UNIVERSITY OF EAST ANGLIA School of Economic and Social Studies

“SOME FEATURES OF THE AIR TRAVEL INDUSTRY THAT DETERMINE THE DEMAND FOR SUPER JUMBOS”

Author: DÁRIO MUHAMUDO

Supervisor: STEPHEN DAVIES

A dissertation submitted to the School of Economic and Social Studies, University of East Anglia, in partial fulfilment of the MA degree, May 2000.

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Contents

i. Index of Tables 3

ii. Index of Figure 4

iii. Abreviations 5

1. INTRODUCTION 6

2. THE DEMAND FOR AIR TRAVEL 7

3. THE MARKET 9

3.1 THE COSTS OF A NEW AIRPLANE 13

4. THE MARKET VALUE 14

5. THE INDUSTRY AND ITS PLAYERS 18

5.1 AIRBUS 18

5.1.1 THE A3XX CONCEPT 21

5.2 BOEING 25

5.2.1 THE B747X CONCEPT 26

5.3 OTHER SUBJECTS: 27

5.3.1 AIRLINES 27

5.3.1.1 AIR FRANCE 27

5.3.1.2 BRITISH AIRWAYS 27

5.3.1.3 EMIRATES AND SINGAPORE AIRLINES 28

5.3.2 ENGINE SUPPLIERS 28

5.3.2.1 ROLLS-ROYCE 29

5.3.2.2 ENGINE ALLIANCE 29

5.3.3 AIRPORTS 29

6. THE COMPETITION DEBATE 31

6.1 THE INFANT INDUSTRY ARGUMENT 32

6.2 COMPETITION LAWS CO-OPERATIONS AGREEMENT 34

6.2.1 EC – US AGREEMENT ON TRADE IN LARGE CIVIL AIRCRAFT 34

6.3 A340 – B777 ETOPS DISPUTE 36

6.4 EC – US HUSH-KITS DISPUTE 36

7. CONCLUSION 39

8. BIBLIOGRAPHY 41

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LIST OF TABLES TABLE 1: THE RANGE OF PRODUCTS OFFERED 6

TABLE 2: UNITS IN SERVICE AS IN DECEMBER 1998 7

TABLE 3: IMPLICATIONS OF THE BOEING / MD MERGER 7

TABLE 4: ORDERS AND DELIVERIES 8

TABLE 5: OVERALL TOTALS 8

TABLE 6: AIRBUS DATA 12

TABLE 7: BOEING DATA 12

TABLE 8: AVERAGE AIRBUS / BOEING DATA 12

TABLE 9: AIRBUS TOTALS 22

TABLE 10: BOEING TOTALS 24

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LIST OF FIGURES

FIGURE 1: MARKET SHARE BY PRODUCT RANGE 9

FIGURE 2: R&D COSTS AS PERCENTAGE OF TOTAL REVENUE 10

FIGURE 3: DECISION TREE 13

FIGURE 4: THE LEARNING CURVE 30

FIGURE 5: A3XX FUNDING 33

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ABREVIATIONS

A Airbus

AAPA American Airlines Pilots Association

AEA Association of European Airlines

ASK Available Seat-Kilometres – The number of seats an airline provides multiplied by the number of kilometres they are flown

B Boeing

BA British Airways

BAE Former British Aerospace, now BAE Systems, after merged with former Marconi Systems

Bn Billion (109)

CASA Construcciones Aeronáuticas, SA- Airbus Spanish partner

CCQ Cross Crew Qualification –Qualification that allows flight crew members to fly different aircraft models at the lowest possible cost

CIS Commonwealth of Independent States

CMO Current Market Outlook – Boeing Document

EADS European Aeronautic Defence and Space Company

EC European Commission

ETOPS Extended Twin Engines Operations

EU European Union

GDP Gross Domestic Product

GMF Global Market Forecast – Airbus Document

IATA International Aviation Transport Association

ICAO International Civil Aviation Organisation

LAD Large Aircraft Division – Airbus division that is studying the A3XX

LCA Large Civil Aircraft

MD McDonnell Douglas

NASA National Administration and Space Agency

RPK Revenue per Passenger-Kilometres – The number of passengers multiplied by the kilometres they fly

US United States

VLA Very Large Aircraft

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1. INTRODUCTION

The demand for ‘superjumbos’ is much more than just an economic problem. It is a

battle between Airbus and Boeing and a battle between the Europe and the USA. In

one side there is the protection of the world leader in aerospace industry, while on the

other there is the protection of the only company that can compete with the leader.

This battle used to be a “David – Goliath” one, but in recent years Airbus began to

harvest the competitive advantage that it had planted in the 1970’s. Nowadays it can

offer a model in every market to compete with Boeing. It has been a long way but with

foresight and the help of some European Governments it has been accomplished. The

only market where it cannot compete with Boeing is the very large aircraft (VLA -

over 400 seats). For this reason Airbus is committed to enter that market, since it will

be then a whole manufacturer and a global supplier of the civil aerospace industry.

The data used by the manufacturers is quite different. One reason lies on the different

sources that were used to produce the documents. While Airbus gathered data from

227 airlines1, Boeing gathered data from the world organisations that deal with the air

travel industry: Association of European Airlines, Airclaims, DOT Form 41, DRI-

McGraw Hill, Jet Information Services, OAG, IATA, ICAO, AAPA, WEFA and

Boeing primary research.

To elaborate some of the tables and diagrams I also used the Internet, which was quite

useful due to the instant up-to-date information that is available. To simplify the

reading the currency used is the US Dollar (since is the most common in the air travel

industry), and 1bn = 109.

1 1999 Global Market Forecast (1999: 58)

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2. THE DEMAND FOR AIR TRAVEL

There are several components of the demand for air travel. Hanlon (1999: 16), analyses

the airline perspective, and considers three: GDP, the effect of fares and the numbers

of flights and routes. On the airline perspective this assumption is correct. People who

want to fly first will take notice of their budget. Then they will assess the fare prices

and then choose the best connection to their destination.

On the issue I am studying here, there more components to the demand function. In

this function I considered the main issues that lead an airline to acquire a specific

aircraft, such as the number of routes it operates (and their range), the number of

passengers (measured in RPK’s - Revenue Passenger-Kilometre’s and ASK’s -

Available Seat-Kilometre’s2).

Although the major carriers in the world are already privatised the GDP of the

countries where they are based plays a major role in the demand for air travel.

ƒ: {GDP, Sc, Lc, Fp, Er}

Whereas: GDP - Gross Domestic Product, Sc- Seating capacity, Lc - Loading

Capacity, Fp - Fuel price and Er - Environmental Regulation.

