Aviation. Opening the throttles

Airbus boosts production in the race against Boeing

WITH the Farnborough International air show opening in Britain on July 19th, the ritual dog-fight has already begun between the two companies which now enjoy a duopoly for large commercial jets carrying over 100 passengers. Last year, Europe's Airbus took the lead for the first time with more deliveries than America's Boeing. It looks set to maintain that position: Airbus has landed orders for 104 jets in the first six months of this year, compared with Boeing's 73. A reflection of Airbus's confidence is a recent bold statement by its parent, European Aeronautic Defence and Space (EADS), that after three years of belt-tightening, production will expand by a huge 25% next year.

Both manufacturers are desperate to grab the headlines at international shows with order announcements. This week Boeing announced ten more tentative orders for its new 7E7 mid-sized, long-range jet, from a pair of European charter companies. They join All Nippon Airways and Air New Zealand as launch customers, which means they should enjoy big discounts as Boeing tries to build credibility for its latest aircraft. Meanwhile, executives from Thai Airways have indicated that they could become only the fourth Asian customer for Airbus's massive new plane, the 555-seater double-decker A380. Its order book has stood at 129.

Philippe Camus, co-chief executive of EADS, says the company sees only the beginning of a recovery in commercial aviation. Yet EADS stunned analysts at an investor forum when it said it was planning to increase production in 2005 and 2006 from 307 aircraft this year to 385.

On the back of such performance, plus progress with defence orders such as those for the A400M military troop carrier, the share price of EADS has soared to a three-year peak. Rival Boeing's share price has also risen to its highest level in two years, helped by a big defence order from the US Navy worth $3.9 billion. That was a rare bit of good news for Boeing's defence business, which has been mired in scandal.

Boeing and Airbus can also draw comfort from signs of a revival in air travel. IATA, the international trade association for airlines, says that for the first time airlines are enjoying traffic levels above those of 2000, the last normal year before terrorism, the SARS epidemic, war in Iraq and economic worries delivered blow after blow to the industry. But higher passenger numbers are not translating into higher revenues-per-passenger, because of price wars and over-capacity. Some carriers are adding capacity on potentially lucrative routes, such as the North Atlantic, which depresses prices. And low-cost carriers are piling pressure on network airlines in America, Europe, Asia and South America.

With more than 600 aircraft ordered from both manufacturers, and the huge increases in the capacity of carriers (particularly in Europe, see page 67) there are suggestions that a bubble is in the making. Nick Cunningham, an analyst at Citigroup Smith Barney in London, worries that the aircraft makers are seeing a repeat of the telecoms-equipment boom of the late 1990s. He points out that the strength of the share prices of the two big aircraft manufacturers belies the weak underlying position of their customers. The world's airlines had been hoping to turn a small profit this year, after racking up cumulative losses of about $31 billion over the past three years. But an oil price stuck firmly in the vicinity of $40 has increased their fuel costs and dealt them yet another blow. This means that, despite more air travellers, the airline industry as a whole is likely to face a fourth consecutive year of losses.

Airbus boosts production in the race against Boeing.

• Primary Source