Author: DÁRIO MUHAMUDOdariomuhamudo.com/Text docs/dissertacao.pdf · 3 list of tables table 1: the...
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UNIVERSITY OF EAST ANGLIA School of Economic and Social Studies
“SOME FEATURES OF THE AIR TRAVEL INDUSTRY THAT DETERMINE THE DEMAND FOR SUPER JUMBOS”
Author: DÁRIO MUHAMUDO
Supervisor: STEPHEN DAVIES
A dissertation submitted to the School of Economic and Social Studies, University of East Anglia, in partial fulfilment of the MA degree, May 2000.
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Contents
i. Index of Tables 3
ii. Index of Figure 4
iii. Abreviations 5
1. INTRODUCTION 6
2. THE DEMAND FOR AIR TRAVEL 7
3. THE MARKET 9
3.1 THE COSTS OF A NEW AIRPLANE 13
4. THE MARKET VALUE 14
5. THE INDUSTRY AND ITS PLAYERS 18
5.1 AIRBUS 18
5.1.1 THE A3XX CONCEPT 21
5.2 BOEING 25
5.2.1 THE B747X CONCEPT 26
5.3 OTHER SUBJECTS: 27
5.3.1 AIRLINES 27
5.3.1.1 AIR FRANCE 27
5.3.1.2 BRITISH AIRWAYS 27
5.3.1.3 EMIRATES AND SINGAPORE AIRLINES 28
5.3.2 ENGINE SUPPLIERS 28
5.3.2.1 ROLLS-ROYCE 29
5.3.2.2 ENGINE ALLIANCE 29
5.3.3 AIRPORTS 29
6. THE COMPETITION DEBATE 31
6.1 THE INFANT INDUSTRY ARGUMENT 32
6.2 COMPETITION LAWS CO-OPERATIONS AGREEMENT 34
6.2.1 EC – US AGREEMENT ON TRADE IN LARGE CIVIL AIRCRAFT 34
6.3 A340 – B777 ETOPS DISPUTE 36
6.4 EC – US HUSH-KITS DISPUTE 36
7. CONCLUSION 39
8. BIBLIOGRAPHY 41
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LIST OF TABLES TABLE 1: THE RANGE OF PRODUCTS OFFERED 6
TABLE 2: UNITS IN SERVICE AS IN DECEMBER 1998 7
TABLE 3: IMPLICATIONS OF THE BOEING / MD MERGER 7
TABLE 4: ORDERS AND DELIVERIES 8
TABLE 5: OVERALL TOTALS 8
TABLE 6: AIRBUS DATA 12
TABLE 7: BOEING DATA 12
TABLE 8: AVERAGE AIRBUS / BOEING DATA 12
TABLE 9: AIRBUS TOTALS 22
TABLE 10: BOEING TOTALS 24
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LIST OF FIGURES
FIGURE 1: MARKET SHARE BY PRODUCT RANGE 9
FIGURE 2: R&D COSTS AS PERCENTAGE OF TOTAL REVENUE 10
FIGURE 3: DECISION TREE 13
FIGURE 4: THE LEARNING CURVE 30
FIGURE 5: A3XX FUNDING 33
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ABREVIATIONS
A Airbus
AAPA American Airlines Pilots Association
AEA Association of European Airlines
ASK Available Seat-Kilometres – The number of seats an airline provides multiplied by the number of kilometres they are flown
B Boeing
BA British Airways
BAE Former British Aerospace, now BAE Systems, after merged with former Marconi Systems
Bn Billion (109)
CASA Construcciones Aeronáuticas, SA- Airbus Spanish partner
CCQ Cross Crew Qualification –Qualification that allows flight crew members to fly different aircraft models at the lowest possible cost
CIS Commonwealth of Independent States
CMO Current Market Outlook – Boeing Document
EADS European Aeronautic Defence and Space Company
EC European Commission
ETOPS Extended Twin Engines Operations
EU European Union
GDP Gross Domestic Product
GMF Global Market Forecast – Airbus Document
IATA International Aviation Transport Association
ICAO International Civil Aviation Organisation
LAD Large Aircraft Division – Airbus division that is studying the A3XX
LCA Large Civil Aircraft
MD McDonnell Douglas
NASA National Administration and Space Agency
RPK Revenue per Passenger-Kilometres – The number of passengers multiplied by the kilometres they fly
US United States
VLA Very Large Aircraft
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1. INTRODUCTION
The demand for ‘superjumbos’ is much more than just an economic problem. It is a
battle between Airbus and Boeing and a battle between the Europe and the USA. In
one side there is the protection of the world leader in aerospace industry, while on the
other there is the protection of the only company that can compete with the leader.
This battle used to be a “David – Goliath” one, but in recent years Airbus began to
harvest the competitive advantage that it had planted in the 1970’s. Nowadays it can
offer a model in every market to compete with Boeing. It has been a long way but with
foresight and the help of some European Governments it has been accomplished. The
only market where it cannot compete with Boeing is the very large aircraft (VLA -
over 400 seats). For this reason Airbus is committed to enter that market, since it will
be then a whole manufacturer and a global supplier of the civil aerospace industry.
The data used by the manufacturers is quite different. One reason lies on the different
sources that were used to produce the documents. While Airbus gathered data from
227 airlines1, Boeing gathered data from the world organisations that deal with the air
travel industry: Association of European Airlines, Airclaims, DOT Form 41, DRI-
McGraw Hill, Jet Information Services, OAG, IATA, ICAO, AAPA, WEFA and
Boeing primary research.
To elaborate some of the tables and diagrams I also used the Internet, which was quite
useful due to the instant up-to-date information that is available. To simplify the
reading the currency used is the US Dollar (since is the most common in the air travel
industry), and 1bn = 109.
1 1999 Global Market Forecast (1999: 58)
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2. THE DEMAND FOR AIR TRAVEL
There are several components of the demand for air travel. Hanlon (1999: 16), analyses
the airline perspective, and considers three: GDP, the effect of fares and the numbers
of flights and routes. On the airline perspective this assumption is correct. People who
want to fly first will take notice of their budget. Then they will assess the fare prices
and then choose the best connection to their destination.
On the issue I am studying here, there more components to the demand function. In
this function I considered the main issues that lead an airline to acquire a specific
aircraft, such as the number of routes it operates (and their range), the number of
passengers (measured in RPK’s - Revenue Passenger-Kilometre’s and ASK’s -
Available Seat-Kilometre’s2).
Although the major carriers in the world are already privatised the GDP of the
countries where they are based plays a major role in the demand for air travel.
ƒ: {GDP, Sc, Lc, Fp, Er}
Whereas: GDP - Gross Domestic Product, Sc- Seating capacity, Lc - Loading
Capacity, Fp - Fuel price and Er - Environmental Regulation.
GDP accounts for two thirds of the air travel growth3. The wealth a country generates
can increase the level of income for its inhabitants and as long as they have a higher
income, they will have more money to consume or to sae. The bundle that is allocated
to consumption can be applied to air travel.
