Airbus, Boeing accuse each other of price war; what’s the real story?

We find this very interesting: Boeing says Airbus is engaged in predatory pricing on the A320. Airbus says Boeing is engaged in a price war.

What’s the truth? It seems to us that orders might tell the story. The scorecard YTD:

Airbus A320 family: 88

Boeing 737 family: 413

It seems to us that if Airbus were engaged in predatory pricing, the scorecard would be reversed.

Last year, of course, Airbus pounded Boeing at a time when it had the NEO defined and Boeing’s MAX was still evolving. But Boeing ended the year with about 1,000 orders and commitments while Airbus ended the year with about 1,200 firm orders and another 200 or so commitments. So while Airbus ended the year ahead, we believe it was essentially because Airbus had a firm product and Boeing did not.

Something doesn’t pass the sniff test here.

 

32 Comments on “Airbus, Boeing accuse each other of price war; what’s the real story?

  1. Airbus A320 family: 88
    Boeing 737 family: 413

    Unless of course Airbus is holding back some big announcements until the Farnborough Air Show in July.

  2. Truth be told, who cares about the so-called “price wars”? There are only so many sales one can make based on price. There are tons of other variables such as fleet commonality, slot availability, ancillary spares & m/x as well as financing.

    What’s more important is profit margins/profitability, return on equity, etc. In this department, if I’m not mistaken, Boeing soundly beats Airbus/EADS as a whole.

  3. The Alrroya report is indeed very interesting. The “New Ostrower” article looks good too, but unfortunately I do not have an account with TWSJ and I was therefore not able to read it in its entirety.

    “Paring production costs will preserve profit margins”. Read: We are lousing money on every deal we make to catch-up with the competition.

    “A lag that helped the European planemaker book record narrow-body orders in 2011”. Was it a lag or a lack? A lack of an airplane to offer. A lack of coherence. A lack of vision. A lack of money. A lack of ground clearance. A lack of bypass ratio. A lack of data. A lack of guarantees. And ultimately a lack of credibility.

    “It hasn’t been lost on us that we need to go play in their sandbox, too.” Please Jim, leave this kind of rhetoric for your BBJ sales rep.

    “Airbus doesn’t adjust prices on the basis of competition”. 🙂

    “We understand what game they’re playing and it’s a market-share game”. Read: We are loosing the game.

    “There they go again. Starting another price war to try to maintain 50% market share,” John Leahy,…” They are not starting another price war John. The war has been going on for more than forty years now.

  4. Jacobin777, it is clear that Boeing has a much greater return on equity, margin and net assets than Airbus. What people fail to realize is the reason behind why that is the case. The biggest expenditures in this industry is the R&D + capital expenditure to setup the infrastructure to manufacture a final product (this industry is pretty much a manufacturing one). Airbus has risen from zero to hero since the mid 80s; but it has been pretty expensive to setup everything from scratch.

    Airbus has had to foot the bill for:
    A320 series (new platform, wings, cockpit, pioneer commercial fbw + fam. derivatives + setup fals) – Required full certification effort
    A330+A340 series (derived a300 platform, derived a320 cockpit, new wings + fam. derivatives + setup/enlarge a300 fals) – Required full certification effort
    A350 (new platform, derived a320 cockpit, new wings + fam. derivatives + setup fals) – Required full certification effort
    A380 (new platform, derived a320 cockpit, new wings + fam. derivatives + setup fals) – Required full certification effort

    Boeing has done instead:
    737ng (derived 737, new avionics + fam. derivatives + expand 737 fals) – No full certification required, grandfathering at its best.
    767-300/400 (derived 767, new avionics + fam. derivatives + modify 767 fals) – No full certification required, derivative plane.
    747-400 (derived 747, new avionics, new wings(?) + modify 747 fals) – No full certification required, derivative plane.
    777 series (new platform, wings, cockpit, pioneer fbw at boeing + fam. derivatives + setup fals) – Required full certification effort
    787 (new platform, wings, cockpit, pioneer commercial fbw + fam. derivatives + setup fals) – Required full certification effort

    So, Boeing has developed 2 full new platforms and 3 major derivatives, whilst reusing much of its existing infrastructure. Airbus has developed 3 full new platforms and two major derivatives (a330/40); but it has had to setup the whole infrastructure! No wonder that there is not much to return.

