John Newhouse: Boeing Versus Airbus

Thanks very much. Not the least interesting and possibly the most interesting thing about this book is that it's a sequel to one I wrote 25 years ago. Some things haven't changed since then, others have. One concerns Airbus itself. The time it was, appeared to be, another European wannabe that would be competing simply against these huge American companies like Boeing, Lockheed and McDonnell Douglas or MacDac as it was known in the days. Nobody thought that Airbus could make that, that it would be around very long. Another thing that hasn't changed or has changed, hasn't changed since then is the enormity of the risks involved in this business. They involve a huge cost and the effort to keep abreast of rather to changing technologies. These picky aircrafts we all fly around and probably regarding more advanced technologies than any other product. So the business is high risk, high cost, low margin and low shareholder security. Can't win, can't break even and you can't quit, said Jean Pierson who at the time was running Airbus. He had the personal force to persuade American carriers to buy his airplanes as well as European carriers. He was really the model of what it takes to run a business like this. As to say it requires vision, guts, judgment and a capacity for hard work. His ambition, not just to make it dent in the market and with his leadership Airbus did and acquired credibility which it also did. He announced that he was going to overtake Boeing and split the market. Boeing along with others in this country wrote that off as - just more of friendship, socialism speaking. But Pierson succeeded in overtaking the Boeing and dividing the market. In doing so, he needed a lot of help from Boeing though and he got it. Boeing began coasting, instead of doing the things one has to do to stay even in this business, that is to say, being bold and experimental, building new equipment. Boeing retreated from his responsibilities and coasted on it's laurels, it's complacent, began taking the airline market for granted, it's after sales service, declined and it's costs, even in this high cost business were really out of sight. Boeing was still using production methods dating to World War II when it was building B17s and B29s in the Air Force. Airbus inevitably was more modern because it started much later. It got into, because it's for the nation much sooner. So its costs were gave an advantage, vis-à-vis Boeing and Boeing knew that. I mean, it was writing off Airbus's French socialism and being complacent. While at the same time a little bit worried. And in fact in the mid-90s I should say in the '96 and '97 period Boeing sent two teams to Toulouse to look at Airbus and Airbus cooperated and Boeing came back and reported. The Boeing teams reported that Airbus was building comparable Airplanes a lot more inexpensively than Boeing and building as many airplanes or has the capacity to build this many airplanes that Boeing with exactly one half of the cubic footage of factory space. Now the Boeing leadership at the time took those reports and buried them. Did nothing with them and I was told, never even exposed the Boeing board with these reports. Which may not have made any difference because Boeing board then as probably now is still is remarkably compliant and never really gets in the way of the leadership. So there was Airbus flourishing, overtaking Boeing. On the way to splitting the market and then suddenly in a period of 18 months from January 2005, to June 2006 Airbus abruptly fell of this comfortable plateau it was sharing with Boeing. In that period of 18 months Airbus went into a decline as steep and as meaningful as what that occurred to Boeing over a 10 year period. Curiously Boeing over the 25 years that my book covers made many mistakes and did very few things right. Whereas Airbus in the same period did many things right and made as far as I can tell only three mistakes. But Boeing survived its mistakes. And thanks partly to Airbuses mistakes. As I say there were three, really, one was designing a super jumbo airplane called the A- 380 that was probably too big for the market. Another larger mistake was making a mess of the production of that airplane. That takes us across to our third mistake. I think, are directly traceable through a change in Airbuses leadership. Jean Pierson went out and partly on doctors orders I think, retired from Airbus in '97. He was replaced by a man named Noel Forgeard whose major advantage was his close connection with France's President Jacques Chirac. He had strong, head strong industrial experience, aircraft industry experience but again it was - it was his relationship with Chirac that mattered. He was not the right man for the job to put in my opinion whereas Pierson was a company man, the company came first in all respects. In the case of Foregeard it was his consuming self interest. Being boss of Airbus was not enough for him, what he wanted was to be co-chairman of what is known as EADS European Aeronautic Space and Defence, Aeronautic Defence and Space Company which is the parent company of Airbus. So he was spending great deal of his time lurking in the corridors of Paris, the corridors that mattered in order to promote himself and with Chirac sell peace, he was succeeding. The company was not benefiting from this pattern. In fact the company was beginning to lose sight of its larger interest. One of which was trying to make a goal of this over sized super jumbo airplane. So with the leadership losing sight of what really mattered, that is to say the presumption, the production of this airplane it floundered and starting in January of 2005, it had to announce delays in delivery of the airplane. And delays matter a great deal to customer airlines. They have the - because they are planning their route structures around new equipment. So a delay can and usually does involve penalty fees and it can amount to tens and millions of dollars. But Airbus was announcing that this was a delay but that it would be able to deliver the airplane later on, six months or what I have forgotten. There are at least two or three