Leeham News and Analysis
There's more to real news than a news release.
Leeham News and Analysis
- Boeing unlikely to meet FAA’s 90-day deadline for new safety program April 18, 2024
- Focus on quality not slowing innovation, says GKN April 18, 2024
- Boeing defends 787, 777 against whistleblower charges April 17, 2024
- Dissecting Boeing CEO’s statement next new airplane will cost $50bn April 15, 2024
- Bjorn’s Corner: New engine development. Part 3. Propulsive efficiency April 12, 2024
Airbus, Boeing face pricing pressure
Airbus and Boeing face pricing squeezes that are the result of their continuing price wars and two products that need price cuts to maintain sales.
The fierce single-aisle battle between Airbus and Boeing, and to a much lesser extent, between Airbus and Bombardier, puts pricing pressure on the A320ceo and to some degree the A320neo.
Airbus and Boeing each blame the other for a price war that has put pressure on margins for the in-production airplanes, but market share battles are only part of the issue. There is the need to keep the production lines humming for these airplanes in advance of the transition to the re-engined A320neo and 737 MAX, particularly as the Big Two up production rates over the next few years.
Airbus announced plans to increase rates on the A320 line to 46/mo by the end of 2016 as the new Mobile (AL) line becomes operational. Although the A320neo is scheduled to enter service in October 2015, initially the Mobile plant will churn out A320ceos. Boeing is boosting production of the 737NG to 47/mo in 2017 and alerted the supply chain to prepare for a potential rate hike to 52/mo by the end of this decade. The new 737 MAX is scheduled to enter service in July 2017. Airbus and Boeing each plan a two year transition period during which the current airplanes will be produced with the re-engined models.
Our Market Intelligence tells us Airbus is already planning to take its Mobile production from 4/mo to 8/mo, the planned capacity of the plant, as early as 2017. This would give Airbus 50 A320s per month, still shy of the prospective 52/mo of the 737 MAX. Airbus’ Tianjin plant, currently producing at 4/mo, has the capacity to go to 8/mo, for a system total of 54. But Boeing has the ability to go to 63/mo should the supply chain be able, and for the moment Airbus is tapped out at 54.
Cutting prices and bundling sales of the current airplanes with the new airplanes is necessary to stimulate demand of the A320ceo and 737NG. But this isn’t the only reason there is pricing pressure.
Fierce market share battles are another. Airbus saw plenty of opportunity to flip 737 customers to the new A320neo and took every advantage to do so. It had the logistical advantage: the A320neo will enter service nearly two years ahead of the MAX, which was launched seven months after the neo. The fleet renewal demand of American Airlines was so great that Boeing alone could not supply American on a timely basis.
Having lost its exclusive supplier position at American, Boeing wasn’t going to lose the next competition, at Delta Air Lines. Delta was only interested in today’s airplanes, taking the conservative position that the Pratt & Whitney GTF and CFM LEAP engines are unproven technology. Delta, once an exclusive Boeing customer, became an Airbus operator with the merger of Northwest Airlines, and Northwest’s management was now in charge at Delta. So a Boeing win was not a given—but neither was an Airbus win; the management likes dual-sourcing. In the end, the former NWA fleet planners and management chose Boeing. If one believes Airbus, it was because Boeing offered the 737-900ER for 10%-15% less than that offered for the A321ceo. Delta later also ordered the A321ceo, but only 30 airplanes compared with the 100 737-900ERs ordered from Boeing.
At United Airlines, another Airbus/Boeing operator after the merger with Continental Airlines, UAL was run by the former Continental management, a solid and exclusive Boeing customer. Legacy United had become a loyal Airbus customer. Legacy United ordered the Airbus A350 XWB and the new UAL expanded this order, but when it came to renewing the fleet with a major in-production order, the Boeing-centric United management chose the 737-900ER over the A321ceo. One officer told us the 737-900ER was a slightly “better” airplane than the A321ceo (and also remarked the A321neo is better than the 737-9) but that Boeing won the deal on “commercial terms.”
