Transterrestrial Musings

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Are the barriers to entry intrinsic to the industry, or are they artifacts of government regulation? I can see it being either or both.

Posted by Jason Bontrager at March 30, 2006 09:58 AM

The barriers to entry are COST. It takes a lot of money to develop a large aircraft. Billions of dollars. Do you think that either Airbus or Boeing _want_ to spend billions developing new airplanes? Don't you think they would spend less if they could?

Posted by Dave Parkins at March 30, 2006 10:01 AM

I don't dispute that developing aircraft is expensive, I was just asking *why* it's so expensive. Is it just the cost of the brain work and testing, or has unionized labor driven up labor costs and FAA testing regulations driven up testing costs and so on.

I never expected that starting an aircraft company would be equivalent to opening a McDonald's franchise.

Posted by Jason Bontrager at March 30, 2006 10:12 AM

Two points. First, what is driving the cost up? Remember cost is the usual form of a barrier to entry.

Second, Airbus and Boeing might not want to spend billions of dollars developing new planes, but they might support regulation and other hurdles in order to discourage competitors. If the market is big enough, I wouldn't mind paying billions more in development costs to secure a several percent increase in profit margins.

Posted by Karl Hallowell at March 30, 2006 10:19 AM

Udvar-Hazy's comments about the Airbus A350 are slightly surprising--only slightly, but still surprising.

Boeing was really screwing up in commercial aviation in the 1990s and early this decade, but now the roles have switched and it is Airbus that is making a lot of mistakes.

A quick historical summary:
-Mid-late 1990s, Boeing fails to find customers for stretched 747.
-Mid-late 1990s, Airbus decides to build the giant A380
-Early 2000s, Boeing announces that it will build the Sonic Cruiser
-Boeing abandons the Sonic Cruiser idea
-Boeing decides to build the 787
-Airbus decides to build the A350
-Airbus changes design of A350

It is worth noting that the A350 was a hasty decision by Airbus when they realized that they could lose the midsize market to Boeing. Airbus' initial approach was to simply take an existing aircraft, the A330, and modify it slightly by giving it new engines. Their customers really hated this idea and told them that it stunk. Airbus then hastily went back to the drawing board and came up with their second A350 design, which is the current one--new engines and a composite wing and a new alloy for the airframe.

The 787 by contrast uses composites for the wing AND the fuselage, plus new engines and a new airframe. It should be much more fuel efficient than previous planes, and certainly more fuel efficient than the A350.

Airbus has looked very uncoordinated with all of this. Their spokesmen regularly trash talk Boeing in public (Boeing's people are a little more discrete). If you look at all the things that Airbus officials have said about the A350, you'd see that they are in trouble. For instance, they were praising their first A350 design and then two weeks later they changed it completely. They also rather bizarrely claimed that going to market two years after the 787 was a _good_ thing. But the problem with that claim is that by the time the A350 is ready, Boeing will have worked the bugs out of the 787 (planes are like cars--don't buy the first model) and lots more customers will line up for it. Now Airbus officials claim that the new design is perfect and will smash the 787 and the 777 (they have called it the "777 killer") when nobody really believes that, especially when Air France is buying 777s. Airbus officials would probably do better to shut the heck up and focus on their markets.

The midsize market will always exist, and the pending retirement of the early 767 fleet opens up opportunities for new sales. The bigger question behind this competition over the midsize market is which company has a more accurate model of future air travel. Airbus is betting that the bigger market is for the traditional hub and spoke system, with really big airplanes like the A380 feeding into central airports like Heathrow and de Gaulle that send smaller planes out to smaller airports, like throughout the rest of Europe. Boeing is betting that what air travelers really want are direct flights, not transfers, and so really big airplanes make less sense. And it is worth noting that some airports like LAX and Atlanta do not want the A380 because of the infrastructure costs. That is why Airbus is building the A380 and Boeing is focusing on the smaller 787.

