Pressure On Boeing, As Airbus Falters

June 18, 2006
The latest slip-up by Europe's Airbus -- whose giant A380 jet is now more than a year late and mid-sized A350 set for a total redesign -- appears to hand US rival Boeing a golden opportunity to take back the lead in the commercial jet market.

But the US plane maker, which has trailed Airbus in orders for the last five years, faces a tough schedule of its own as it aims to put its strong-selling 787 Dreamliner into service by 2008, and may not be able to ramp up production quick enough to take advantage of Airbus's problems.

"Boeing has huge challenges in front of it, nothing has changed there," said Richard Aboulafia, an analyst at aerospace consultants Teal Group. "It's high-risk, high pay-off -- there's no getting around that equation."

The 787's fuselage, which is primarily made of carbon composite materials baked into shape and promises fuel savings for airlines and roomy cabins for passengers, has roundly beaten Airbus's rival A350 in sales since its launch two years ago.

But media reports of 787 production problems, and memories of Boeing's disastrous attempt to ramp up production during the last peak in orders in the late 1990s, hang over the company.

"The biggest risk is if (the 787) just doesn't deliver as advertised, or ends up costing more to build than the price it was sold at," said Aboulafia.

Boeing, which is the Pentagon's No. 2 defense supplier, has also had serious problems with the US government, recently agreeing to pay USD$615 million to settle two embarrassing arms procurement investigations.

James McNerney, its new chief executive -- the third in as many years -- is also still learning the ropes after less than a year at the helm.

Even so, investors are backing Boeing.

Its stock has risen 11 percent since Airbus announced a new six month delay to its A380 superjumbo late on Tuesday. Boeing shares are now trading just below their all-time high hit in May.

Industry-watchers say Boeing has got the market right -- with its 787 outselling Airbus' A350 almost four to one -- which will help overcome production hiccups and the challenges of expanding production.

"When you get the right market, you get launch customers, with that comes enthusiastic investors and with that comes cash," said Aboulafia.

The view on Wall Street is that Boeing will spend as much as it takes to get the 787 out on schedule to avoid Airbus-like setbacks.

With McNerney's reputation on the line, there will be no shortage of cash to fix problems, said Morgan Stanley analyst Heidi Wood in a recent research report.

"On time 787 delivery will be one of the most obvious early metrics of McNerney's ability to execute," she said. "Missing the 787 schedule would be a major and potentially costly and highly public blow. It seems reasonable to expect the lever to push will be dollars spent instead of schedule."

On top of that, there is hope that Boeing will manage a ramp-up in production better than it did last time it had a surge in orders, in the late 1990s, when it fouled up processes at its own plant, and fell out with suppliers over prices.

This time around, Boeing has spent time lining up a team of suppliers which are building about 60 percent of the plane's structure, so a ramp-up in 787 production should not overly stress Boeing.

"It's a minimal effort on Boeing's part -- they are just snapping the bits into place," said Aboulafia. "All the risk is essentially pushed down to suppliers."

With demand for the 787 holding steady, Boeing has said it is considering opening a second production line for the plane, which is set to have its first flight next Spring and enter service in 2008.

With Airbus dithering about what to do with its rival A350 -- which is not likely to enter service before 2012 -- Boeing could have a valuable window to trounce its competition, said Aboulafia.

"If Airbus can't get its act together until 2014, then you are talking about a healthy amount of time for Boeing just to make an awful lot of cash for everybody."