Airbus Breaks Boeing's Near-Monopoly in Japan

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Japan Airlines announced Monday that it has ordered 31 long-haul A350 jets from Airbus, expected to replace aging Boeing (NYSE: BA  ) 777s that are due to come out of service over the next decade. The deal would be worth nearly $10 billion at list prices, though the airline likely negotiated a considerable discount. It also purchased an option to buy an additional 25 A350s, which, if executed, would make its A350 rival its Boeing 787 Dreamliner fleet. This marks the first time that Japan Airlines has ordered from Airbus over Boeing. For Airbus, this is a major entry point into the Japanese market, which has been a Boeing stronghold for more than half a century.

Just three years ago, Boeing had virtually locked its archrival out of Japan, with Airbus controlling a mere 2% of the commercial jet market. Today, that figure has grown to 12%. Monday's deal, the largest ever in Japan for Airbus, shows that it will continue to grow at Boeing's expense in what used to be the latter's second home.

Boeing's relationship with its Japanese partners goes back to the post-war reconstruction period, during which American forces disallowed Japan from building a domestic aviation industry and American and Japanese industry became economically and politically intertwined, with Japanese companies supplying parts to American plane makers.  Boeing has invested heavily in the relationship: Around a third of the parts of its flagship 787 Dreamliner, including the wings, were assembled by Japanese suppliers. In return, Japanese carriers All Nippon Airways and Japan Airlines were the biggest launch customers for the 787, and together operate over a third of the global Dreamliner fleet.

And yet, the Dreamliner itself may be playing a part in Airbus' entry into Japan.. The problem-plagued plane was delivered to its launch customers more than three years behind schedule, and since airlines set their routes well in advance, that played havoc with customers' scheduling. Once the plane was finally rolled out, the worldwide fleet was swiftly grounded for a further three months while Boeing addressed a problem with the Dreamliner's batteries that caused planes to catch fire. This has shaken airlines' confidence that Boeing can deliver working products on time.

Japan Airlines President Yoshiharu Ueki claimed publicly that these problems didn't affect his decision. The airline was deciding between Airbus' A350 or Boeing's upcoming redesigned 777, not the 787, and Japan Airlines' decision seems to have been made on price and year of availability, with the A350 expected to enter service in 2019 to Boeing's expectation of delivering the 777X in 2020. But Shinichiro Ito, the head of Japan Airlines' rival All Nippon Airways, told Reuters last month that his airline would indeed consider the risk of late deliveries when it replaces its aging 777 fleet, expected to be worth about 30 new orders. If Airbus wins these orders as well, Boeing could lose what would otherwise likely be the launch customers for the new 777 design. As these key airlines train pilots on Airbus systems and build relationships with Airbus, it could get harder and harder for Boeing to maintain its dominant market share.

The bright side
While Boeing faced a certain setback in Japan, bulls can take comfort in Boeing's record-breaking $410 billion order backlog, enough to keep the company busy for years. With global passenger travel historically increasing faster than the rate of global economic growth, Boeing could push this record backlog even higher in the event of a sustained recovery. The Motley Fool has compiled a special free report, "3 Strong Buys for a Global Economic Recovery," detailing how Boeing and two other companies are poised to profit from a faster recovery. Click here to read the full report!

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 08, 2013, at 3:33 AM, SeniorMoment wrote:

    This is the biggest and nastiest shock Boeing have had this year (and that says something).

    You should never take a relationship with your customers for granted.

  • Report this Comment On October 08, 2013, at 11:19 AM, Boeingretired wrote:

    Delayed 787, delayed 747-8, numerous issues with 787 in service, now losing customers. Thanks Mr. McNerney Jr.

  • Report this Comment On October 08, 2013, at 1:41 PM, speculawyer wrote:

    Et Tu, Japan?

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