Now this is not an either/or market. There will still be _some_ demand for the A380 even if Boeing is right with its market analysis. But there will be less demand than Airbus wants. They really need to sell at least 300 and probably more like 400 A380s to break even. If Udvar-Hazy is saying that Airbus will sell "at best 300 or 400" A380s, then he is essentially predicting that Airbus will probably not break even on the A380.

Although this is a Seattle (Boeing) newspaper, they are right that Udvar-Hazy is a big player in this field. If he doesn't like the long-term viability of the A350, Airbus should be worried. The question is whether they can afford to reverse direction now. That will put them even farther behind the 787. Plus, they will have to hit up their governments for development funds.

Posted by Dave Parkins at March 30, 2006 10:29 AM

"Is it just the cost of the brain work and testing, or has unionized labor driven up labor costs and FAA testing regulations driven up testing costs and so on."

Because commercial airliners are big, complex devices that have to operate reliably and safely for several decades before being retired. Reliability and safety rates for airliners have improved incredibly in the last three decades. Quite often the airlines can leave a high bypass turbofan engine on a plane for years before overhauling it. That kind of safety and reliability requires highly trained people. You cannot do this stuff in sweatshop conditions.

It's worth digging into the stories of some of the other airliner companies to see how this affects their costs. Russia is now buying American planes because they cannot make their own ones (at least not ones that anybody, including themselves, want to buy). China has never managed to get into this business. And Brazil's Embraer recently developed a larger regional jet and is having bad reliability problems with it (software mainly). If you want planes that run on time and don't crash, then you have to put a lot of development money into them.

Posted by Dave Parkins at March 30, 2006 10:35 AM

Yowzah -- and thanks, Rand. The linked article is as dramatic as a business story gets.

At a psychological guess, Udvar-Hazy and Hubschman had been telling Airbus this in private, and were frustrated at a lack of response. "You have until Farnborough to get it together" is like slapping *both* cheeks. Twice.

Posted by Monte Davis at March 30, 2006 12:00 PM

Correct me if I'm wrong, but this is the Udvar-Hazy that the recently opened extension to NASM (the one near Dulles) is named after.

Posted by Paul Dietz at March 30, 2006 12:14 PM

Yes: rumor has it his $65M gift influenced the Smithsonian's choice of name -- shocking, but there you have it :-)

He has leased/financed more jetliners than I have bought socks... and in the process, built a global reputation (think Warren Buffett) for being even more objective and accurate than airline execs in judging whether a new design will make money over time. GE Capital's in the same business.

So these are absolutely the last two guys Airbus wants to have kicking the tires and grumbling out loud.

Posted by Monte Davis at March 30, 2006 01:18 PM

"rumor has it his $65M gift influenced the Smithsonian's choice of name -- shocking, but there you have it."

Actually, he never _asked_ them to name it for him, but they decided to do that anyway because he was such a generous donor.

Posted by Dave Parkins at March 30, 2006 02:11 PM

Precisely. Add to that the potential legal liability from large lawsuits following a crash. Suppose an airliner carries 250 people and crashes, killing everyone on board. The liability from the lawsuits could easily exceed a billion dollars. Even if the crash wasn't in any way the aircraft manufacturer's fault, they'll be sued and have to spend millions in legal fees. Those fees alone can easily exceed the profit they made when they sold the plane.

Sure, the FAA and international regulations contribute to the high development costs for a new airliner, but a certain amount of "defensive engineering" no doubt adds to the cost as well.

Posted by Larry J at March 30, 2006 02:59 PM

Even if the crash wasn't in any way the aircraft manufacturer's fault, they'll be sued and have to spend millions in legal fees. Those fees alone can easily exceed the profit they made when they sold the plane.

That brings up an interesting point, because in fact a smaller startup company doesn't face this particular barrier, because it doesn't have the big pockets that would attract a billion-dollar lawsuit. One of the reasons that Boeing and Airbus have to spend so much on their airplanes is because they are worth so much.

