Emirates’ airline Airbus A380 (photo credit: AFP/Getty Images)Getty
Airbus just announced that it would stop producing its Superjumbo A380.
It’s an outcome that rival Boeing anticipated about 25 years ago when it outplayed Airbus with a brilliant bit of judo strategy (using Airbus’s strength against itself), according to my 2008 book, You Can’t Order Change: Lessons from Jim McNerney’s Turnaround at Boeing.
To be sure, I’ve flown in the A380 to Dubai a few times and found the Emirates flight to be very comfortable — even in economy class.
On February 14, Airbus announced that with Emirates orders tapering off, it would stop making A380s in 2021, according to the Wall Street Journal.
But the very existence of the A380 was a product of Boeing cleverly taking advantage of Airbus’s ambition to defeat Boeing in the market for jumbo jets — thus diverting it from trying to replicate what Boeing thought would be the far more successful 787.
Boeing’s ability to envision and create the future gives me optimism that it can sustain the 26% average annual stock price increase that it has generated over the last decade. (I have no financial interest in the securities mentioned in this post).
As the Journal reported, in 2000, Airbus bet over $10 billion on the 555-seat A380 because it wanted to replace Boeing’s 50 year old 747 jumbo jet. The A380 went over budget due to development delays and while passengers liked the plane, airlines preferred Boeing’s 787 Dreamliner or Airbus’s A350.
The decision to end the A380 comes in the wake of recent order cancelations. The Journal noted that last week Qantas “formally canceled an order, placed in 2006, for eight more A380s.” Singapore Airlines is selling its first two A380s for scrap and Emirates — which bought 123 of the planes — will take delivery of the last 14, according to the Journal.
This A380 denouement was envisioned by Boeing’s former CEO, James McNerney.
When he was a Boeing director, before taking on the CEO role, he saw that mid-sized planes in the point-to-point airline segment — pioneered by airlines like Southwest — would be more profitable than the long-range, hub-segment which flew passengers to big airports and let them sit for hours waiting for their connecting flights.
Unlike Airbus, which fell victim to confirmation bias – the tendency to see only data that reinforces a pre-existing expectation – McNerney relied strongly on Boeing’s Strategic Analysis Department (SAD).
As an independent unit, SAD asked its Airline Advisory Council, consisting of Boeing’s best customers, what they would like in a new aircraft. And it looked at trends in the airline industry – such as changing route structures, new business objectives (such as an emphasis on profit versus market share).
As a board member, in 2001, McNerney supported the approval of what by 2008 amounted to a $10 billion investment in the 787. The board agreed to the investment because it was convinced that the market was out there and that Boeing could succeed by building on its strengths.
Here’s the brilliant bit of Judo strategy that Boeing used against Airbus.
The evidence for the size of the market came from both Boeing’s strategic analysts and from a market research study done jointly with Airbus.
In the mid-1990s, Boeing had been trying to decide what to do about its 747 which was reaching the end of its life.
Boeing was considering whether to develop a “growth version” of the 747 which would increase its capacity to 500 seats from 420 seats. But Boeing’s profits were dwindling since demand for the 747 was falling off, and it was cutting production volume.
So Boeing proposed to Airbus that the two companies conduct a joint study to assess the market potential for a replacement version of the 747. Why Airbus agreed to this joint study is not clear.
Some observers thought that Airbus welcomed the opportunity to learn more about the market and the technology for jumbo aircraft. It may have also hoped that Boeing would spill the beans on useful information that would help Airbus build a bigger aircraft.
Others contend that the joint research project on the next generation 747 was a deliberate Boeing tactic to stall Airbus and to get it to divert resources that might have been more profitably invested.
Richard Aboulafia, vice-president of Teal Group, an aerospace consulting firm, and others thought that Airbus – which lacked a jumbo aircraft – had fuselage envy. As Aboulafia put it, Airbus exhibited “hubris. They told themselves, ‘If we have the biggest plane, we will beat Boeing.’”
In any event, at the end of the joint study, Boeing concluded that the super jumbo market would be far smaller than Airbus did.
According to John Walsh, of Walsh Aviation, an aerospace consulting firm, Boeing estimated that demand for super jumbo aircraft would amount to 250 units while Airbus thought the market would total 1,000. At McNerney’s urging, Boeing remained focused on market for intermediate-sized jets, which proved to be the better bet.
While Airbus thought it was delivering the coup de grace to Boeing; Boeing thought it was getting the better of Airbus and that it would take Airbus a long time to figure that out and to respond.
Specifically, Boeing believed that Airbus’s internal conflicts would slow down its response to Boeing’s success with the 787 in the mid-range market.
As it turned out, the A380 exacerbated those conflicts. British members of Airbus agreed with Boeing’s more conservative market forecast for the super-jumbo. While the French contingent was inclined toward the much higher estimate for A380 sales, Airbus’s German subsidiary was somewhere in between the large and small estimates.
According to aerospace financial consultant, Philip Bolt, who worked on the forecast while at former UK-based Airbus partner, BAE Systems, “We hewed to the view that the market for the smaller, 300-seat aircraft would be bigger than that for the large aircraft. However, the Franco-German momentum overwhelmed BAE’s view. And BAE exited from its Airbus shareholdings at the appropriate moment. I don’t think the A380 will ever be profitable.”
Airbus’s decision to go forward with the A380 delayed its ability to respond to the market demand for the 787. According to a European industry insider who agreed to speak frankly on condition of anonymity, “Boeing knew that the market for a growth 747 sold to the passenger airline industry would be limited. But Airbus’s decision to invest in the A380 meant it had no money to build an aircraft to compete with the 787.”
Boeing has demonstrated its ability to see 20 years into the future and make the right bets.
This makes me think that it’s placing the right bets to take a big piece of its vision for the industry’s future — that record-setting domestic passenger traffic and a robust domestic economy will drive the need for 2,300 new airplanes — valued at $320 billion by 2028.
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