    All summed up, it’s pretty much amazing that airbus has been able to compete at all. They have had so much investments that they will only start to pay off within the next decade as the company matures as a whole – if they execute well enough. Setting up an aerospace giant is a huge undertaking that cannot be done with a short term view.

    • That may be one reason. the other is the way Boeing can heap value on potential assets.
      The Dreamliner production pileup seems to have been valued at cost. ( enormous cost actually ) .
      When eventually finished they may produce revenue in the order of 1/5th to 1/3rd of that value.
      You won’t find such large ( if any ) delayed action losses in Airbus bookkeeping.
      This is not limited to Boeing it is a principal US problem.
      Redo Boeing quarterlies with about $15b less assets and profits will definitely look different.

      • I don’t think US accounting laws allow the situation you are trying to describe. Maybe Europeans can do that, but I do not think that is allowed in the US.

      • Uwe, These “potential assets”, are you referring to Inventory?

      • Your referring to marked to market accounting practices. Where you book sales future revenues as current profits. This is what caused Enron to blow up in that once the sale was made they never went back or for that matter forward to revise their profit statements. They just hid the loses in offshore shell companies. Since the Enron experience US laws and practice regarding marked to market practices have been strengthened considerably. So no these assets are not counted as revenue until Boeing actually gets the cash.

    • @hardwaremiste:

      Most of the bills for Airbus products, especially the A32X were paid years (if not decades -from the 90’s) ago. The A380 was a poor decision from the first place. IIRC, Airbus/EADS promised an ROI of 16%. Had Airbus not messed up production, I doubt they still would have gotten a 16% ROI from the A3XX program.

      The A345/A346 are derivatives. In fact, one can even say the A330 is a derivative of the A300 program.

      The A35X program has seen a few “restarts” and has cost Airbus/EADS. The A400M has cost EADS as well (though they can’t be blamed for part of the problem).

      Boeing has had 2 programs the past 2 decades as well. The B777 and B787 program.

  5. hardwaremister :
    All summed up, it’s pretty much amazing that airbus has been able to compete at all. They have had so much investments that they will only start to pay off within the next decade as the company matures as a whole – if they execute well enough. Setting up an aerospace giant is a huge undertaking that cannot be done with a short term view.

    I like your analysis mister. Actually it is more a synthesis than an analysis. And this is rarely being done. Business analysts abound, but “business historians” remain a rare breed.

    Boeing was created in 1916. They had time to develop and mature. I would say that Airbus is about where Boeing was in the late sixties. They had just established themselves as number one and they were still benefitting from the government help that was necessitated by the circumstances of WWII and the Cold War.

    My impression is that Boeing has reached its apogee at the turn of the century. At which time they have entered a slow decline that remained manageable because there was only one adversary. Whereas in the late sixties there were four players: Boeing, Douglas, Lockheed and Airbus, which had just been created. But there was room for only two. So Lockheed pulled out of the market and Douglas was absorbed, first by McDonnell, and later on by Boeing.

    What might have accelerated the decline is the Dreamliner fiasco. It could actually mark the end of a Dream. I am not sure if Boeing will be able to maintain a good return on equity for very long. The 787 is a drain on the finances. The 737 has an impressive backlog, but an uncertain future. It’s getting old. I mean, really old. They will keep selling them for a while. But not with the margins they are used too.