Airbus and Boeing have challenges in the wide-body arena as well. Sales of the A330 have stalled. The A330 received a tremendous boost by the disarray of the Boeing 787 program and a boost from the delays in the A350 development. Helped by near-term availability to backfill these program delays, A330 sales were also boosted by willingness to cut the price dramatically. With tooling and amortization long-since paid off and completed, Airbus has tremendous room to drop the price. Sales were routinely in the $90m-$100m range and occasionally reported to be even lower than this. One Boeing salesman claims Airbus has recently sold the A330 for $65m, but we haven’t been able to confirm any price remotely close to this. We’ve heard of one special-case transaction in the upper $70m, but even this is anecdotal.
A330 sales have stalled. Airbus has huge production gaps beginning in 2016. Customers are waiting to see what Airbus is going to do about launching the re-engined A330neo. The A330 Regional, intended for the Chinese market and with hopes for 70-200 sales, hasn’t materialized even with deep price discounts.
Boeing is facing the prospect of cutting prices on the 777-300ER to keep this production line going until introduction of the 777X, which has an EIS of 2020. Boeing claims it will maintain pricing, but we already hear of deeper discounts than have been the case when sales were robust. There have been only 10 orders so far this year for the -300ER. We fully expect pricing to fall as the 2017 production gap gets closer.
We also expect Airbus and Boeing to cut production rates of their aging twin-aisle lines.
As for Airbus vs Bombardier, the pricing pressure faced by Airbus is one of its own choosing. Although Airbus officials publicly denigrate and dismiss the viability of the Bombardier CSeries, we know from our Market Intelligence that Airbus engages in extremely aggressive counter campaigns where Bombardier appears to be making headway with its CS300, which competes with the A319. Customers we talk with, and our own economic analysis, tell us that the economics of the CSeries is far better than the A319ceo or neo. Airbus declared in 2010 that it would not ignore Bombardier as Boeing had ignored Airbus in its early days. Accordingly, we are told that Airbus offers the larger A320ceo at a hugely discounted price to customers ready to order the CS300, a price that Bombardier can’t match; and that Airbus is also offering to arrange acquisition of cheap, used A319ceos (lease rates below $100,000/mo) as an alternative to the $300,000/mo for a new CSeries. The tactics have worked in several campaigns.
And Airbus/EADS will go to the EU Governments demanding more money……..and use the threat of layoffs to extort more cash………..they are even throwing in “free-engines and other free spares” to keep the order books filled-in. Somebody has to pay for the “free-bees”. Government run/sponsored entities always fail in the end…….too much bureaucratic-labor/overhead……..can’t manipulate sales to EU Sponsored-Owned Carriers and their Affiliates forever to keep the lines humming. Airplane building-selling is always cyclic with sometimes drastic downturns………….been that way since Commercial Aviation began.
In the same way Boeing used the threat of layoffs/moving jobs to extort tax breaks.
Seriously – let’s not pretend either of the two companies is any better than the other when it comes to trying to leverage their power as a large creator of jobs towards the respective governments, be in Washington or South Carolina for Boeing, or Germany, France, or Alabama for Airbus.
This allegation had already been flogged to death five years ago. I would humbly propose to do some research on the subject of launch aids for Airbus as well as their balance sheet, which actually shows a healthy profit.
Re-hashing this neither makes Airbus an entity that’s more government-run/sponsored than Boeing, nor does it make the general assumption – that government-owned/sponsored entities always fail – any truer.
It’s not ownership that eventually decides whether a company is going to be successful, it’s its products, competition, and management.
If Airbus ever do fail, that’d be a very long end indeed… they’ve been around for over 40 years now, saw Lockheed and McDonnell Douglas fail as commercial plane makers, and are currently battling with Boeing over market share, with the expected split being somewhere around 50:50, no worse than 40:60 for either manufacturer, at any rate.
“In the same way Boeing used the threat of layoffs/moving jobs to extort tax breaks.”