The seating capacity of an aeroplane is important because the higher number of seats
available will lower the seat per mile cost, hence reducing the fares.
2 RPK’s is the demand for traffic measured by the number of passengers multiplied by the number of kilometres they fly. ASK’s number of seats an airline provides multiplies by the number of kilometres they are flown; a measure of airline capacity. 3 Boeing (1998: 14)
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The same argument is used for the loading capacity, in this case for the cargo sector,
since there will be a lower tonne per mile cost.
The amount of fuel price plays a very important part in the demand for the VLA, since
the aeroplanes have to comply with different regulations. The fuel price has a direct
effect on the price of the tickets, since during the year there are variations on the price
due to the fluctuations of the oil prices and of the Dollar.
Usually new aircraft already comply with the latest environmental regulations in noise
level and pollution. For these reason the new aeroplanes are quieter and cleaner than
the previous ones.
Why do people fly?
There basically two reasons for people demand for air travel: Business and Leisure /
Tourism. The job of the airlines is to cater for these needs. With the recent evolution in
the telecommunication world the people needs while they travel also changed.
Economy class travellers demand Internet and email facilities, while the businessman
demand laptop sockets and 180o reclining seats.
To these new needs, the aircraft manufacturers should be aware and supply aircraft’s
that meet the airlines and their customers’ expectations. This means that aircraft’s
should be fully convertible and allow changes in a short period of time.
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Source: Airbus Global Market Forecast 1999 and Boeing’s Current Market Outlook 1999
3. THE MARKET
This part of the dissertation describes the range of products (aircraft’s) that the two
companies involved in this study supply for their customers. The market is segmented
in the number of seats that each model can transport4. In Table 1, for each pair of seats
capacity there will be a correspondent model by each manufacturer:
Seating Capacity Airbus model’s Boeing model’s
70 – 100 A3185
B717-200 B737-100/-200/-500/-600 DC-9 MD-87
125 – 175 A319-100 A320-100/-200 A321-100/-200
B727-200 B737-300/-400/-700/-800 B757-200/-300 DC-8-10/-20 MD-81/2/3/8 MD-90
200 – 250 A300 A300-600/-600R A310-200/-300 A340-200
B767-200/-200ER B767-300/-300ER
300 – 400 A330-200/-300 A340-300/-500
B747SP B747-200/-300 B767-400ER B777-200/-200ER DC-10 MD-11/-11ER/-11C
>400 (Very Large Aircraft) A340-600 (entering in service in 2002)
B747SR&D (over 500 seats) B747-100/-400 B777-300
4 After analysing both manufacturers segmentation I decided to use the Airbus perspective since it seemed to me to be the most accurate one. This segmentation was taken from Airbus GMF(1999: 8) 5 Legend of aircraft terminology: A – Airbus model; B – Boeing model; C – Combi (a mixture of a freighter and a passenger aeroplane where a space of the passenger deck is used to carry cargo pallets); DC – Douglas Aircraft Family model; ER – Extended Range, a model with greater range than the basic model; MD – McDonnell Douglas model; SP – Special Performance; SR&D – Short Range & Domestic – A B747 jet with only one class configuration (usually it has two or three) especially design for short flights in highly congested routes in areas like South East Asia.
Table 1: The range of products offered
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The aircraft manufacturing industry is a very competitive one. Since the end of WWII6
that the US led the way in the production of aircraft’s. After almost fifty years the
world panorama has changed. Table 2 highlights the number of units in service of the
two major manufacturers.
Table 2: Units in service as in December 1998: Seating Capacity: Airbus Boeing Other Manuf. Total Airbus % Boeing %
70 – 100
0 495 651 1146 0.0 43.2
125 – 175
883 5233 61 6177 14.3 84.7
200 – 250
452 659 0 1111 40.7 59.3
300 – 400
204 1235 86 1525
80.1
Over 400 seats (Very Large Aircraft)
0 48 0 48 0.0 100
Total 1539 7670 798 10007 Source: Airbus Global Market Forecast and Boeing’s Current Market Outlook
In 1997 the Boeing Company merged with McDonnell Douglas and these two
companies became a giant aerospace, defence and space company. The implications in
the civil aircraft industry can be seen in the following table:
Table 3: The implications of the Boeing / McDonnell merger:
Seating Capacity Boeing (Before 97)
McDonnel Douglas
% of MD in Boeing
% of Airbus in Boeing
70 – 100 18 477 96.4 0.0
125 – 175 3925 1308 25.0 16.9 200 – 250 659 0 0.0 68.6 300 – 400 905 330 26.7 16.5
>400 48 0 0.0 0.0 5555 2115 27.6 20.1
6 This period marked the beginning of the civil air transportation.
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In the 70-100 seats market MD produced almost all the aircraft’s. After 1997 it
increased Boeing share in that market.
Last year was very successful for the European consortium. It was the first year that
they outsold Boeing in the number of orders. They claimed 55 percent of all the new
orders, and they can now fight to keep these results over the next years. Table 4 shows
the relations between orders and deliveries for the last three years.
Table 4: Orders and Deliveries
AIRBUS BOEING
ORDERS DELIVERIES ORDERS DELIVERIES
97 460 182 568 37598 556 229 656 56399 476 294 391 62000* 59 65 128 75*The 2000 numbers refers to data until: 31st of March for Airbus and 6th of April for Boeing7. The next table summarises the total number of units produced by these manufacturers
since they were created until today:
Table 5: Overall totals:
Airbus Boeing Total 1539 7670 10007
The diagram in the next page shows the different market share by product range
actually owned by the two companies. Since the data as is presented was not available,
I calculated the shares with the help of the documents produced by the companies.
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7 Airbus and Boeing web sites.
70 - 100
AirbusBoeingOther Man.
AirbusBoeingOther Man.
125 - 175
AirbusBoeingOther Man.
200 - 250
AirbusBoeingOther Man.
300 - 400
AirbusBoeingOther Man.
>400
Figure 1: MARKET SHARE BY PRODUCT RANGE
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3.1 THE COSTS OF A NEW AIRPLANE
In order to understand the financial effort that both companies will have to make in
order to create the very large aircraft, I have produced the next diagrams that represent
the amount of money that will be employed in the research and development of the
new aircraft. The discrepancy of the values lie on the fact that Airbus will be
developing the new aircraft in a recently created Large Aircraft Division, while Boeing
is aiming at a stretched version of its B747-400. The issues surrounding the value and
the different perception of the market will be discussed in the next part of this paper.
Fig. 2: R&D Costs as a percentage of Total Revenue
Airbus Development Costs percentage of Total Revenue
71%
Total RevenueDevelopment Costs
Boeing’s Development Costs percentage of Total Revenue
Total RevenueDevelopment Costs
8%
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4. THE MARKET VALUE
“Although the demand for large aircraft,
passenger and freighters, only represents
10% of the total, it accounts for more than
25% of the potential business; that is nearly
$320 billion”.
