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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

COMPETITION:BATTLE FOR ASIA

Airbus vs. Boeing?
The winner is the region's carriers

By Tim Healy


AT FIRST, THE VOICE of Airbus Industrie's senior vice-president for marketing holds the studied cool of a pilot announcing his approach. "I've got to hand it to Boeing's PR people," says John Leahy, the European consortium's first American executive. "They've taken a short-term situation and built on it." But then, an increasingly indignant Leahy sits up straight, his back in an upright and locked position: "Although, to say the least, the media coverage has been annoying. I'm absolutely astounded by Boeing's public relations coup." Leahy soon could use a restraint to keep himself securely fastened in his seat: "They have the world believing that everybody is queuing up to buy their planes. It isn't true. It just isn't true."

Unfortunately for the European group, Boeing's recent successes go beyond hype. That is especially true in Asia, where the world's leading planemakers are locked in a battle to sell new aircraft. In November, Boeing announced its largest single order ever outside the U.S. Singapore Airlines said it would spend $12.7 billion for 77 Boeing 777 jets, the American maker's newest planes. SIA's chief executive, Dr. Cheong Choong Kong, says the airline expects its traffic to grow 8% to 10% a year. "We can't afford to outguess the economic cycle and make short-term decisions," the CEO told Asiaweek. "At times, we might be a little short if the economy is more bullish than we expected, or sometimes we may have a little surplus through recessionary times. But in all, our philosophy is to plan according to a steady rate."

Boeing's momentum continues in 1996. Late last month, Thai Airways International said it intended to buy 12 Boeing jets. About the same time, Taiwan's China Airlines revealed it would purchase six Boeings for $300 million. The company plans to add 26 more planes to its current fleet of 41 by the year 2003. And in between the Singapore and February orders was a hotly contested $4-billion purchase by Malaysia Airlines. Boeing took all of it, a coup because MAS has long had a strong relationship with Airbus. "That's one we just don't understand," says Leahy. "Our offer was better than Boeing's -- plain and simple. We respect Malaysia's order, but we're confused by it."

Not to say that everything is going against Airbus. In 1994, for the first time since it was founded in 1970, the consortium of four European aerospace companies attracted more orders than either Boeing or the smaller U.S.-based McDonnell Douglas. Even in pretty dismal 1995, Airbus won an order of 24 planes from Philippine Airlines, which also bought seven Boeing 747 jumbo jets. Airbus also snagged a consolation prize in the Thai order -- nine jets. Last week, Garuda Indonesia signed on for six Airbus 330s. Coming up: the decisions of Korean Air and rival Asiana, and carriers in China, potentially the richest market after the U.S. and Japan. In February, Airbus announced a deal in which the mainland's Air China will begin operating its first Airbuses in 1997. Boeing has sold six 777s to China Southern Airlines and recently built a parts center in Beijing.

Asia is crucial for a turnaround at Airbus and Boeing, which are both emerging from a manufacturing slump they attribute to a recession among many Western airlines. Right now, Asian air travel is growing faster than in any other region of the world -- and almost twice as fast as in North America. Over the next 20 years, predicts Airbus, Asian airlines will buy 3,800 jets -- two-thirds of them additional aircraft; the rest replacements. That's nearly a half trillion dollars worth of airplanes. No wonder Korean electronics maker Samsung, to name just one Asian giant, is looking to pick up assets of the bankrupt Dutch planemaker Fokker. The Indonesian government is also planning to develop its first indigenous jetliner.

And the winner is . . . the region's carriers -- and the Asian traveler. "The airlines end up with better aircraft and more influence over the final product," says Kaushik Shridharani, airline analyst for UBS Securities in Hong Kong. "It isn't like cars, where Detroit builds a car and then goes out and sells it. The manufacturers will ask the airlines what they want and then build it." And passengers? Expect to find yourself in safer, roomier planes in coming years. No longer will individual video screens be the exclusive purview of business- and first-class customers. On Boeing's 777, every passenger has one. "On the triple seven, there are more lines of software supporting in-flight entertainment than engineering," says Cathay Pacific's Roland Fairfield. "If you're an engineer" -- he's the airline's head of engineering -- "that's a pretty worrying statistic," he adds with mock concern.

Speaking of numbers, Boeing has captured 70% of new commercial airplane orders worldwide in 1995 after trailing Airbus the previous year. In Asia, eight of ten purchase commitments went to Boeing. Leahy stresses that overall, the number of 777 planes on order still lags behind Airbus's two entries in the 250- to 350-seat class, the A340 and A330. But Boeing is fast closing the gap. Last year's wins translate into $14.6 billion worth of firm orders for the American manufacturer. That is twice as much as the take for Airbus's entire family of planes.