Those actually were local state taxes which Boeing & aerospace suppliers requested to EXTEND the tax break from 2024 to 2040. They never requested any new tax breaks though. The B&O tax rate is going to be the same at 0.2904% instead of 0.484% going forward to 2040 which it’ll go back to the rate of 0.484% in 2041 (if they don’t request another extension then). The rate of 0.2904% comes from the 7E7 (now 787) tax package passed back in 2003 by Gary Locke and the Washington State Legislature. Airbus in the news is trying to challenge that tax break which has been around for 10 years now. Even if they got SB 5952 repealed, Boeing still benefits from the tax break for the next 10 years.
Boeing and both B&A suppliers still pays B&O taxes for every plane they manufacture and sell in Washington State. It’s also impossible do tax evasion on the B&O tax break because it’s a tax on economic activity.
Also the $8.7 billion tax break is not exclusive to Boeing because the Washington State Constitution prohibits that. Instead all of Boeing and their suppliers including Airbus suppliers can take advantage of the tax break. There are at least 25 Airbus suppliers in Washington State so Airbus is indirectly being affected by the tax break.
An example?
Exotic Metals supplies parts for the Airbus A300/A320/A330/A340/A380
http://www.exoticmetals.com/aboutexotic/history/
http://www.spokesman.com/stories/2014/mar/21/exotic-metals-forming-co-opening-plant-in-airway/
“Exotic Metals will be eligible for a reduction of the state business and occupation tax granted by the Legislature last fall as an incentive to Boeing Co. and the aerospace industry.”
So when the Airbus spokesperson claimed that the tax break will pay for the cost of the 777X program, they’re either lying or just hugely misinformed. The $8.7 billion (both 7E7 tax break and 777X tax break combined) affects the entire aerospace industry in the State of Washington.
“Today, Exotic is a major contributor to every model of Boeing airplane currently in production.”
Another attempt to obfuscate the issue. Yes, they supply parts to Airbus, but they came into being because of Boeing and that is still their biggest customer.
Are there any exclusive Airbus suppliers in Washington state? I doubt it very much.
“Exotic Metals will be eligible for a reduction of the state business and occupation tax granted by the Legislature last fall as an incentive to Boeing Co. and the aerospace industry. The incentive was part of the state’s effort to persuade Boeing to build its new 777X aircraft in Washington”
That is from the other link you posted. The quote does seem to sum up the situation quite plainly, Boeing…..and the aerospace industry. But the second line doesn’t leave much doubt.
Your point being? If Boeing had moved 777X production elsewhere, they would have requested tax breaks there as well, as evident in their RFP sent out at the time.
To state the obvious: A tax break is a tax break, and this one was 100% designed to keep 777X production in Washington state. Whether it’s a newly introduced one or an extension is a technicality. The extent of the extension is – at ~$8.7bn – about 62% larger than the existing tax break, due to run out in 2014 (at ~$5.3bn). A tax break, that incidentally was ruled illegal by the WTO.
So let’s also not pretend that Boeing and Washington state didn’t know what turf they were getting onto when they agreed on these tax breaks. Scott and others have continuously been pointing this out ever since the extension was first proposed.
I fully expect them to pay all taxes they’re not exempt from.
Yes, and Boeing could get launch aid from European governments if only they chose to develop and build a plane in the EU.
It’s a technicality that in theory, Airbus or its suppliers could benefit as well. You know as well as I do that talk of extending these tax breaks only started when Boeing, their main beneficiary, threatened to move 777X production elsewhere.
Don’t take my word for it, though, take Governor Inslee’s, who said in October 2013 “If Boeing decides to build the 777X and its carbon fiber wing in Washington, I believe those incentives should be extended through the anticipated life of the airplane — to 2040”.
http://www.heraldnet.com/article/20131004/NEWS01/710049899
So let’s make no mistake about it: The prime target and prime beneficiary of these tax breaks is and was Boeing. Had 777X production been moved elsewhere, they would not have been extended (and Boeing would have demanded and received tax breaks elsewhere instead).