    On the other hand, the Triple Seven is still a triple winner: alone it its class, with a relatively modern design, and in great demand throughout the world. But unfortunately Boeing will use the considerable profit margins of this aircraft to modernize it. It is a great solution to a problem that does not exist. Does the A350-1000 represent such a threat? I don’t think so. Is Boeing sitting on a huge pile of cash that they don’t know what to do with? I don’t think so. Could they have put the 777X money to a better use? Absolutely! They should have, and probably could have, put the money on a new narrow-body aircraft to replace the antiquity that the 737 has become.

    The scenario is totally different on the other side of the Pond. Just as Boeing had reached its apogee, Airbus was becoming number one. And they have stayed there for the better part of the last decade. They have better aircraft, a better sales team and a much better Management. As we know, it’s not always been like that. They have had a chaotic history, but they have since put their acts together and that will eventually be reflected in the returns on equity.

    • Ditto.

      However, I strongly believe that the 777x will be a great success. It is also the project to undertake with the most solid business case in Boeing’s portfolio. The FALs are setup and probably all major players are going to get really serious about acquiring and nurturing expertise on re-skinning planes to different materials as they become available. It just makes sense, and as tools and engineering processes are created and validated. It is natural to foresee that this will become an industry-wide tendency.

      The 777x will be to the 777 what the 737ng was to the 737; the right thing to do at the right time. The same will apply to the a320neo as the logical evolution of the a320. I would also be shocked if airbus was not expecting to introduce further improvements in incremental steps to its neo baseline.

      The 737max will be a really compromised aircraft, extracting whatever might be remaining of a bygone platform at the lowest possible cost… but with very very polished industrial processes to hedge upon. This will enable Boeing to cover that market pocket to the best of its ability; and with a very mature manufacturing infrastructure.

      In a way, the 737max is no different than what Airbus chose to do with the a330/a340; the best possible with whatever it had. Two projects in one, both suboptimal but pretty darn competitive. The a340 was the first victim as Boeing introduced a fully optimal platform with the 777. However, people forget that the a330/a340 project appeared not as a choice “by preference” but by monetary constraints. This allowed Airbus to establish itself as a credible player for long-haul aircrafts, but also opened the door to other competitors by proving that it could be achieved. The a350 should become the first long-haul aircraft that is uncompromised and fully optimal in the Airbus’ portfolio.

      Boeing chose the lean route with the 787, a great idea and most probably a fantastic platform for years to come. It however has become the poster child of where to limit the transfer of knowledge and responsibilities to third parties.

      The 787 could have been the beginning of the end of Boeing; nonetheless, the earlier right bet on the optimal 777 will enable them to weather the bumpy ride. That was quite a stroke of luck for Boeing, and a loud and clear message for all the players around.

      • “Just as Boeing had reached its apogee, Airbus was becoming number one. And they have stayed there for the better part of the last decade. They have better aircraft, a better sales team and a much better Management” sure
        The reality is quite different. With Boeing’s commercial airplane programs now solidly on track, Airbus’ day in the sun is waning. Airbus faces a future where their 2nd rate products will be increasingly irrelevant, except to 3rd world and developing nations

  6. The comments above continue to reflect the US (Boeing) attitude towards
    Airbus since they were established in 1970, i.e. that Airbus is not and never
    will be profitable!
    Airbus has a line-up of three modern and efficient aircraft, the A380, A350
    and the A320NEO, while Boeing has the ill-selling and late 747-8, the 777
    which requires modification or a complete redesign against the A350, the
    787, which may never make a profit and the still to be defined 737Max.

    In the meantime, for most of the last 12 years, Airbus has outsold Boeing,
    because the emphasis in Europe is NOT on profit, but on jobs!
    We may consider that attitude wrong, or even stupid, the net result in E’s
    favor is, that until recently, they have had lower unemployment, universal
    healthcare, better overall retirement conditions and a far better distribution
    of wealth than we have by far, between the lower 99% and top 1% of the
    population than we have and getting worse!