GDP accounts for two thirds of the air travel growth3. The wealth a country generates

can increase the level of income for its inhabitants and as long as they have a higher

income, they will have more money to consume or to sae. The bundle that is allocated

to consumption can be applied to air travel.

The seating capacity of an aeroplane is important because the higher number of seats

available will lower the seat per mile cost, hence reducing the fares.

2 RPK’s is the demand for traffic measured by the number of passengers multiplied by the number of kilometres they fly. ASK’s number of seats an airline provides multiplies by the number of kilometres they are flown; a measure of airline capacity. 3 Boeing (1998: 14)

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The same argument is used for the loading capacity, in this case for the cargo sector,

since there will be a lower tonne per mile cost.

The amount of fuel price plays a very important part in the demand for the VLA, since

the aeroplanes have to comply with different regulations. The fuel price has a direct

effect on the price of the tickets, since during the year there are variations on the price

due to the fluctuations of the oil prices and of the Dollar.

Usually new aircraft already comply with the latest environmental regulations in noise

level and pollution. For these reason the new aeroplanes are quieter and cleaner than

the previous ones.

Why do people fly?

There basically two reasons for people demand for air travel: Business and Leisure /

Tourism. The job of the airlines is to cater for these needs. With the recent evolution in

the telecommunication world the people needs while they travel also changed.

Economy class travellers demand Internet and email facilities, while the businessman

demand laptop sockets and 180o reclining seats.

To these new needs, the aircraft manufacturers should be aware and supply aircraft’s

that meet the airlines and their customers’ expectations. This means that aircraft’s

should be fully convertible and allow changes in a short period of time.

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Source: Airbus Global Market Forecast 1999 and Boeing’s Current Market Outlook 1999

3. THE MARKET

This part of the dissertation describes the range of products (aircraft’s) that the two

companies involved in this study supply for their customers. The market is segmented

in the number of seats that each model can transport4. In Table 1, for each pair of seats

capacity there will be a correspondent model by each manufacturer:

Seating Capacity Airbus model’s Boeing model’s

70 – 100 A3185

B717-200 B737-100/-200/-500/-600 DC-9 MD-87

125 – 175 A319-100 A320-100/-200 A321-100/-200

B727-200 B737-300/-400/-700/-800 B757-200/-300 DC-8-10/-20 MD-81/2/3/8 MD-90

200 – 250 A300 A300-600/-600R A310-200/-300 A340-200

B767-200/-200ER B767-300/-300ER

300 – 400 A330-200/-300 A340-300/-500

B747SP B747-200/-300 B767-400ER B777-200/-200ER DC-10 MD-11/-11ER/-11C

>400 (Very Large Aircraft) A340-600 (entering in service in 2002)

B747SR&D (over 500 seats) B747-100/-400 B777-300

4 After analysing both manufacturers segmentation I decided to use the Airbus perspective since it seemed to me to be the most accurate one. This segmentation was taken from Airbus GMF(1999: 8) 5 Legend of aircraft terminology: A – Airbus model; B – Boeing model; C – Combi (a mixture of a freighter and a passenger aeroplane where a space of the passenger deck is used to carry cargo pallets); DC – Douglas Aircraft Family model; ER – Extended Range, a model with greater range than the basic model; MD – McDonnell Douglas model; SP – Special Performance; SR&D – Short Range & Domestic – A B747 jet with only one class configuration (usually it has two or three) especially design for short flights in highly congested routes in areas like South East Asia.

Table 1: The range of products offered

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The aircraft manufacturing industry is a very competitive one. Since the end of WWII6

that the US led the way in the production of aircraft’s. After almost fifty years the

world panorama has changed. Table 2 highlights the number of units in service of the

two major manufacturers.

Table 2: Units in service as in December 1998: Seating Capacity: Airbus Boeing Other Manuf. Total Airbus % Boeing %

70 – 100

0 495 651 1146 0.0 43.2

125 – 175

883 5233 61 6177 14.3 84.7

200 – 250

452 659 0 1111 40.7 59.3

300 – 400

204 1235 86 1525

80.1

Over 400 seats (Very Large Aircraft)

0 48 0 48 0.0 100

Total 1539 7670 798 10007 Source: Airbus Global Market Forecast and Boeing’s Current Market Outlook

In 1997 the Boeing Company merged with McDonnell Douglas and these two

companies became a giant aerospace, defence and space company. The implications in

the civil aircraft industry can be seen in the following table:

Table 3: The implications of the Boeing / McDonnell merger:

Seating Capacity Boeing (Before 97)

McDonnel Douglas

% of MD in Boeing

% of Airbus in Boeing

70 – 100 18 477 96.4 0.0

125 – 175 3925 1308 25.0 16.9 200 – 250 659 0 0.0 68.6 300 – 400 905 330 26.7 16.5

>400 48 0 0.0 0.0 5555 2115 27.6 20.1

6 This period marked the beginning of the civil air transportation.

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In the 70-100 seats market MD produced almost all the aircraft’s. After 1997 it

increased Boeing share in that market.

Last year was very successful for the European consortium. It was the first year that

they outsold Boeing in the number of orders. They claimed 55 percent of all the new

orders, and they can now fight to keep these results over the next years. Table 4 shows

the relations between orders and deliveries for the last three years.

Table 4: Orders and Deliveries

AIRBUS BOEING

ORDERS DELIVERIES ORDERS DELIVERIES

97 460 182 568 37598 556 229 656 56399 476 294 391 62000* 59 65 128 75*The 2000 numbers refers to data until: 31st of March for Airbus and 6th of April for Boeing7. The next table summarises the total number of units produced by these manufacturers

since they were created until today:

Table 5: Overall totals:

Airbus Boeing Total 1539 7670 10007

The diagram in the next page shows the different market share by product range

actually owned by the two companies. Since the data as is presented was not available,

I calculated the shares with the help of the documents produced by the companies.

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7 Airbus and Boeing web sites.

70 - 100

AirbusBoeingOther Man.

AirbusBoeingOther Man.

125 - 175

AirbusBoeingOther Man.

200 - 250

AirbusBoeingOther Man.

300 - 400

AirbusBoeingOther Man.

>400

Figure 1: MARKET SHARE BY PRODUCT RANGE

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3.1 THE COSTS OF A NEW AIRPLANE

In order to understand the financial effort that both companies will have to make in

order to create the very large aircraft, I have produced the next diagrams that represent

the amount of money that will be employed in the research and development of the

new aircraft. The discrepancy of the values lie on the fact that Airbus will be

developing the new aircraft in a recently created Large Aircraft Division, while Boeing

is aiming at a stretched version of its B747-400. The issues surrounding the value and

the different perception of the market will be discussed in the next part of this paper.

