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The invincible duopoly of Airbus and Boeing

Airbuswerk in Hamburg
Not a competitor in sight. Source: dpa

On a January day in the airspace over Europe, an Airbus test pilot threw a brand new Airbus A350-900 long-haul plane into a stomach-churning series of maneuvers, climbing rapidly into the sunlight, hitting a steep descent, and turning sharply at speeds that pinned the technicians on board to their seats.

The procedure was an “acceptance flight,” the final step on a very long and extremely expensive journey from the conception of a new plane model to its delivery to a customer – in this case, to the German national carrier, Lufthansa, for a price tag of $310 million (€250 million).

The compicated development of the A350 illustrates the immense obstacles smaller airplane manufacturers face as they attempt to compete with giants like Airbus and Boeing, two companies that have formed a seemingly unbreakable duopoly on the sale of long-haul planes. Originally, the A350 – conceived in 2004 as a more fuel-efficent, faster and quieter replacement for the aging A330– was supposed to take five years to develop. In the end, it took 14 years and cost billions more than originally planned.

Such delays are common in the capital intensive industry. The sheer investment of time and money involved in developing new plane models leaves upstart companies with little chance of beating the Airbus and Boeing behemoths, which can far more easily afford the outlays. Even as players from Brazil, Canada, Russia and China are making serious attempts to challenge the dominance of Airbus and Boeing, the odds are heavily stacked against them. As a result, analysts say, the Airbus-Boeing duopoly is likely to persist and even strengthen in the foreseeable future.

This dynamic is currently demonstrated by the financial performance of the two companies. On Wednesday, Boeing reported a 39 percent jump in operating profit to $3 billion in the 4th quarter with revenue up 9 percent at $25.4 billion. Boeing CEO Dennis Muilenburg predicted revenue will reach $96 to $98 billion in 2018 from $93.4 billion in 2017. He said Boeing will deliver up to 815 new jets this year, up from 763 in 2017. The company’s stock has soared to record levels of late.

Given the sums involved in developing new planes, it’s no surprise that formidable rivals are few and far between.

Shares in Boeing’s European arch-rival Airbus have also risen, up more than 30 percent since the end of August, outperforming the German and French stock market indices. Airbus has orders for more than 7,200 planes, mainly for the upgraded, fuel-efficient medium-range A320/321 neo (short for new engine option) jets. They in turn are Airbus’s answer to the Boeing 737 Max series of modern short-haul airliners.

“Even with the new competitors, we forecast that the Boeing 737 and Airbus A320 models will account for 92 percent of deliveries of short and medium-range aircraft by 2028,” consultancy Oliver Wyman wrote in a recent research note.

The delays and higher-than-expected costs that characterized the development of the A350 are a matter of course in the airline industry. Around the same time that Airbus conceived the A350, orders for its counterpart at Boeing, the 787 Dreamliner, were going through the roof. This prompted Airbus to undertake a more ambitious plan for the plane than originally conceived, including the use of new materials such as aluminum-lithium alloys to offset the weight advantage of the Dreamliner.

There were a number of other challenges along the way that further delayed the development of the A350. At one point, delivery problems with another model – the A380 superjumbo – preoccupied Airbus management. A long running dispute with Boeing over state aid for the development of new planes played out before the World Trade Organization, spurring Airbus to forego government subsidies for the A350. Regulatory authorities finally approved the A350 for delivery to customers in the fall of 2015.

Regulatory delays have not only affected Boeing and Airbus, but also Bombardier’s C Series of small medium-range jets, the MRJ 90 made by Japan’s Mitsubishi and the MC-21 made by Russia’s UAC. And even when such models are successfully built, there’s no telling whether they will be a hit with customers. For manufactures, the risk of making a bad investment is potentially catastrophic.

01 p19 The world’s leading aircraft manufacturers-01

Canadian Bombardier, for instance, overreached with its C Series – seen as serious rivals to smaller Boeing and Airbus jsets – as the development costs soared to $2 billion above budget. It was then hit with a sales bombshell when Boeing won a trade ruling slapping huge duties on sales of the CS100 and CS300 because of what the US firm said were unfair government subsidies. In the nick of time, Airbus stepped in with a deal that gives the Europeans a slightly more than 50 percent stake in the C series. The trade ruling has since been overturned. Bombardier competitor Embraer of Brazil, meanwhile, is also looking for its own heavyweight partner and is currently in talks with Boeing.

Given the sums involved in developing new planes, it’s no surprise that formidable rivals are few and far between.

Mitsubishi grounded its MRJ regional jet flight test fleet last year following an engine shutdown on a test flight in August. The prototypes are back in the air, but deliveries won’t start until 2020 rather than the planned 2013.

There’s another factor that keeps the duopoly strong: an airline must have crews and maintenance teams available for every plane model. That has led to an international trend towards homogenous fleets in order to keep costs down.

Mexico’s Interjet recently experienced how risky it can be to use planes from a new manufacturer. It operates 22 Russian-made Sukhoi Superjet 100 planes, but has had to ground four of them because it had problems obtaining spare parts. Interjet was forced to gut the grounded planes in order to keep the others flying.

Jens Koenen leads Handelsblatt’s coverage of the aviation industry. To contact the author: koenen@handelsblatt.com

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