people here now who know lot more about this, in this case and I know I am sure one of them will be correcting me at some point. So that was mistake number 2, the third and really vital mistake. Directly traceable in my opinion to Noel Forgeard was not building the Airplane that could have headed Boeing off. That is to say Boeing's so called dream model 787 and I will go back a bit to say that airliners are like T-shirts, they come in different sizes, small, medium, large, extra large and even super jumbo. The richest segment of the market is the middle market which involves Airplanes of 200 to 300 seats. Now Boeing had dominated that market at one time with it's, particularly with its Airplane, the 767. So Airbus under Pierson took direct aim and displaced Boeing with a newer and more modern Airplane call the A330-200. Boeing decided to return the compliment, as it were by building the 787. Although it took Boeing far too long to decide to do that and there was a lot of resistance to doing it in Seattle and even within the Boeing board because a decision to build the airplane and is immediately telling shareholders and board members that big deficits lie ahead. We have no idea of whether and if so when an airplane like this will begin to make money. What more likely than not only several years down the road. Where is the break even point of a program like this, nobody has the least idea. Winnable deal or even if indeed there is one its all nearly impossible given the cost of these airplanes and the huge uncertainties involved in production methods to establish a break even point. So there is always resistance and there was a built-in resistance in Boeing that took them far too long to decide to build this airplane. We finally built it, meanwhile Airbus was sitting on tents doing nothing because Boeing had done throughout most of the 1990s. Airbus had an airplane, which it was calling the A-350 which was a final look alike an airplane very like Boeing's Dream Liner which I should add by now has been probably the most spectacular selling airliner that maybe not in history, but certainly in the current era that is just so marvelously well. Noel Foregeard did not want to invest a lot of money in the A350 that is decided to build, a new state of the art airplane. He thought, he could do just as well or took the position he could do just as well by modifying Airbuses A330 200,. Putting new engines on it, doing this that and the other and he could make this a better and improved airplane and Airbus's numerous customers in the middle market would buy it because they could get it a lot quicker than they could get the Boeing airplane and it might sell for $7 or $8 million less. Well as it happened not a single airline in the world was interested in Noel Forgeard's fix instead they all bought, for example, Airbuses best customers they all bought the 787. Now, the combination of what's become of the A380 which the delays have persisted and the penalty fees are climbing and Airbus's credibility has suffered. I think the parent company EADS lost $7 billion in capital utilization in one day in June of '06. So lot of people are tending to write Airbus off. I have even heard couple of people in Wall Street say well Airbus is in floating. They maybe right and they know more than I, but I don't believe it. I think the airlines of the world need two suppliers and we will take steps to make sure that there will be two suppliers. An example is Singapore Airlines which a great many people, if not, most people know about these things that are we can say it's the best run airline in the world. Singapore Airlines was, I think the launch customers for the Super Jumbo A380 and made a huge fuss when Airbus announced the first cancellation. They went public and demonized Airbus and yet Singapore Airlines was the first airline to expand its order of A-380. Not only that when Airbus belatedly four years too late finally announced that it was going forward with its A350 that is the airplane that designed another state of the art airplane designed to compete with Boeing 787. Singapore Airlines was, I think, the first and possibly the second airline to order this airplane. So Singapore Airlines plus another, plus the leasing company would buy and launch a number of these airplanes compared to what the airlines can buy. They, I think, have cleared have their throats in ways to make it clear they will want to keep Airbus in the picture. Now the most consent and the most contentious issue between Boeing and Airbus concerns what involves subsidies. How they provide financial assistance to these companies. Boeing has for many years complained about how the member governments of Airbus provide, launch aid for new Airbus programs and they can provide up to one third of assistance and then once the program begins to make money, if it does make money Airbuses will begin repaying the loan. Airbus responded to Boeings complaint or at the Boeing argument by with the argument that Boeing benefits as much as we do but instead of getting financial assistance directly from the US government it get this indirectly by Air Force Programs and NASA Program. For example, Airbus points out correctly that a great deal of the new technology in Boeings super selling 787 airplane comes from its involvement with the Air Forces stealth bomber programs and so forth. I mean, I would rather argue the Airbus case if I were doing so than the Boeing case. The Boeing was Boeing made the initial complaint and then through the office of the special trade representative and the government, our government took into the World Trade Organization. And Airbus via the European Commission filed a second complaint against Boeing and therefore by the time we had it - but Airbuses lost sight of a very big advantage that Boeing has and that's its involved with three Japanese Companies called the Three Heavies. These are Fuji Heavy, Kawasaki Heavy and Mitsubishi Heavy. And these companies have been involved in the last three Boeing airplane. 