Airbus, 1st Quarter Media Briefing
“Delivery distribution for the 1999-2018
period for the B747, A3XX and larger
aircraft will be worth $173.4 billion”.
Boeing, Current Market Outlook
It is important to understand why the companies are reluctant to enter this market.
Partly due to the necessary investment in research and development to create such a
product and to be aware of the demand needs. When Boeing created the B747 in the
late 1960’s it almost went bankrupt due to a series of setbacks from unexpected rises in
costs to delivery delays. The aircraft did not establish itself in the market straight
away.
I draw a table of payoffs for a game that I considered to be the situation where we
stand now. In this game the two players are the aircraft manufacturers (Airbus and
Boeing) deciding whether they should enter or stay out (actions) of the market for very
large aircraft (airliners with more than 400 seats and cargo freighters with more than
80 tonnes capacity). The payoffs will be the market share value they hope to get if their
aircraft actually goes into full production scale minus the costs attached to the
development and production of the aircraft that will be $12bn for Airbus and $2bn for
Boeing8. The difference of $146,6bn (£92.9bn) will determine the decision of Boeing.
They have stated that although the market doesn’t require an aeroplane this size for the
next 10 years (only after 2008 the demand will increase), if Airbus actually starts to
produce the new aircraft they will enter the market at once. Analysts of Lehman
8 These values were given by the two companies to Béghin (2000) and reflect their financial efforts to create such an aircraft. The discrepancy of the values can be explained by two reasons: one is that Boeing already has an established very large aircraft division (responsible for the B747-400 Jumbo-Jet), while Airbus is creating this division from scratch; the second is Marketing is a powerful toll and both companies produce different information in order to persuade their potential customers that their project
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Brothers, an investment bank, forecasted that in 2004 Boeing would have a market
share (in value) of 60%, but only 50% in 2008 if Airbus launches the aircraft in 20059.
One problem in drawing the pay-off table lies on the fact that the assumption of the
difference in demand between the two companies. As a matter of fact while Airbus
considers this market worth nearly $320bn, Boeing estimates the market to reach
“only” $173,4bn. To turn this problem around I calculated an average of the two
values and estimated the payoffs in the different cases. Although the data on the value
of the market shows some discrepancies, the value of the data on costs that is available
is consensual: Airbus $12bn and Boeing $2bn3. The tables 6, 7 and 8 are as follows:
Table 6: Airbus data Boeing
Enter Stay out
Airbus Enter 148, 158 308, 0
Stay out 0, 318 0, 0
Table 7: Boeing data Boeing
Enter Stay out
Airbus Enter 74.7 , 84.7 161.4, 0
Stay out 0, 171.4 0, 0
Table 8: Average Airbus/Boeing
Boeing
Enter Stay out
Airbus Enter 111.35, 121.35 234.7, 0
Stay out 0, 244.7 0, 0
is the most accurate and feasible one. If they have the financial security and the resources to allocate in the production of the aircraft, then it will have more chances to succeed. 9Béghin (2000).
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By analysing the different payoff tables we can see that if Airbus starts to produce the
new aircraft, Boeing’s best response is to enter the market as well. For the case I am
discussing in this paper I will assume that Airbus will be the first to make its decision.
Therefore the decision of Boeing will be based on the decision of Airbus. I drew a
payoff tree for this game. Since the payoffs are relatively similar in value, for this
example I’ll use the data I have calculated for the average between the values provided
by Airbus and Boeing.
By backward induction we can see that since Airbus is the first to make its choice the
best strategy for Boeing once Airbus chooses “Enter” will be to choose “Enter” as
well. When Airbus chooses “Enter” their payoff can either 0 or 121.35. Assuming this
decision will be rational they will enter the market and share the payoffs with Airbus.
Since this decision is Boeing best response to the strategy played by Airbus I can say
there is Nash equilibrium (Enter, Enter).
We can also see that no matter what Airbus does, Boeing’s best strategy it is to enter,
since its payoff will always be greater than Airbus, even if this company decided to
Airbus
Boeing
Boeing
Enter
Enter
Stay Out
111.35 121.35
234.7 0
0 244.7
0 0
Enter
Stay Out
Stay Out
Fig. 3: Decision Tree
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“Stay Out”. If we compare the costs of both companies we can see that the decision
represents a higher risk for Airbus rather then for Boeing10. While in Airbus the
development costs rise up to 71% of total net revenue, in Boeing this amount
represents only 8% in total net revenue for the commercial airplanes sector only (the
numbers for the whole company is not available).
Another reason for the unwillingness of Boeing to create these Super-Jumbos lies on
the fact that the B747-400 is actually the only aircraft capable of carrying more than
400 passengers, and unlike all the other markets where Airbus has already launched a
competitive model, in that particular market they do not have a direct competitor. The
B747-400 is also the most profitable aeroplane in the Boeing family. If there were a
new competitor and substitute it would affect the sales and reduce the profits for the
Seattle manufacturer.
The dimension of the companies can explain the discrepancy of these values. Airbus is
committed to the production of commercial aeroplanes (providing also technical
assistance and maintenance), whilst Boeing has interests in commercial and military
aeroplanes, space systems, missile and tactical weapons, rotorcrafts, electronics and
applies the projects of its engineers to develop solutions to other areas, beyond the
aerospace industry. By this reason it can allocate profits generated in others areas to a
specifically sector, benefiting from economies of scale.
For a better understandment of the industry where these players are developing their
activities, the next section presents them through their history describing their
activities until a view on their actual situation.
10 See Figure 2.
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5. THE INDUSTRY AND ITS KEY PLAYERS
5.1 AIRBUS
The history of Airbus is (so far) an exemplar one. The spirit behind its creation was
pioneering. In the beginning of the 1970’s and after looking at the panorama in the
aerospace world the European authorities noted that although they were acquiring 25%
of the aeroplanes produced worldwide their manufacturers had less than 10 % of the
market share11. Their American competitors were enjoying a de facto monopoly12. The
decision to establish a multinational consortium was encouraged by the stories of
success of European aerospace innovations: the first turbojet engine and the first
commercial supersonic transport (Concorde) built by BAE (of the UK) and
Aerospatiale (of France) for their flag carriers (British Airways and Air France). They
understood that by themselves they didn’t have the dimension, the resources or the
financial effort to endeavour a project of this strength. At this point manufacturers in
Europe realise that they would face extinction if they continued to fight against each
other so they decided to join synergy’s and share development costs in order to fill a
market niche that was neglected by the US manufacturers. The niche was a 250-300
seat aircraft with the economics of a two engines powered jet. The closest aircraft
supplied by the US manufacturers for these markets had three engines and a minimum
seating capacity of 300 passengers. This was considered quite inefficient because the
amount of fuel required for three engines was mainly for intercontinental routes while
the European airlines wanted to fly it across Europe (mainly). Due to the interest of
France, United Kingdom and Germany, the governments of these countries decided to
combine efforts and established a consortium to build an aircraft that would be known
as the European Airbus (later it would be named the A300). They were established
11 Airbus web site: http:www.airbus.com/history.htm
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under the French law as a Groupment d’Interet Economique, which is a legal body that
allows companies to centre their activities on a specifically part of a consortium
structure while they are still pursuing non-competitive projects. This way each of the
partners would focus on a part of the aircraft (where they were more competitive and
efficient) and then all of the parts would be assembled in a particular place, in this case
Toulouse, in the South of France.
