Boeing's Bounce
For the past five years, Europe's Airbus has outsold U.S. airplane manufacturer Boeing. But that is about to change. Boeing has racked up nearly 450 orders for its twin-aisle 787 Dreamliner, while Airbus has delayed its new flagship jumbo jet, the 550-seat A380, lost orders, and changed CEOs. Randy Baseler, vice president for marketing in Boeing's commercial airplane division, discusses the market with Deputy Business Editor Rick Newman.
Boeing is on a roll. Why?
Obviously, we're in an up cycle for the industry. We went through 9/11; now the airlines are coming back. Last year we had about 70 percent of the wide-body market, and we should do well again this year. A lot is powered by airplanes like the 787. That's the fastest-selling airplane ever.
Why do airlines like it?
The 787 flies 2,000 miles farther than other airplanes of its size, like the 767 or the A330. It can fly to more long-distance cities. If the competition has one and you don't, you're in trouble. We just saw Airbus announce details of the A350, which will be five years behind the 787. They're missing out on a strategic surge among the airlines.
Lufthansa just ordered 20 747s. That's a European airline in Airbus's home market. Is that a setback for Airbus?
When Airbus introduced the A380, we sat back and asked, "Where do we want to be with our twin-aisle strategy?" We don't want to be in the 500-plus-seat market. We want to take breakthrough technologies and apply them to the 250-seat market. And airlines will need 400-to-450-seat airplanes [like the 747] even if they buy A380s. The Lufthansa order gives them a nice size increment.
How down is Airbus?
If you look at deliveries this year, they're in pretty good shape. Where they need to bounce back is their product strategy decisions. It dates back to the late '90s, when they decided to stick with four engines on wide bodies instead of two. Now there's a two-year delay with the A380. Certainly in the next few years we'll pass them on deliveries. The 737 and the A320 will be about fifty-fifty, but on the more expensive airplanes, we'll have well over 50 percent of the market. They're still going to be healthy, though. They will challenge us.
This is a cyclical business, and Boeing has struggled in the past. How do you guard against a downturn?
While there's a tremendous amount of demand right now, we are much more judicious about going up in [production] rate or stretching our supply system till it breaks. We've moved a lot to suppliers. And one thing helping our industry with regard to ups and downs is global demand. Ten or 15 years ago, 45 percent of our deliveries were in North America. Our projections show that in 20 years, North America will account for about 35 percent, Asia Pacific 29 percent. In dollar terms, Asia Pacific will be bigger-about 36 percent, to 29 percent for North America-because they buy bigger airplanes. It's like having a more diversified portfolio.
Do you assume China will eventually build its own airplanes?
In a 20-year time frame, it's possible. Further out, it's likely.
Will that be a threat to Boeing?
Well, remember, it's not just about turning out airplanes. You also need an infrastructure all over the world to support the airplanes, and that costs a lot of money. Besides, China could end up not being a competitor. They could be a supplier. The horizontal and vertical tails on 737s are made in China. They also did the 757 tail.
Is the weak dollar helping Boeing?
If airplanes are priced in dollars-which ours are-that helps. But when we negotiate a deal, the whole thing is so complex that it's hard to take prices back to an exchange rate.
What kind of consolidation do you foresee in the airline industry?
Both the U.S. and Europe have struggled with getting more consolidated. There are 14 flag carriers in Europe. They probably need three or four or five, max. Same in the U.S. Now who they are, we'll wait and see. But we believe consolidation is good. You may not sell as many airplanes in the short run, but as airlines get more efficient, fares go down, demand goes up, they need more seats in the sky and more airplanes.
What did Boeing learn from 9/11?
We try to look at things that are predictable, then ask what we can do to mitigate it-to lessen pockets of timing, depth, and impact. We were already seeing a slowdown before 9/11. But not that deep. Then we announced we would drop production rates significantly. So now, we make sure we do constant work with our major suppliers. More centralized planning.
What risks do you foresee?
In North America, even if there's mediocre growth, airlines will still need replacement airplanes. Asia is more of a growth market. A slowdown there could have a bigger impact than in North America.
This story appears in the December 18, 2006 print edition of U.S. News & World Report.