Fig. 2: R&D Costs as a percentage of Total Revenue

Airbus Development Costs percentage of Total Revenue

71%

Total RevenueDevelopment Costs

Boeing’s Development Costs percentage of Total Revenue

Total RevenueDevelopment Costs

8%

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4. THE MARKET VALUE

“Although the demand for large aircraft,

passenger and freighters, only represents

10% of the total, it accounts for more than

25% of the potential business; that is nearly

$320 billion”.

Airbus, 1st Quarter Media Briefing

“Delivery distribution for the 1999-2018

period for the B747, A3XX and larger

aircraft will be worth $173.4 billion”.

Boeing, Current Market Outlook

It is important to understand why the companies are reluctant to enter this market.

Partly due to the necessary investment in research and development to create such a

product and to be aware of the demand needs. When Boeing created the B747 in the

late 1960’s it almost went bankrupt due to a series of setbacks from unexpected rises in

costs to delivery delays. The aircraft did not establish itself in the market straight

away.

I draw a table of payoffs for a game that I considered to be the situation where we

stand now. In this game the two players are the aircraft manufacturers (Airbus and

Boeing) deciding whether they should enter or stay out (actions) of the market for very

large aircraft (airliners with more than 400 seats and cargo freighters with more than

80 tonnes capacity). The payoffs will be the market share value they hope to get if their

aircraft actually goes into full production scale minus the costs attached to the

development and production of the aircraft that will be $12bn for Airbus and $2bn for

Boeing8. The difference of $146,6bn (£92.9bn) will determine the decision of Boeing.

They have stated that although the market doesn’t require an aeroplane this size for the

next 10 years (only after 2008 the demand will increase), if Airbus actually starts to

produce the new aircraft they will enter the market at once. Analysts of Lehman

8 These values were given by the two companies to Béghin (2000) and reflect their financial efforts to create such an aircraft. The discrepancy of the values can be explained by two reasons: one is that Boeing already has an established very large aircraft division (responsible for the B747-400 Jumbo-Jet), while Airbus is creating this division from scratch; the second is Marketing is a powerful toll and both companies produce different information in order to persuade their potential customers that their project

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Brothers, an investment bank, forecasted that in 2004 Boeing would have a market

share (in value) of 60%, but only 50% in 2008 if Airbus launches the aircraft in 20059.

One problem in drawing the pay-off table lies on the fact that the assumption of the

difference in demand between the two companies. As a matter of fact while Airbus

considers this market worth nearly $320bn, Boeing estimates the market to reach

“only” $173,4bn. To turn this problem around I calculated an average of the two

values and estimated the payoffs in the different cases. Although the data on the value

of the market shows some discrepancies, the value of the data on costs that is available

is consensual: Airbus $12bn and Boeing $2bn3. The tables 6, 7 and 8 are as follows:

Table 6: Airbus data Boeing

Enter Stay out

Airbus Enter 148, 158 308, 0

Stay out 0, 318 0, 0

Table 7: Boeing data Boeing

Enter Stay out

Airbus Enter 74.7 , 84.7 161.4, 0

Stay out 0, 171.4 0, 0

Table 8: Average Airbus/Boeing

Boeing

Enter Stay out

Airbus Enter 111.35, 121.35 234.7, 0

Stay out 0, 244.7 0, 0

is the most accurate and feasible one. If they have the financial security and the resources to allocate in the production of the aircraft, then it will have more chances to succeed. 9Béghin (2000).

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By analysing the different payoff tables we can see that if Airbus starts to produce the

new aircraft, Boeing’s best response is to enter the market as well. For the case I am

discussing in this paper I will assume that Airbus will be the first to make its decision.

Therefore the decision of Boeing will be based on the decision of Airbus. I drew a

payoff tree for this game. Since the payoffs are relatively similar in value, for this

example I’ll use the data I have calculated for the average between the values provided

by Airbus and Boeing.

By backward induction we can see that since Airbus is the first to make its choice the

best strategy for Boeing once Airbus chooses “Enter” will be to choose “Enter” as

well. When Airbus chooses “Enter” their payoff can either 0 or 121.35. Assuming this

decision will be rational they will enter the market and share the payoffs with Airbus.

Since this decision is Boeing best response to the strategy played by Airbus I can say

there is Nash equilibrium (Enter, Enter).

We can also see that no matter what Airbus does, Boeing’s best strategy it is to enter,

since its payoff will always be greater than Airbus, even if this company decided to

Airbus

Boeing

Boeing

Enter

Enter

Stay Out

111.35 121.35

234.7 0

0 244.7

0 0

Enter

Stay Out

Stay Out

Fig. 3: Decision Tree

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“Stay Out”. If we compare the costs of both companies we can see that the decision

represents a higher risk for Airbus rather then for Boeing10. While in Airbus the

development costs rise up to 71% of total net revenue, in Boeing this amount

represents only 8% in total net revenue for the commercial airplanes sector only (the

numbers for the whole company is not available).

Another reason for the unwillingness of Boeing to create these Super-Jumbos lies on

the fact that the B747-400 is actually the only aircraft capable of carrying more than

400 passengers, and unlike all the other markets where Airbus has already launched a

competitive model, in that particular market they do not have a direct competitor. The

B747-400 is also the most profitable aeroplane in the Boeing family. If there were a

new competitor and substitute it would affect the sales and reduce the profits for the

Seattle manufacturer.

The dimension of the companies can explain the discrepancy of these values. Airbus is

committed to the production of commercial aeroplanes (providing also technical

assistance and maintenance), whilst Boeing has interests in commercial and military

aeroplanes, space systems, missile and tactical weapons, rotorcrafts, electronics and

applies the projects of its engineers to develop solutions to other areas, beyond the

aerospace industry. By this reason it can allocate profits generated in others areas to a

specifically sector, benefiting from economies of scale.

For a better understandment of the industry where these players are developing their

activities, the next section presents them through their history describing their

activities until a view on their actual situation.