This is why it will not be Boeing or Airbus (or particularly, the non-commercial at this point, after the Tri-Star fiasco, Lockheed-Martin) who will build low-cost space transports.

Hmmmm...that's probably worth a blog post.

Posted by Rand Simberg at March 30, 2006 03:10 PM

"Add to that the potential legal liability from large lawsuits following a crash."

You might want to look into that. It's not true. There are limitations on liability. Passengers are NOT awarded billions of dollars in lawsuits over airplane crashes. Look it up.

There seems to be a general attitude among the commenters here that airliners must cost so much because of government regulations and union labor. That's rather silly. Airliners cost so much because they have to be designed by highly trained (and thuse expensive) personnel and have to be extremely safe. Even a fraction of one percent failure rate would produce huge casualties every year.

Posted by Dave Parkins at March 30, 2006 04:30 PM

The problem with Boeing in the 90's was Philip Condit. He took down the firewall that separated the commercial aircraft division from the defense contracting division, thus allowing the defense contracting culture to infest and damage Boeing's commercial aircraft division. This firewall has been largely repaired and Boeing is now "flying right".

The problem with Airbus is more fundamental. Airbus is a product of European business culture, which is built on "gay" bureaucracy. Since Europe has socialist economies, they have yet to deregulate their airline industry in the manner that the U.S. did starting in 1978. Hense, it costs more to fly from London to Paris (a 1 hour flight) than it does to fly from London to New York (a 6 hour flight).

Regulated air travel tends to be centralized where people get funnelled through a small number of large airports. The A380 was designed and built on this market assumption. Boeing's 787, on the other hand, was built on the assumption of more de-centralized air travel, which allows for more direct flights between smaller air ports. Hense fueling demand for smaller, but long range, aircraft.

The Asian market is in the process of becoming deregulated, especially in South East Asia. This is being reflected in more and more orders for the 787. The A380 has been bought mainly by European and Asian airlines that fly routes between Europe and Asia (i.e. between London and Singapore).

This does not even take into account that the 787 is the more advanced aircraft. Also, the A380 requires extended runways and gate modifications. Also, who wants to hang out in a departure lounge with 650-800 other people waiting to get on the same airplane.

I think the 787 is going to be a cash-cow for Boeing.

Posted by Kurt at March 30, 2006 05:35 PM

Kurt said

______________________________________________

This is not even close to being true. I fly in Europe all the time and Ryan Air, Easy Jet, and British Midlands (BMI) all offer low cost air fares all around Europe. With a seven day advance I can fly between London and Munich for about $200 and between Amsterdam and Gatwich for under a hundred sometimes.

Some of these airlines have figured out the Southwest business model of flying into lesser airports (Stanseed, Manchester, Liverpool) and even Virgin flys from some of these airports for International flights.

Check out Easyjet.com right now. They have a $35 dollar flight from London to Amsterdam for the flower festival

Dennis

Posted by Dennis Ray Wingo at March 30, 2006 07:24 PM

I agree, the 787 will probably be a cash cow for Boeing. It's certainly having an affect in the secondary aircraft market for certain models.

The Seattle Times story is a bit overblown. IIRC the response was in answer to a question from the audience, and it wasn't to me quite at the level of spanking that the article implies.

Mr. Parkin's analysis above is pretty spot on for the markets, but there were things that the Airbus presentation went over besides the A350. The rhetoric in the article is a bit overblown ("That would be an admission that Airbus' strategy [with the A350, not overall] is -seriously- flawed and needs a -radical- about-face." emphasis added).

And the Airbus and Boeing guys both get plenty of digs in at each other in the presentations, just with different styles. Airbus's 4.5" German-engineered ruler gag is getting a bit long in the tooth, though.

The 787 doesn't really compete with the A380 (which is an unbelievably quiet plane), though of course Boeing is now talking a stretch 787 to capture the bottom end of the hub-to-hub market. They'll sell plenty of A380s, particularly in Asia and the Middle East, and the model will do just fine. It will likely also serve as a formidable cargo carrier, though I think just about everyone has some affection for the great 747.

