NO AIRCRAFT BETTER sums up the quaint absurdity of Airbus’s origins than the Beluga. The cargo jet, which resembles a winged whale, carries aerofoils, tails and bits of fuselage from production sites across Europe to be turned into aeroplanes in Toulouse and Hamburg. In a normal company, it would be redundant. Like the Beluga, Airbus is far from normal. Started in 1967 as a jumble of aerospace firms from Germany, France, Britain and, later, Spain, it needs the ungainly plane to make it function smoothly.
As one of Europe’s biggest industrial firms, though, Airbus is neither quaint nor absurd. It has stood out for its innovation, competitiveness and, sometimes, inspired leadership. Under Tom Enders, an outspoken former German paratrooper, it has achieved its mission of becoming (Beluga notwithstanding) a more “normal” company. Mr Enders managed to reduce the influence and ownership of the French and German states. Airbus’s share price quadrupled in his seven-year tenure. Its American former head of sales, John Leahy, who retired last year, was a salesman extraordinaire, racking up, he claims, $1.6trn of aircraft sales at Airbus, making him the nemesis of its arch-rival, Boeing. With such men, it was harder to argue that the aerospace industry was a lazy duopoly.
But in the past year Airbus has acquired a controlling stake in the C Series jet, designed by Bombardier of Canada, while Boeing has joined forces with Embraer, Bombardier’s Brazilian rival, making the fortress in single-aisle commercial-aircraft manufacturing even more impregnable. Meanwhile, Boeing is in disarray following two air disasters since last October that have grounded its bestselling jet. On the face of it, both developments are good for Airbus. In fact they could be the biggest potential traps for Guillaume Faury, the 51-year-old Frenchman who replaced Mr Enders on April 10th, because they risk dulling Airbus’s competitive edge.
From an operational point of view, Mr Faury takes over at an ideal time. Like everyone at Airbus, he will lament the crashes of Boeing’s 737 MAX aircraft in Ethiopia and Indonesia, which killed 346 people. Undeniably, though, the longer that plane is grounded, the stronger the outlook for Airbus’s own highly successful narrow-body, the A320neo. Airbus may already be reaping the benefits: a bumper deal for 290 A320s from China last month was a further kick in the teeth for Boeing. In February Airbus took the tough decision to scrap its loss-making A380 super-jumbo. That will bolster margins on commercial aircraft, which hit 9% last year, according to Bloomberg—short of Boeing’s 13% but an improvement.
One of the curiosities of the Airbus-Boeing duopoly is how restrained those margins were—especially at Airbus. In his recent book about the global jetliner business, “AeroDynamic”, Kevin Michaels, an aerospace analyst, notes that between 2011 and 2017 both firms delivered more than 6,600 A320s and 737s between them. Normally, a duopoly and sky-high barriers to entry would have allowed them to jack up prices. Instead, they offered big discounts. The competition for orders was cut-throat, partly owing to the “John Leahy factor”, Mr Michaels writes.
As operating margins at both firms have crept up recently, however, both have reduced the share of sales they spend on research and development of commercial aircraft. This is partly because the experience of building complex and costly new planes, such as Boeing’s 787 Dreamliner and Airbus’s A380, has been chastening. Such “moonshots” have gone out of fashion. Excessive re-engineering also played a part. Boeing’s 737 series dates back to 1967, the same year Airbus was conceived, and has been tinkered with extensively. As Boeing grapples with the two disasters, the prospect of deciding swiftly to build a new mid-sized aircraft, known as NMA, is receding. That takes more pressure off Airbus to innovate.
Meanwhile, Airbus’s shareholders are clamouring for it to follow Boeing in handing back more cash through dividends and buy-backs. That is common across the capital markets. But it would make both companies keener than ever to milk their duopoly status. Richard Aboulafia of the Teal Group, a consultancy, describes Boeing dismissively as a “legacy jet manufacturer and distributor of shareholder returns”. Its rising payouts may be one reason Boeing’s shares have not fallen more steeply, despite the firm’s admission this month that its software contributed to the crashes. Airbus will be tempted to move in the same direction.
The European firm would be wise to resist this urge and instead consider ploughing money back into the business. For a start, Mr Faury must contend with Brexit, which risks disrupting Airbus supply chains in Europe but may provide an opportunity to expand its operations beyond the continent. Then there is the long-running stand-off with Boeing over subsidies and tax breaks. On April 8th the Trump administration threatened tariffs on $11bn worth of European goods, including aircraft and helicopters, which would hurt Airbus. The European Union immediately threatened retaliation. Nothing will be decided until the World Trade Organisation sets the level of damages this summer. But one thing is clear: it will be harder for either firm to rely on state support in the future.
A change in the climate
Meanwhile, Mr Faury has a chance to take advantage of a coming wave of technological change. Acknowledging this, he talks of innovation over the next decade and beyond that could match anything in the history of aviation. That includes engine electrification, artificial intelligence and advanced connectivity that would change how aircraft are developed, manufactured, flown, powered and serviced. It means increased use of new materials (see Science section) and 3D printing, and greater efforts to reduce greenhouse-gas emissions. Airbus may be slow to embrace these long-term opportunities, given its cosy position. Gingerliness may even bring short-term gains. But technology could lower barriers to entry. In the end, ambition will pay off—even if it endangers the Beluga.
This post was originally posted at https://www.economist.com/business/2019/04/11/airbus-risks-losing-its-competitive-thrust.