10 See Figure 2.

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5. THE INDUSTRY AND ITS KEY PLAYERS

5.1 AIRBUS

The history of Airbus is (so far) an exemplar one. The spirit behind its creation was

pioneering. In the beginning of the 1970’s and after looking at the panorama in the

aerospace world the European authorities noted that although they were acquiring 25%

of the aeroplanes produced worldwide their manufacturers had less than 10 % of the

market share11. Their American competitors were enjoying a de facto monopoly12. The

decision to establish a multinational consortium was encouraged by the stories of

success of European aerospace innovations: the first turbojet engine and the first

commercial supersonic transport (Concorde) built by BAE (of the UK) and

Aerospatiale (of France) for their flag carriers (British Airways and Air France). They

understood that by themselves they didn’t have the dimension, the resources or the

financial effort to endeavour a project of this strength. At this point manufacturers in

Europe realise that they would face extinction if they continued to fight against each

other so they decided to join synergy’s and share development costs in order to fill a

market niche that was neglected by the US manufacturers. The niche was a 250-300

seat aircraft with the economics of a two engines powered jet. The closest aircraft

supplied by the US manufacturers for these markets had three engines and a minimum

seating capacity of 300 passengers. This was considered quite inefficient because the

amount of fuel required for three engines was mainly for intercontinental routes while

the European airlines wanted to fly it across Europe (mainly). Due to the interest of

France, United Kingdom and Germany, the governments of these countries decided to

combine efforts and established a consortium to build an aircraft that would be known

as the European Airbus (later it would be named the A300). They were established

11 Airbus web site: http:www.airbus.com/history.htm

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under the French law as a Groupment d’Interet Economique, which is a legal body that

allows companies to centre their activities on a specifically part of a consortium

structure while they are still pursuing non-competitive projects. This way each of the

partners would focus on a part of the aircraft (where they were more competitive and

efficient) and then all of the parts would be assembled in a particular place, in this case

Toulouse, in the South of France.

Success did not come easy and the new company faced some problems in establishing

itself as responsible and reliable. Although they had some orders in Europe (especially

from flag carriers like Air France and Deutsche Lufthansa) they soon realised they had

to expand their customer database in order to be more profitable. And this strategy had

one goal: to sell their product in the US market. It was not easy to prove to US airlines

that the European aircraft would be as reliable as the aircraft’s who have been

produced in their country for so long. When Eastern Airlines (a former US based

airline - it has gone bankrupt) decided to buy four A300 this represented a major

breakthrough for the company and it paved the way for a huge amount of orders: “It

showed other airlines around the world they were ‘in good company’ if one of the

major US operator was acquiring the European product”13.

After the establishment of the A300 as a reliable, efficient and economic aircraft

customers began to demand the same efficiency and cost saving for other markets,

especially in the 125-150 seats and in the 200-250 seats. To cater for these interests

they launched a shortened version of the A300 (the A310 which could carry up to 230

passengers) and developed a completely new aircraft - designated the A320 (up to 175

passengers). This aircraft was built as part of a new family of aircraft where the latest

technology and the use of so many computers integrated systems was a novelty. The

12 European Commission web site: http://europa.eu.int/comm/trade/goods/aircraft/overview.htm#2

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‘fly-by-wire’ system14 changed the way pilots flew and was considered a major

innovation – this move was only followed by the US manufacturers some years later.

The idea behind building aircraft families is to reduce crew training, maintenance and

operating costs. This way pilots and cabin crew members can obtain the same

qualification for the whole family of aeroplanes (example: nowadays a pilot with the

A320 qualification can also fly the A318, the A319 and the A321, since they share the

instruments and have the same cabin basic configuration).

After established in the 200-250 and in the 150 seats markets Airbus managers started

to look at other markets and launched the A330/A340 family which were designed to

fill the medium, long and ultra long haul needs. Although the A340 differs from the

A330 due to the two extra engines the cross crew qualification (CCQ) is easier and less

costly to obtain due to the similarities of the aircraft’s that share almost all the

structure, from wings to engines. In these new aeroplanes the technology that had been

used in the A320 was adapted and incorporated as standard, in what became an

industry reference.

One of the main reasons of the competitiveness of Airbus is the way in which their

products are assembled. By producing different parts at the most efficient way they

make sure the final product has the lowest cost. Another reason is the constant

innovations that are incorporate in the aircraft’s. For instance the A300 was the first

commercial aeroplane to have automatic windshear protection and due to the cockpit

design, it was also pioneer in being certified with a two-member flight crew (at that

time aeroplanes had a minimum of two pilots and one flight engineer). The materials

used in the structure of the aircraft also play a very important role. Some control

13 Airbus web site: http://www.airbus.com/history.htm 14 The fly-by-wire system uses optical fibre signals instead of mechanical cables to transmit the commands from the cockpit to the aeroplane wings and tail.

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services and (later) the tail were made out of “composites - non-metallic materials that

have the strength and integrity of aluminium and other alloys but weigh less”15.

With all of these arguments and after almost 30 years since their foundation the

European

Consortium is one of the world’s top two manufacturers and has won approximately

45% of the world market in recent years (accordingly to Airbus this market share is

calculated through yearly orders made to both Airbus and Boeing).

While I was writing this dissertation three of the Airbus Consortium partners merged

and created the European Aeronautic Defence and Space Company (EADS). The new

company, which is formed by DaimlerChrysler Aerospace (Germany) Aerospatiale-

Matra (France) and CASA (Spain), now has 80 percent share of the Airbus

Consortium, leaving BAE Systems with the remaining 20 percent. This merger comes

with good timing, since the European consortium is starting to produce military

aircraft16 and the merger can generate economies of scale and apply the efficiency

level that has been successful in the civil aircraft to the military aircraft market.

5.1.1 THE A3XX CONCEPT

The next goal of Airbus is to create a family of very large aircraft capable of carrying

almost 600 passengers: the A3XX. They have created a specific division to study and

develop the aeroplane17. This way they would be able to enter the ‘over 400 seats’

market where the B747 doesn’t have a competitor. The studies for this new product are

15Airbus web site: http://www.airbus.com/history.htm 16 The Airbus A400M, currently in final assembly phase, will compete with the C-130 “Hercules” from the US manufacturer Lockheed Martin. 17The Large Aircraft Division of Airbus was created in September 1996, although the feasibility studies date from 1990. Airbus’s 1st Quarter Media Briefing (2000: 14-15)

22

quite advanced, and the first flight is schedule for mid 2004 with the first delivery in

2005.

I’ll analyse the factors that lie behind the demand for such an aircraft from the Airbus

point of view.

After studying the conditionalities of the industry Airbus produced two documents that

reflect the company’s forecast for the demand of air travel for the next years. One of

them its the Global Market Forecast’99 (GMF) that gathers data from 227 airlines from

around the world (excluding the CIS due to the lack of satisfactory data and the

volatility of the social situation18) and anticipates the behaviour of the civil air

transport industry for the period between 1999-2018. The second document its the

Media Briefing for the 1st Quarter of the year 2000. While the first document refers to

all the industry (including freighter / cargo companies) the second document was

specifically created to keep the other partners (and potential customers) informed on

the progresses made in the development of the aircraft.