Capable of carrying 350 passengers, the basic cost of the twin-engine 777 is about $125 million. Both the two-engine A330 (cost: $110 million) and the four-engine A340 ($120 million) can accommodate about 300 passengers. Launched in the early 1990s, the Airbuses boast fuel-efficient engines, fly-by-wire controls, which means pilots rely more on computers, and a much-expanded entertainment system. All three are medium-haul models, perfect for intra-Asian travel and direct flights to Europe and America's West Coast. Cathay Pacific, which recently took delivery of the first of its 11 Boeing 777s, will field some of them on a Hong Kong-Vancouver route that continues on to Chicago. "We have major routes that we've been operating less efficiently than we could," says managing director Rod Eddington.

So why is the 777 seemingly the plane of choice? A spokesman for SIA says both Boeing and Airbus planes are good, but "the versatility of Boeing's 777 family, its better revenue potential and the better overall economics were hard to ignore." SIA hasn't shut out Airbus entirely: this year, it begins receiving the first of 17 A340s it ordered in 1991. It has options on 20 more. Carriers that have yet to make a purchasing decision are keeping mum. Hak Yung Moon, director of flight operations in Hong Kong for Asiana Airlines, says he is removed from the final decision-making in Seoul, but if he had his way the company would go with Boeing. He likes the synergy of staying with one family of planes. "All the Boeings are similar to maintain -- it would be really convenient for us," says Hak.

With its new facility in Beijing, Boeing can now more easily supply spare parts for Asia. The U.S. manufacturer already has several victories in the wars in China. Bill Whitlow, a stock analyst for Pacific Crest Securities in Seattle, Boeing's hometown, says one in every seven planes Boeing sold in 1993 and 1994 went to the mainland. He predicts that the proportion will drop only slightly in the future. China's Ninth Five-Year Plan calls for the nation to buy 320 commercial aircraft, bringing its total fleet to 1,000 by the end of the year 2000. On the other hand, Boeing could be hurt by the current political tension between China and the U.S. over Taiwan and trade issues like copyright infringement.

Boeing's biggest advantage over Airbus is its long-distance, 400-seat 747 jumbo jet. Airbus has no comparable plane, which makes it not unlike a television maker that has come out with a new 25-inch model, but has ceded the market for expensive wide-screens. Most analysts doubt Airbus can ever achieve its goal of winning half the commercial jet market without contesting Boeing at the high end. The 747 behemoth long ago paid for its research costs, and Boeing can afford to use it as a sweetener for 777 deals. The basic cost of a four-engine 747 is about $150 million.

The world's carriers would like to see Airbus make a jumbo jet of its own. "It is not in the interests of the airlines to have a monopolistic supplier," says Karmjit Singh, SIA's assistant director of corporate affairs. Airbus realizes it needs one. So what's the problem? Money. The Europeans may need up to $15 billion to develop a "super-jumbo" jet, code named the 3XX, that would seat more than 600 passengers. Airbus and Boeing had talked of cooperating on an 800-seat plane, but the negotiations collapsed. Airbus is constrained by a U.S.-Europe trade agreement that permits its three owner-governments -- France, Germany and Spain -- to contribute at most just a third of the estimated development cost. (The pact does not cover British Aerospace, which has been privatized.) Even that ceiling is a reach, given the need for European governments to pursue fiscal responsibility as they strive for monetary union.

Whitlow, the Seattle aerospace analyst, cites other reasons. Daimler-Benz, the German participant that owns 38% of Airbus, lost $4 billion in 1995. The French partner, Aerospatiale, which also has a 38% share, was $200 million in the red in the same year because of a restructuring. Last month, Moody's Investors Services lowered Airbus's credit rating, citing Daimler's financial problems and the fact that France may soon privatize Aerospatiale, making the company's obligations less secure. Nevertheless, predicts Stephen Miller, who founded Hong Kong's Dragonair in 1985 and now heads airline leasing and consulting company Trinity Group, expect Airbus to go ahead with the 3XX. "They don't have a choice," he says bluntly.

Airbus is scouring the world -- and especially Asia -- for a deep-pocketed partner. But here, Airbus runs into a major political hurdle. The consortium was founded at least partly on the principle that European jobs could be saved. Existing Airbus shareholders may balk if the new investor demands jobs as the quid pro quo for money. At least when it comes to Asian governments, Leahy has a ready answer: most value technology over jobs. "We differ from Boeing on that," says the Airbus vice-president. "We're more willing to transfer the most up-to-date technical advances to Asian countries." For its part, Boeing says it understands that in some nations, jobs go hand in hand with an airplane order. "In China there is always the caveat: you must do business with us if you want us to buy your planes," says spokesman Mark Hooper.

How willing will European governments be to export jobs from economies that already have unemployment rates of 10% or higher? Late last year, Daimler-Benz backed out of a European consortium bidding to team up with Asian partners -- Aviation Industries of China, South Korean giants Hyundai and Samsung, India's Hindustan Aeronautics Ltd. and, possibly, interests from Singapore -- in a project to produce a 100-seat commuter plane. Daimler insisted that some work be done in Europe as a way to preserve aerospace jobs; the others regarded the demand as a deal-killer. That's a sobering reality check for Airbus. For Asia, however, it is an indication of the dominant role the region will play in the future of the airline -- and aircraft manufacturing -- industries.


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