One Big Win for Airbus Might Actually Be a Loss


At the Paris Air Show last week, Airbus took home the grand prize in terms of customer commitments, having sold airplanes worth tens of billions of dollars over the course of the week. Boeing also had a fairly good week, with orders from the likes of Air Lease and United Continental , but had to settle for the second spot in terms of total deal value.

Yet one big Airbus order -- United Continental's decision to upgrade its 25 Airbus A350-900 orders to the larger A350-1000 model, while also adding 10 more firm orders -- actually may have been a loss for Airbus. While United dumped its A350-900 orders last week, it placed 20 orders for Boeing's similarly sized 787-10, a new stretched version of the Dreamliner.

Boeing's new Dreamliner: the 787-10 (courtesy of Boeing)

Investors may see this as a win-win situation for Boeing and Airbus; at the end of the week, both had 10 more orders from United than before the show. Yet Boeing is now poised to dominate the high-volume segments of the widebody market at United, while Airbus is confined to the lower-volume "large widebody" market segment. This probably means that Boeing will get the vast majority of future widebody orders from United.

Market segmentation
Of all the major U.S. airlines, United has been the most aggressive in updating its widebody fleet. After last week's 787-10 order, United is now slated to receive 65 Dreamliners, of which six are already in service. Furthermore, the company's A350 order book now stands at 35 planes.

United has been very clear with investors that the company is investing in its fleet in order to replace older, less-efficient aircraft, not to grow. This means that Boeing and Airbus are fighting for a finite number of orders with United.

Initially, Boeing and Airbus were attacking different segments of the widebody market. The larger of the initial two Dreamliner variants (the 787-9) is comparable in size to the smallest A350 (the A350-800), but that is the only overlap. However, Boeing's new 787-10 is similar in size to the A350-900, which is by far the best-selling version of the A350.

Reading the tea leaves
It is therefore not a coincidence that shortly after United agreed to order 20 787-10 airplanes, the company switched its Airbus order from the similarly sized A350-900 to the larger A350-1000. The A350-1000 will primarily replace United's 23 Boeing 747 jumbo jets. Meanwhile, United has already begun replacing its older 767s with the smaller versions of the Dreamliner. United's new 787-10 orders suggest that the company intends to use that plane to replace its fleet of 74 Boeing 777s. (United's 777s are similar in size to the 787-10.)

As of the end of 2012, United operated 158 widebodies, of which 135 were within the size range of the three Dreamliner models; only the Boeing 747s are larger. While Airbus has locked in 35 A350 orders from United, Boeing is likely to corner the vast majority of United's fleet replacement orders. After all, once United introduces the 787-10 as a Boeing 777 replacement, it will be hard to justify ordering similarly sized A350-900s; it would add unnecessary complexity to operate two different aircraft types that are the same size.

Stealing a march
While Airbus gained 10 A350 orders from United last week, this wasn't really a win for the company. Boeing's timely decision to stretch the Dreamliner has positioned it to win almost all of United's widebody replacement business over the next 10-15 years. By contrast, Airbus will primarily provide replacements for the largest jets in United's fleet: a lower-volume segment.

United is just one airline, albeit a big one with 158 widebodies as of late 2012. However, if other airlines -- especially those that have already ordered smaller versions of the Dreamliner -- also decide that the 787-10 meets their needs, Airbus could lose a lot of business that it would otherwise have won with the A350-900.

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Adam Levine-Weinberg is short shares of United Continental Holdings and long Sep 2013 $33 Puts on United Continental Holdings. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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