Quotes of the Day

Boeing CEO Harry Stonecipher spent last Christmas at his St. Petersburg, Florida, home. He wasn't happy about that. Angered because carriers like AirAsia and Air Berlin were buying rival Airbus planes, all too aware that the European manufacturer would soon be rolling out its 555-seat, double-decker A380 jumbo liner — and was also developing a smaller plane, the A350, to compete with his new baby, the Boeing 737 — Stonecipher had told his salespeople he would travel anywhere in the world, even on Christmas Day, if he was needed to close a deal.

No one called. "That troubled me. The whole idea is that I will go anywhere for them," he says.

It's a safe bet, too, that Stonecipher won't be jetting to Toulouse this week to join four European leaders, over a dozen airline CEOs, scores of journalists and more than 5,000 invited guests at Airbus headquarters, where his rival, Airbus CEO Noël Forgeard, is officially unveiling the mammoth A380, which cost $12 billion to launch. The A380 is a powerful symbol of the coming-of-age of the 35-year-old Airbus, and underscores the fact that the world's two major commercial airplanemakers — Airbus and Boeing — are at each other's throats as never before. Although the U.S. government and the European Union reached a temporary deal last week to avoid a battle about government subsidies in the World Trade Organization, the two sides were sniping at each other again less than 24 hours later, when Forgeard said aircraft "launch aid" — no-risk loans from European governments — wasn't "part of the past." A spokesman for the U.S. trade representative fired back: "The U.S. will not agree to permit new aircraft subsidies that are illegal under WTO rules. That certainly covers launch aid." Competition in the commercial airplane market — expected to be worth $2 trillion over the next 20 years — is to be expected, but this feud has bigger implications. At its core, it is a debate about the relationship between the state and private enterprise — specifically, what sort of helping hand a country can legally give its friendly local planemaker. But because of the big money involved and the critical role that aircraft play in national security, the spat threatens already tense U.S.-E.U. relations, and could hurt the huge aerospace industries — and their hundreds of thousands of employees — on either side of the Atlantic.

It's been a high-flying journey for Airbus, a company founded in 1970 as a government-backed consortium to forge a European answer to America's hegemony in civil aviation. Although the firm struggled during its first decade, funding from France, Germany, Spain and Britain helped keep it afloat — and still provides assistance today, though the company is flourishing. Airbus, which is owned by the Franco-German-based conglomerate European Aeronautic Defense & Space Co. and British-based BAE Systems, just finished an impressive second straight year of selling more planes than Boeing.

The A380 is Airbus' prized 21st century showpiece. The plane, which has a list price of $285 million — though airlines rarely pay the published rate — has been ordered by major airlines around the world, including Air France, Emirates, Lufthansa, Qantas and Virgin. "The A380 is the most significant event in aviation in 40 years — since the introduction of the Boeing 747," says Stephen Forshaw, an executive at Singapore Airlines, which will be the first airline to fly the aircraft in the spring of 2006.

For Chicago-based Boeing, which has been designing planes since World War I, such songs of praise for Airbus have got to hurt. But the paeans to the A380 are also proof that Airbus can stand on its own financially. Boeing has seen its market share fall from 67% in 1999 to 47% in 2004. Much of that is due, says Boeing, to Airbus' unfair advantages — no- or low-risk loans that, Boeing claims, Airbus has received from European governments to the tune of some $15 billion. It wants the loans to stop. "Airbus is all grown up," says Boeing's Stonecipher. "It is selling more planes than Boeing and says it is making better margins. This is about drawing a bright line: no more launch aid."

But what, exactly, constitutes state aid to private industry? In fiscal 2003 alone, the E.U. estimates, total U.S. government support for Boeing R. and D. was $2.74 billion, representing 11.9% of its revenues.

(Of course, Airbus' majority stakeholders, EADS and BAE Systems, both have significant military businesses, too.) The Europeans thus don't see subsidies going to zero. Says Forgeard: "We want a level playing field with a level of support that is acceptable to both sides."

The debate over subsidies is especially heated because the aircraft business is so precarious. Launch costs for a new aircraft can be enormous, with little guarantee that the market will reward innovation. In December 2003, Boeing announced it would build the twin- engine, highly efficient 7E7 — its first new airplane in a decade and its designated aircraft of the future. In contrast to the A380, which is designed to fly lots of people to big hub airports, the smaller (around 220 passengers) 7E7 aims to fly longer distances and to more cities. The company estimates its launch costs at a massive $9 billion.

But while Boeing predicted it would have 200 orders for the $120 million 7E7 by the end of last year, only a few airlines have actually ordered one, including an obscure Italian carrier called Blue Panorama and Britain's First Choice Airlines. Explains a Boeing spokesman: "It is simply a matter of time before we get there." The company notes that Boeing's commercial airplane unit is still profitable.

Airbus places heavy bets, too. Late last year the company announced it would launch a new plane — the A350, similar to the 7E7. Boeing's argument is that Airbus can make such snap choices because it never faces the kind of market risks that Boeing does. Richard Aboulafia, an aerospace analyst at Virginia-based Teal Group, agrees: "Airbus has the freedom to develop new products whenever it wants, or to discount prices whenever it wants, because its shareholders won't abandon it. Boeing, a fully floated company, has no such luxury."

Boeing is trying to spin the A350 as a sign of lost confidence in the A380. Sniffs Stonecipher: "The A380 is a great engineering success — but so was the Concorde. The A380 could be a market disaster." John Leahy, Airbus' American-born top salesman, dismisses that prospect, saying airlines want both options — the A380 and the A350.

No matter who's right, Boeing can't afford to make the wrong call. Ulrich Horstmann, an aerospace analyst for Bayerische Landesbank in Munich, says: "If Boeing doesn't make the 7E7 a success, it has no more trumps in its hand." Don't think Stonecipher isn't aware of that. He has overseen a revamping of Boeing's commercial airplane unit and recently approved the firing of the head of the firm's sales team. He admits that Boeing has been arrogant in the past, but says he sees that dangerous overconfidence among the Airbus troops. "I've been listening to the Airbus guys ... Sounds a lot like Boeing a few years ago. Arrogance is just awful. It will kill you," says Stonecipher. So he is hopeful, if not happy. And yes, he has some travel plans in the very near future.

• SALLY B. DONNELLY | Chicago
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