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February 12, 2007

News & Opinion: What You Need To Know About The Airline Industry

By: 800-CEO-READ @ 9:45 PM – Filed under: Management & Workplace Culture


In this passage from Boeing Versus Airbus, John Newhouse is elegant and efficient in his description of aircraft industry's product tiers, important equipment specifications, and overall history of the industry. I have been fascinated by the duel between these two companies and Newhouse tells me more in 700 words than I have read in countless articles.
Airliners, like T-shirts, com in different sizes—small, medium, large, and extra-large. But they have more variety than T-shirts, because the suppliers build each of their products into families ; in turn, the family members, the airplanes, vary somewhat in size, range, and other characteristics, the better to fill each of the airline market's crevices.

The low end of the market is covered by two single-aisle airplanes, Boeing's 737 and Airbus's A320. They are roughly the same size, seating up to 190 people. Both are exceptionally successful, having exceeded the most optimistic forecasts of their respective companies. The 737 is older and has been steadily improved over the years. But the A320, a newer slightly larger and more comfortable aircraft, is outselling the 737, not least in the low-cost market that Boeing had monopolized. In December 2004, the surge in orders for A320's from low-cost carriers caused Boeing to shake up its sales force and replace its chief salesman, Toby Bright.

The biggest revenue earners are airplanes with 200 to 300 seats. For many years, Boeing had this so-called middle market largely to itself with the 757, a long single-aisle airplane, and the double-aisle 767. The narrower and less comfortable of the two, the 757, could seat up to 239 passengers, while the more popular 767 carries 218 to 304, depending on the version. The extended-range version of the family became the most profitable of all Boeing aircraft (a distinction widely but wrongly thought to belong to its 747 jumbo). This airplane's other distinction lay in becoming the first long-range, transatlantic, twin-engine airliner. It was quietly followed by the A310, which was less popular.

Then, in the mid-1990's, Airbus moved aggressively into this Boeing fiefdom with the A330-200, a new medium-size airplane that quickly became very popular with airlines for moving both people and cargo. The heavy demand for the A330-200 drove Boeing out of the middle market, the richest segment. In October 2003, it announced that too few orders for its single-aisle 757 had dictated a decision to end production of the aircraft by the end of that year; the news foreshadowed serious job cuts. As for the 767, its days, too, were clearly numbered.

Between these middle-sized vehicles and the high-end jumbo lay a hole in the market for which Boeing and Airbus began competing vigorously in the 1990s. Boeing entered with the 777, a high-quality and very popular airplane. The 777 in a standard configuration with seats between 300 and 370 passengers. Its launch customer, United Airlines, began flying it in 1994. Airbus's counterpart aircraft in the market, the A340, began life commercially a bit earlier, with Air France and Lufthansa, in March 1993.

Predictably, these minijumbo—the 777 and he A340—became minifamilies of aircraft with varying ranges and other features. Each of the two product lines flourished for a time, until the 777 began to take control of the market. It is judged marginally more comfortable than the A340 (and most other aircraft) and is believed to have slightly lower operating costs. In most ways that matter, teh 777 is much the better airplane.

More important, the 777, in its early standard version, may have trailed the A340, but Boeing had thoughtfully begun to design and build an extended-range member of the minijumbo family before Airbus got going with a similarly long-range A340. This meant that competitive edge in what became a highly profitable market for the longest-range versions of the big airplanes belongs to Boeing.

The market's extra-large segment—the high end—has belonged to Boeing since the late 1960's, when it built and began selling the 747, an airplane that was two and a half times larger than the 707, the next biggest LCA. Thirty years later, Airbus, perhaps unwisely, chose to overtake and even oust Boeing from the market by building a new and even bigger airplane. This superjumbo, the A380, had been scheduled to begin its commercial life with Singapore Airlines, the launch customer, in the spring of 2006. But Airbus, aware that the airplane couldn't meet performance guaranties, pushed the delivery date back to the fall of that year, and then was obliged to postpone it for a few additional months. The airplane's prospects were becoming unclear.