Airbus Calls B.S. on Boeing

It's a rare Reuters news story that warns you of offensive language to follow, but Airbus chairman Fabrice Bregier lit up paragraph 11 of this article recently with some rather colorful language, brought about by his frustrations with an $8.7 billion dollar tax incentive package awarded by the state of Washington to a certain competitor late last year.

Brergier argued that the tax incentives deal gives Boeing  (NYSE: BA  )  an unfair cost advantage. Of course, such protestation is nothing new: Both companies have been taking their grievances to the World Trade Organization for years, claiming the other's tax incentives and subsidies to be illegal.

Brergier also jawed about another monetary disadvantage that potentially has a more immediate impact on Airbus' competitiveness: the strength of the euro against the U.S. dollar. According to Reuters, Brergier "also urged monetary authorities to increase support for European exporters with their currency policies." The effects of Boeing's $8.7 billion in tax incentives will be spread over 16 years. But the currency exchange differential between the euro and the dollar is a much more current catalyst for Brergier's dyspeptic language. Check out this chart, the bane of many an Airbus executive:

Euro to US Dollar Exchange Rate Chart

Euro to US Dollar Exchange Rate data by YCharts

While the greenback has seen pocketed relative strength over the last year, most notably against Latin American currencies and the Japanese yen, the euro continues to buy more and more dollars. This export disadvantage may be perceived by Airbus as equally punitive as a tax as it tries to price and close large deals.

While pricing is a primary component of finalizing a sale, airlines, especially when buying in bulk, are really making long-term fleet decisions. The cost of repair and maintenance, estimated life span, seat capacity, and current interest rate environment all play a significant role in determining the cost/benefit of a particular aircraft, and they are as influential as price when an airline signs off on a major order.

The real cause of foul language?
But perhaps no factor is as influential as fuel efficiency in a purchase decision. And a growing perception regarding the fuel economy of Boeing's upcoming 777x may be heightening Airbus' tetchiness as of late. Late last year, well-heeled Emirates Airlines, the primary customer of Airbus' A380 super jumbo jet program, ordered up a massive $76 billion worth of the 777x. 

Adding insult to injury, Bloomberg news recently reported that Emirates was also considering Boeing's 747-8 for its fleet. The 747-8, said to have leaner cash operating costs and consume less fuel than the A380, is currently available for purchase, versus the 777x, which will see its first delivery in 2020.

This is related to the latest chapter in a respectful but pointed dialogue between Airbus and Emirates. Emirates has argued for a leaner, lighter, more efficient A380, and CEO Tim Clark has urged the airline to consider a re-engining of the current A380, as the next generation aircraft is years away. This entails taking some of the efficiencies gained in the development of Airbus' "neo" engine (short for "New Engine Option") and applying them to the four engines in the A380.

While Clark was later disclosed not to be interested in the 747-8, that he discussed the jet with Boeing is evidence of Emirates' passion to wring more fuel efficiency out of the A380. And Boeing clearly relished the opportunity to give Tim Clark some leverage in his dealings with Airbus, by offering a real-time alternative to the A380.

Airbus hasn't leapt to overhaul its A380 engine configuration. In the first place, as Clark readily admits, if Airbus does nothing, Emirates will still order the plane, as it's a profitable aircraft for the carrier. Also, other Airbus customers, such as leasing company Amedeo, don't believe re-engining is an appropriate solution. An article in Aviation Week last week points out that Amedeo CEO Mark Lapidus believes that efficiencies from such a project would get absorbed by added weight and higher maintenance costs. 

Airbus management probably doesn't want to spend time and resources to modify the plane's aerodynamics for a re-engine while it's gearing up to compete with Boeing's 777x by 2020. Ultimately, however, the manufacturer may be forced to heed Emirates' call, as Clark is pushing firmly for what he believes is an achievable 10%-12% gain on current fuel economy. Both suppliers of A380 engines, the Engine Alliance (General Electric and Pratt & Whitney), and Rolls Royce, have put forward that they are studying possible re-engine scenarios.

Cover your ears?
For aircraft manufacturers, the struggle to provide ever-greater fuel efficiency is one of the toughest burdens of the business. In the next few years, as both Airbus and Boeing introduce a wide variety of aircraft using evolved composite materials, and which sport the most advanced engines companies like GE and Rolls-Royce can offer, customers are sure to absorb new fuel benchmarks quickly, and demand even better performance. Thus we shouldn't be too scandalized to hear further cursing from these two fierce competitors as their next generation aircraft roll out.

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Read/Post Comments (14) | Recommend This Article (4)

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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 June 08, 2014, at 9:30 PM, vet212 wrote:

    What about the rather large amount of Eurozone government subsidy provided Airbus?

  • Report this Comment On June 08, 2014, at 10:28 PM, TMFfinosus wrote:

    Hi vet212,

    The WTO ruled in 2012 that while Boeing received between $3 billion and $4 billion in U.S. subisidies, Airbus actually received $18 billion in European subsidies. Personally I don't think Boeing's package from Washington State is so unfair -- as BA points out, part of the tax incentives are open to suppliers -- including Airbus' vendors who also serve Boeing.

    Great question and thanks for commenting!

    Asit

  • Report this Comment On June 08, 2014, at 11:48 PM, BAbuster wrote:

    The Boeing Co did get a healthy tax break. Its largest ever. Thanks to IAM751 and WA state, Boeing is going to real well for a LONG time...

  • Report this Comment On June 09, 2014, at 1:04 AM, TMFfinosus wrote:

    Hi BAbuster,

    Not only Boeing's largest ever tax break, Washington State's largest ever package, and if I'm not mistaken, the largest incentive package ever given by a U.S. state to a single company...