    • I am really sad that what I have written above may have come across as the martyrisation of Airbus. In fact, I am more inclined to picture Airbus more as a visionary than just another player in the industry (let alone subsidized player). Through its persistent strategy to invest in the much needed infrastructure to become a strong leader; it has made it to the top.
      They have been innovative, and consistently invested heavily to nurture engineering expertise and establish themselves as the leader they have become today.

      Would have they been more profitable shall they have chosen to more “evolutionary”? Yes, but their outlook would be quite bleak.

      Airbus actually stands in a very enviable position, and their profits will increase as their setup costs will be lowered in the future. It is most probable that investors do not understand the underlying value that is being created and heavily criticize the current margins. Their aim is to invest with a short term view of the current facts, and with their approach their judgement is unfortunately right. What they fail to grasp is that engineering-based companies do not yield in the same fashion a service-bound asset would. Value is built up over time, and until a critical maturity point is not reached, returns are not great.

      By doing a quick “sum” of investment costs on both Boeing and Airbus, I was trying to convey how well Airbus has done. Most importantly, and up to the reader, is to realize how better are things to come for Airbus in the coming decade. When margins are finally up it will the be final vindication of the whole match.

  7. I think what Jon writes, is only a confirmation what was already clear for some time. Boeing is using alarming discounts to regain some terrain after lasts yrs unexpected NEO tsunami.

    What everybody feels but loves to ignore
    – During the last 5-7 yrs $10-15+ billion vaporized under the 787 and 747-8i. No, it did not vaporize, its real.
    – Margins on the 737 are low, check out what Southwest and Norwegian paid (60% discounts).
    http://aviationblog.dallasnews.com/archives/2011/12/why-we-think-southwest-airline.html
    – The 767 is marginal, first 400 787s where sold below production prices & will remain a drain for yrs to come.
    – Sales and likely margins on the 777-300ER are great. That’s about the only type too.

    Now: Boeing books great results again, Hallelujah.

    Boeing is soo profitable, add all subsidies (WTO, ImEx, DoD, NASA). Smelly. Traditionally the market wants to be exited about Boeing. I know 787 costs are spread out into the future, the first 1400 machines.. handy accountants. I wonder what stock holder driven creativity there is more. If it looks too good to be truth it usually is. IMO it doesn’t feel good.

    Nice to isolate the MAX-NEO sales of the last few month and suggest some general trend. I think everybody can see who’s on top at this moment and probably will stay there for some time. The MAX contracts are pending aggressive fuel burn guarantees, CFMI is sweating. 200 NEO commitments?! (American alone said it will purchase 260 Airbus aircraft from the A320 family with 365 options and purchase rights, 625..) Nobody seemed interested in “commitments” before the MAX, Airbus doesn’t even mention them. Maybe we better go back to signed contracts iso adding in these vaporcontracts, introduced solely to create marketing momentum.

    Some large Airbus A320 users will have to place NB orders in the next few yrs. Would they write a check for the 737-9 MAX instead of a GTF powered A321 NEO? Maybe..

    • keesje :
      Nice to isolate the MAX-NEO sales of the last few month and suggest some general trend.

      Was anybody doing that?
      I took Scott’s first post – that included the MAX/NEO sales of the last few months, but his point was that Boeing claims that Airbus is waging a price war, while the latest sales numbers indicate otherwise. (Although it has to be said that Boeing currently still has way more slots at their disposal than Airbus do.)

      keesje :
      Nobody seemed interested in “commitments” before the MAX, Airbus doesn’t even mention them. Maybe we better go back to signed contracts iso adding in these vaporcontracts, introduced solely to create marketing momentum.

      I agree regarding “commitments” – I remember around the time when the 787 was launched, there were constant attacks against Airbus for using commitments in their PR releases and just combining MoUs, LoIs and firm orders into one number that looked nice and big. A lot of the same people that complained then are themselves quoting Boeing’s “over 1000 orders and commitments” for the MAX without thinking twice about it.
      So – for any manufacturer, let’s stay with firm orders only. Everything else ist just conjecture, as there’s not even a clear definition of “commitment”. Options, MoUs, LoIs, which of these actually count?

