Airbus versus Boeing. The super-jumbo of all gambles

Airbus unveils its double-decker for a new era in aviation

SIR RICHARD BRANSON, founder of Virgin Atlantic, did not need to watch the Martin Scorsese, Leonardo DiCaprio award-winning movie, “The Aviator”, last Sunday to learn how critical the choice of new aircraft is (among other things) to an airline's fortunes. Nevertheless Sir Richard emerged from the film “quite inspired” before flying to Toulouse for the unveiling of his latest choice, the Airbus A380. This is the biggest passenger jet the world has seen, built to carry at least 555 passengers. He has decided, along with 13 other airline bosses (so far), that the A380 is going to make him money.

At a spectacular two-hour show featuring dancers, trapeze artists, fountains and holographic planes “flying” about the giant hangar, 4,500 guests saw the aircraft, with its double-decked body and curving wings, unveiled in gleaming white. But once the show was over and the celebrating politicians gone, the real work continued: to persuade the world's leading airlines that this is the plane to transform air travel, as the original “jumbo”, the Boeing 747, did 35 years ago - and that it is not a commercial dud like Concorde.

Like Howard Hughes, the subject of “The Aviator”, whose giant, eight-engined “Spruce Goose” eventually succeeded as Lockheed's Hercules troop carrier, Airbus is taking an enormous gamble on its double-decker, due to make its first test flight by the end of March for entry into service in June 2006. It has cost over €12 billion ($15 billion) to get this far, spread equally between Airbus, its industrial partners and the European governments that have advanced refundable launch loans. Airbus foresees a market for 1,650 super-jumbo aircraft (including freighters) over 20 years. It needs to sell half that to make money.

Those magnificent men

The bosses of the 14 airlines which have already agreed to buy some 149 A380s were in Toulouse to explain their decision. The A380 should cut the cost of carrying one passenger one mile by between 15% and 20%, compared with the 747, the “queen of the skies”. She is now entering her twilight years. Only ten freighter versions have been ordered in the past year, and production is down to about one 747 a month. Airlines that need very big planes have instead opted for the new Airbus, which the Toulouse plant is expected to produce at a rate of four aircraft a month.

Virgin and other carriers such as Singapore Airlines, Lufthansa and Emirates operate long-haul services, frequently using airports, such as London's Heathrow, where there are limited runway slots for take-off and landing. Some airlines on busy long-haul routes fly two 747s almost simultaneously, wing to wing. Putting their combined payload into one more efficient, larger aircraft plainly makes sense.

The A380 will initially be able to carry about 30% more passengers than the 747 in a conventional layout, with 50% more floor space. No wonder Sir Richard talks of adding gyms, bars, beauty parlours, casinos and private beds (“to give you two chances to get lucky”). Less populist, Tim Clark, president of Emirates, which has ordered 45 planes to fulfil its ambitions of establishing Dubai as a new global hub, says that business and first-class passengers will enter through separate doors to an exclusive upper deck. Like passengers on the old ocean liners, they will not have to mix with the cramped masses below.

The promised lower operating costs mean plenty of profit potential for airlines confident that they have enough heavy-traffic routes to fill most of the seats. Chris Avery of J.P. Morgan points out that, thanks to economies of scale and modern technology (the 747 was designed some 40 years ago), the A380 needs only 11% more passengers (323) than does a 747 to break even on a trip. Yet it can carry 232 more than that, from which it can profit. Even the biggest Boeing can cram in only 123 more than its 290-passenger break-even level.

Yet Boeing is convinced that Airbus is making a huge strategic error. Bosses of the Chicago-based company are wont to quote Napoleon on never interfering with your enemy when he is making a great mistake. But such bombast is now wearing thin as orders for the new Airbus roll in. Industry insiders are convinced that, by Easter, Airbus will have landed a Chinese order for the plane, while leading carriers such as Cathay Pacific and British Airways are merely sitting temporarily on the sidelines, waiting for the inevitable teething troubles to be sorted out and for the even bigger versions of the new aircraft expected before long.

Boeing's strongest argument is that the air-travel market is fragmenting. People want to travel direct to their long-haul destinations, not squeeze into huge planes before changing later to smaller ones at crowded hub airports in order to reach their final destination. The success of the 747 was ensured by the fact that its huge wings and fuel tanks allowed it to fly farther than any other plane. But smaller widebody jets half the size of the new Airbus can fly as far as the A380. These planes open up the long-haul market while reducing the airlines' risk, because they need to fill fewer seats to cover the trip cost.

Boeing thinks that there will be a market for barely 400 very large aircraft (ie, bigger than today's jumbos) over the next 20 years. It sought to address this demand with stretched versions of the latest 747s, but has had no takers. On the other hand, Boeing's chief executive, Harry Stonecipher, says that, if there turns out to be a far bigger market than it now expects, Boeing will certainly enter it.

Yet that might prove difficult. Mr Avery asks where Boeing would go to find customers. The long-haul airlines with the greatest need are already buying the new Airbus, and would have little incentive to wait at least three years for a Boeing super-jumbo to emerge. “It really does look like Boeing have missed the boat,” he says.

Airbus, having just beaten Boeing on deliveries for a second year, is delighted to have broken Boeing's monopoly for really big jets. It can even afford to launch a rival to Boeing's mid-sized 7E7, called the A350, even though the terms of a truce in the battle between Europe and America over government subsidies require it to use its own money for this spoiler. But two things could upset Airbus. In 1992 the Toulouse manufacturer thought it had stolen a huge lead on Boeing with its big A330-A340 widebodies. But Boeing struck back in 1995 with its all-new 777 model, which sold well at Airbus's expense. Airbus had thought its competitor would merely upgrade the 767, an older widebody. This time, another 747 upgrade, allowing up to 450 seats (about 30 more than today's jumbos), might drain off some demand for the new Airbus. The low development costs of a 747 upgrade would mean it could be priced keenly to counter the A380's lower operating costs.

Another potential nightmare for Airbus is that the airlines that have already ordered the new plane may give a false impression of likely long-term demand. What if these pioneers prove to be the bulk of the potential buyers? The new Airbus must also overcome the wariness of travellers about the hassle of getting in and out of such a giant craft (and, presumably, the consequent long queues at immigration). Maybe onboard bars will lure them.

Airbus bosses agree that passengers prefer, by and large, to fly direct. But hub-and-spoke economics combined with a 20% lower cost per passenger are strong grounds for believing that the A380 will become this century's long-haul workhorse, as the 747 was in the last one.

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