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Jun 14, 2007 | 19:30 GMT

5 mins read

Global Market Brief: Airbus and Boeing's Next Developments

Summary
There are only two "new" models of civilian jetliner on the market that aim to maximize capacity and fuel efficiency: the Airbus A380 and the Boeing 787 Dreamliner. These models, however, are not in competition. They aim to fill fundamentally different roles.
Airlines worldwide are expected to take a delivery of almost 30,000 new planes over the next two decades, thanks to a surge in demand for air travel, according to a forecast released June 13 by U.S. plane manufacturer Boeing. The race for that market will ultimately come down to who can offer the best models to fill the demand. The emphasis in this new breed of civilian jetliner is not only on capacity, but also on fuel efficiency, necessitating a high level of composite materials in order to extend range and thicken profit margins. Right now there are only two "new" models on the market that aim to do just that: the Airbus A380 and the Boeing 787 Dreamliner. These models, however, are not in competition. They aim to fill fundamentally different roles. The Airbus 380, capable of carrying 500 or more passengers, is the largest commercial passenger airplane in the world. If it ever gets off the ground, it is poised to dominate the massive transcontinental routes that aim to use Qatar and Singapore as mega-hubs. Airport hubs accepting the A380 will need to make structural adjustments to accommodate the plane. The size of the A380 will limit the number of planes any one airport can accept, since the giant aircraft must be separated from other planes and has other operating restrictions. The A380 also will tie up gates — loading and unloading 500 or more passengers simply takes a long time. Plenty of hubs seem willing to accept the costs associated with these changes, and the A380 really does promise to be a fundamental step forward for the industry. However, the A380 will not take over the entire industry. The plane might command travel from mega-city to mega-city, but not every route requires squeezing so many passengers onto one airplane. This is where the Boeing 787, the other new plane on order, comes into play. Thanks to the gradual expansion of wealth in the United States, Europe and China, traffic has increased between mega and small cities, and also between small cities. These trips are perfect for midrange planes such as the Boeing 787 that will carry 200-300 passengers. Thanks to its size, it is able to tap into the market for trips between small cities, for which an A380 would be overkill. Additionally, the 787 theoretically would be able to replace all existing midhaul planes in the world whenever old models are ready for retirement. Here is where the Airbus and Boeing investment strategies split. Airbus' A380 is indeed the magic bullet for the super-large, long-haul routes, but it has little place elsewhere in the system. In comparison, Boeing's 787 Dreamliner can be a stock plane in almost any airport on virtually any nontranscontinental hub-to-hub route. Boeing essentially gets two (very large and expanding) markets for the price of one plane. Both aerospace firms have other models that compete in what will soon be the other's market, but in this Boeing enjoys a distinct advantage. Neither next-generation competitor plane — the huge 747-8 for Boeing and the midhaul A350 for Airbus — exists yet. But the 747-8 is simply an advanced version of an existing model. It will take its maiden flight in 2008; the freight version of the plane is slated to enter service in 2009, while the passenger version is scheduled for sale in 2010. However the A350 is currently only a dream. The initial plans for the A350 were not exactly welcomed with open arms by customers, who complained of the plane's fuel inefficiency and poor design. After months of complaints, Airbus ditched the design and went back to the drawing board — and is still there. Airbus hopes the A350 will be ready for sale in 2014 — at which time Boeing will have enjoyed six years of experience making the 787 — but even that assumes that Airbus is able to secure a few billion euros in launch subsidies, which is looking less likely by the day. In Airbus' most significant recent setback, French President Nicolas Sarkozy announced plans to sell the French government's stake in European Aeronautic Defense and Space Co., Airbus' parent company. With the withdrawal of French government support, Airbus might lack the funds necessary to see its plans get sketched out, much less take flight. Meanwhile, the market is becoming stratified with the A380 still stuck in development — numerous technical delays and administrative scandals have pushed the plane's full release back by two years — while the 787 is right on schedule. That split has dropped two windfalls in Boeing's lap. First, it means the 747-8 will be released nearly at the same time as the A380, mitigating the impact of Airbus' more revolutionary design. A day late and a dollar short the 747-8 may be, but the A380s repeated delays mean Boeing is still in the game for the large-scale, long-haul market. Second, Airbus' A350 problems — namely, the A350's nonexistence — have led to a surge in orders for the less ethereal Dreamliner that has booked Boeing's 787 production facilities solid until 2014. Ironically, Airbus' inability to field the A350 has led to overloading at Boeing to the point that Airbus might actually be able to increase sales of its older planes. But regardless of the delays, with only two planes between two giant competitors and 30,000 purchases waiting to be made, there is plenty of room for competition. The question will be: Who can field a model in time? China is attempting to leverage its Airbus and Boeing parts-supply agreements in order to jump into the game, while Brazil's Embraer and Canada's Bombardier could be nearing the cusp of moving from their small regional jet niche into larger passenger jets. But launching a civilian aviation regime is not child's play, as it requires the full command of a host of largely