Airbus plays down potential advantage following Boeing 737 crashes
Despite major order, European plane maker has made it clear it has no intention of pushing to gain from the tragedies
The ceremony last week at the Elysee palace in Paris exuded the full pomp of the French state.
Under gilded ceilings dripping with chandeliers, executives of Airbus and the agency that buys planes for China’s airlines signed an order worth $35 billion as French president Emmanuel Macron and his Chinese counterpart, Xi Jinping, looked on.
Normally, such an event would be full of gloating. In commercial aviation - a zero-sum industry with just two global players, Airbus and Boeing - the rivalry is intense and victories are savoured and celebrated, according to Bloomberg. But these aren’t normal times, and the ceremony marking Airbus’ biggest deal in several years was unusually muted. Guillaume Faury, soon to be Airbus’ chief executive, was subdued, calling the huge order “a sign of confidence between us and our Chinese partners”.
Almost all the planes - 290 of the 300 - are in Airbus’ single-aisle A320 family.
Boeing is mired in a painful investigation following two fatal crashes - an Ethiopian Airlines accident this month and the Lion Air crash in October - of its popular new 737 Max 8 jet, which has since been grounded worldwide. The catastrophes, which claimed the lives of everyone on board the two planes, have tested the faith in the US Federal Aviation Administration, which certified the jet, and raised a chorus of criticism about Boeing’s slow response.
The crisis has shifted the playing field in favour of Airbus at a time that it needs a victory. In February, the company cancelled its A380 double-decker after just a dozen years in service. And its sales force, mired in an investigation into allegations of corruption, has suffered the worst start to the year in at least a decade.
Yet Airbus has made it clear it has no intention of taking advantage of the tragedies, and sales staff were told that they shouldn’t mention them in their pitches to customers, according to a person who participated. At the Paris signing, Mr Faury declined to comment on what the Boeing grounding might mean for Airbus. And CEO Tom Enders has stressed that this isn’t the time to go after the wounded rival’s business. “When something like that happens, we’re all one big family,” he said at an industry event on March 15. “Safety is not a competition item.”
That makes sense, says Michael Hewson, an analyst at CMC Markets, a brokerage in London. For both manufacturers safety is the bedrock of their business, and without it they would struggle to make sales. “It’s a bad look if you try capitalise on anything like that,” Mr Hewson said. “It’ll come back and bite you.”
Some airlines that had bought the single-aisle Boeing have said they will reconsider or even cancel their orders, creating an opening for Airbus to pick up business. On March 28, flag carrier Garuda Indonesia said it planned to call off deliveries of 49 Max 8s, although it said it would most likely buy other Boeing aircraft. Indonesia’s Lion Air, the owner of the plane involved in the first crash, has also hinted that it will scrap a deal to buy almost 200 Boeing737 Max planes.
Southwest Airlines on Wednesday became the first major US airline to cut its financial outlook for the year after being forced to pull its fleet of 737 Max planes, the world's biggest, out of service, Reuters reported.
United Airlines and Air Canada have also warned of a hit to their business, with the Canadian carrier suspending its 2019 forecasts.
Other companies, however, have expressed confidence in the jet.
Kenya Airways is in discussions with Airbus to acquire an unspecified number of planes from the Toulouse, France-based company, but remains a “happy and loyal customer” of Boeing, according to chief executive Sebastian Mikosz.
Sub-Saharan Africa’s third-largest carrier, which wants to add 50 airliners to its fleet over the next six years to ward off competition from the rest of Africa and the Middle East, is “seriously thinking” about Airbus’s medium-range A220, Mr Mikosz said in the Rwandan capital, Kigali.
“If the producer offers us a good deal on the pricing and their delivery and training conditions, we will adopt,” he said. The long-haul A380, though, was out of the equation as it “never made a dime for anybody”.
Besides the A220, the industry has “very limited alternatives” for narrow-body aircraft other than Boeing’s 737 Max, which was grounded after two deadly crashes in the last five months.
“We are one of the potential customers for this aircraft,” Mr Mikosz said of the 737 Max. “I’m not losing trust in them. I believe that once the corrections are done, we will have to conduct a very detailed and large communications exercise to explain what was wrong and what was corrected.”
TUI, meanwhile, remains committed to its Boeing 737 Max orders although the grounding of the plane worldwide caused the Anglo-German tour operator to issue a profit warning on Friday.
It said its profit would fall by at least €200 million (Dh824.5m) this year due to the cost of substituting planes, loss of business and lower fuel efficiency - further evidence of the financial impact of the two accidents after warnings from North American airlines.
The holiday firm's shares fell to an all-time low.
Global airlines and travel groups have had to make contingency plans after 737 Max planes were taken out of service.
Based on feedback from Boeing and EU regulator Easa, the planes should be flying again in July, TUI's chief executive Friedrich Joussen said.
For Airbus, it’s been a slow year so far. In January and February, the company booked just four new sales and had 103 cancellations, including a $2.8 billion dollar deal for A320 aircraft that had been destined for now-defunct Germania. Last year the company’s order backlog fell even as its output grew to its highest level ever.
“It was a difficult year for our sales team,” Mr Enders said at the company’s annual results conference in February.
Against that backdrop, Airbus’ sales force could do with some decisive wins. The windfall in Paris was a nice get, but was the fruit of a campaign that had been in the works for more than a year.
The task of bringing home additional deals has fallen to Christian Scherer, who took over as chief commercial officer about six months ago after a short-lived stint by Eric Schulz, a company outsider who struggled to adapt to the Airbus culture. During a recent tour of Asia, Mr Scherer insisted the crashes won’t have any measurable effect on sales and that his company wouldn’t seek to benefit from them.
“Boeing, just like we would do, if they have a solution, a fix to find, they will find it very diligently and very quickly,” Mr Scherer said last week in Taipei. The tragedy with the Boeing jets will have “no bearing” on demand for his aircraft, he said.
Beyond the moral restraint keeping Airbus from trying to capitalise on the crisis, the company faces hard practical limitations. For the past several years, fraud agencies in the UK, France, and the US have been looking into allegations of bribery and corruption in the Airbus sales force. The investigations have thrown the sales team and top management into turmoil.
At the same time, it’s not easy for carriers to switch manufacturers. Many airlines have made substantial down payments on their orders, which they risk losing if they cancel. Their fleets are often planned around families of jets, allowing them greater flexibility in assigning pilots and maintenance staff. And there are only two manufacturers in the business, with a potential Chinese entrant yet to prove itself. Both of today’s players have order backlogs on their planes that are years long, so any airline that cancels would join the back of the queue at the rival manufacturer.
That means the effect of the crashes on either company’s order book won’t be dramatic, says Nick Cunningham, an analyst at Agency Partners, a London equity research firm. He does, however, say that Boeing will probably feel compelled to accelerate the introduction of a new model that’s not tarnished by the two tragedies. And that, in turn, will spur Airbus to build a new plane to compete with it.
“It puts pressure on Boeing to replace the Max earlier and Airbus to do the same,” Mr Cunningham says. “The impact will be on product strategy.”
No report has yet been issued on the Ethiopian crash but preliminary findings may be published as early as next week.
Morningstar analyst Chris Higgins on Thursday reduced his estimate for how long the groundings would last to two months from three, based on details presented by Boeing of its proposed fix to the MCAS software.
"We've revised our base-case timeline for the groundings to around two months because this MCAS fix appears mature, the MCAS upgrade should only take one hour per plane, and the updates will not require significant training," he wrote in a note.
Updated: March 30, 2019 05:50 PM