Any effect these breaks have on WA-based suppliers for Airbus, Bombardier, Embraer, etc. is just incidental to wooing Boeing. The last time this was examined, the tax breaks were subsequently ruled illegal by the WTO.
Yes, I know that aspects of Airbus’ launch aid have been ruled illegal as well, and I’m 100% against repeating/extending these as well. It’s just that you chose to paint a picture of these tax breaks being really nothing worth talking about, which is a point of view I obviously disagree with.
@Aero Ninja:
Nice find 🙂
Sorry – typo, I meant 2024, of course.
“The extent of the extension is – at ~$8.7bn – about 62% larger than the existing tax break, due to run out in 2014 (at ~$5.3bn).”
Actually no, it’s still the same tax break. Why? 10 years have passed since it took effect which there was about $265 million in tax breaks per year from 2004 to 2024. SB 5952 took effect when the Boeing declared Washington the site of the 777X aka 2014. The primary purpose of SB 5952 was to extend the tax break from 2024 to 2040. So that’s 16 years from 2024 to 2040. With the new program proposed, it increased the value of the tax break from $265 million (assessed at the time) to an expected $335 million per year when SB 5952 was enacted.
So the reality is that HB 2294 still had life in the law and is still in effect today. Neither HB 2294 or SB 5952 gives dollar amounts. They only fix the B&O tax rate at 0.2904% which one can extrapolate based on current airplane sales from Boeing to get that figure. So HB 2294 was really worth $2.984 billion from 2014 to 2024 and SB 5952 is worth $5.7 billion from 2024 to 2040.
“I fully expect them to pay all taxes they’re not exempt from.”
They pay the same Aerospace B&O tax rate that Boeing pays which is 0.2904% if their economic activity is tied to Aerospace but not necessarily Boeing but can be Airbus, Learjet, Bombardier, etc. They also get tax exemptions on defense sales.
“That is from the other link you posted. The quote does seem to sum up the situation quite plainly, Boeing…..and the aerospace industry. But the second line doesn’t leave much doubt.” I never denied otherwise. I gave the links knowing exactly what it contains. I also love reading direct sources such as the WTO ruling (353R-01). It’s so amusing what the WTO claims is unfair while ignoring certain things such as contracts that Boeing won from the Department of Defense against other competitors (Lockheed, Northrop, Raytheon to name a few). They claim those contracts are subsidies so does that mean the German & French government buying A400M’s are subsidies as well? They also cry foul about C-17 technology being implemented on the 787. They might as well just say that all of what Boeing does is illegal and should not bother to compete in LCA’s.
“Had 777X production been moved elsewhere, they would not have been extended (and Boeing would have demanded and received tax breaks elsewhere instead).”
Not in the same amount that Washington had put up. Missouri could only put up $1.7 billion over 2 decades in tax breaks but nowhere in the neighbor of $5.7 billion ($8.7 minus $2.984).
Boeing already went to the government and did get a huge amount of tax breaks.
One of your biggest “EU Sponsored-Owned Carriers” is Lufthansa. Lufthansa was and is launch costumer for B737, B747-8i and B777X.
LH is no longer government-owned, not even partly – hasn’t been since 1997. Of the types you mentioned, only the 737 was launched at a time when LH was a state-owned carrier.
Anyway, as I said, I think ownership is secondary – management and product are much more important.
If you really want to point to state-owned carriers ordering Boeing, don’t go back to the old BA, LH and AF – just look at Chinese airlines (excluding Cathay) and the almost 600 planes (and counting) they ordered from Boeing in the last 10 years.
um, maybe Boeing should be glad of the EU ETS? They have been its biggest benifactor
And of course… the information about paying royalties to the governments from any A320 and A330 sold are just “unfunded rumors” 😉
Still stuck in 1975?
Boeing, with a much better, and more independent, financial position should be able to underbid Airbus across the board.
From the article above:
“[…] Boeing offered the 737-900ER for 10%-15% less than that offered for the A321ceo.”
