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Joo Rip Gwa Rhhee
Joined: 25 May 2003
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 Posted: Sat Jul 15, 2006 6:01 pm Post subject: William Pfaff on Boeing |
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Published on Tuesday, December 23, 2003 by the International Herald Tribune
Boeing and Airbus: When Good Business Practice Just Doesn't Fly
by William Pfaff
An all but perfect model of logical delirium� is how the eminent French political analyst and philosopher, Raymond Aron, once described a complex instance of 1960's nuclear deterrence theory.
The phrase came to mind while reading the argument recently made in The Wall Street Journal by Holman W. Jenkins Jr. to explain why it is a good thing rather than bad thing that Boeing, one of the great, pioneering American aircraft companies, has fallen into grave decline.
Unless I misunderstand this article - and I have carefully examined it for evidence of irony - the present condition of Boeing is the right and proper outcome of good business practice and enlightened management.
Let Airbus make huge gambles on technological progress and future markets. If it fails, governments will bail it out. If Boeing makes such gambles and loses, stockholder return will suffer.
The article concedes that in the past Boeing won its place as the world's greatest aircraft manufacturer by making and winning just such gambles. "Back in the 60's, when a director asked for future profit estimates on the proposed 747, he was told to go suck an egg." That, the author says, "doesn't fly today, nor should it."
The article is prompted by Boeing's decision to abandon its project to build a near-supersonic Sonic Cruiser to compete with the 800-passenger super-jumbo A380 that Airbus is starting to put together in Toulouse.
Boeing has chosen instead to explore the market for a new but essentially conventional aircraft, the 7E7, its first new design in a decade.
Boeing now is an ideologically correct company. Its management mandate is to produce positive quarterly earnings and annual profit increases, so as to keep Boeing's stock price high. This is incompatible with betting the company on a visionary project.
If the result of these good business practices is Boeing's eventual ruin, that's the way it is, you know. Investors will find another company to invest in.
You will understand why I quoted Aron on logical delirium. You ruin the company to save the stock price.
Boeing was a pioneering American aviation company. It produced the earliest monoplane fighter aircraft for the U.S. Army Air Force (as it was then). Its role in World War II was primarily as manufacturer of a heavy bomber, the B-17, on which it had bet the company.
The prototype flew in 1935, long before any other country had a long-range bomber. Building it was a considerable financial risk for Boeing. The B-17's defensive armament and its speed were supposed to allow it to operate without fighter escorts and to make "pinpoint" attacks with its Norden bombsight, also a technical advance.
However nobody made pinpoint bombing attacks in World War II, and the B-17 succeeded mainly because of formation tactics and its phenomenal operational ceiling of 35,000 feet, or 10,600 meters - 10,000 feet higher than its British counterparts. It was one of the most important aircraft in the war.
While there were Boeing efforts in passenger aircraft before and after the war, including the memorable trans-Atlantic Stratocruiser of the 1950's, with berths and a cocktail lounge, Douglas dominated the market with the DC-3 and its descendants.
Then, in 1954, Boeing made a military tanker into a commercial airliner, the 707, and initiated the passenger jet era. (Britain had been the true pioneer in 1949 with the De Havilland Comet, ruined by a series of crashes due to metal fatigue, poorly understood at the time).
Boeing followed in 1969 with the all-new 747 jumbo, changing the nature of air travel and tourism, with profound and not always happy cultural and social consequences. The 747 was another project on which Boeing "bet the company."
The French and Germans, prewar aviation leaders, then decided to become players again, and with government support founded Airbus.
Its long-term government loans, essential to a start-up on this scale, were a source of tension with Washington, eventually settled in a formal agreement setting limits on government support for both sides - Boeing having always benefited from indirect support via its military programs.
Airbus had a generation's advantage with its new aircraft. Boeing was building with basic technology from the 1950's and 1960's, Airbus with that of the 1970's and 1980's. The result is that today Airbus is the leading commercial aviation manufacturer.
Could Boeing have fought back? Certainly, but market economics and the new priority on investment return had tamed a company once run by engineers and aviation visionaries. Wall Street was hostile to the investment needed to give Boeing innovative models to fight off Airbus.
Management moved the company's headquarters from Seattle to Chicago so that stockholders would stop thinking of it as a passenger aircraft builder. That was the real tip-off.
Boeing downsized by 40,000 workers. Although it currently is in serious trouble with the Pentagon over several forms of alleged skullduggery, it insists that its future now lies in military and other government projects. The Wall Street Journal, defender of market investors and enemy of socialism, nods its satisfaction at how it all has turned out for Boeing.
Copyright � 2003 the International Herald Tribune |
http://www.commondreams.org/views03/1223-10.htm
Idiot |
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happeningthang
Joined: 26 Apr 2003
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| Posted: Sat Jul 15, 2006 7:14 pm Post subject: |
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| Who's the idiot? |
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Joo Rip Gwa Rhhee
Joined: 25 May 2003
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| Posted: Sat Jul 15, 2006 9:37 pm Post subject: |
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COMMENTARY
DOW JONES REPRINTS
The Airbus Debacle
By RICHARD ABOULAFIA
June 20, 2006; Page A20
Production delays. Political infighting. Cost and time overruns. Sounds like a typical day at any large aircraft corporation, and last week's news of another big setback for delivering Airbus's A380 550-seat mega-jetliner fits this pattern. Yet the market isn't taking all these problems at the European plane maker in stride, wiping away much of Airbus parent company European Aeronautic Defense and Space Co.'s gains since it was created six years ago. Investors were far more understanding a few years back when Boeing went through similar crises. A double standard? If only it were so.