    Thanks for chiming in,

    A

  • Report this Comment On June 09, 2014, at 1:07 AM, rotorhead1871 wrote:

    airbus is the BS operation.....brought about by GOVERNMENT ACTION.......hiding as a capitalist company.....HA!!! what a JOKE........AIRBUS is the product of the socialist european jobs programs....so go make your deal......or go cry for for more TAX relief money from your whining governments.....problem is you want the capitalist world to support the european lifestyle of the AIRBUS countries......AINT GONNA HAPPEN.......compete or BE GONE!!!!...the EURO is TRASH and a complete phony currency...why do you think AB is moving to the USA......the get away from the euro.....HAHAHA!!

  • Report this Comment On June 09, 2014, at 2:40 AM, Tyeward wrote:

    WOW!!!!! Well look at the pot calling the kettle black. Sorry Airbus but this is a state level incentive. The US is not the EU. Airbus has quite a few federal budgets to pull from for incentive. Washington State is within the law. If this was the US Federal government you would probably have somewhat of a minor case and it would probably be dismissed. Since this is a State level incentive, you might want to bring your problem up in Olympia. Every state has the right to "butter the bread" as they see fit to keep one of their corporations happy. Boeing represents a significant chunk of Washington State´s economy. DC won´t block this and you won´t be able to tie it up in courts either. Besides, no one is going to want to hear an argument from you while France, Germany, The UK, and a few others are directly supporting Airbus with their own separate incentive packages. I would also like to remind people of the fact that Airbus is building an assembly plant in Alabama. You can´t tell me that the choice to place that plant in Alabama wasn´t due to some sort of major incentive either. I hope after this Airbus knows that they will be under the microscope quite a bit. Might as well prepare for some dirty laundry because Airbus has quite a bit, and a quick spray of febreze won´t cover that smell.

  • Report this Comment On June 09, 2014, at 5:20 AM, NicoV wrote:

    TMFfinosus

    The numbers you provided do need to be put into the correct context: while at first sight it may appear that the $18 billion for Airbus is much higher than the $3 - 4 billion for Boeing, remember that most of the Airbus money was in the form of government loans. In other words, that money is not for Airbus to keep, it needs to be (and is being) paid back. This is not the case with the Boeing money.

  • Report this Comment On June 09, 2014, at 8:44 AM, whoswho007 wrote:

    Sounds like AB is wetting their pants here and throwing a hissy once they realized Boeing has twice the orders this year then them.

  • Report this Comment On June 09, 2014, at 9:40 AM, TMFfinosus wrote:

    NicoV,

    Thanks for providing that context on my comment above regarding the subsidies -- the article on the ruling I read didn't make this difference you refer to clear.

    Best,

    Asit

  • Report this Comment On June 09, 2014, at 10:19 AM, ZizewitzMB wrote:

    1) To TMFfinosus

    The Government loans to Airbus are repaid only proportionally to the involved aircraft sold. In case with the disastrous A340 and most probably also with the A360 means the repayment is far than complete.

    2) Complementing what is stated in the article, the 16 year tax incentive to airbus, assuming that only 500 B777X will be sold, would be ~ $12,000,000 per aircraft, which referred to the real price (not the list one) of about $280,000,000 would be only 4%!!

    Compare that with the give-aways by the EU for the A400!!

    3) The A380 is compared with the B777X and even the B747-8i an obsolete aircraft. To make it competitive (and certainly not completely) the "NEO-ing" implies much more than the "re-motoring" and not justifiable given the limited market for superjumbos.

    And really, it will never be REALLY competitive: such A380neo would be what the B747-8i is to the

    B777X. With the additional draw back that it would continue be due to its size not adequate for the majority of Airports, a problem which the already available B747-8i does not have, being able to substitute the discarded B747-400 (and older)

    caminito@netzero.com

  • Report this Comment On June 09, 2014, at 10:38 AM, TMFfinosus wrote:

    ZizewitzMB,

    Points well taken. You allude to a fundamental problem with the A380 -- so far it has attracted the most interest from the up and coming Middle East airlines (and at that primarily Emirates). In this phase, Middle Eastern countries are pouring billions into both state of the art airports and their choice of aircraft in order to try to pull some of the North America / Asia stopover business from Europe. So there exists a concentrated base of buyers for superjumbos and in particular the A380. I think Airbus still has to prove to itself and the market from where future buyers of the A380 will emerge once Emirates for example reaches its fleet goals. And where is the market for used A380s? -- that's a huge question for the next five to ten years.

    Thanks for chiming in, insightful comments.

    Best,

    A

  • Report this Comment On June 09, 2014, at 10:39 AM, TMFfinosus wrote:

    Tyeward and whoswho007,

    Um, those are some really colorful metaphors you are both using to make your points...

    --A

  • Report this Comment On June 09, 2014, at 11:39 AM, NicoV wrote:

    Zizewitz MB, a few remarks

    The A340 was not a separate program, it was launched together with the A330 as a single program, and funded as a single program. Loans were repaid with every A330/340 that was delivered. While the A340 sales were disappointing, the A330's massive success compensated for that.

    No A360 exists, but I assume you mean the A380. It still remains to be seen whether that program becomes profitable. But the loans still need to be repaid. I've read claims before that Airbus would only need to repay them if the plane is successful, but have never seen that backed up by reliable sources.

    The comparison with the A400 is quite irrelevant: that's a military program, and these are funded in a completely different way, on both sides of the pond.

  • Report this Comment On June 09, 2014, at 12:40 PM, ScamuelJones wrote:

    Boeing kisses Obumma bin Lying's azz to get their favors from him, and they screwed EADS out of a military airplane tanker bid that EADS had lawfully won! The ONLY thing that Boeing can safely make in my opinion is paper airplanes! P. S. WHERE are the tanker planes that Boeing was supposed to be building?????

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