15 percent of the 767 something like a 27 percent with the 777 and they have always wanted to build the wing for a Boeing airplane, well the wing is clever part of any airplane. I don't think many people, certainly in Seattle expect that Boeing would ever allow the Japanese companies to built the wing for one of its airplane. Now the three heavies are building the wing for the DreamLiner, the new Boeing airplane. And they are building a section of the fuselage. First of all Japanese never build the wing for big airplane like this that commercial airplane. Nobody has ever built the wing for one of these airplane that's made largely or at least partially have composites or the wing box which is the keystone of the airplane and of composites. The Japanese who are very good with experience but composites have never built the wing, so this is, as you might imagine, has caused a certain amount of talk. Now many people including a lot of people in Toulouse have wondered why, we that is to say Airbus haven't taken this up with the WTO because of the so called three heavies get at least as much and everybody thinks really more assistance for the Japanese government than airbus gets from the member governments and that's important. Now why hasn't that done so, I have asked that question and the answer I got from very disgruntled Airbus people, disgruntled because they disagreed with the position is that we have a tiny share of the Japanese market. We really think that we can sell the A380 Super Jumbo to Japan Airlines. Now we don't want to offend the Japanese thereby risking able to do that. I think more serious people in Airbus think that's absolute nonsense. The Japanese are never going to buy the Airbus Airplanes. But they need to have a stronger case in the WTO and in booking the Japanese would help. Going back to the support that Boeing gets via Air Force program I will just read a paragraph, if I may, from taking up. In January 2006 Dominic Gates of the Seattle Times, was a very good reporter, by the way sighted what he described as a bombshell dropped some months earlier by group of Boeing engineers working on the 787 program. These engineers veterans of the B2 stealth program told an internal investigator that data from B2 bomber technical manuals had simply been copied straight into 787 technical specifications. Boeing managers, Gate said, where caught by surprise. We all underestimated the amount of screening we needed to do for military technology, said Walt Gillette Head Engineer and President for Airplane Development on the 787. It is our clear intent to make sure we comply with the law, Gillette said, but Gates wrote the underlying issue is whether Boeing has planned to outsource high hi-tech 787's composites manufacturing, with US Government technology in the hands of either enemies or potential future economic competitors. Yet Boeing's internal response, he continued suggests a reverse perspective. That the law is designed to protect military secrets create barriers to the legitimate sharing of commercial technology, which exactly we see as essential in the global - globalized aviation market place. It's an argument, I think I broke, it's an argument that can be used to support Airbus in contention that US technology flows back and forth between the military and civilian sectors with Boeing as the main beneficiary. Another issue has caused a lot of comment in Washington of course, as the subsidy issue is defense scandals that have over taken Boeing. Unlike other Defense companies Boeing used to have fewer defense related, defense product related scandals and say McDonnell Douglas or Lockheed and some other companies earlier on. But then in 1997 Boeing merged with McDonnell Douglas, very controversial move. A lot of Boeing people were appalled at the idea of trying to marry their corporate culture with a corporate culture they regard they regarded as somewhat sleazy and therefore worrisome and an autocratic culture like that, with a kind of shoot the messenger in style and they felt that they had a problem solving culture instead that flattered themselves with that self in that definition of their own culture and to a degree it had been traditionally accepted rather it had, they hadn't solved problems themselves. They had been creating problems but never mind Boeing people, hence believing in calling themselves Boeing Heritage people so they distinguish themselves people who are coming in to the company from McDonnell Douglas. They did begin having problems after they join forces with McDonnell Douglas and it's also true that the merger left McDonnell Douglas basically in charge of Boeing because the two biggest individual shareholders, became John McDonnell, the chairman of the former chairman of McDonnell Douglas and Harry Stonecipher who had been the CEO. So Boeing people began saying that McDonnell Douglas had just bought Boeing with Boeings money and there was a lot to that. The Boeing people would, were frankly very afraid of Harry Stonecipher who had been running McDonnell Douglas and then came in under the terms of the merger. Now he became president and Chief Operating Officer of Boeing. They all felt correctly, but Harry who is a very capable CEO he has made money wherever he has been and shareholders have always liked Harry because he is a Texan. But this is a different business its not about protecting shareholders because in the end you can't protect if you don't build an equipment and Harry was never a great thought center of R&D in any case the merger eventually fulfilled the worst anxieties of Boeing people by leading two scandals. First of all, some of these people stole 25000 pages of proprietary material from Lockheed, in competing with Lockheed by selling rockets to the airforce. Boeing got penalized a billion dollars for that and was told to stay away from this business for x number of years, I can't remember now. And then a more serious problem arose in October '04, yes it was. I no longer I no longer remember when a Boeing connived with the airport with the air force to sell aerial refueling tankers. The air force was letting a contract to replace its tankers and Boeing wanted to keep it s 767 line open, 767 would be a jolly airplane for this purpose. So the air force said fine