Success did not come easy and the new company faced some problems in establishing
itself as responsible and reliable. Although they had some orders in Europe (especially
from flag carriers like Air France and Deutsche Lufthansa) they soon realised they had
to expand their customer database in order to be more profitable. And this strategy had
one goal: to sell their product in the US market. It was not easy to prove to US airlines
that the European aircraft would be as reliable as the aircraft’s who have been
produced in their country for so long. When Eastern Airlines (a former US based
airline - it has gone bankrupt) decided to buy four A300 this represented a major
breakthrough for the company and it paved the way for a huge amount of orders: “It
showed other airlines around the world they were ‘in good company’ if one of the
major US operator was acquiring the European product”13.
After the establishment of the A300 as a reliable, efficient and economic aircraft
customers began to demand the same efficiency and cost saving for other markets,
especially in the 125-150 seats and in the 200-250 seats. To cater for these interests
they launched a shortened version of the A300 (the A310 which could carry up to 230
passengers) and developed a completely new aircraft - designated the A320 (up to 175
passengers). This aircraft was built as part of a new family of aircraft where the latest
technology and the use of so many computers integrated systems was a novelty. The
12 European Commission web site: http://europa.eu.int/comm/trade/goods/aircraft/overview.htm#2
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‘fly-by-wire’ system14 changed the way pilots flew and was considered a major
innovation – this move was only followed by the US manufacturers some years later.
The idea behind building aircraft families is to reduce crew training, maintenance and
operating costs. This way pilots and cabin crew members can obtain the same
qualification for the whole family of aeroplanes (example: nowadays a pilot with the
A320 qualification can also fly the A318, the A319 and the A321, since they share the
instruments and have the same cabin basic configuration).
After established in the 200-250 and in the 150 seats markets Airbus managers started
to look at other markets and launched the A330/A340 family which were designed to
fill the medium, long and ultra long haul needs. Although the A340 differs from the
A330 due to the two extra engines the cross crew qualification (CCQ) is easier and less
costly to obtain due to the similarities of the aircraft’s that share almost all the
structure, from wings to engines. In these new aeroplanes the technology that had been
used in the A320 was adapted and incorporated as standard, in what became an
industry reference.
One of the main reasons of the competitiveness of Airbus is the way in which their
products are assembled. By producing different parts at the most efficient way they
make sure the final product has the lowest cost. Another reason is the constant
innovations that are incorporate in the aircraft’s. For instance the A300 was the first
commercial aeroplane to have automatic windshear protection and due to the cockpit
design, it was also pioneer in being certified with a two-member flight crew (at that
time aeroplanes had a minimum of two pilots and one flight engineer). The materials
used in the structure of the aircraft also play a very important role. Some control
13 Airbus web site: http://www.airbus.com/history.htm 14 The fly-by-wire system uses optical fibre signals instead of mechanical cables to transmit the commands from the cockpit to the aeroplane wings and tail.
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services and (later) the tail were made out of “composites - non-metallic materials that
have the strength and integrity of aluminium and other alloys but weigh less”15.
With all of these arguments and after almost 30 years since their foundation the
European
Consortium is one of the world’s top two manufacturers and has won approximately
45% of the world market in recent years (accordingly to Airbus this market share is
calculated through yearly orders made to both Airbus and Boeing).
While I was writing this dissertation three of the Airbus Consortium partners merged
and created the European Aeronautic Defence and Space Company (EADS). The new
company, which is formed by DaimlerChrysler Aerospace (Germany) Aerospatiale-
Matra (France) and CASA (Spain), now has 80 percent share of the Airbus
Consortium, leaving BAE Systems with the remaining 20 percent. This merger comes
with good timing, since the European consortium is starting to produce military
aircraft16 and the merger can generate economies of scale and apply the efficiency
level that has been successful in the civil aircraft to the military aircraft market.
5.1.1 THE A3XX CONCEPT
The next goal of Airbus is to create a family of very large aircraft capable of carrying
almost 600 passengers: the A3XX. They have created a specific division to study and
develop the aeroplane17. This way they would be able to enter the ‘over 400 seats’
market where the B747 doesn’t have a competitor. The studies for this new product are
15Airbus web site: http://www.airbus.com/history.htm 16 The Airbus A400M, currently in final assembly phase, will compete with the C-130 “Hercules” from the US manufacturer Lockheed Martin. 17The Large Aircraft Division of Airbus was created in September 1996, although the feasibility studies date from 1990. Airbus’s 1st Quarter Media Briefing (2000: 14-15)
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quite advanced, and the first flight is schedule for mid 2004 with the first delivery in
2005.
I’ll analyse the factors that lie behind the demand for such an aircraft from the Airbus
point of view.
After studying the conditionalities of the industry Airbus produced two documents that
reflect the company’s forecast for the demand of air travel for the next years. One of
them its the Global Market Forecast’99 (GMF) that gathers data from 227 airlines from
around the world (excluding the CIS due to the lack of satisfactory data and the
volatility of the social situation18) and anticipates the behaviour of the civil air
transport industry for the period between 1999-2018. The second document its the
Media Briefing for the 1st Quarter of the year 2000. While the first document refers to
all the industry (including freighter / cargo companies) the second document was
specifically created to keep the other partners (and potential customers) informed on
the progresses made in the development of the aircraft.
The GMF considers some variables that determine the demand for air travel, but the
leading variable is economic growth (GDP19). Depending on the amount of available
income people will be more or less willing to travel. The amount of trade, economic
transactions, tourism and general business activities of a country (or a city or a region)
play an important role that influences the demand for air travel.
According to Airbus, and based on worldwide analysts’ opinions, air traffic growth is
one of the world most dynamic industries: it has been growing since it was created (on
an average of 8% in the last 50 years). This growth was only possible due to
innovations in fuel efficiency, capacity, extended range and aircraft productivity. For
the foreseeable future Airbus forecasts a 5% growth per annum. Some of the growth
18 Commonwealth of Independent States in Airbus GMF (1999: 7).
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will assimilated by arrangements made in the current fleet (by using bigger aircraft’s in
short haul flights, for example). However most of it is through increases in aircraft
capacity and fragmentation (meaning there is an increase in flight frequencies and the
opening of new routes between pairs of cities). This led to the hub-to-hub situation
where airlines take passengers to a centre point where they are then distributed to the
several destinations. This situation creates demand for lower capacity aircraft as well
as for regional aircraft’s (this measure also helped the development of secondary and
regional airports). But people prefer direct connections between their departure and
arrival points. For this reason they value the money they spend on their ticket and they
would welcome lower fares for the same destinations. In some routes where air traffic
is already congestioned it is necessary to use the biggest aircraft available to lower the
airfare20. In the 1970’s productivity in airlines jumped with the appearance of the
B747. At that time it was twice as big as it precursors and reduced the price of flying in
over 30%21. Since that time there hasn’t been any similar increase in productivity. For
Airbus “the time has now come for a new, larger aircraft to pick up the pace of
progress”22.