The GMF considers some variables that determine the demand for air travel, but the

leading variable is economic growth (GDP19). Depending on the amount of available

income people will be more or less willing to travel. The amount of trade, economic

transactions, tourism and general business activities of a country (or a city or a region)

play an important role that influences the demand for air travel.

According to Airbus, and based on worldwide analysts’ opinions, air traffic growth is

one of the world most dynamic industries: it has been growing since it was created (on

an average of 8% in the last 50 years). This growth was only possible due to

innovations in fuel efficiency, capacity, extended range and aircraft productivity. For

the foreseeable future Airbus forecasts a 5% growth per annum. Some of the growth

18 Commonwealth of Independent States in Airbus GMF (1999: 7).

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will assimilated by arrangements made in the current fleet (by using bigger aircraft’s in

short haul flights, for example). However most of it is through increases in aircraft

capacity and fragmentation (meaning there is an increase in flight frequencies and the

opening of new routes between pairs of cities). This led to the hub-to-hub situation

where airlines take passengers to a centre point where they are then distributed to the

several destinations. This situation creates demand for lower capacity aircraft as well

as for regional aircraft’s (this measure also helped the development of secondary and

regional airports). But people prefer direct connections between their departure and

arrival points. For this reason they value the money they spend on their ticket and they

would welcome lower fares for the same destinations. In some routes where air traffic

is already congestioned it is necessary to use the biggest aircraft available to lower the

airfare20. In the 1970’s productivity in airlines jumped with the appearance of the

B747. At that time it was twice as big as it precursors and reduced the price of flying in

over 30%21. Since that time there hasn’t been any similar increase in productivity. For

Airbus “the time has now come for a new, larger aircraft to pick up the pace of

progress”22.

A larger capacity aircraft would allow airlines to increase the Revenue Passenger

Kilometre’s23 (RPK’s), since there would be more seats available per flight. On the

other hand compared with its closest rival (the B747) the A3XX will only need 58% of

occupancy to break-even, while the B747 needs 70% (Airbus assumption24). This

reflects in an additional profit for the airline in almost 109 seats. This argument

alongside with advances in technology will help the A3XX increase its productivity

19 Idem. 20 Airbus’s 1st Quarter Media Briefing (2000: 2-3) 21 Boeing History, http://www.boeing.com 22 Airbus’s 1st Quarter Media Briefing (2000: 1) 23 RPK’s is the measure of traffic demand. 24 Airbus’s 1st Quarter Media Briefing (2000: 9).

24

rate. The operating costs will also be lower than its main opponent (around 15 to 20%

on average25).

Sharing the same philosophy of the Airbus aircraft families the new aircraft will be

built-in with “fly-by-wire” technology and CCQ that allows crews to acquire the new

qualification by converting it from previous “cockpits”, and by doing this, reducing the

costs of training.

This projected productivity will also be used in the freighter market that has been

growing twice as much as the passenger market. One of the initial versions of the

aircraft will also be available for this market. The arguments behind it will be the same

argued for the passenger version, cost effective, fuel efficient, higher capacity and

lower operating costs in comparison with the B747-40026.

There are already two airlines interested in the A3XX, with a total of 15 orders27. A

meeting of the Airbus supervision board was scheduled for the 26th of May to approve

the production of the new aircraft, but without any reason it was postponed without a

new date being given28. The following table shows the totals of Airbus aircraft until the

30th of April 2000:

Table 9: Airbus Totals

Total Orders 3,689 Total Deliveries 2,253

Total in Operation 2,176

25 Idem. 26I must stress that all the data presented by Airbus compares the A3XX with the B747 because its the closest rival, although if Airbus starts to produce the aircraft Boeing will create a new aircraft to provide a closest substitute to compete with the A3XX, as we shall see ahead. 27 Financial Times(1999) 28 Done (2000)

25

5.2 BOEING

The history of Boeing can be traced to the beginning of the XX century when William

Boeing became interested in the growing aeroplane industry. Their first production

order came in 1917 when they won a Navy contract to built 50 training aeroplanes just

before the US joined WWI. By the end of WWI the military didn’t order more

aircraft’s, since there was a “flood of war-surplus” aeroplanes. They had to diversify

their activities in order to survive, building aeroplanes prototypes. Although most of

them did not go on production they were pioneers in several areas of aviation (e.g. a

Boeing aircraft delivered the first international AirMail). During the post WWI and

WWII periods the company survived by building military aircraft’s and by

modernising British fighter planes. After WWII the military cancelled their bomber

orders and recession affected Boeing deeply leading them to closing plants and

dismissing over 70,000 workers. They expected to revive by transforming a former

troop carrier into a luxurious commercial airliner, but their client’s preferences went to

a freighter cargo and an aerial tanker. During the post war period US engineers found

data on wind tunnel in Germany and used it to develop a new bomber.

By the end of the 1940’s the company was set to start the development and production

of jet propelled aircraft’s. With the construction of their own wind tunnel in the US,

they engaged in the research and development of more sophisticated aeroplanes and

with the advent of jet’s they decided to increase R&D and create a prototype of a jet

transport aeroplane. This was considered a huge gamble that paid-off and soon the

company created the B707-120 which was the first Boeing commercial jetliner.

The company continued to develop civilian and military aircraft’s as well as special

prototypes for NASA, including space capsules (the Apollo project) and lunar orbiters

(that photographed the Moon surface and helped the lunar anchorage in 1969). During

26

the Cold War period Boeing was in charge of developing several projects of defensive

and offensive missiles to intercept invading enemy aircraft. Later the company would

use all of its experience acquired in those projects to the development of the Space

Shuttle.

The markets started to evolve and Boeing accompanied them. After the success of the

B707, the airlines started to demand different types of aeroplanes and Boeing

developed different aeroplanes for these different needs. The massive B747 (Jumbo-

Jet) was a response to “crowded airports and increased airline traffic indicated the need

for an airliner with even greater payload capacity and range”29. Boeing continued to

extend its activities in the field of commercial aviation and in 1996 merged with

McDonnell Douglas (their US main rival) and brought under the same brand the highly

specialised military and defence sector of Douglas. Nowadays Boeing is the world’s

largest producer of commercial jetliners, offering aeroplanes from 100 to almost 600

seating capacity. The following table shows the totals for Boeing:

Table 10: Boeing Totals

Total Orders 14,592

Total Deliveries 13,109

Total in Operation 9675

5.2.1 The B747X Concept

While Airbus tries to convince the airlines that there is in fact demand for aircraft of

the A3XX size, Boeing is sure that the demand for these aeroplanes does not justifies

the development of a completely new aircraft. For this reason they are investing on a

stretched version of the B747-400 which will provide the same number of seats of the

27

A3XX but at a much lower cost. While Airbus is assessing the market to invest $12bn

in the development and production of the A3XX, Boeing claims it only needs to

allocate just $2bn to develop the B747 stretched version. The reason for this is the

established large aircraft division of Boeing that prefers to build a stretched version

rather than an all-new aircraft.

