Current Developments

In Early 2001, EADS Airbus, set out to attack the monopoly of Boeing by officially launching the A380, which now will become the largest passenger aircraft with more than 550 seats. This aligned snuggly with our analysis, based in 2000 that Airbus should forge ahead with the project due to positive present value of estimated future cash flows. The launch of the A380 programme pushed Boeing, which had previously led the pack in commercial aviation, into the position of challenger.

The roles were now reversed and now Boeing had to come up with an answer. The first answer was the B747X, an extended and face-lifted version of the B747. This move fell within with our analysis in Section 3.2, about Boeing's retaliation to Airbus's launch of the A380. They had indeed poured in huge research and investments and developed a stretched version of the 747s. But despite a heavy marketing effort in the beginning of 2001, Boeing did not have the same success with its 747X as Airbus did with the A380. Given the segment's slim size, Boeing had no other choice than to withdraw from the race and create another niche in which to compete.

In April 2001, Boeing retaliated by presenting the concept of the Sonic Cruiser, which does not only have a surprisingly new design with canards and delta wings, but also a very different strategic approach to the market. While Airbus' competitive driving factor is a more comfortable super-jumbo intended to fly between the world's major hubs at a very low cost-per-seat, Boeing's one is a faster, smaller and more flexible long haul aircraft designed to meet the customers' desire for direct point-to-point flights between smaller distant, medium-sized flights, foreseeing the increasing congestion of the world's large hubs.

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This move is an explicit attempt by Boeing to "sandbag" Airbus. Once Airbus had committed to develop the super-jumbo, Boeing announced a change in the game in large aircraft, from a focus on size to a focus on speed (and range), knowing that Airbus could not imitate, in terms of resources and speed in launching. However, the fact that Boeing has yet to commit to the sonic cruiser, it may plausibly (still) be regarded as a feint or a phantom plane that simply gave Boeing something positive to announce as it was forced, by credibility constraints, to withdraw from the contest to develop new very large aircraft. Moreover, future changes in public opinion about ecological aspects as well as the evolution of the world economy and the oil price will certainly be decisive for whether low operating costs and higher-flying comfort will win over high speed and flexibility.

However, with the global economic slowdown, many fear that Boeing and Airbus would be exposed to overcapacity. However, Airbus is still confident about its A380, especially in these times where cost savings are asked and demanded by the airlines, will be the right offer, so Airbus should stick to their time schedule. In contrast, Boeing is considering whether to ditch their proposed Sonic Cruisers and focus on building a new, cheaper conventional airplane since the airline industry is struggling and everything these days is about doing things cheaper, instead of faster. Some, however, think this is a short-term view that Boeing is taking, and that the company has historically stayed strong by making big bets during downtimes that pan out when the economy picks up.

Airbus continued to achieve impressive results in 2001, despite the economic downturn. An extensive and state-of-the-art product line, combined with prudent industrial policies, rigorous order book management and a truly customer-oriented approach enabled Airbus to consolidate its position as market leader in civil aviation. Day-to-day business was conducted according to plan and the Airbus aircraft family continued to grow with the A340-600 making its maiden flight, final assembly of the first A318, the first A340-500 entering production and preparations for manufacturing the A380 underway at Airbus sites all over Europe.

Indeed, Airbus' A380 met with overwhelming market success in 2001, winning almost 100 sales, as anticipated, just one year after commercial launch. Despite the downturn, Airbus won more new orders than its competitor for the second time in the last three years, and delivered a record number of aircraft leading to its largest turnover ever. In addition, Airbus maintained a healthy and strong order backlog, larger than the competitor's for the second consecutive year. This backlog constitutes a major asset for the coming years. It has continued to increase with respect to the competitor's and, purged of orders from airlines facing severe financial difficulties, it represents more than five solid years of production.

In conclusion, Airbus showed great success on the whole. The launch of the A380, indeed, had benefited Airbus Industrie greatly, hence substantiating our analysis about the project's positive NVP and that the project should be eventually launched. On the other hand, Boeing Commercial Airplanes Chief Executive Alan Mulally announced that Boeing will cease work on its proposed high-speed Sonic Cruiser and instead develop a conventional airplane that will use lightweight materials, better production processors and other technologies to operate at significantly lower costs than today's commercial jets, coupled with lower fuel burn.

The new "super-efficient" aircraft would help financially foundering airlines would improve their balance sheets by reducing operating costs 15 to 20 percent. It is not clear when the new jet would enter service, as it would depend on the pace of the airline industry recovery. Boeing Chairman Phil Condit said the company would not have a full-fledged launch of any airplane project until late 2003 at the earliest and research and development expenditures are to be hold down at 3 to 3.5 percent of revenues, so Boeing can maintain its profitability during the current down cycle. That will mean a shrinking pool of money for new projects.

Many in the aerospace industry have anticipated the demise of the Sonic Cruiser since last year's September 11 terrorist attacks. The subsequent economic downturn, which triggered more than $7 billion in losses at U.S. airlines in 2001, only heightened pessimism about the project. Many initially gushed about the Sonic Cruiser's promise to cut travel times 15 to 20 percent. By offering such speeds at costs roughly equivalent to today's 767, the Sonic Cruiser would allow airlines to make more money by charging frequent business travelers an even greater premium over coach passengers. That was the idea, at least. But since the dot-com bust, business travelers have stayed in their offices more and, when they travel, are paying cut-rate prices.

Against that backdrop, a premium product such as the Sonic Cruiser lost much of its appeal. No one can predict with full confidence as to whether Boeing or Airbus would emerge as the ultimate leader in the market. However, the evolution of the world economy and the oil price, together with the development within each of them, will definitely contribute to the overall performance.

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