  8. However, I strongly believe that the 777x will be a great success. It is also the project to undertake with the most solid business case in Boeing’s portfolio. The FALs are setup and probably all major players are going to get really serious about acquiring and nurturing expertise on re-skinning planes to different materials as they become available. It just makes sense, and as tools and engineering processes are created and validated. It is natural to foresee that this will become an industry-wide tendency.

    I’m not at all convinced that the 777-9X will not be vulnerable against an all new 11 abreast “XXWB” aircraft.

    Globally the aviation sector is expanding with passenger demand doubling every 15 years hence the demand for ever larger aircraft. When Airbus launches the A380 stretch programme (IMO, not a question of if, but when), the stretched A380 will be almost twice the size, passenger capacity-wise, of that of the A350-1000.

    Since its inception, Airbus has been an expanding business enterprise that have been busily creating an increasingly expansive product line. Why should Airbus stop doing that after the A350 and A320neo R&D phase has been completed, when clearly, there is a large gap in their WB product line. Due to, among other things, the massive industry growth, there’s no valid reason IMO, that a decade hence, there will not be a relatively large demand for aircraft sized between the A350-1000 and an A380-900/1000.

    IMO, the fuselage diameter constrained 777-9X, which can only accommodate a 10-abreast seating with significantly less passenger comfort than that of the 747-8, may have have a hard time competing with both the 9-abreast A350-1000 XWB and, for example, an all new 11-abreast Airbus “XXWB” having a full composite fuselage and wing.

    BTW, I wrote down a few thoughts in a recent thread over at aeroturbopower, on whether or not a 777-8X/9X launch in the near term would be IMO the best strategic move by Boeing.

    http://aeroturbopower.blogspot.com/2012/05/b777-9-will-more-than-challenge-a350.html#comment-form

  9. hardwaremister :
    I strongly believe that the 777x will be a great success. It is also the project to undertake with the most solid business case in Boeing’s portfolio.

    No one doubts that the 777X will be a great success. But the 777 is already a great success and has a good chance to remain successful for a long time. I say this because it has no competition at the moment and is not seriously threatened by other existing projects. Although I must admit that I am not 100% sure of that.

    I also doubt that it has the most solid business case in Boeing’s portfolio. I see the NSA as the most solid business case. The long term viability of Boeing in the commercial aircraft business rests on the 737 replacement. But since you have a well balanced viewpoint and a very informed general opinion, I invite you to comment on the desirability of the NSA at this stage of the game.

    If you put the 777X and the NSA side by side in the balance, what would make you choose the 777X over the NSA as an essential measure to ensure the long term survivability of Boeing Commercial Airplane?

    hardwaremister :
    The 777x will be to the 777 what the 737ng was to the 737; the right thing to do at the right time.The same will apply to the a320neo as the logical evolution of the a320. I would also be shocked if airbus was not expecting to introduce further improvements in incremental steps to its neo baseline.

    The 737 Classic was seriously threatened at the time my the new kid on the block: the A320. It is a totally different scenario for the 777.

    Since you suggest that the neo could benefit from incremental improvements, would you subscribe to the idea that Airbus should start working on an A320.5 as a new variant with three or four additional rows of seats?

    hardwaremister :
    The a350 should become the first long-haul aircraft that is uncompromised and fully optimal in the Airbus’ portfolio.

    Do you think that the A350XWB, with all its possible variants, can compete with both the 787 and 777 at the same time? In other words, and like I have said before, can Airbus hit two birds with one stone with the A350?

  10. What’s the truth? It seems to us that orders might tell the story. The scorecard YTD:

    Airbus A320 family: 88

    Boeing 737 family: 413

    Scott, I see it differently. The 413 B-737 Family orderbook for (YTD) 2012 includes some 230 B-737NG/MAX 2011 commitments from Lion Air and another 100 from Norwegion that were converted into firm orders this year. Take out those 330 airplanes from this year and Boeing’s orderbook for 2012 is at 83 airplanes, almost exactly what Airbus has for the A-32X Family.