“One officer told us the 737-900ER was a slightly “better” airplane than the A321ceo […] but that Boeing won the deal on “commercial terms.””
So Boeing already underbids Airbus but the wages are still to high to do it “across the board”. Boeing should move production to Bangladesh…
Are you suddenly suggesting Boeing should compete primarily on price, not quality, something you riled against when you alleged Airbus was doing it?
Are you also ok with such undercutting being partially funded by tax breaks?
More to the point, though – I don’t agree that Boeing is in a position to undercut Airbus pricing across the board.
Their 787 programme is still bleeding money – 200 frames in, each frame delivered is still sold for less than what it cost to build it. The fact that Boeing can write off the 787 cost overruns over the course of ~1300 frames (as per Jon Ostrower in his latest WSJ article) helps to cover this fact with regard to Boeing’s annual results. But it doesn’t change the fact that Boeing should be very eager to start making money on the 787 – and ideally other programmes – to recover the 787 cost overruns. They sunk a few billion into the 747-8, to, which they probably want to earn back somehow. Then there’s the 737MAX, which is going to be more costly to develop than the A320neo (by a factor of 2, according to Ostrower), and the 777X, which Boeing still needs to develop, and which still needs to be delivered on time and on spec.
Airbus don’t have as much on their plate – the A380 cost has already been written off, and the type is going to break even on a per-frame basis next year. Most of the NEO development is already done (EIS is next year), as is most of the A350 development (EIS this year – and no significant cost overruns we know of so far). They still have A330neo and potentially A350-1100 ahead of them, though.
So in short – I don’t think either company is in a position to undercut the other across the board. Which is probably all right, as I wouldn’t really want any company winning out just on price – having said that, I sort of frown on Airbus’ tactics in trying to fend off the CSeries.
Reblogged this on AIRLINE NEWS PHILIPPINES.
Scott, regarding A’s 320 production in Ala.,could you clarify where the fuselage and interior, wings, and empanage will actually be produced. I have the impression that these activities will not take place in the US, but rather in Europe, and that Ala. will simply put the finished parts together. Thx.
From what I’ve read so far, Alabama will work as a FAL the same way that Hamburg, Tianjin and Toulouse do. I.e. they will chiefly assemble pre-produced parts – cockpit and front fuselage from Saint-Nazaire, vertical stabiliser from Stade, wings from Broughton, etc.
They will probably source some lesser materials/assemblies more locally, but the main components will still be shipped from Airbus’ main manufacturing sites in Europe. “Shipped” is the keyword here, too, as from what I’ve read, these assemblies will be sent to Alabama by ship, not Beluga.
Fromme is correct
If Airbus needs to keep the production lines humming for the A320ceo why then open additional capacity in Mobile to build even more of this obsolete aircraft?
I believe Airbus should have scheduled Mobile strictly for the A320neo and skip the A320ceo entirely. Airbus can only have a negative return on its investment to produce the A320ceo there.
I have never understood the Airbus logic to produce the A320ceo before the A320neo in Alabama. In my opinion that decision reflects poor planning and a lack of vision.
It is better for beginners to work on a well understood product than to do an all new product somewhere in the heat of the south. The A320NEO will be first produced by the assembly lines with best knowledge available. I guess Mobile and Tianjin will be the last plants to produce CEOs.
Lufthansa Technik now controls 787 production in Boeing’s Charleston plant for several leasing companies and other airlines…
http://www.aero.de/news-19609/Lufthansa-Technik-schaut-Boeing-auf-die-Finger.html
There is also a rumor about 787 Neos in 2018 but just 2 of them;-)
http://www.aero.de/news-19616/Neos-least-zwei-Dreamliner.html
What you say would make sense for two different aircraft, like say the CRJ versus the CSeries for example. But I don’t expect the neo to be that much different than the ceo, except for the engines. On the other hand he 737 MAX should be a different animal with many new “obsolete” parts. 😉
I always thought that the Alabama production was intended for the US market. So if it is the last facility to build the ceo it could only mean that American air carriers bought, or intend to buy, quite a few of them.
