Gloom settles on Boeing, Airbus as earnings plummet 2 largest plane makers battle for shrinking market in Asia, U.S.

Aircraft production

September 06, 1998|By BLOOMBERG NEWS

LONDON -- Three years into the steepest surge in jetliner production in aviation history, earnings at the world's two biggest aircraft makers are plummeting.

Boeing Co. and Airbus Industrie have slashed prices in a fierce battle for market share, and Boeing hurt its cause further with production snarls that cost $3 billion. It's a disappointment for both as they gather at Farnborough, England, this week for the year's biggest air show.

Now the bust is approaching fast. Orders are drying up from recession-struck Asia. Major U.S. and European carriers are scaling back purchases of large jets and warning of slowing economies. Adding to the gloom is concern global terrorism could put people off flying as it did during the 1991 gulf war.

Asia's slump may be "the trigger that sends the industry into decline," said Adam Brown, vice president for strategic planning at Airbus. "We are at the peak of this cycle and we do have to expect to see some downturn in business."

The concerns overshadow the clutch of orders plane makers are expected to unveil at Farnborough, which starts tomorrow about 30 miles south of London and is expected to draw about 1,300 companies.

The European plane maker is lining up a sale of as many as 30 jets worth $2.7 billion to United Parcel Service of America Inc., and Boeing is widely expected to announce more orders for its 100-seat 717. Airbus is expected to respond by setting plans to build a 100-seater of its own.

Industry executives argue that any decline this time won't be as severe as the early 1990s recession, when airlines lost a collective $15 billion, slashed their aircraft orders by four-fifths 33 and plane makers laid off tens of thousands.

So far, Brown said, 14 Asian airlines have canceled orders for Airbus jets and another 15 orders have been deferred for up to two years. Boeing maintains it stands to lose no more than 90 orders from Asian airlines over the next five years, a fraction of its 560 total orders last year.

Analysts say those estimates are still too optimistic.

"I'm becoming increasingly wary about how hard that soft landing is going to be," said Chris Partridge, associate director of aerospace finance at Deutsche Bank. "I don't think we've seen the end of it by any means."

Neither plane maker has taken much financial advantage of the gains in the current boom, which has seen orders of large jets quadruple to 1,250 last year from about 300 in 1994.

Boeing lost $178 million last year, its first annual loss in five decades, after trying unsuccessfully to double production to more than 40 jets a month. It ran into unprecedented assembly-line bottlenecks and parts shortages that finally led it last week to oust the head of its commercial airplane unit, Ronald Woodard.

Boeing shares have fallen 43 percent in the past year while the S&P 500 Index rose 6.4 percent. Trying to boost shares from a three-year low, the Seattle-based company last week said it will buy back up to 15 percent of its common stock in an effort that would cost $5 billion at its current price.

Airbus has appeared the victor this year, snatching a series of orders from longtime Boeing customers including British Airways Plc and Iberia SA.

It sold more jets than Boeing in the first half, better than its usual one-third of the world's market, and made inroads into Boeing-dominated Latin America with a $3.5 billion sale to a group of four carriers.

The question is whether the company -- a partnership of plane makers in France, Britain, Germany and Spain -- will make any money on the sales.

In the first look into the private company's normally closed books, one of its partners, Daimler-Benz Aerospace AG, reported recently that Airbus profits plunged 61 percent to $147 million last year, eroded by steep discounts. The figure is a return of just 1.3 percent on $11 billion in sales, well below the double-digit margins in other parts of the industry.

Some analysts say Airbus will even lose money on its heavily discounted sale of as many as 188 short-haul jets to BA, until now Boeing's most reliable customer.

Another problem for Airbus: While it's selling far more of the less-expensive narrow-bodied jets, it still trails Boeing in sales of wide-bodied jets. For all its gains the European group still lacks a big, 400-seat jet like Boeing's 747.

"Yes, Airbus is stealing market share, but its dollar delivery base is diminishing against Boeing's dollar delivery base. So it's actually losing market share," said Partridge, the Deutsche Bank analyst.

Pub Date: 9/06/98

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