Boeing Beats Airbus -- Twice -- By Thinking Smaller

This week's news reveals that Boeing (BA) is beating Airbus on two key battlefronts. With the withdrawal of Airbus and its U.S. partner, Northrop Grumman, from competition for an Air Force contract to build 179 airborne refueling tankers, Boeing now faces no competition for a deal expected to be worth $35 billion. Airbus also announced that thanks to massive cost overruns and weak demand, its A380 -- an up to 555 seat jumbo aircraft -- will lose money for at least the next two years. Both of these storylines represent Boeing victories over Airbus, and reveal the scars from over a decade's worth of competition between the two companies.

According to The New York Times, Airbus and its U.S. partner, Northrop Grumman (NOC), declined to bid on the tanker contract because they didn't think they could win. That's because they believed that the Pentagon's specifications for the deal favored Boeing's smaller 767 over the larger Airbus A330. Boeing's aircraft could save billions in fuel costs over the next 40 years. In December, I wrote an article about the likelihood that Airbus would not bid.

The bidding for this contract has a rich history. The Air Force's first attempt to pick a manufacturer fell apart in 2004 after a corruption scandal in which Boeing offered jobs to family members of the then-chief procurement officer. That resulted in a Boeing executive going to jail, and scuttled the bidding. The Airbus/Northrop Grumman partnership won the bidding the next time around, only to see that contract nullified after Boeing protested that the criteria used to evaluate the bids had been biased against them.

In the Short Term, A380 Is Too Big to Succeed

The news about Airbus's losses on the A380 also reflects the long competition between the two companies. As I wrote in my book, You Can't Order Change, Boeing and Airbus had agreed in the mid-1990s to cooperate on an analysis of the revenue potential of super-sized passenger aircraft. Boeing concluded that the market was too small and declined to invest in it.

By contrast, Airbus decided that the market potential was significant and that by building a super-jumbo aircraft, it would deliver the coup de grâce to Boeing, which at the time had not yet enjoyed success with the Dreamliner 787. The 787 now has 865 orders and is poised to generate nearly $151 billion in revenues -- if Boeing can get the oft-delayed plane into production.

Despite disagreements within the Airbus consortium -- members in the U.K. agreed with Boeing's analysis of the minimal market potential -- Airbus went ahead and invested in the A380. This ended up costing at least $12 billion, and with the size of the aircraft, very few airports can accommodate it. Moreover, the global economic slowdown means that demand for the A380 is not likely to rise soon.

The result is that Airbus is likely going to have a very difficult time selling enough A380s to recoup its investment. It looks like the dagger Airbus aimed at Boeing's heart has missed its target, and ended up deep in Airbus's own chest.
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