation of church and state is needed to preserve democracy as a whole. I'll support non-religious charter schools.
Before everyone goes bonkers about Boeing and it's sales, let me give you a little sour cream for your coffee. As others have said and yes it's true. The 787 is made ouside of the US. ( not good ) I say this becuse I deal with these outside firms. Let me tell you that, when Boeing starts to make this bird they are going to waste a great deal of OVERTIME. Why do I say this.
These outside firms or what ever you wish to call them and just plain worthless. We rework a great deal of what they give us. Now if this is coming in wrong and Boeing has to fix it all the time, we will be in the same spot as AirBust.
PS... forget the tanker, the Dems won't even let that happen and the 767 has always been the wrong plane. To small and can't carry the weight!
Many commenters here are dangerously off course. Boeing is right on two accounts.
1) In making a bet that a more nimble plane both it its flying characteristics and in its design and assembly would be the correct strategy compared to a large and complex new design like the A380
2) In off-shoring the design and build of much of their planes, given the lay of the land. Unions have drastically increased the cost of labor in this country, and that coupled with the growth of technology in other countries has created a distributed manufacturing and design philosophy that is now a part of many products and companies. Boeing would be insane, not to mention roundly rebuked by its shareholders and board of directors to keep assembly, or a "made in USA" philosophy solely for the benefit of Americans or Washingtonians at the expense of their success. To buy American is un-American. We buy whatever is the best, and that is what encourages capitalism and competition. Hopefully the best is indeed American, but when it's not, it certainly does not help to reward mediocrity. If Japan is capable of making a better, stronger, cheaper wing through carbon composite lay-up technology, then that's where you go to get the parts to make a better airplane. This is capitalism, if you don't like it, take a public job with the state of WA or Seattle and you can sulk in your socialist assault on our GNP.
But honestly, a collectivist consortium like Airbus never even had a chance against Boeing. They have to pay their employees all kind of ridiculous collectivist benefits, shorter workweeks, more vacation, etc. How the hell are they going to build an airplane when everyone is in the south of France all August?
This is what socialist fools like Gregoire want for the State of WA, and it's exactly what they get. It's no surprise that Boeing would do an end-run around WA and any other obstacle that stands in the way of actually making a successful and profitable airplane, and that's exactly as it should be.
24. BTW, even with rework, it's substantially cheaper to pay OEM costs for subassemblies than it is to bear the full overhead costs of an employee, and that's why American business does that more often lately. But there is another factor. It costs a lot to tool up for all kind of subassembly and expertise these days. Much of any product is actually an amalgam of many other products and technologies and their localized expertise. All those costs have to be taken into account when building something as large and as complex as an airplane.
It is my understanding that these new planes will have the capacity to carry 600 passengersÖ as someone who flies between Seattle and San Jose twice a week I know it can take 30 to 40 minutes to load a 737...how long is it going to take to load one of these guys? Letís see...
One hour to park and drag your gear to the terminal...One hour to go through security...30 minutes at the gate... Two hours to board plane...Two hours for the flight...Two hours to deplane...One hour for your luggage...One hour to drag your luggage to the parking lot...thatís 10 and a half hours to fly to San Jose...If one pushed it you might be able to drive that distance in the same time!!!
Jeff B. is on mark. Outsourcing manufacturing at Boeing is nothing new. It's been going on for several decades. Today it's in a much bigger proportion and over the last couple of decades, heavily involving more capital investment (R&D, tooling and brick and mortar) on the part of suppliers. Only makes sense. You want some revenue? - How much cash will you invest up front? It's the old risk/reward thing we all deal with.
I was troubled and dismayed when I heard Boeing was outsourcing the wings for the 787. After I thought about it a little the business strategy made sense. The real strategic weapon for Boeing is product design and integration (bringing it all together). They know somethin' 'bout airplanes. Final assembly is still in house (and probably always will be).
Boeing is a good case study for horizontal business integration. They've been doing it for a long time. Remember how the vertically integrated companies imploded in the last couple of decades (do IBM or AT&T come to mind)?
Airbus is in real trouble. Their business construct is a horizontal integration across countries (rather than competitive suppliers). Even with the heavy subsidies, it's not working. Based on recent news coming out of them, they've recognized that but given their makeup, their ability to change is questionable.
BTW, Boeing has also used computing technology as a strategic weapon for a long time.
Cato 7--some eye-opening reading is in order for your answer--
not plugging books, but those very near Him have interesting things to say--Morris ("Because he..") and especially good--Buzz Patterson ("Dereliction..") lots of cross-corroboration between books from different axe-grinders with different backgrounds/agenda. and--Buzz carried the "football"--a VERY inside & credible source.
Jeff B.--very good points. got me re-thinking on trade. but--what about strategic defense things--cant/shouldnt send all to be outsourced/mfg. (profitably) BUT at the mercy of foreigners.
28. Pacific Grove - I think the A380 can go up to about 550 passengers or so, but that's designed for long routes like London to the Middle East, Singapore to LA, etc. Airlines are obviously still going to use planes appropriate to the size of the route.
Cato @ 21. You are using that same old and wrong 'separation of church' argument. The voucher or whatever is given to the parent of the child. There is no separation issue there. Where that parent spends that voucher is not an endorsement of any religion by the government.
The same way the government sends out welfare/unemployment checks - there is no restriction to whom the recipient may give that money. Or Medicare will pay a Catholic hospital because the PATIENT chose to go there for treatment.
The restriction on the voucher should be an accredited school, as food stamps are restricted to food.
30. There are many business reasons to have the production of the 787 around the world. If the all these countries have 'skin in the game' they are going to buy 787s instead of airbus. That is one of the main reasons to for spreading the work out.
