Boeing's Challenge

Boeing (NYSE: BA) is reportedly once again considering revamping its 747 airplane, and skeptics are already questioning the wisdom of such a move. In the end, though, there's little doubt that the aerospace giant must find some way to respond to Airbus' aggressive movement into the jumbo jet space.

In the near term, Boeing's focus on the mid-sized 7E7 seems to be a good strategic move, since demand for planes of the 7E7's dimensions and price range is expected to be much larger than that for pricier jumbo jets. In addition, the company's decision to make fuel efficiency the 7E7's primary selling point appears equally sagacious, given that margins are thin in the airline industry and fuel cost is a major factor in profitability.

By comparison, Airbus' concentration on the massive A380 seems somewhat less savvy. At $280 million per plane, the A380 will be a big investment for any airline. In addition, the European consortium indicates that because of the aircraft's size and double-decker configuration, initially only 12 airports worldwide may be ready to accommodate it when it comes into service in 2006. In the meantime, other airports will have to make changes to facilities before the first A380 touches down.

Even with the A380's drawbacks, Airbus has received orders for 129 of the aircraft. The reason for airlines' interest is simple: the new plane will offer fuel efficiency and noise reduction that the 747 can't match. In the near term, this won't be a huge problem for Boeing since airlines aren't likely to replace their 747s with A380s all at once, given the costs involved. But over the long term, if Boeing does not come up with a better offering, the A380 will dominate the large jet space.

To stay competitive in commercial aircraft, Boeing eventually will have to deliver an answer to the A380. Certainly, the firm has its defense business to fall back on, but as the ongoing Air Force tanker program debacle shows, dealing with the federal government carries its own risks. In the final analysis, Boeing needs the commercial aircraft business, and that means it must be competitive with Airbus in every aircraft category.

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Fool contributor Brian Gorman is a freelance writer living in Chicago, Ill. He does not own shares of any companies mentioned here.