John Leahy, the chief operating officer-customers for Airbus, will retire in January after 33 years with the company. LNC’s editor, Scott Hamilton, has known Leahy for most of this time. This is the second of a series of reports derived from interviewing Leahy about his pending retirement. The first article appeared Nov. 28.
By Scott Hamilton
Dec. 14, 2017, © Leeham Co.: When John Leahy was promoted from his position as head of Airbus sales in North America and moved to headquarters in Toulouse,
France, to assume the world-wide position as head of sales, he had an ambitious goal to achieve 50% market share by 2000.
He had a little over five years to go from low-double digits to this lofty goal.
The Airbus executive board initially laughed at him, Leahy recalls 22 years later.
Leahy’s goal of achieving a 50% market share was key to Airbus’ future.
“That was very important, because [McDonnell] Douglas was failing in its strategy of ‘we’ll be a small player over in the corner and just take the small, profitable deals.’ That lasted about three or so years. They rapidly marginalized their whole company,” Leahy says.
“I said we can’t do that. We need to be in a band of 40% to 60%.” Leahy said the goal of 50% was plotted out, much to the skepticism of the Airbus executive board.
“I can remember going to the executive board meeting, which was the CEOs of the government entities and manufacturers that owned us, like Aerospatiale, Deutsche Aerospace, British Aerospace and CASA. They listened to my presentation in January  and why this was so important,” Leahy recalls.
“They said that sounds very motivating for your sales team. But we want to know what is the real and realistic goal of market share that we should be aiming for. I paused, and I said ‘50%. That’s what we need to do.’ They started laughing. Somebody said, ‘you can’t be serious. Twenty-five percent, maybe 30% would be a more reasonable, more attainable target.’”
A genuine debate ensued about whether 50% was ever attainable under any circumstances, Leahy says.
The first year of Leahy’s new position ended with Airbus at an 18% market share. Leahy speculated that in an American corporation, the executive board would have concluded he didn’t do well and would have booted him out, or at the very least, given him one more year.
When he went to the next board meeting in January , “there was none of that. I thought that I’d be heavily criticized. But they wanted to know what was happening in the market and what was Boeing doing, their pricing strategies against us. Everybody seemed quite comfortable that this was a long-term strategy,” he says.
“It might take the next five years getting there, and if you start off with a bad year, you recover. I was very impressed with that.”
By 1997, McDonnell Douglas was down to about a 7% market share in commercial aviation. Boeing and MDC merged. Through the early 2000s, Boeing—following MDC strategy, critics said—focused on derivatives instead of investing in new airplanes.
Boeing came under a lot of criticism during this period, particularly by noted consultant Richard Aboulafia, for starving spending for research and development. Aboulafia routinely pointed to Boeing’s stingy R&D spend and the larger funding at Airbus as one of Boeing’s strategic mistakes.
But to some degree, it’s not this simple.
Boeing, and Airbus and others, pursue derivatives following costly new airplane programs because this is where the profits are. The question was whether Boeing made a strategic mistake in producing the 757-300, 767-400 and 747-900 (standard), none of which sold well, or Boeing tried the proverbial push to a bridge too far.
“I hate to go into whether Boeing got it right or wrong,” Leahy says. “We’ve got enough strategic mistakes we’ve made. I focus on those more than my competitor’s strategic mistakes.
Pressed, Leahy says, “If you go back to mistake number one, is why did we have 18% market share in 1995, I think Ron Woodard [then president of Boeing Commercial Airplanes] and his management team were absolutely appalled at this concept that Airbus would even dream of the possibility of having a 50% market share by 2000. They were determined that they were going to crush us.”
Woodard believed Boeing had an “enormous industrial might” and Europe didn’t, allowing Boeing to go into the market and cut prices (“which he was doing in 1995”), based on high volume, lower production costs and the ability to pass through lower prices.
“He also offered very early delivery slots,” Leahy recalled. Woodard offered airplanes the next year or in 18 months. “He knew we couldn’t.”
The result was a disaster for Boeing. Leahy said Boeing could have sustained the low pricing, and it did. But as Woodard upped production of the 737, everything fell apart. The supply chain couldn’t keep up with a dramatic increase in the production rate (from 21 737s a month to 27, at the time an unprecedented rate). Production lines fell behind, quality control suffered and deliveries were late. Boeing took the unprecedented step of shutting down the 737 line for 30 days to catch up. Boeing reported its first loss in 40 years. Woodard lost his job over the snafu.
“I think that set Boeing back quite a few years,” Leahy says. “That would be the first strategic mistake, at least during my career over here I think they made.