Boeing pug - you may be right in the short term (which I doubt), but sooner than later, any overseas production problems will be addressed and you might just be out of a job.
I don't like offshoring work either, but you have yourself to blame. Greedy unions and their members drive work away. Enjoy your severance.
I have no deep philo-political comment on this affair.
It's just such fun seeing the Euro-socio-crats take it in the shorts. (Hey, they probably secretly enjoy it.)
And all in time for the holidays, too!
Right said Fred @ 29 - Where that parent spends that voucher is not an endorsement of any religion by the government.
You say that but when one of the neighborhood kids starts using his/her voucher to go to a Muslim school watch all the LittleGreenFootball types start espousing their hatred towards the propagation of Islam in the US. It's clearly an endorsement of religion by sending a kid there because why else would they go there? You don't go to Hebrew School and not expect to learn Hebrew and the traditions of the Jewish Faith.
Now, if only we could get Boeing to pay sales taxes and the fabulous B&O tax.
You know, like the rest of us have to?
Cato. Why does the left always need to muddy the water?
Of course it is an endorsement of religion BY THE PARENT, not the government. The first amendment says nothing about private citizens not allowed to endorse a religion, and you know it!
36. ... and typical left trying to bring bigoted intolerant arguments into it! It must be that the left always show their true colors of the totally intolerant bigots they are. I wouldn't care if my neighbor sent their children to an accredited Muslim school. As I have been saying it is the parent's choice, not the government's. The simplicity must be confusing!
Right said Fred, I see now your going to accuse me of being a bigot and side step the issue of federal money going to religious schools. I said nothing of the sort, I'm talking about some of the conservative peeps over at LGF
I am saying the Govt. should not be paying money for religion education regardless of the parents professed religion, simple as that.
Cato - so you disagree with Medicare paying Catholic hospitals as the patient chose treatment there. You are also disagree that the government gives me a break on taxes because I donate to a religious school, church, temple, or mosque?
The government pays citizens for their choices, even if religion is involved in those private choices. So where is the consistency - in principle, not political agenda?
The parent is given money, in the form of a voucher, to pay for accredited education. Where that is spent is in no way an endorsement of a religion. But it does fulfill the educating of children.
There's certainly some good reasons to in-source certain military contracts. It's false to think that somehow we can be globally competitive by isolating ourselves to domestic purchases, but given security considerations, there are indeed some things that should only be done by Americans. Still though, there's very good reason to outsource portions of even a large military aircraft order because Boeing is a public company. Boeing won't be able to compete with Airbus if it has one arm tied behind its back with respect to mandates to fill certain orders through US channels only. Especially when they've built their latest success by doing the opposite with their commercial planes. There are always exceptions.
To me the most interesting fact is how unions are self defeating. It won't be long before most of the workforce in this US is a knowledge based workforce. Even certain necessary localized manufacturing will be more about excellent computer operator skills and less about traditional assembly line unskilled union labor. Unions will survive only where they have built Democrat backed strongholds in government and in certain key knowledge trades that are unionized as with the Airline Pilots. To the extent that unions provide excellent skilled knowledge workers, they are still somewhat valuable, but when they digress into stiff arming large companies into benefits and wages that are not competitive, they seal their own fate.
If you are a union employee in a large US company, you'd be best served by hedging your bets with alternative skills and education before you get canned or worse, your management's demands bankrupt your company outright. You are always better off if you can put yourself in a position to negotiate on your own behalf for more valuable skills.
40. so you disagree with Medicare paying Catholic hospitals as the patient chose treatment there. You are also disagree that the government gives me a break on taxes because I donate to a religious school, church, temple, or mosque?
Those places will not be asking you to pray. I went to Catholic School at one point in my life, we used to attend mass during school hours, I don't feel that tax dollars should be used to support religions schools. Charter schools, sure. Religious education vouchers, No.
Where that is spent is in no way an endorsement of a religion.
Sure it is, the Govt. is now paying someone to teach you religion. Something the Govt. should have no business doing.
Hey Eric Earling...
I dont care how big they get they are still just Greyhound buses with wings!!!
Cato - given "Sure it is, the Govt. is now paying someone to teach you religion. Something the Govt. should have no business doing", then you obviously disagree on the same grounds
that the government should not give me 30 cents on the dollar to be taught how to be a (fill in your favorite religion) when I make a donation to a church? It is endorsing in the same manner. Though in both cases the government has absolutely ZERO
say in it.
Actually they are teaching me the basics as defined in the accredidation - which is the point of the required education. Some schools teach things beyong the basic requirements, some a certain religion, some how to have sex, some how to get an abortion, etc. Various parents have disagreements with any or all of these. Why not allow choice, other than socialists loose control that way?
43. ... and in additionn, the government is giving parents money to educate their child. Nothing more nothing less. They do not say beyond the accredidation, what can or needs to be taught.
You are funding the religious institution with your money. The Govt. recognizes that and gives you credit, much like it would do for any other charity.
The Govt. should NOT pay to let parents send their kids to a religious school. The difference being the education part here.
The government is giving parents money to educate their child. Nothing more nothing less
The Govt. is giving money to a religious institution to educate people in that particular religious doctrine. Govt. stays out of religion, religion stays out of Govt. I see no reason why it should be any different.
Rey 32--i'm secretly gloating too. happy for our companies. happy that again, the much adored socialistic places our libs point as "beter" or "enlightened" are again proven less optimal.
all along my gut wondered if a group of proud, nationalistic, socialistic countries could ever come together for such a project well enough to beat us.