A larger capacity aircraft would allow airlines to increase the Revenue Passenger
Kilometre’s23 (RPK’s), since there would be more seats available per flight. On the
other hand compared with its closest rival (the B747) the A3XX will only need 58% of
occupancy to break-even, while the B747 needs 70% (Airbus assumption24). This
reflects in an additional profit for the airline in almost 109 seats. This argument
alongside with advances in technology will help the A3XX increase its productivity
19 Idem. 20 Airbus’s 1st Quarter Media Briefing (2000: 2-3) 21 Boeing History, http://www.boeing.com 22 Airbus’s 1st Quarter Media Briefing (2000: 1) 23 RPK’s is the measure of traffic demand. 24 Airbus’s 1st Quarter Media Briefing (2000: 9).
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rate. The operating costs will also be lower than its main opponent (around 15 to 20%
on average25).
Sharing the same philosophy of the Airbus aircraft families the new aircraft will be
built-in with “fly-by-wire” technology and CCQ that allows crews to acquire the new
qualification by converting it from previous “cockpits”, and by doing this, reducing the
costs of training.
This projected productivity will also be used in the freighter market that has been
growing twice as much as the passenger market. One of the initial versions of the
aircraft will also be available for this market. The arguments behind it will be the same
argued for the passenger version, cost effective, fuel efficient, higher capacity and
lower operating costs in comparison with the B747-40026.
There are already two airlines interested in the A3XX, with a total of 15 orders27. A
meeting of the Airbus supervision board was scheduled for the 26th of May to approve
the production of the new aircraft, but without any reason it was postponed without a
new date being given28. The following table shows the totals of Airbus aircraft until the
30th of April 2000:
Table 9: Airbus Totals
Total Orders 3,689 Total Deliveries 2,253
Total in Operation 2,176
25 Idem. 26I must stress that all the data presented by Airbus compares the A3XX with the B747 because its the closest rival, although if Airbus starts to produce the aircraft Boeing will create a new aircraft to provide a closest substitute to compete with the A3XX, as we shall see ahead. 27 Financial Times(1999) 28 Done (2000)
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5.2 BOEING
The history of Boeing can be traced to the beginning of the XX century when William
Boeing became interested in the growing aeroplane industry. Their first production
order came in 1917 when they won a Navy contract to built 50 training aeroplanes just
before the US joined WWI. By the end of WWI the military didn’t order more
aircraft’s, since there was a “flood of war-surplus” aeroplanes. They had to diversify
their activities in order to survive, building aeroplanes prototypes. Although most of
them did not go on production they were pioneers in several areas of aviation (e.g. a
Boeing aircraft delivered the first international AirMail). During the post WWI and
WWII periods the company survived by building military aircraft’s and by
modernising British fighter planes. After WWII the military cancelled their bomber
orders and recession affected Boeing deeply leading them to closing plants and
dismissing over 70,000 workers. They expected to revive by transforming a former
troop carrier into a luxurious commercial airliner, but their client’s preferences went to
a freighter cargo and an aerial tanker. During the post war period US engineers found
data on wind tunnel in Germany and used it to develop a new bomber.
By the end of the 1940’s the company was set to start the development and production
of jet propelled aircraft’s. With the construction of their own wind tunnel in the US,
they engaged in the research and development of more sophisticated aeroplanes and
with the advent of jet’s they decided to increase R&D and create a prototype of a jet
transport aeroplane. This was considered a huge gamble that paid-off and soon the
company created the B707-120 which was the first Boeing commercial jetliner.
The company continued to develop civilian and military aircraft’s as well as special
prototypes for NASA, including space capsules (the Apollo project) and lunar orbiters
(that photographed the Moon surface and helped the lunar anchorage in 1969). During
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the Cold War period Boeing was in charge of developing several projects of defensive
and offensive missiles to intercept invading enemy aircraft. Later the company would
use all of its experience acquired in those projects to the development of the Space
Shuttle.
The markets started to evolve and Boeing accompanied them. After the success of the
B707, the airlines started to demand different types of aeroplanes and Boeing
developed different aeroplanes for these different needs. The massive B747 (Jumbo-
Jet) was a response to “crowded airports and increased airline traffic indicated the need
for an airliner with even greater payload capacity and range”29. Boeing continued to
extend its activities in the field of commercial aviation and in 1996 merged with
McDonnell Douglas (their US main rival) and brought under the same brand the highly
specialised military and defence sector of Douglas. Nowadays Boeing is the world’s
largest producer of commercial jetliners, offering aeroplanes from 100 to almost 600
seating capacity. The following table shows the totals for Boeing:
Table 10: Boeing Totals
Total Orders 14,592
Total Deliveries 13,109
Total in Operation 9675
5.2.1 The B747X Concept
While Airbus tries to convince the airlines that there is in fact demand for aircraft of
the A3XX size, Boeing is sure that the demand for these aeroplanes does not justifies
the development of a completely new aircraft. For this reason they are investing on a
stretched version of the B747-400 which will provide the same number of seats of the
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A3XX but at a much lower cost. While Airbus is assessing the market to invest $12bn
in the development and production of the A3XX, Boeing claims it only needs to
allocate just $2bn to develop the B747 stretched version. The reason for this is the
established large aircraft division of Boeing that prefers to build a stretched version
rather than an all-new aircraft.
5.3 OTHER PLAYERS:
5.3.1 AIRLINES
There are a few numbers of airlines that would be willing to acquire a superjumbo. The
majority of them are major 747 operators. For this example I will refer to Air France,
British Airways, Emirates and Singapore Airlines.
5.3.1.1 AIR FRANCE
The French carrier operates 83 long-haul aircraft, 43 of them are B74730. It uses it on
his routes between France and the US, Africa, Caribbean and Asia. These are the
markets where a very large aircraft would be more useful. So far their policy is to
acquire aircraft’s that do not put their financial solvency at risk. For this reason they
have been leasing aircraft’s and then returning them to their owner. There was a
special affinity between Air France and Airbus, since they were Airbus first customer
when they acquired the first A300. They are included in the group of 20 airlines that
have been working with Airbus in the project phase of the A3XX.
29Boeing web site: http://www.boeing.com
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5.3.1.2 BRITISH AIRWAYS
The “World favourite airline” operates several models of the B747 fleet. They operate
virtually around the world and cover the long haul and ultra-long-haul networks.