and they gave Boeing five months to redefine specifications so that the 767 could be at the airplane that fit the air forces needs. On those five months Boeing eliminated 19 of the tasks that the air force wanted this plane to fulfill. And it was really a scandal. Not only that, Boeing was working with a woman, whose daughter was a Boeing employee and who was being promised a job at Boeing when she retired from the air force which would be fairly soon, and she was giving Boeing frequent heads up what the competition was doing for example she once told Boeing that Airbus was bidding, and they were seriously underbidding Boeing so something had to be done about that and some people, are certainly unfortunately for Boeing John McCain got on that case and decided to make an major issue of it and then it did become very interesting and maybe I will just read a paragraph itself about that. The process of defining, the process of defining the specifications for the new tanker, was McCain said, this was, when I was talking to him. One example of what he was talking about, Boeing was allowed to define everything he said. And then I go into the specification whichever what you talked about. According to McCain the tanker deal was inserted into an appropriations bill, this was direct appropriations 87 million by the fellow Republican stalwart, Senator Ted Stevens who was then sharing the Appropriations Committee. The record supports this contention as this Stevens himself in a hearing of McCains, committee he took credit for his lead role expressing pride. I challenge anyone about my backroom dealing or anything else to, we offer the amount that was right, that is right in front of God and everybody. It was in the bill and it was reported, it was there to be debated as a matter of a fact there was some debate about it. Among the hard questions spilling out of the affairs why so many people [overlapping voices] played this hand so crudely and risked so many ugly consequences. Their explanation according to some knowledgeable people in Capitol Hill said President Bush let it be known that he wanted the Boeing Air Force deal done. In October '02 he says as much in meeting in the Oval Office with house speaker Dennis Hastert one of the arrangements most strenuous advocates and he then instructed Andrew Card White House Chief of staff to become his point man in this trouble that lay ahead. Bush was (indiscernible) Hastert not long before had guided the first of the president's massive tax cuts with a ride to the matter of skeptical House of Representatives. Helping borrow was important to Hastert according to his spokesman of only because the company's headquarters being close to his district and a number of Boeing people lived there. Yes, the speaker goes Illinois and he has been personally involved and he has been personally involved and this he makes no secret of his spokesman, John Theory told the Washington post etcetera, etcetera, etcetera. He is not just fighting for the sake of his constituency, it's also for the country's sake. This state of corruption wouldn't change until we start putting people in jail and within a year or two, people he had in mind this woman I meet at earlier, and regarded she was working with the Boeing, were both in jail and Boeing got very lucky in July '05 and because they persuaded a guy named Jim McNerney whom they wanted to be their ____ leader for the year, so he had consistently turned it down. He had been running the GE aerial engines company for a long time where he did a great job he thought he was going to succeed Jack Welch but he didn't. So instead he went to 3M and built that up into a very successful operation and Boeing kept offering this job and he kept turning it down, and finally in July '05 for whatever reasons changed his mind coming to Boeing and he knew something had to be done about this cultural problem that helped Boeing's integrated defense systems section as it calls itself and defense unit. So he did that at the annual meeting of senior Boeing people get together in spot in Florida and what he did was about this. The Boeing general council since retired he had done, in Douglas Bain gave the opening speech and McNerney was in the audience and Bain began his thought by saying as I walked up here I think heard Jim McNerney mutter here comes Dr. Death. No one there with any doubt about who had staged the show. Was there culture of win at the cost of Bain asked the audience, we now know what the cost is, Boeing he noted paid possible indictment for US attorneys on both coasts and the Department of Justice's assessment has exceeded $5 billion. Also Bain added Boeing could be barred from government defense contract who denied export licenses to both military and commercial sales. He reported that 15 company vice-president had been pushed out for various technical lapses in recent years. I found that to be an astronomically high number he said. There are some within the prosecutor's offices that believe that Boeing is rut in to the core, Bain said. The US attorney in Los Angeles he said is looking at inviting Boeing for violations of the economic Espionage Act, the Procurement Integrity Act, the False Claims Act and the Major Frauds Act. The US attorney in Alexandria, Virginia is looking at indicting us for violation of the conflict of interest laws and both are looking to thrown in a few conspiracy and dating and abetting charges for good measure. These are not the zip codes he said as he read off the federal prison numbers of (indiscernible). How come in the year 2000 nobody said should really be hiring the relatives of our chief procurement officer of the largest custom we have on the defense side. Possible impending penalty he said include a presume denial with export licenses both on the commercial and government side as well as "loss of security clearances and possible re-suspension on dating for space contracts or even total debarment from all government contracts on the defense side. Bain ended with three questions do we have a culture of silence, where was the manager through out this, is the problem the ranking file, or is the problem us?