Bigger Or Faster?

Former Boeing executive Tex Boullioun called the aircraft business "the sporty game," because you've got to place huge bets on new jetliners to win. A poker player, Boullioun would have loved the latest bids from the game's biggest rivals. After stalking Boeing for years, Airbus has drawn even with the U.S. giant in global market share for new jetliner sales. Late last year the European consortium decided to up the stakes. Airbus said it was building a state-of-the-art superjumbo aircraft, now called the A380, which will haul at least 600 people. The A380 is a $10 billion attempt by Europe to steal Boeing's treasure chest--the market for jumbo jets, which the 747 has monopolized since its creation in the 1960s.

Boeing passed on the challenge. The Seattle giant will neither hatch a new superjumbo design nor "stretch" the 747 to add seats. The company will update the 747 to compete with the A380--but its seeming indifference to the superjumbo market led industry experts to wonder: was Boeing losing interest in the sporty game? With profits in the commercial-aircraft industry getting thin, Boeing has been shifting its attention to new businesses, including space and communications, as it strives to become a diversified conglomerate modeled on mighty General Electric. The company even announced a plan to move its headquarters out of Seattle, the symbolic capital of the airline industry.

Boeing's change of direction seemed to clear the way for Airbus to grab the title it has coveted for decades: world's leading aircraft manufacturer. Seeking to seize the advantage, analysts say, Airbus has offered large discounts on the A380 to spark interest in the mammoth jet. Europeans were still cheering the apparent American retreat when Boeing pulled a card out of its sleeve--one signaling that the company has no intention of abandoning its core commercial business. Instead of going "big" with a new superjumbo, and following Airbus, Boeing announced plans to go "fast"--by building a revolutionary new Sonic Cruiser that would carry between 150 and 300 passengers and fly 20 percent faster than current jets (just under the speed of sound). The cruiser, says Boeing, would knock an hour off every 3,000 miles of flight time--and, unlike the Concorde, would be reasonably economical for airlines to operate. Heidi Wood, a senior aerospace analyst at Morgan Stanley in New York, calls the Boeing plan "the biggest breakthrough in air travel in 30 years." She says that Boeing may have outmaneuvered Airbus because airlines believe they can make more money with a Sonic Cruiser than they can with the A380. Says Wood: "Faster is more interesting than bigger."

The dynamics of the game have suddenly changed. Airbus executive vice president Philippe Delmas says the Sonic Cruiser was met with "interest" at Airbus headquarters in Toulouse, maybe even a little envy. "Boeing engineers are extremely creative," he says. "We don't underestimate them."

Meanwhile, conspiracy theorists suggest that Boeing's idea might be too creative--a massive bluff to scare airlines away from the A380 by promising a "new thing." Richard Aboulafia, an analyst with the Teal Group consultancy in Washington, D.C., says Boeing could build a bigger, better Concorde, but making it economical is another matter. "Costs increase almost geometrically when you get close to the sound barrier," says Aboulafia.

Bluff or not, the Cruiser idea is a crafty bid. The mere possibility that Boeing will follow through with the Cruiser is likely to deter carriers from ordering the A380. JAL, for one, was quick to express interest in a near-sonic jet. And while Boeing was unwilling to match Airbus's bet on the superjumbo market, Airbus may now be unable to follow suit with a cruiser of its own. All of its development funds are sunk in the A380 pot. "This is either brilliant psychological warfare or the greatest ambush in the history of aerospace," says Aboulafia. "Either way, it's a win for Boeing. For carriers, the A380 risk is now great. If you buy a fleet of A380s and suddenly the Sonic Cruiser appears, you've just invested in a horse-drawn carriage when cars are arriving--and that is the analogy. If the Cruiser is for real, then Airbus is toast."

What will it be: bigger or faster? Airbus bills the A380 as a "flying cruise ship," big enough for restaurants and athletic clubs, and catering above all to growing consumer demand for roomier seats in all classes. By contrast, the Sonic Cruiser will appeal to first-class and business passengers willing to pay a premium to save time. The cruiser could, for example, cut four hours off a trip from New York to Hong Kong. Says analyst Wood: "What Airbus is missing is that people don't love to fly. We don't want an in-flight massage. We want to get from point A to point B as fast as possible."

Airbus and Boeing agree that air traffic will grow in the years ahead. But after that their philosophies diverge. While Airbus projects that about 1,200 superjumbos will be needed over the next 20 years, Boeing's projections are less than half that--not enough to justify a major investment in that aircraft class. Airbus argues that the only way for airlines to bypass growing congestion at major airport hubs like Tokyo, London and New York is to fly fewer, larger planes. Boeing contends that customers want to bypass these hubs entirely and fly direct--say, Chicago to Osaka with no stop in Tokyo--in smaller planes. Boeing also argues that airlines will start devoting planes to economy-class or first- and business-class customers. Paul Nisbet, an analyst for JSA Research in Newport, Rhode Island, says that Boeing's move is no bluff: it has talked for years about the fragmenting market--and now, with the Sonic Cruiser announcement, "they are putting their money where their mouth is."

It's possible that both the A380 and the Sonic Cruiser can occupy profitable niches in the market. But it's more likely that one company will lose its bet, and find the investment return too small to please shareholders. That will dent not only the corporate wallet but also national pride, since Boeing and Airbus are proxies for transatlantic trade tension. The United States has argued for years that Airbus is a state-subsidized European conspiracy to dislodge Boeing as the top airline manufacturer. But after years of operating as a clunky consortium--backed by cheap government loans, and divided by secretive "walls" separating the German, French, British and Spanish partners--Airbus is transforming itself into one company with a top-down chain of command. Beginning this year the company will report its profits or losses. Airbus officials say the streamlining will save the company about € 350 million annually. "In the past, people didn't really feel they were working together. Employee allegiance was more to their country or factory than to the bigger company," says Delmas of Airbus. Now, he adds, "Airbus is acting like a start-up."

Boeing's transformation is equally dramatic. After its stock was battered by Wall Street in the late 1990s, Boeing began divorcing itself from the wild mood swings of the flight industry. It made major acquisitions--including the $4 billion purchase of the Hughes satellite division--and launched new businesses, including one that will offer satellite-based Internet services to plane passengers. Today, only 60 percent of the company's $52 billion in annual sales comes from the cyclical commercial-aircraft market. "Their objective is to maximize profit rather than be the best airplane builder in the world," says Nisbet. "Now, if they can do both, fine. But if there is a choice, they will go for profit."

Airbus has a new interest in profit, too, but its first aim is to make the A380 a success story. Europe's technological pride is at stake. Airbus has a respectable 62 orders for the jet--but about 50 came during the launch period late last year, apparently at considerable cost. French analysts say that Singapore Airlines, one of the first and most important airlines to commit to the A380, probably got a 35 percent to 40 percent reduction in the jet's $220 million list price. That would make the plane cheaper than the 747. Since January, however, Airbus has landed only 12 orders, and French analysts say airlines may be waiting for additional sweeteners. They seem likely to get them. Airbus is determined to launch a fleet of superjumbos, whether there's much money in that pot or not. Boeing is determined to foil its rival. That's the sporty game.