The 787 should do well, though the U.S. market is in a bit of a financing pickle at the moment with regards to fleet renewals. The U.S. airlines have many aircraft that have many years of debt left on them, and some planes will be parked while payments continue to be made. And then there's the money they're going to have to borrow to retrofit winglets on the useful aircraft where the fuel savings make the most sense (NASA had a hand in that research, BTW. Fascinating stuff when you think about it).

Look to the Chinese to try to make a name for themselves in aviation. They had a fair-sized display at the Paris Air Show, though they're really more at the commuter jet stage for linking smaller areas to the hubs. Look for them to try to make a play in India against Embraer. If the Russians could ever get the general corruption in politics and business cleared up they could probably produce some decent larger aircraft. That Sukhoi, though. Holy cow. There's nothing like hearing over 100,000 people gasp at the same time as it drops its butt (using thrust vectoring) before flying straight up into the sky.

In my opinion there's little use in comparing the airplane/airline and space industries. The considerations, while similar in many ways, don't really offer much, IMHO, in cross-fertilization potential. I am intrigued, however, at the idea of using an equipment trust certificate approach (or enhanced ETC for that matter) in financing the equipment notes on reusable space hardware. It's not a cut-n-paste option from one industry to the other, so I still have to think about it for a bit.

I'm just waiting for the airplane galleys to be replaced with vending machines, where the flight attendants become nothing more than garbage collectors. Ugh, the soul of flying is leaving the industry in this country. If only we had high-speed trains...

Posted by ken murphy at March 30, 2006 07:37 PM

I read somewhere that about half of the diminished fuel consumption of 787 is due to the new engines - hence Airbus thought they'd make a cheap A350 by sticking those engines to a somewhat changed A330. That might make sense, since development costs would be low and you could sell the aircraft at a cheaper price than a 787. For the 787 composites, you need new huge autoclaves etc. that cost a lot and must be debugged.

Now, if you think the subsidies in the aircraft producing industry are big, especially for research and development, wouldn't you also think that the airlines would want Airbus and Boeing to develop new fuel-efficient jets for the airlines, _with government money_, so they could fly cheap? The more development cost instead of operating cost, that's from the government's pocket instead of the airlines'.
That stinks. Every time a new jet is developed, it's money transfer from other transportation industries to airlines too.

Posted by meiza at March 31, 2006 05:42 AM

Check out Easyjet.com right now. They have a $35 dollar flight from London to Amsterdam for the flower festival

The lower cost airlines in Europe are one important reason why the channel tunnel is in such dire financial condition.

Posted by Paul Dietz at March 31, 2006 06:27 AM

Kurt wrote:

-------------------

This paragraph is so wrong as to be laughable. The Boeing Commercial Airplane group is by far the most inefficient, cost-ineffective unit in Boeing. Until that "firewall", so to speak, came down, many Boeing commercial employees considered BCA to be just a large jobs program. Their engineers -- all union -- bragged about how *many* employees -- numbering in the tens of thousands -- it took to design a new airplane. They marveled at going to work at their drafting boards "chiseling out blocks for the great flying pyramid." (Yes, that's a quote.)

After the market failure of the 747X and the Sonic Cruiser, that culture began to change when the 787 allowed the military side to bring in some of their tools and processes to improve productivity (but just some). That's why that airplane likely to be a money maker for Boeing. The culture took another leap forward with MMA -- they're finally getting their engineering and manufacturing tools and processes up to speed enough to build significantly different models on the same assembly line. Until the military folks showed them how to do it right, Seattle would build a military derivative of a commercial airplane by building the commercial airplane -- complete with seats -- and then flying it to a modification center where they would tear out the seats and install the military gear. Egads, I can't believe Seattle still wanted to do that with MMA! Hello, this is the 21st century!!

Now if we could just get BCA to stop wasting time making drawings.

Mike

Posted by Michael Kent at March 31, 2006 06:06 PM

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