Although they are also one of the short listed airlines for the A3XX project, the BA
fleet has only one Airbus model: the A320. All the other models (excluding the
Concorde) are Boeing models. Recently the European Consortium suffered a setback
when BA said: “We have no immediate plans to buy the A3XX”31.
5.3.1.3 EMIRATES AND SINGAPORE AIRLINES
These two carriers hit the headlines in the beginning of May 2000 when they confirm
their willingness to become the launch customers of the A3XX32. The Middle East and
South East Asia, are two of the regions with the highest growth potential33. Singapore
Airlines is one of the world most profitable airlines and operates in one of the most
busy routes in the world (Intra-Asia, Trans-Pacific and Asia-Europe34).
5.3.2 ENGINE SUPPLIERS
The new aeroplanes will need a new engine that will allow them to reach the expected
performance in meeting fuel consumption and environmental regulations. Three of the
world leading engine manufacturers have already committed to the development of
more powerful engines capable of lift up a very large aircraft: Rolls-Royce and Engine
Alliance. I must ad that is the customer who chooses the engine to install in the
30 Air France (1999: 41) 31 Skapinker (1999) 32 Perrett (2000) 33 Airbus 1999 Global Market Forecast (1999: 21) 34 Airbus 1st Quarter Media Briefing (2000: 2)
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aircraft. The plane manufacturer can offer a range of available options, but the final
choice belongs to the airline.
5.3.2.1 ROLLS-ROYCE
This company based in the UK has been providing engines for the civil aircraft
industry for a long time. It will offer the new Trent 900 engine capable of offering
75000lbf35 and, in conjunction with the wing performance can carry 85 tonnes over
7650nm.
5.3.2.2 ENGINE ALLIANCE
This company is the result of an alliance of the two major US engine manufacturers:
General Electric Aircraft Engines and Pratt & Whitney (a division of United
Technologies Corporation). They will be offering the GP 7200, which will have the
same characteristics as the Trent 900. These engines are due to enter into service in ten
years time36.
5.3.3 AIRPORTS
Another key partner(s) involved in the creation of a very large aircraft are the airports.
Airbus as been in contact with over sixty airports in the world including the ones that
are expected to receive the firsts operations of the very large aircraft. The range of
airports include New York John F. Kennedy Airport (JFK), London Heathrow Airport
(LHR), Paris Charles De Gaulle (CDG), Tokyo International – Narita Airport (NRT)
and Madrid Barajas (MAD).
35 Lbf is the measure (Pounds force/thrust) of Sea Level Static Thrust that an engine can provide. 36 Airbus 1st Quarter Media Briefing (2000: 20)
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The contacts established so far tend to minimise the impact of an aircraft this size in
parking, taxi, take-off and landing operations. One major concern is to make both
aircraft’s fitting an 80m x 80m box (the recommended size by the Airports Council
International37). Since Boeing will be offering a stretched version of the B747-400 the
impact will be minimum. Airbus is projecting the new aircraft based on the B747-400
requirements. So the impact in the infrastructures will be minimised. Some airports
will have to make special arrangements to cope with the arrival of a single very large
aircraft flight, especially in handling facilities. The “Turn-Around-Time38”
37 Airbus 1st Quarter Media Briefing (2000: 11) 38 The Turn-Around-Time is the time an aircraft takes to deliver its passengers and prepare for the next flight.
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6. THE COMPETITION DEBATE
In the world of commercial aircraft manufacturing every single order counts, since it
involves an enormous amount of money and is the beginning of a series of relations
between the producer and the customer. For instance, once the aircraft is bought it
needs maintenance, servicing, spares and revisions operations, simulators and crews
will have to be trained to operate that particular model. For these needs the
manufacturer will supply the spare parts for replacement as well as courses and
training for the flight and cabin crews and the technicians to keep the plane in good
flying conditions. With time these relations will be strengthened and, as long as the
manufacturers keep their customers happy it can lead to new orders.
The battle for the world skies is also a battle between the US and Europe. One of the
arguments behind the European Commission support of the Airbus Consortium was
the Infant Industry Argument39 whereas one country can support a particular industry
in order to gain comparative advantage. By doing this, governments can create new
industries in their countries, provided that they have good foresight when choosing the
industry to support or ‘create’. The support is granted during the time that is necessary
for the company to develop expertise in manufacturing the product. There are some
problems that arouse, especially when it comes to assess how much of support will be
need or until when should the support be provided. This last issue is the centre of the
debate since Boeing argues that the aid some European governments40 are providing
for the A3XX project is a loan disguised as a (unfair and illegal) subsidy, since the
company can no longer shelter under the infant industry argument. A statement over
the issue was given by the US Trade Representative: “Airbus, which will be making
39 Munro (2000)
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this new jumbo liner, is not an infant company. This is not a new industry in Europe.
Airbus has garnered about 50%41 of the new orders last year, they’re shooting for 60%
this year”42.
6.1 THE INFANT INDUSTRY ARGUMENT
The Infant Industry Argument can be explained with the help of the Learning Curve43,
described in the following diagram:
During the time a country takes to learn how to manufacture a product a certain degree
of support is granted. When Airbus was created, it was considered an Infant Industry
since there was not a civil aircraft industry in Europe. To face competition from across
the Atlantic, the European Governments involved in the Airbus consortium decided to
provide support through subsidies and special financial conditions to allow the
industry to develop. In the firsts years the argument was easily defendable, since
40 The UK Government granted a loan to BAE Systems in the value of $333ml (nearly 30% of the project) in order to help the development and production costs for the British part in the aircraft manufacturing. 41Accordingly with the data provided previously, Airbus accounted for 55% of the total orders for new airplanes (the total combines the Airbus and Boeing orders for 1999 only. The source of the data was the companies web sites). 42 Milner (2000: 21) 43 Krugman et al (1997: 154).
Unit
Cumulative Output
L
L*
Co*
C1
The Learning Curve shows that unit cost is lower, the greater the cumulative output of a country’s industry to date. A country that has extensive experience in an industry (L) may have lower unit cost than another country with little or no experience, even if the second country’s Learning Curve (L*) is lower.
Figure 4: The Learning Curve
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Airbus was an example of Infant Industry. Nowadays it is harder to defend their point
of view, since last year it outsold Boeing in the number of ordered planes for the first
time since it was created. For this reason a Boeing spokesman questioned the financial
viability of the project: “One has to ask why Airbus needs assistance from the
taxpayers of Europe. If the market is so good, why do they not raise funds from
commercial sources?”44.