5.3 OTHER PLAYERS:

5.3.1 AIRLINES

There are a few numbers of airlines that would be willing to acquire a superjumbo. The

majority of them are major 747 operators. For this example I will refer to Air France,

British Airways, Emirates and Singapore Airlines.

5.3.1.1 AIR FRANCE

The French carrier operates 83 long-haul aircraft, 43 of them are B74730. It uses it on

his routes between France and the US, Africa, Caribbean and Asia. These are the

markets where a very large aircraft would be more useful. So far their policy is to

acquire aircraft’s that do not put their financial solvency at risk. For this reason they

have been leasing aircraft’s and then returning them to their owner. There was a

special affinity between Air France and Airbus, since they were Airbus first customer

when they acquired the first A300. They are included in the group of 20 airlines that

have been working with Airbus in the project phase of the A3XX.

29Boeing web site: http://www.boeing.com

28

5.3.1.2 BRITISH AIRWAYS

The “World favourite airline” operates several models of the B747 fleet. They operate

virtually around the world and cover the long haul and ultra-long-haul networks.

Although they are also one of the short listed airlines for the A3XX project, the BA

fleet has only one Airbus model: the A320. All the other models (excluding the

Concorde) are Boeing models. Recently the European Consortium suffered a setback

when BA said: “We have no immediate plans to buy the A3XX”31.

5.3.1.3 EMIRATES AND SINGAPORE AIRLINES

These two carriers hit the headlines in the beginning of May 2000 when they confirm

their willingness to become the launch customers of the A3XX32. The Middle East and

South East Asia, are two of the regions with the highest growth potential33. Singapore

Airlines is one of the world most profitable airlines and operates in one of the most

busy routes in the world (Intra-Asia, Trans-Pacific and Asia-Europe34).

5.3.2 ENGINE SUPPLIERS

The new aeroplanes will need a new engine that will allow them to reach the expected

performance in meeting fuel consumption and environmental regulations. Three of the

world leading engine manufacturers have already committed to the development of

more powerful engines capable of lift up a very large aircraft: Rolls-Royce and Engine

Alliance. I must ad that is the customer who chooses the engine to install in the

30 Air France (1999: 41) 31 Skapinker (1999) 32 Perrett (2000) 33 Airbus 1999 Global Market Forecast (1999: 21) 34 Airbus 1st Quarter Media Briefing (2000: 2)

29

aircraft. The plane manufacturer can offer a range of available options, but the final

choice belongs to the airline.

5.3.2.1 ROLLS-ROYCE

This company based in the UK has been providing engines for the civil aircraft

industry for a long time. It will offer the new Trent 900 engine capable of offering

75000lbf35 and, in conjunction with the wing performance can carry 85 tonnes over

7650nm.

5.3.2.2 ENGINE ALLIANCE

This company is the result of an alliance of the two major US engine manufacturers:

General Electric Aircraft Engines and Pratt & Whitney (a division of United

Technologies Corporation). They will be offering the GP 7200, which will have the

same characteristics as the Trent 900. These engines are due to enter into service in ten

years time36.

5.3.3 AIRPORTS

Another key partner(s) involved in the creation of a very large aircraft are the airports.

Airbus as been in contact with over sixty airports in the world including the ones that

are expected to receive the firsts operations of the very large aircraft. The range of

airports include New York John F. Kennedy Airport (JFK), London Heathrow Airport

(LHR), Paris Charles De Gaulle (CDG), Tokyo International – Narita Airport (NRT)

and Madrid Barajas (MAD).

35 Lbf is the measure (Pounds force/thrust) of Sea Level Static Thrust that an engine can provide. 36 Airbus 1st Quarter Media Briefing (2000: 20)

30

The contacts established so far tend to minimise the impact of an aircraft this size in

parking, taxi, take-off and landing operations. One major concern is to make both

aircraft’s fitting an 80m x 80m box (the recommended size by the Airports Council

International37). Since Boeing will be offering a stretched version of the B747-400 the

impact will be minimum. Airbus is projecting the new aircraft based on the B747-400

requirements. So the impact in the infrastructures will be minimised. Some airports

will have to make special arrangements to cope with the arrival of a single very large

aircraft flight, especially in handling facilities. The “Turn-Around-Time38”

37 Airbus 1st Quarter Media Briefing (2000: 11) 38 The Turn-Around-Time is the time an aircraft takes to deliver its passengers and prepare for the next flight.

31

6. THE COMPETITION DEBATE

In the world of commercial aircraft manufacturing every single order counts, since it

involves an enormous amount of money and is the beginning of a series of relations

between the producer and the customer. For instance, once the aircraft is bought it

needs maintenance, servicing, spares and revisions operations, simulators and crews

will have to be trained to operate that particular model. For these needs the

manufacturer will supply the spare parts for replacement as well as courses and

training for the flight and cabin crews and the technicians to keep the plane in good

flying conditions. With time these relations will be strengthened and, as long as the

manufacturers keep their customers happy it can lead to new orders.

The battle for the world skies is also a battle between the US and Europe. One of the

arguments behind the European Commission support of the Airbus Consortium was

the Infant Industry Argument39 whereas one country can support a particular industry

in order to gain comparative advantage. By doing this, governments can create new

industries in their countries, provided that they have good foresight when choosing the

industry to support or ‘create’. The support is granted during the time that is necessary

for the company to develop expertise in manufacturing the product. There are some

problems that arouse, especially when it comes to assess how much of support will be

need or until when should the support be provided. This last issue is the centre of the

debate since Boeing argues that the aid some European governments40 are providing

for the A3XX project is a loan disguised as a (unfair and illegal) subsidy, since the

company can no longer shelter under the infant industry argument. A statement over

the issue was given by the US Trade Representative: “Airbus, which will be making

39 Munro (2000)

32

this new jumbo liner, is not an infant company. This is not a new industry in Europe.

Airbus has garnered about 50%41 of the new orders last year, they’re shooting for 60%

this year”42.