  11. Howard:
    I know, it is all downhill around the US 😉

    Observer:
    Creative handling of “inventory” is what I had in mind.

    • OV-099 wrote;
      “I’m not at all convinced that the 777-9X will not be vulnerable against an all new 11 abreast “XXWB” aircraft.”

      I don’t know about that. But I do know the wider a fuselarge gets, the higher the drag index. How wide, over the current B-777 do the OEMs want to go before committing to a blended wing body design? Right now, the only true BWB flying anywhere (with people aboard) is the B-2 Sprite bomber. But will pax like flying in a BWB? Near the airplane centerline, it iwll be little different from today’s airplanes, but the further out you go into each wing, the more movement each passenger will have using a standard rate turn (30 degrees of bank). This may make some pax sick, while others, including me, will enjoy it. The solution would have to be increase the airspace around each BWB so it could make turns using about 5 degrees of bank.

      • KC, what matters is the fuselage slenderness ratio (also known as the fineness ratio) where the total length of the fuselage and empennage is divided by the fuselage maximum diameter.

        Do take a look at this paper:

        http://www.fzt.haw-hamburg.de/pers/Scholz/OPerA/OPerA_PUB_DLRK_10-08-31.pdf

        The number of seats abreast n-SA is a parameter that greatly reflects on the degree of passenger comfort. The n-SA parameter can be determined statistically. Later it will be shown that this parameter can be related to the
        fuselage slenderness and optimized (see Section 3.5.6).
        According to (5) the following equation is valid:

        (1) n-SA = O.45*sqrt(n-PAX)

        where n-PAX is the number of passengers.

        The 777-300ER can carry a maximum of 550 passengers at 10 abreast. The n-SA value for the 77W at 550 pasengers is 10.55. A 75m long “XXWB” aircraft at 11 abreast, having the same passenger comfort as the 77W at 10 abreast, would have a maximum passenger capability of around 600 seats. Hence the n-SA value would be 11,02. This would seem to indicate, in a first order approximation, that a larger diameter barrel optimised for 11 abreast will be more efficient than that of the fuselage diameter legacy constrained 76.5m long 777-9X derivative aircraft.

  12. Airbus has definitively been engaged in predatory pricing, for years on end by taking advantage of EU government subsidies. How else could one explain A320’s market share going up to/beyond 50% (from 0)?

    • If we turn this around, I am sure everybody would be certain about Boeing building the better product by quite a margin.
      The conglomeration that is Airbus gave leverage from size, subsidies enabled Airbus to enter a nearly closed market dominated by US corporations.
      A better product enabled them to gain market share in a continuous process.
      This is not a BetaMax versus VHS situation.

  13. “We find this very interesting: Boeing says Airbus is engaged in predatory pricing on the A320. Airbus says Boeing is engaged in a price war.
    What’s the truth? ”

    Maybe it got lost Boeings statement is a next day reaction on Airbus’ comment.

    Unintentionally the opening suggests otherwise.

    IMO another ” if you can’t convince them confuse them” by Boeing hoping the public will conclude the truth is somewhere in the middle. That’s a good PR result is the truth isn’t in the middle.

    I have noticed this Boeing media strategy frequently recently. If it works maybe Leahy should start saying the A330 is better then the 787..

    • Leahy has been saying all along that EVERYTHING Airbus builds is better than anything Boeing builds.

    • Keesje, McNerney made the comments at Boeing investor day. Ostrower heard them and called Airbus. Leahy reacted. That was the sequence.

  14. Well, I see a lot of pessimistic people on both sides. I think that both Airbus and Boeing will be doing the flying public a huge favor by staying competitive so that we get better competition and better planes.

  15. Personally I think they are both doing what they think is necessary.
    Call it what you will.

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