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The End of the A & B Duopoly?

March 5, 2019

 

One of the most remarkable features of aviation over the past 30 years has been the emergence of the seemingly unassailable Airbus and Boeing duopoly.

 

 

 

 

In the 1990s the European upstart Airbus began to nibble at the market-owning American manufacturers’ lunch. The only way for the Americans to remain dominant was to consolidate. So Boeing pulled off a reverse takeover of McDonnell Douglas in 1997 and became the largest aircraft builder in the world. But still Airbus gained relentlessly on the Americans, and in 1999 for the first of many years thereafter, Airbus outsold Boeing in a close fought race.

The rivalry between A and B is fierce and for the past twenty years Airbus vs Boeing (A vs B) has been one of the most remarkable and successful duopolies on Earth. Between them they have the market for large airliners completely sewn up. But there was still space at the bottom for other manufacturers to build planes smaller than the 737 and A320 family. Bombardier developed its C-Series – thanks to massive Canadian government backing – and Embraer its E-Series.

With Bombardier and Embraer bringing new products to market, the unassailable dominance of Boeing and Airbus began to look shaky. The Big 2 decided to take the upstarts out. Airbus struck first – helped no doubt by some French sangfroid – and bought Bombardier’s C-Series. Boeing belatedly bought into Embraer – although the new populist Brazilian government was not keen on yet another concentration of airline builder power – as ‘Yanqui’ imperialism.

It looked like the duopoly had been restored – and now Boeing and Airbus controlled the market from 100 to 500 seat planes. But nothing lasts forever. The big guns are stumbling – victims of their own success. The demand for new planes – particularly narrow-bodies – has exceeded their most optimistic expectations. Between them, Airbus and Boeing are now churning out more than four new planes every day. They delivered 1,608 planes in 2018, compared with 1,481 a year earlier. That’s up from 1,000 deliveries in 2011, reflecting the surging demand for planes, particularly from the fast-growing Asian carriers. Significantly though, for the first time in years, A & B have both missed production targets, and the airlines that have been kept waiting for their new planes are unhappy.

Demand has grown too fast for the component suppliers to keep up. Achieving unprecedented production figures requires on time deliveries from suppliers. As A and B struggle with their supply-chains – whether for whole fuselages, engines or seats - the demand for new airliners - especially narrow bodies – may just have grown too big for their combined efforts. Boeing deliveries in 2018 were hurt by late shipments of engines which left dozens of unfinished ‘gliders’ parked around Boeing’s Seattle factories. For Airbus, supply problems were also mostly late engine deliveries, though internal delays compounded production problems. Both plane makers are working hard to increase output, but their component suppliers are scared of a bubble – and thus of making a huge investment to ramp-up production – just as the world may be headed into recession.

Yet the production pressure on Boeing and Airbus is showing little sign of easing. In 2018 Boeing logged 893 net new orders and Airbus logged 747 net orders, adding to already long waiting lists filling the next several years’ production.

Their cosy duopoly is straining at the seams – and looking vulnerable to a disruptor. And this time the disruptor is far bigger than the Canadian and Brazilian builders. The Chinese and Russian governments have scented blood and are stepping into the ring.

Up to now Chinese plane-making efforts have been a bit of a joke, but that’s about to change. The C919, designed by China’s Comac to compete with the A320 and 737, has flown. For A & B the threat may seem deceptively distant because they still have better products. But memories are short – until 1987 Boeing also saw Airbus as an inferior and overly-subsidised competitor. Then the A320 hit the market and state support pushed it ahead of Boeing’s aging 737.

The Big-2 may also scoff at aspiring contenders by arguing that they will never match A & Bs economies of scale. But they may be underestimating the huge built-in demand the Chinese plane builders have, thanks to the long waiting lists for A & B’s planes and the enormous growth of the Chinese domestic market. The C919 already has about 1,000 orders from Chinese airlines—and could easily expand across Asia, Russia and Africa. Comac’s 1000 orders may be from Chinese airlines, but they are more recession-proof than western airlines with some decidedly shaky orders.

They may be lagging in technology, but China’s pockets are deep. The C919 was designed to go head-to-head with A & B’s latest generation planes: the A320neo and the 737 MAX. A conservative estimate for public money spent on the C919 is above $7 billion. That’s far more than the C-Series cost to develop, and, adjusted for inflation, it’s on par with the A320.. Western suppliers have been falling over themselves to supply the latest technology to the Chinese contender. It is powered by a CFM’s LEAP-1C engines and has the most up-to-date avionics.

For now, A & B still have some breathing space. The C919’s big challenge remains FAA certification, particularly the flight-deck design to satisfy Part 25.1302 of the FARs. Comac’s challenges in meeting the certification requirements reflect a larger problem plaguing the Chinese manufacturer, namely a lack of technical know-how. While foreign experts in China transfer manufacturing knowledge and R&D capabilities, the communication problems, misinterpretation of FAA requirements, and limited local skills have significantly delayed progress.

The challenges have become evident as the C919 continues to undergo further envelope expansion flight testing and the Shanghai team encounters repeated setbacks due to design changes and a shortage of local expertise. “But they’re learning fast,’’ said a Chinese analyst. “It’s not like you are working with Airbus or Boeing who can go through this process within an 18-month time span. You need to account for the learning curve.’’

While Comac improves its FAA Certification capabilities, reliance on foreign technology transfer will continue, raising doubts that the Chinese can meet their objective to develop an indigenous alternative to the C919’s CFM Leap-1C engines within a decade. While joint ventures with foreign firms can serve as effective vehicles for knowledge transfer, foreign aerospace manufacturers increasingly recognise the need to carefully safeguard their intellectual property.

And, as if the Chinese threat was not bad enough, the Russians are also climbing into the ring.  Their Irkut MC-21 will be available in two versions which go head to head with the larger A & B narrow bodies. This is the new sweet spot in the airliner market— the 165-seat MC-21-200 and the 211-seat MC-21-300. And significantly for the Western engine builders, the Russians do know how to build engines, so the MC-21 is available with two engine options — the Russian Aviadvigatel PD14 and the Pratt & Whitney PW1440G geared turbofan.

Although Irkut does not have a track record with commercial airliners, the company and its Yakovlev subsidiary have a long history of building some of the world’s best military aircraft. In addition, Irkut also manufactures components for the Airbus A320. So it knows how to make and supply parts to a western standard.

For now, A & B want to believe that both the Chinese and Russian single aisle offerings have one crucial weakness: they are both designed, built, sold, and supported by state-owned companies and historically, state-owned companies do a really bad job of competing in the free market. They argue that in real sales, the C919 had 180 firm orders as at end of 2018, with the MC-21 holding about 200 (excluding the more obviously fictitious ones). But coercing Chinese and Russian domestic carriers into placing orders for state-built aircraft is completely different from actually getting them to take delivery of these planes. 

The best illustration of this is China’s ill-fated Comac ARJ21 regional jet. In theory, the ‘firm’ order book consists of 290 aircraft. But none will probably ever be delivered. It took so long to develop that the rest of the industry got far ahead in technology and fuel efficiency. Nonetheless, the doomed ARJ21 will already have been a useful lesson for the Chinese to learn certification requirements for the C919.

In the final analysis, the long-running battle between Airbus and Boeing masks the fact that it is one of the world’s most successful duopolies. It is a fierce competition, and that rivalry has sharpened both companies’ competitive skills, particularly when it comes to new product development. That competitive edge may to be powerful enough to keep out newcomers. But for how long?

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