Not-So-Unfriendly Skies

Dec. 21, 2004
For Airbus and Boeing, developing new planes may seem risky, but aerospace takes a long-term view.

Now doesn't seem like a great time for Toulouse, France-based Airbus SAS and Chicago-based Boeing Co., the world's dominant large-commercial-aircraft producers, to be launching new passenger jets. Think about it. Terrorist threats continue. The U.S., Japanese and several European economies are growing more slowly than expected. There are fewer passengers in the air and fewer commercial flights. One major U.S. airline is in bankruptcy; another is on the brink. Executives of Boeing and Airbus, a European consortium jointly owned by BAE Systems PLC and the European Aeronautic Defence & Space Co. NV, could be excused if they were sitting back, their seat belts tightly fastened, waiting for the market turbulence to pass. But Airbus, with 97 orders and commitments, already is cutting metal for its 555-seat A380 superjumbo aircraft. Boeing continues development work on its 200- to 250-seat advanced-design Sonic Cruiser but has yet to make a production decision. The fact is that while the financial risk for each of the plane makers is very large -- estimated to be as much as $10 billion -- the gamble may not be as big as it seems. "The aerospace industry is a very long leadtime industry," stresses Jon B. Kutler, chairman of Quarterdeck Investment Partners, a defense and aerospace investment firm with offices in Los Angeles, Washington, D.C. and London. "Aircraft designers tend to look at long-term macro trends. And while the economy and the terrorist threat are very real today, it doesn't mean that the world won't be a different place five or six years from now." The A380 is slated to go into commercial service in 2006; the Sonic Cruiser, if it's built, could take to the skies in 2008. Airbus may have two promising markets for its double-deck A380, suggests Kenneth Button, a professor of public policy at George Mason University in Fairfax, Va. One market, he says, is the large-aircraft Asia-Europe long-haul passenger market, which "is forecast by everyone to be growing in the future." The other promising market is air freight. This past July, for example, air-cargo traffic was up 10.5% from July 2001, while passenger traffic was down 7.9%, according to figures from the Geneva-based International Air Transport Association. Boeing forecasts a 6.4% average annual growth rate for air-cargo traffic during the next 20 years, a dramatic contrast to the 5.9% decline between 2000 and 2001. "The world's fastest growing aviation market is not moving people around; it's moving things around," Button emphasizes. Especially in the Far East, with the economic development of such countries as India, China and Thailand, "there is quite a big market for large air freighters. And, indeed, that could be something the A380 could fit into." In contrast, Button has reservations about Boeing's proposed fast-flying, smaller aircraft. Particularly for business travelers, "I don't know how much you gain by it," he states. Button notes that telecommuting is "slowly taking off" and wonders whether that will reduce business demand for airplane seats. The market for the time-saving premium service that the Mach .95-.98 Sonic Cruiser would offer is "uncertain," says Andrew Watterson, a Dallas-based vice president of Mercer Management Consulting. But he believes that if one airline buys the plane, competitors will follow -- not unlike the collection of airlines that followed British Airways' lead a few years ago in installing premium-priced seats that fully recline into flat beds. Watterson also notes that 75% of the interior space on a United Airlines Boeing 777 already has seats that carry a premium price -- from extra-cost economy to first class. "So Boeing is not off the mark," says Watterson. "I don't think the A380 is quite the bet-the-company kind of risk that others believe it to be," states Quarterdeck's Kutler. "And Boeing, while it has had its ups and downs over the past couple of years, is a well-run company that has a great deal of diversification on the military side also."

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