For the A3XX project, Airbus will raise the money needed to accomplish this task
from three different sources: the Consortium partners with 30% (CASA,
DaimlerChrysler Aerospace, BAE Systems and Aerospatiale-Matra), the parent
Governments with 30% as well (France, Germany, Spain and UK) and the new partner
suppliers with 40% (“It is Airbus intention to make up to 40 percent of the value of the
programme available to new industrial partners. Agreements to participate are in place
with nine of the industry’s leading players, including Aerostructures Corporation,
Belairbus, Eurocopter, Finavitec, GKN Westland Aerospace, Hurel-Dubois, Latecoère,
Saab and Stork Aerospace. Discussions are underway with a number of other
aerospace manufacturers including Alenia, and other leading companies in Europe,
North America and Asia”45). This diagram shows the distribution of the different
financial sources:
44 Mortished (2000)
30% European
30% Consortium
40% Equipment Partners
Figure 5: AIRBUS
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6.2 COMPETITION LAWS CO-OPERATION AGREEMENT
In recent years, due to the increasing trade and economic relations between Europe and
the USA it became clear that it would be wise to establish a bridge among the two
economic surfaces. This agreement was established due to the “increasing likelihood
of concurrent and potentially conflicting jurisdiction over cases involving economic
activity in both the Community and the USA” 46. This was an attempt to prevent
situations that could mine trade and other economic relations between the two
economies. By doing this the problems that arouse most frequently in these cases
would be solved quickly due to the shared information and analysis of the cases
presented: “The EC/US and EC/Canada agreements are designed to facilitate increased
co-operation between the EU and its two principal North American trading partners
with respect to the enforcement of our respective competition rules”47.
6.2.1 EC-US AGREEMENT ON TRADE IN LARGE CIVIL AIRCRAFT
One of the reasons that the US authorities and Boeing consider the Government
support illegal is that it violates the European Commission / United States 1992 EC-
US Agreement on Trade in Large Civil Aircraft. This agreement was specifically
created for the civil aircraft sector. When the US officials started to get worried with
the competition that American manufacturers had to face from Airbus, they attacked
the “alleged subsidies paid by the European governments for the developments of the
early models of the Airbus family”48. On the other hand the Europeans were also
“concerned by subsidies accruing to US large civil aircraft (LCA49) manufacturers
45 Airbus’s 1st Quarter Media Briefing (2000: 12) 46 Goyder (1998: 551-552) 47 Pons (1999) 48 http://europa.eu.int/comm/trade/goods/aircraft/overview.htm#2 49 Large Civil Aircraft comprises all the aircraft with more than 100 seats. In this market over 80% of the sales are supplied by EU/USA manufacturers. Idem.
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through NASA and Defense programmes (…) The EU and the US started bilateral
negotiations for the limitation of government subsidies to the LCA sector in the late
1980s. Negotiations were concluded in 1992 with the signature of the EC-US
Agreement on Trade in Large Civil Aircraft which focuses on the limitation of both
direct and indirect government support”50. The main question establishes a “ceiling on
the amount of direct government support (33% of the total development costs) for new
aircraft programmes. It establishes that such support (granted in the form of repayable
royalty-based loans) will be repaid at an interest rate no less than the government cost
of borrowing”51. At the same time is also states the amount of indirect support (i.e.
benefits provided for aeronautical applications of NASA or military programmes) should be
limited to a 3% of the nation's LCA industry turnover (…) In order to verify compliance
with the above disciplines, the Agreement establishes that the parties must exchange
transparency information on a yearly basis on their respective support systems, through
bilateral consultations that normally take place twice a year. Such consultations are an
occasion to discuss questions concerning the implementation of the agreement and any
other issue of relevance to the LCA sector. It must be remarked that the exchange of
transparency information has highlighted an important divergence between the US and
the EU in the way to interpret the indirect support discipline. In general, the EU
considers that the US notification of indirect support to its LCA industry falls short of
the real benefits derived from NASA programmes and military spin-offs”52.
50 Idem. 51 Ibidem. 52 Ibidem.
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6.3 THE A340 –B777 ETOPS DISPUTE
Another subject that is under fire between the two manufacturers is the Extended
Range Twin-Engine Operations53. The aircraft’s were allowed to fly routes where, if
any problem occurred, they could reach an alternative airport at the speed of only one
engine in a time frame of the stipulated limit (180mn for twinjets54). When Airbus
released the A340-500 it was allowed to fly with 207mn of ETOPS, mainly because of
its four engines. Boeing recently required an ETOPS extension for its B777-200
because this aircraft only has two engines but can compete with the A340 due to its
ultra-long-haul autonomy. Behind these arguments is the fact that since the Boeing
model is efficient with only two engines but is limited to 180mn ETOPS, it is not
allowed to fly routes over great distances without an alternative airport in reach within
the limit. This situation applies to Trans Pacific routes where the aircraft has to fly
over water for several hours. Airbus is committed to ensure that Boeing will not be
granted the extension it required by lobbying the authorities responsible for the ETOPS
regulation55.
6.4 THE EU / USA HUSH-KITS DISPUTE
The dispute for the world skies also has implications on the authorities of the
economical areas. The hush-kit56 is a technological device that is used to reduce the
noise level on aircraft engines without having to replace the whole engine. This was
53 ETOPS – An international regulation that limits the autonomy of an aeroplane accordingly with the number of engines. Roque (1999: 12-13) 54 Idem. 55 Airbus web site: http://www.airbus.com 56 “A hush kit forces engine exhaust through a nozzle into an ejector shroud, decreasing the velocity of the exhaust and thus theoretically making it quieter. But the EU says hush kits induce weight and performance penalties which translate into 50 percent more fuel consumption on take-off and significantly worse noise standards than current technology aircraft” Financial Times (1999).
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created to meet the ICAO Chapter Three standards of noise levels57 due to become
effective in May 2002. This measure, by US manufacturers, allowed several airlines to
meet the standards required for 2002 without having to replace their current aircraft’s.
The EU called for a unilateral ban on hush-kited aircraft registered outside EU after
May 2002. On this side of the Atlantic, the European Union argues that: “the
regulation aims to reduce aircraft noise and environmental degradation caused by fuel
burn from aircraft”, since a Hush-kited plane will burn more fuel at take-off58. In
Europe most of the airports are located near highly urban area that have been
increasing the number of complaints against aircraft noise level. To face this the EU
considers that is preferable for companies to acquire new and quieter aircraft59. But
analysts claim the main reason for this is trade and the market for replacement fleets.
There is a market potential of nearly “1,600 used US aircraft and rebuilt engines in
Europe that represent one billion dollars in potential sales”60. By doing this one of the
greatest beneficiaries will be Airbus with an increase in the number of potential
customers61. On the other hand all the hush-kit manufacturers are US based companies.
The “US Commerce Department estimated that the economic injury sustained by US
airlines exceeded dollars 2bn”62.
If the EU ban is not withdrawn the “US House of Representatives will ban supersonic
Concorde planes from landing at US airports”, and it would waiver the 63. British
Airways (which together with Air France are the only two Supersonic Concorde
57 Prestowitz (2000) 58 Financial Times (1999) 59 Idem. 60 “James Oberstar (US Representative – Democrat) said in support of the measure that the issue between the EU and the United States is not environmental concern over air and noise pollution but trade. He said at stake is the resale of about 1,600 used U.S. aircraft and rebuilt engines in Europe that represent nearly one billion dollars in potential sales” Ibidem. 61 “The EU position will also benefit Airbus Industrie, the European multinational consortium that receives funding from EU member states, as Airbus order books are filled by European airlines eager to replace ageing fleets” Prestowitz (2000).
