Defense/Aerospace Industries

[DewDiligence]

Upstarts Are Creating Headwinds for Boeing, Airbus

http://online.wsj.com/article/SB10001424052748704734304575120821506239764.html

›March 15, 2010
By PETER SANDERS And DANIEL MICHAELS

When it shops for a new fleet of single-aisle airliners later this year, UAL Corp.'s United Airlines won't just be choosing between Boeing Co. and Airbus. It will also look at planes from Canada's Bombardier Inc. and Brazil's Embraer.

For years, Airbus and Boeing have split the market for big passenger jets. But a series of shifts in the sector could start to erode that dominance, leading to big changes in the commercial aircraft industry.

"I've got to think the duopoly we've enjoyed for the past 20 or 30 years is not going to last forever," Jim Albaugh, chief executive of Boeing's commercial airplane unit, said in an interview this month.

The prospect of increased competition is already forcing the two giants to consider making costly changes to their most popular models. At an industry conference in Orlando Monday, Airbus Chief Operating Officer John Leahy said senior Airbus executives were expected to meet Tuesday to discuss upgrade options for the top-selling A320 family, though he said a decision wasn't expected to be made right away.

Boeing will decide in the next few months whether to embark on a revamp of its 737 single-aisle jetliner line.

Neither company had wanted to launch such an expensive undertaking for years. But their customers have started clamoring for more fuel-efficient planes just as upstart manufacturers have begun producing rival jets.

Bombardier has historically built smaller planes and so was never in the crosshairs of Boeing or Airbus. But the Montreal-based company now pledges that the new 150-seat jetliner it is developing, the CSeries, will deliver a 15% improvement in fuel consumption over current 737s or A320s.

"We have an advantage with our all-new technology," said Gary Scott, president of Bombardier's commercial aircraft unit.

The 150-seat CSeries can't compete with all 737 or A320 models, which can carry up to 200 passengers and fly further. But the Bombardier plane could eat into the lower-end of their market.

Last month, Indianapolis-based Republic Airways Holdings Inc., which operates Frontier and Midwest Airlines, said it was buying 40 CSeries planes, making it Bombardier's first U.S. customer for the model. Germany's giant Deutsche Lufthansa AG last year ordered 30 CSeries planes for its Swiss International subsidiary. Both orders were replacements for regional jets, and the airlines' decision to forego smaller 737s or A320s in favor of the CSeries boosted the Bombardier plane's credibility.

Embraer, the marketing name of Brazil's Empresa Brasileira de Aeronautica SA, is considering launching a bigger version of its biggest regional jet, which would rival the CSeries.

"The main reason Boeing and Airbus are considering" revamping is because of the CSeries and the new engines it will use, said Henri Courpron, President of the aerospace division at aviation investment bank and consultantcy Seabury Group.

For Boeing and Airbus, which is a unit of European Aeronautic Defence & Space Co., the prospect of making changes to the workhorses of their product lines comes at a difficult time.

Boeing has spent billions of dollars developing its new long-range 787 Dreamliner, considered the most sophisticated commercial airplane ever built. But the project is three years late and far over budget. It's also behind on its revamped 747 widebody jet, long its most iconic product.

Airbus is in a similar predicament: Its A380 superjumbo and A400M military airlifter are in the red and behind schedule.

Both had hoped to hold off at least a decade before replacing their single-aisle models with entirely new planes. Drafting new blueprints would yield planes that gulp less fuel and fly longer between expensive maintenance overhauls. But it would take several years and cost billions of dollars more.

Neither company can afford that now—and the breakthroughs necessary for dramatic fuel savings aren't ready.

"Game-changing technology comes out in the middle of the next decade," said Mr. Leahy in an interview earlier this month. "If we were to bring out a new aircraft this decade, it would basically look a lot like what we have now."

In addition, Airbus and Boeing have recently begun to churn out their small jetliners faster than ever, boosting profitability at a crucial moment. Both have order backlogs equivalent to around six years of output. Demand remains strong for newly built 737s and A320s, largely because carriers want to replace older, less-efficient models.

Airbus announced on March 9 it will increase production of A320-family planes in December to 36 per month from 34 currently. Boeing's Mr. Albaugh said this month that the company will decide whether or not to increase the 737 production rates by summer.

Making any changes to those planes would disrupt the companies' hard-won manufacturing efficiency and could slow demand as airlines hold out for newer versions.

But at the same time, they can't ignore the demands of their core customers. Instead of redesigning the planes entirely, Airbus and Boeing are likely to put new, more fuel-efficient engines on their existing planes, an option known as re-engining.

Louis Gallois, chief executive of Airbus parent EADS, said last week he thinks there is "a strong probability" that the company will decide to re-engine.

Mr. Leahy said Monday that if Airbus decides to add a new engine to the A320, it will require minimal changes to the current design and only two hours of self-instruction by pilots to gain proficiency on the "new" jet. The plane would be ready for service by late 2015, he said.

Earlier this month, Boeing officials told analysts that it would be able to install new engines on its 737 model but they would likely be bigger and heavier than the current version. That would require updating a number of key structural components on the planes, as well as adding new instrumentation to the cockpit.

What the two plane makers decide will affect upcoming competitions to sell new planes to customers.

United Airlines, for example, wants to replace older A320-family planes. It is looking at Bombardier's CSeries and a possible Embraer entrant, but also believes putting new engines on current Airbus and Boeing models could give an "attractive fuel-consumption improvement," Chairman and Chief Executive Glenn Tilton said last month.‹