The biggest problem for Airbus today, to put it gently, is that its superjumbo should never have been born. The A380 program was launched in 2000 in the face of considerable skepticism. Aircraft were getting smaller, not larger. New technologies allowed long-range travel with great economies. Passengers wanted direct flights offering more choices, more often. Airlines wanted smaller planes to get rid of discount travelers. The A380 was a $13 billion bet on a shrinking niche.
Not surprisingly, the giant plane has proven unpopular. In the six years since its birth, it has won 159 orders, including 45 from Emirates, a carrier pursuing the unusual strategy of ordering scores of each type of plane to meet high growth expectations.
In the same period, the mid-sized long-range widebodies, led by Boeing's new high-tech 787, have racked up more than 700 orders. One notch larger, 300/400-seat planes have garnered another 500 orders led by Boeing's 777. The A380/747 niche is 5%-10% of the market by value of total annual deliveries; the smaller widebodies comprise half.
Worse, after securing the small list of customers that actually need a few planes this big, the A380 order book has grown at only a very modest pace for the last four years. Other than Emirates, no airline has ordered more than a token number. The mid-size 250/300-seat market, meanwhile, is gathering steam, with blue-chip carriers such as British Airways, Lufthansa and even Emirates now shopping for new long-range jets in this class.
Airbus is desperately seeking resources to compete with the 787 and 777 with its own new plane. Customers criticized its initial offering, the A350, so it now needs $10 billion to create an all-new family, the A370 series. But money and engineers are tied up in the A380 program. When the superjumbo delay news broke, Singapore Airlines ordered 20 787 "Dreamliners," casting a no-confidence vote in Airbus's ability to fund the A370. Meanwhile, Boeing might follow the 787 with a new narrowbody, necessitating an Airbus response to compete in that 40%-45% of the market.
This means that, with the A380, Airbus is racing to deliver something that's a mere sideshow. The delays are simply bitter icing on an unpalatable cake.
* * *
How did this disaster happen? When Airbus was born in 1970, it was a defensive creation, a way for Europe to save its legacy jet industries from U.S. dominance. They pooled their resources with government support and created a European widebody, the A300. The first 20 years weren't easy, but Airbus did much better than other European jetliner projects like the notoriously money-losing Concorde.
Starting in the late 1980s, Airbus moved from defense to offense. It launched the A320 narrowbody and A330/340 widebody families. It helped drive Lockheed and McDonnell Douglas out of the market. By 1997, Airbus and Boeing formed a duopoly. That carried political implications for American-European relations.
Airbus still enjoyed government nurturing. It was the only notable success for publicly funded European industrial policy. European politicians were eager to underwrite and take credit for an impressive achievement. When Airbus created plans for the world's biggest jetliner in the mid-1990s, they knew they could count on government support.
Airbus didn't need to be overly careful with the A380's bottom line. Government launch aid was good for one-third of development costs. These loans were legal under the terms of the U.S.-EU 1992 jetliner aid agreement. Private cash was easier and cheaper to get since investors knew Europe's hapless taxpayers would be the last to be repaid.
If the market for large aircraft looked dubious, well, Airbus proposed duty-free shopping courts and restaurants aboard its new jumbo, unrealistic and borderline-absurd ideas designed to stimulate airline demand. From a business standpoint, this "whole new way to fly" was nonsense. Yet bureaucrats saw national pride at stake, hence a slam-dunk reason to invest public cash. They've basked in reflected glory, with European prime ministers and officials attending every major A380 milestone. Jacques Chirac, the French president, responded to last week's news by expressing "total confidence" in the program. That looks to be wishful thinking from a government that enjoys messing around in its nation's industries.
A board of diverse, apolitical and independent shareholders would never have tolerated the risk associated with such a shallow business case. Here the distinction from Boeing's difficulties becomes apparent.
A few years ago, Boeing looked like it was in Airbus-like dire straits, yet the situation was in fact very different. Before launching the 787 in 2004, Boeing spent eight years shortchanging its product line but returning billions to shareholders. Airbus spent a fortune on its product line, but misinvested horribly, jeopardizing return on investment. Thus, it was easy for Boeing to start raising cash for the 787. Meantime, investor patience with Airbus is running thin, just as its parent company seeks buyers for some of the shares that its major French and German industrial shareholders, Lagard�re and DaimlerChrysler respectively, are looking to dispose of. EADS also needs money to buy BAE System's 20% Airbus stake. Adding to EADS's woes, market regulators are investigating large share sales in March, before the A380 news went public, by senior company executives, including the French co-CEO, No�l Forgeard.
Boeing has also suffered technical snags with its jets, most recently its ambitious and risky all-composite body for the 787. But Boeing pursued the right market segment. Even if the 787 stumbles, Boeing would recover, since that plane satisfies strong demand and brings in cash. Airbus, by contrast, is merely racing to build a handful of A380s so it can transfer resources to a more important aircraft.
Airbus faces a difficult path. Even if it can fund a new jet family, it doesn't have much credibility with customers right now. Airbus needs to do a brutally honest assessment of the A380 and determine whether it will ever turn cash positive, and whether it is worth the risk of losing ground in the other 90%-95% of the market for civilian aircraft. Canceling the A380 program altogether should be an option on the table.
Resources and customers need to be found for the A370. Unless it happens fast the program won't get going until after Boeing runs off with the up-front demand. And a chastened Airbus will have learned an important lesson from the A380: Easy public money comes with a high price.
Mr. Aboulafia is vice president of analysis for Teal Group Corp., a Washington-based aerospace and defense consultancy. |
URL for this article:
http://online.wsj.com/article/SB115076743837384778.html
by the way for those who don't follow this Richard Aboulafia is just about the number one authority on the aircraft business.
As he usually does William Pfaff was writing about a subject that he knows nothing about. |
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