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operators) issued a statement saying that: “We are not concerned about it because 65%
of Concorde passenger are US nationals”64. The House of Representatives also said
they “would revoke U.S. noise waivers granted to the Concorde supersonic aircraft,
which have been in effect for the past 30 years. Actually Concorde does not meet the
current ICAO noise standards” 65.
The issues surrounding the Atlantic dispute for the dominance of the world skies is a
very tricky one. In one side we have the established American manufacturers which
have been dominating the LCA sector for nearly 50 years, while on the other side we
have an European Consortium that managed to achieve almost 40 percent of the world
market in thirty years and is the only manufacturer to compete with their American
counterpart. For these reasons it is not so surprising that both Governments (US and
the European Commission) are willing to support their “national” based companies.
Although Boeing argues that the European Governments support Airbus through
disguised subsidies, it is also true that Boeing “receives similar subsidies by the back
door via heavily padded defence contracts for the Pentagon”66. But comparing with
other industries, “with only two manufacturers in the world capable of launching a
civil aircraft, subsidies are almost a necessity to ensure a competitive industry
exists”67.
62 Financial Times (1999) 63 Idem. 64 British Airways Press Office page in http://www.britishairways.com 65 Financial Times (1999) 66 Mortished (2000: 31) 67 Idem.
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7. CONCLUSION
From the demand point of view (in this case for the airlines), competition is very
important since it offers choice. The virtue of Airbus lies on the fact that it
considerably lowered the prices of aircraft. Although it is widely considered one
example of good strategic trade policy, it is considered to be a minor winner. The
major winner was the world third biggest aircraft market: Japan68. Europe also won in
terms of GDP in the countries where the aircraft’s are assembled. The most important
part is that it broke the de facto monopoly of the US manufacturers. In any industry it
is important to people, companies and authorities to be able to choose.
In the market for aeroplanes with more than 400 seats there is only one aircraft in
operation, the B747-400. Since its manufacturer is not willing to introduce a bigger
model in the next years, due to demand perceptions, people could be paying relatively
higher fares instead of the ones they would pay if there were more available seats per
kilometre.
So far the Airbus strategy has been fruitful in the civil aircraft sector. With the recent
merger of three of its partners and the expansion to the military sector some fissures
may arise. A first sign of it was the threat of veto by BAE Systems if EADS decided to
sell 5 per cent of Airbus to Alenia69 (an Italian aerospace group). On the other hand
there are rumours that the military division of BAE Systems is set to merge with
Boeing. For these reasons, the creation of a giant aerospace industry in the European
soil has been a tough issue. Another recent event was the UK government choice of the
Missiles to equip the Harrier aircraft. There were two options: a US model with given
proofs and currently in production, and a European prototype. The UK decision would
68 Munro (2000) 69 Harrison (2000)
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deeply affect the development of the European model. In the end the order went to
both companies but with different shares70.
This kind of setbacks cannot happen in a competitive sector such as aerospace
industry, where the competition if fierce.
When Airbus expressed its intention of producing a very large aircraft, being the first
to do this, gain some projection and it was considered an innovator. On the 26th of
May, and with the postponing of the meeting that would authorise the production of
the new aircraft, the Boeing Company took advantage of it claiming an uncertainty
level on their European competitor decision, and reinforcing its argument of non-
financial viability financial. Boeing also argues “the project could only go ahead
because of launch aid being offered by European governments in the form of repayable
soft loans71”.
By analysing the data provided by the companies it is not clear to assume which side is
right. The information is quite biased due to the competition and what is at stake: the
world leadership in civil aircraft manufacturing. With these dissertation I tried to
present the different points of view and some questions that I considered important in
the demand for ‘superjumbos’. Since this problem is being discussed at this moment it
will not be long until a final decision is made.
70 BAE Systems and Boeing web sites. 71 Done (2000)
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8. BIBLIOGRAPHY
Abel, Andrew et al: Macroeconomics, Harlow, Addison-Wesley, 1998 Airbus Industrie: 1st Quarter Media Briefing 2000, Blagnac, Airbus Industrie - Large Aircraft Division, 2000 Airbus Industrie: Global Market Forecast 99 - 2018, Blagnac, Airbus Industrie, 1999 Air France: 1998-99 Business Report, Roissy-CDG, Société Air France, 1999 Begg, David et al: Economics, London, McGraw-Hill Book Company Europe, 1997 Béghin, Frédéric: “Les constructeurs préparent des monstres volants”, Capital Essentiel de Économie, Paris, 2000 Boeing Commercial Airplanes Group: Current Market Outlook 1999, Seattle, Boeing Commercial Airplanes Group - Marketing, 1999 Cooke, Andrew: The Economics of Leisure and Sport, London, Routledge, 1994 Done, Kevin: Boeing poised to enter superjumbo race, London, BBC News / Yahoo!, 2000-05-21 Financial Times: “U.S. Could Ban Concorde if Europe Bans Hush-Kited Planes”, Financial Times, London, 1999-03-03 Goyder, D. G.: EC Competition Law, Oxford, Oxford University Press, 1998 Hanlon, Pat: Global Airlines: Competition in a Transnational Industry, Oxford, Butterworth-Heinemann, 1999 Harrison, Michael: “Thwarted BAe may block sale of 5% Airbus stake to Alenia”, The Times, London, News International, 2000-03-14 Krugman, Paul et al: International Economics: Theory and Policy, Massachusetts, Addison-Wesley, 1997 Leathley, Arthur: “Superjumbo’ brings revolution in the air”, The Times, London, News International, pp. 23, 2000-03-14 Milner, Mark: “US warns against Airbus aid”, The Guardian, London, pp. 21, 2000-05-22 Mortished, Carl: “Transatlantic dispute looms over Airbus aid”, The Times, London, News International, pp. 27, 2000-03-14 Munro, Alistair: Strategic Trade Policy – Lecture 8 IPE Course, Norwich, UEA, 2000
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Perrett, Bradley: More airlines declaring A3XX interest, Brussels, Reuters, 2000-05-23 Pons, Jean-Francois: International co-operation in competition matters - where are we four years after the Van Miert Report?, Zurich, European Commission – DG IV, 1999 Roque, João: “Giants War”, Sirius Magazine, Lisbon, Associação Portuguesa de Pilotos de Linha Aérea, no.72, January/February 1999, pp. 12-13 Sirius Magazine: “Singapore Airlines Ordered more B777”, Sirius Magazine, Lisbon, Associação Portuguesa de Pilotos de Linha Aérea, no.75, July/August 1999, pp. 5 Skapinker, Michael: Airbus plan for 'super jumbo' hits first snag, Financial Times, London, 1999-12-09 Web sites consulted: http://europa.eu.int/comm/trade/goods/aircraft/overview.htm#2 European Commission
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