“The next step was the continued hubris when we got to 50%, which we did in 1999,” a year ahead of Leahy’s target. “They said this was a one-off, every dog has his day. One year you could hit 50% but it’s impossible every year. They never really internalized the fact that we were here to stay as a 50% player until probably it was too late.”
Leahy also pointed to Boeing’s “hubris” that United would never buy anything but the 737 and their belief that the 737 was so superior to the A320. United shocked Boeing and the industry by ordering Airbus. (This is described in the first part of the Leahy interview.)
If Boeing had its strategic mistakes, so has Airbus. Leahy didn’t want to go into detail for this article (“I’m saving that for my book”), but observers widely believe the A340 was one. This four-engined airplane entered service just ahead of the twin-engine Boeing 777-200 and about the same time as the three-engine McDonnell Douglas MD-11.
The A340 sold fewer than 300 aircraft.
“The 340 was a damn good airplane for a four-engine airplane,” Leahy says. “We got it wrong. To a large degree, we got it wrong by listening to some very important customers, about whether long-range, intercontinental, trans-oceanic flying would go to twins or would it stay with four-engine airplanes.
“Even when I got over here in December of 1994, I was appalled by the fact that people didn’t even want to look at the concept of intercontinental twins. They really were focused on the four-engined airplane. They had customers who were pushing the fact that it would always be four engines. It’s no secret Lufthansa was one of them.”
Leahy said some Asian customers admitted there might be twins across the Atlantic, but not across the Pacific. “It’ll never happen,” they said. “We listened too much to that, rather than seeing where the future was going,” Leahy says.
“I can remember being at one meeting with senior management of GE and Airbus. At one meeting, GE’s Brian Rowe [then-CEO of GE Aviation] was so desperate to do something with the GE90 because he had gotten himself into a situation where he was trapped in being one of three engines on the 777, which wasn’t really selling that well.”
At that point, the 777 were “A” and “B” models. Leahy says the A330/340 combination was selling well against those early 777s. “It was a regional airplane that nobody really wanted.”
(Leahy’s memory is a little selective on this point. A review of the history of the orders during these early years for the 777-200 vs the A330/A340 favors the 777.)
GE, he says, would have paid for the development of putting the GE 90 on an A330.
“I can remember [Airbus] just rolling their eyes, saying ‘no, why would we want to do that? We’ve got a proper strategy: a four-engine airplane for long-haul, planes for regional flying, all with the same fuselage, all with the same wing, this is an unbeatable strategy.’
“I was flabbergasted. I was stunned by that. It was one of the biggest strategic mistakes we made, missing the turn to twins vs quads,” Leahy says.
Airbus also stumbled with the initial development of the A350. Airbus was caught flat-footed by the Boeing 787, which Leahy initially ridiculed as another Boeing “paper” airplane concept. Airbus’ first response was to develop the A350 as a derivative of the A330: a new wing, the GEnx engine and other upgrades—a concept that resurrected with the launch of the A330neo more than a decade later, only using Rolls-Royce Trent engines.
The initial A350 drew a few orders compared with the greater success of the 787.
An incident at a large industry conference in 2006 blew up the original A350 concept.
Steven Udvar-Hazy, then CEO of the mega-lessor ILFC, had ordered 20 A350s—but 74 787s. At a delivery ceremony at the Boeing wide-body factory in Everett (WA) between ILFC and customer Aeromexico for the airline’s first 777-300ER, the local newspaper aerospace reporter asked Hazy what he thought of the A350.
Hazy said something to the effect that it was insufficient compared with the 787. The write up was just a short paragraph in the local paper the weekend before the industry conference began on Monday.
Leahy spoke at the conference immediately before Hazy. After Hazy made his presentation, I asked Hazy about the A350 comments, noting they didn’t go into detail. What was Hazy referring to in his criticism, I asked?
“Is John Leahy still in the room?” Hazy asked. Leahy, standing all the way in the rear, said he was.
Hazy then launched into his criticism. The A350 had a metal fuselage, it didn’t have the advanced technology that the 787 did, and so on.
When he was done, I rushed back to Leahy for his reaction. It was muted, to say the least.
About a week later, the CEO of Singapore Airlines, which had ordered the plane, leveled similar criticisms, a public move highly unusual at the time.
Airbus went back to the drawing board. Leahy didn’t speak to me for a year.
“You were a rabble-rouser,” Leahy said in this interview, recalling the events.
(To this day there are some in Airbus who believe this was a set-up with Hazy; it wasn’t.)
“That wasn’t a strategic mistake,” Leahy said. “I’d put it in the tactical category. If it was a strategic mistake, we were caught blind-sided when they brought out the 787 with their work in composites and their engine technology.”
The story will continue.