6.1 THE INFANT INDUSTRY ARGUMENT

The Infant Industry Argument can be explained with the help of the Learning Curve43,

described in the following diagram:

During the time a country takes to learn how to manufacture a product a certain degree

of support is granted. When Airbus was created, it was considered an Infant Industry

since there was not a civil aircraft industry in Europe. To face competition from across

the Atlantic, the European Governments involved in the Airbus consortium decided to

provide support through subsidies and special financial conditions to allow the

industry to develop. In the firsts years the argument was easily defendable, since

40 The UK Government granted a loan to BAE Systems in the value of $333ml (nearly 30% of the project) in order to help the development and production costs for the British part in the aircraft manufacturing. 41Accordingly with the data provided previously, Airbus accounted for 55% of the total orders for new airplanes (the total combines the Airbus and Boeing orders for 1999 only. The source of the data was the companies web sites). 42 Milner (2000: 21) 43 Krugman et al (1997: 154).

Unit

Cumulative Output

L

L*

Co*

C1

The Learning Curve shows that unit cost is lower, the greater the cumulative output of a country’s industry to date. A country that has extensive experience in an industry (L) may have lower unit cost than another country with little or no experience, even if the second country’s Learning Curve (L*) is lower.

Figure 4: The Learning Curve

33

Airbus was an example of Infant Industry. Nowadays it is harder to defend their point

of view, since last year it outsold Boeing in the number of ordered planes for the first

time since it was created. For this reason a Boeing spokesman questioned the financial

viability of the project: “One has to ask why Airbus needs assistance from the

taxpayers of Europe. If the market is so good, why do they not raise funds from

commercial sources?”44.

For the A3XX project, Airbus will raise the money needed to accomplish this task

from three different sources: the Consortium partners with 30% (CASA,

DaimlerChrysler Aerospace, BAE Systems and Aerospatiale-Matra), the parent

Governments with 30% as well (France, Germany, Spain and UK) and the new partner

suppliers with 40% (“It is Airbus intention to make up to 40 percent of the value of the

programme available to new industrial partners. Agreements to participate are in place

with nine of the industry’s leading players, including Aerostructures Corporation,

Belairbus, Eurocopter, Finavitec, GKN Westland Aerospace, Hurel-Dubois, Latecoère,

Saab and Stork Aerospace. Discussions are underway with a number of other

aerospace manufacturers including Alenia, and other leading companies in Europe,

North America and Asia”45). This diagram shows the distribution of the different

financial sources:

44 Mortished (2000)

30% European

30% Consortium

40% Equipment Partners

Figure 5: AIRBUS

34

6.2 COMPETITION LAWS CO-OPERATION AGREEMENT

In recent years, due to the increasing trade and economic relations between Europe and

the USA it became clear that it would be wise to establish a bridge among the two

economic surfaces. This agreement was established due to the “increasing likelihood

of concurrent and potentially conflicting jurisdiction over cases involving economic

activity in both the Community and the USA” 46. This was an attempt to prevent

situations that could mine trade and other economic relations between the two

economies. By doing this the problems that arouse most frequently in these cases

would be solved quickly due to the shared information and analysis of the cases

presented: “The EC/US and EC/Canada agreements are designed to facilitate increased

co-operation between the EU and its two principal North American trading partners

with respect to the enforcement of our respective competition rules”47.

6.2.1 EC-US AGREEMENT ON TRADE IN LARGE CIVIL AIRCRAFT

One of the reasons that the US authorities and Boeing consider the Government

support illegal is that it violates the European Commission / United States 1992 EC-

US Agreement on Trade in Large Civil Aircraft. This agreement was specifically

created for the civil aircraft sector. When the US officials started to get worried with

the competition that American manufacturers had to face from Airbus, they attacked

the “alleged subsidies paid by the European governments for the developments of the

early models of the Airbus family”48. On the other hand the Europeans were also

“concerned by subsidies accruing to US large civil aircraft (LCA49) manufacturers

45 Airbus’s 1st Quarter Media Briefing (2000: 12) 46 Goyder (1998: 551-552) 47 Pons (1999) 48 http://europa.eu.int/comm/trade/goods/aircraft/overview.htm#2 49 Large Civil Aircraft comprises all the aircraft with more than 100 seats. In this market over 80% of the sales are supplied by EU/USA manufacturers. Idem.

35

through NASA and Defense programmes (…) The EU and the US started bilateral

negotiations for the limitation of government subsidies to the LCA sector in the late

1980s. Negotiations were concluded in 1992 with the signature of the EC-US

Agreement on Trade in Large Civil Aircraft which focuses on the limitation of both

direct and indirect government support”50. The main question establishes a “ceiling on

the amount of direct government support (33% of the total development costs) for new

aircraft programmes. It establishes that such support (granted in the form of repayable

royalty-based loans) will be repaid at an interest rate no less than the government cost

of borrowing”51. At the same time is also states the amount of indirect support (i.e.

benefits provided for aeronautical applications of NASA or military programmes) should be

limited to a 3% of the nation's LCA industry turnover (…) In order to verify compliance

with the above disciplines, the Agreement establishes that the parties must exchange

transparency information on a yearly basis on their respective support systems, through

bilateral consultations that normally take place twice a year. Such consultations are an

occasion to discuss questions concerning the implementation of the agreement and any

other issue of relevance to the LCA sector. It must be remarked that the exchange of

transparency information has highlighted an important divergence between the US and

the EU in the way to interpret the indirect support discipline. In general, the EU

considers that the US notification of indirect support to its LCA industry falls short of

the real benefits derived from NASA programmes and military spin-offs”52.

50 Idem. 51 Ibidem. 52 Ibidem.

36

6.3 THE A340 –B777 ETOPS DISPUTE

Another subject that is under fire between the two manufacturers is the Extended

Range Twin-Engine Operations53. The aircraft’s were allowed to fly routes where, if

any problem occurred, they could reach an alternative airport at the speed of only one

engine in a time frame of the stipulated limit (180mn for twinjets54). When Airbus

released the A340-500 it was allowed to fly with 207mn of ETOPS, mainly because of

its four engines. Boeing recently required an ETOPS extension for its B777-200

because this aircraft only has two engines but can compete with the A340 due to its

ultra-long-haul autonomy. Behind these arguments is the fact that since the Boeing

model is efficient with only two engines but is limited to 180mn ETOPS, it is not

allowed to fly routes over great distances without an alternative airport in reach within

the limit. This situation applies to Trans Pacific routes where the aircraft has to fly

over water for several hours. Airbus is committed to ensure that Boeing will not be

granted the extension it required by lobbying the authorities responsible for the ETOPS

regulation55.

