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:
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.
Asit Sharma has no position in any stocks mentioned. The Motley Fool owns shares of General Electric. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.