unrelated engineering regimens. For now, the money remains on Boeing. RUSSIA/UNITED KINGDOM: BP is on Russian state-controlled natural gas monopoly Gazprom's "short list" for participation in a liquefied natural gas (LNG) project on the Baltic Sea worth around $3.7 billion, in which Gazprom would hold a controlling stake. This LNG facility — Gazprom's first — depends on Gazprom having a more technologically advanced partner in this field, such as BP. This comes as the Russian government and BP are increasingly at odds over the company's participation in the Kovykta natural gas field's development. There are indications that the Kremlin is dragging its feet on deciding whether to revoke TNK-BP's ownership of the Kovykta field because Gazprom wants to make a deal with BP to keep it in the country; the Kremlin is offering to let BP keep a minority stake in Kovykta if it will develop Gazprom's LNG project. BP is already thinking of jumping ship in Russia, and a deal like this likely is not enough to convince BP to stay in Russia and spend billions of dollars on projects in which it is not a majority stakeholder. IRAN: Iran will begin a gasoline rationing plan June 14 to help reduce massive state gasoline subsidies. The plan's first phase will limit government vehicles to about 2.6 gallons of gasoline per day, with private cars being affected later. The Iranian government, which spent $5 billion importing gasoline last year, has already raised pump prices by 25 percent and required consumers to document gasoline purchases in efforts to curb use. This move allows Iran's conservative establishment to check the influence of President Mahmoud Ahmadinejad and the ultra-conservative faction he represents, but also addresses the problem that Iran must import gasoline because of a lack of indigenous refineries. When the rationing is applied to vehicles used by the common consumer, it could cause problems for the regime. CHINA: Sina Corp., China's largest Web portal, announced June 11 it will partner with Google Inc. to improve Sina's search capabilities. This partnership with Sina will help to spread Google's search engine — which currently ranks second in China, with Baidu in first place — to a wider Chinese audience. The Sina-Google partnership is mutually beneficial; it likely will boost Google's market share in the Chinese domestic market (the rapidly growing Chinese search market is expected to reach $587 million by 2010), improve Sina's search technology and help Sina develop its future as a major international Internet company. Furthermore, by incorporating its search technology into Sina's Web site, Google will be able to shield itself from future international criticism related to Chinese censorship regulations. A similar approach has already been adopted by Yahoo, which yielded a majority stake of its China service to local company Alibaba.com in October 2006. UNITED ARAB EMIRATES: UAE Economy Minister Sheikha Lubna al-Qasimi said June 12 that her country is considering opening up many of its business sectors to full foreign ownership. Currently, foreign investors can own up to 49 percent of most businesses and only 25 percent in areas such as financial services and insurance. According to Dubai's Al-Bayan newspaper, al-Qasimi said the justice minister is reviewing the proposal while local and federal officials and the business community discuss which economic sectors to open to complete foreign ownership. UAE officials said they will particularly favor technology investments. Investment limits in the United Arab Emirates have held up free trade agreement negotiations with foreign countries, including the United States. Two days after al-Qasimi's announcement, a Canadian parliamentary member called for a free trade agreement between Canada and the United Arab Emirates. The investment rule announcement is part of the UAE plan to increase its role as a regional and international financial and commercial center. SOUTH AFRICA: Thousands of public sector workers joined one of South Africa's largest strikes in marches across the country June 13, and unions urged other workers to join them in a one-day "solidarity" strike as activities reach a peak. However, news reports suggest this solidarity strike did not have the turnout the umbrella organizing group Congress of South African Trade Unions (COSATU) was hoping for. Although the strike will continue, and will keep affecting South Africans, the June 13 solidarity strike was too weak to be called a success. COSATU is calling for a 10 percent pay raise for all public service workers, but the government thus far has only shown a willingness to grant a 7.25 percent pay increase. ECUADOR: On June 14, after lengthy debate, Ecuador's unicameral legislature approved a bill setting a cap on the interest rates banks will be able to charge customers for credit and opening the country's banking system to foreign banks on the same regulatory terms as national banks (national banks have thus far had a monopoly on domestic transactions). Under the bill, Ecuador's Central Bank would become authorized to set interest rates — and the rates would vary according to the sector of the economy seeking loans, thereby enforcing investment priorities determined by the state. The bill is a modified version of a legislative proposal the executive branch presented to the National Congress on May 18 titled "Financial Justice Law." President Rafael Correa urged passage of the law, but given the modifications he will study the bill and decide whether to veto it (completely or partially) and send it back to the National Congress. The country's private banks have launched a public campaign with advertisements in local newspapers decrying the proposal, warning that it could spark a banking crisis like the one the country experienced in 1999. Though this warning is likely exaggerated, the extent to which Correa's government chooses to control the banking sector will serve as a bellwether for the tone of larger upcoming changes to be determined by the Constituent Assembly, which will be elected Sept. 30.

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