6.4 THE EU / USA HUSH-KITS DISPUTE

The dispute for the world skies also has implications on the authorities of the

economical areas. The hush-kit56 is a technological device that is used to reduce the

noise level on aircraft engines without having to replace the whole engine. This was

53 ETOPS – An international regulation that limits the autonomy of an aeroplane accordingly with the number of engines. Roque (1999: 12-13) 54 Idem. 55 Airbus web site: http://www.airbus.com 56 “A hush kit forces engine exhaust through a nozzle into an ejector shroud, decreasing the velocity of the exhaust and thus theoretically making it quieter. But the EU says hush kits induce weight and performance penalties which translate into 50 percent more fuel consumption on take-off and significantly worse noise standards than current technology aircraft” Financial Times (1999).

37

created to meet the ICAO Chapter Three standards of noise levels57 due to become

effective in May 2002. This measure, by US manufacturers, allowed several airlines to

meet the standards required for 2002 without having to replace their current aircraft’s.

The EU called for a unilateral ban on hush-kited aircraft registered outside EU after

May 2002. On this side of the Atlantic, the European Union argues that: “the

regulation aims to reduce aircraft noise and environmental degradation caused by fuel

burn from aircraft”, since a Hush-kited plane will burn more fuel at take-off58. In

Europe most of the airports are located near highly urban area that have been

increasing the number of complaints against aircraft noise level. To face this the EU

considers that is preferable for companies to acquire new and quieter aircraft59. But

analysts claim the main reason for this is trade and the market for replacement fleets.

There is a market potential of nearly “1,600 used US aircraft and rebuilt engines in

Europe that represent one billion dollars in potential sales”60. By doing this one of the

greatest beneficiaries will be Airbus with an increase in the number of potential

customers61. On the other hand all the hush-kit manufacturers are US based companies.

The “US Commerce Department estimated that the economic injury sustained by US

airlines exceeded dollars 2bn”62.

If the EU ban is not withdrawn the “US House of Representatives will ban supersonic

Concorde planes from landing at US airports”, and it would waiver the 63. British

Airways (which together with Air France are the only two Supersonic Concorde

57 Prestowitz (2000) 58 Financial Times (1999) 59 Idem. 60 “James Oberstar (US Representative – Democrat) said in support of the measure that the issue between the EU and the United States is not environmental concern over air and noise pollution but trade. He said at stake is the resale of about 1,600 used U.S. aircraft and rebuilt engines in Europe that represent nearly one billion dollars in potential sales” Ibidem. 61 “The EU position will also benefit Airbus Industrie, the European multinational consortium that receives funding from EU member states, as Airbus order books are filled by European airlines eager to replace ageing fleets” Prestowitz (2000).

38

operators) issued a statement saying that: “We are not concerned about it because 65%

of Concorde passenger are US nationals”64. The House of Representatives also said

they “would revoke U.S. noise waivers granted to the Concorde supersonic aircraft,

which have been in effect for the past 30 years. Actually Concorde does not meet the

current ICAO noise standards” 65.

The issues surrounding the Atlantic dispute for the dominance of the world skies is a

very tricky one. In one side we have the established American manufacturers which

have been dominating the LCA sector for nearly 50 years, while on the other side we

have an European Consortium that managed to achieve almost 40 percent of the world

market in thirty years and is the only manufacturer to compete with their American

counterpart. For these reasons it is not so surprising that both Governments (US and

the European Commission) are willing to support their “national” based companies.

Although Boeing argues that the European Governments support Airbus through

disguised subsidies, it is also true that Boeing “receives similar subsidies by the back

door via heavily padded defence contracts for the Pentagon”66. But comparing with

other industries, “with only two manufacturers in the world capable of launching a

civil aircraft, subsidies are almost a necessity to ensure a competitive industry

exists”67.

62 Financial Times (1999) 63 Idem. 64 British Airways Press Office page in http://www.britishairways.com 65 Financial Times (1999) 66 Mortished (2000: 31) 67 Idem.

39

7. CONCLUSION

From the demand point of view (in this case for the airlines), competition is very

important since it offers choice. The virtue of Airbus lies on the fact that it

considerably lowered the prices of aircraft. Although it is widely considered one

example of good strategic trade policy, it is considered to be a minor winner. The

major winner was the world third biggest aircraft market: Japan68. Europe also won in

terms of GDP in the countries where the aircraft’s are assembled. The most important

part is that it broke the de facto monopoly of the US manufacturers. In any industry it

is important to people, companies and authorities to be able to choose.

In the market for aeroplanes with more than 400 seats there is only one aircraft in

operation, the B747-400. Since its manufacturer is not willing to introduce a bigger

model in the next years, due to demand perceptions, people could be paying relatively

higher fares instead of the ones they would pay if there were more available seats per

kilometre.

So far the Airbus strategy has been fruitful in the civil aircraft sector. With the recent

merger of three of its partners and the expansion to the military sector some fissures

may arise. A first sign of it was the threat of veto by BAE Systems if EADS decided to

sell 5 per cent of Airbus to Alenia69 (an Italian aerospace group). On the other hand

there are rumours that the military division of BAE Systems is set to merge with

Boeing. For these reasons, the creation of a giant aerospace industry in the European

soil has been a tough issue. Another recent event was the UK government choice of the

Missiles to equip the Harrier aircraft. There were two options: a US model with given

proofs and currently in production, and a European prototype. The UK decision would

68 Munro (2000) 69 Harrison (2000)

40

deeply affect the development of the European model. In the end the order went to

both companies but with different shares70.

This kind of setbacks cannot happen in a competitive sector such as aerospace

industry, where the competition if fierce.

When Airbus expressed its intention of producing a very large aircraft, being the first

to do this, gain some projection and it was considered an innovator. On the 26th of

May, and with the postponing of the meeting that would authorise the production of

the new aircraft, the Boeing Company took advantage of it claiming an uncertainty

level on their European competitor decision, and reinforcing its argument of non-

financial viability financial. Boeing also argues “the project could only go ahead

because of launch aid being offered by European governments in the form of repayable

soft loans71”.

By analysing the data provided by the companies it is not clear to assume which side is

right. The information is quite biased due to the competition and what is at stake: the

world leadership in civil aircraft manufacturing. With these dissertation I tried to

present the different points of view and some questions that I considered important in

the demand for ‘superjumbos’. Since this problem is being discussed at this moment it

will not be long until a final decision is made.

70 BAE Systems and Boeing web sites. 71 Done (2000)

41

8. BIBLIOGRAPHY

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