Delta ordered 30 A321CEOs. With an output of just 4 aircraft this is quite a lot of time to learn. After that the Mobil workforce would be ready to make a smooth switch to the predefined processes for NEO production then already elaborated by more experienced European workforces.
The next thing is the Mobil workforce is currently trained on the CEO production:
http://www.airbus.com/presscentre/pressreleases/press-release-detail/detail/first-manufacturing-employees-for-airbus-assembly-line-in-mobile-alabama-start-training-in-hamburg/
I am a bit confused by your position here Normand. On the one hand, you seem to find it unwise for Mobile to start u´p with the CEO but then you note that the biggest difference between CEO and NEO are the engines. Exactly what is the downside of letting Mobile start up on the CEO?
Unless Wikipedia is obsolete, the Mobile facility should be assembling by some time in 2015 (no idea which quarter) and the NEO should be introduced by October 2105. I woudl imagine the first NEOs will be built in Toulouse and/or Hamburg and once they get the wrinkles out, they would start up Tianjin and Mobile.
If they did not start up on the CEO, I would think there would be alot of wasted time and money. Of course I am assuming there will still be CEOs to be delivered at that point in time.
Yes you are right Aero Ninja, if they didn’t start the ceo right away there would indeed be a waste of time and money. But I was always of the opinion, and still am, that Airbus should have synchronized the opening of Mobile with the neo in order to avoid having to set up for the ceo and then switch in a relatively short period of time to the neo.
I just hate situations where when everything is getting to speed you have to stop and go through a new process again. This could also be viewed as a waste of time and money. Not counting the inconvenience for the staff.
At least Airbus has, or had, the option. Bombardier did not. They build a brand new assembly building which should be operational early this summer, but there will be very few aircraft to build at that time, and for a prolong period, because the certification programme has been delayed. For the staff it will be very convenient though, for it will give them the opportunity to adapt to the new production environment at a less hectic pace.
Somewhen, somehow, Airbus has let the Cat out of the Sack, naively, imprudently – by way of commercial intelligence or otherwise … implying this : Airbus has been depossessed of a vitally important commercial secret = the extent to which A330 sales margins were confortable … However, the exact values of applicable A330 sales pricing strategy threshholds “R2”, “R1” and “R0” are NOT accessible internally in Airbus to the average “Sales Director”, wherefore presumed leaks if any must stem from higher hierarchic levels, or have been disseminated through customer-to-customer concertation, despite an explicit/very strict non-disclosure contract clause.
Whatever scandalously extravagant hard-discounting practises are being reported (??), in fact there are strictly no reasons for eg A330 prices to be discounted at all, never mind throwing in shirt and trousers : as an investment, the Payback Time @ List Price of an A330 ranges btw 2.3 and 3.5 years pending the market where the aircraft is deployed. So why are Airbus yielding to the abusive price pressure ?
It all amounts to a serious lack of sales discipline ! A Sales Price is akin Reputation : it takes a lifetime to establish, but one foul move and it’s gone, hardly retrievable ! …
Imagine an active arm institution complementing NSA snooping ( using gained information for clandestine wide spectrum warfare against every other nation.
I can only understand the huge rate increase by an expected demand that comes from replacement of current single aisles. Given that oil prices start rising again, replacement of a 12-year old single aisle can easily become a business case for an airline if a 15% fuel burn improvement is possible. That puts a huge 4-digit number of “replacement” orders on the table. Values for CEO-aircraft will fall like a rock, just no one willing to put this truth out.
There has always been the feel good formula of blaming low prices for competitor success.Without any proof always.
Suggesting the A321 and 737-900/9 are somehow splitting the market is only for selected markets and time frame.
Hard numbers learn us the A321 has already outsold the combined 757, 737-900/900ER/9, 767-200 sales of the last 35 years, and it is getting worse fast.
AA didn’t split their NB order between A and B. The orders and options numbers are far apart. I see the chances of UA ordering a sizeable A321 fleet in the near future as larger then 50% too.