Battle for the skies intensifies

One of the greatest business rivalries of recent decades has been the battle between Boeing and Airbus for dominance of the skies. The rivalry has forced both manufacturers to up their game and the result has been technological marvels such as Airbus' double-decker A380 and Boeing's "plastic" 787 Dreamliner.

Competition theory would suggest that a duopoly, like the one enjoyed by Boeing and Airbus, should lead to comfortable pricing, excessive margins and limited innovation.

Despite Boeing and Aircraft enjoying a combined market share of at least a 90 per cent the ruthless competition between the two companies, which has occasionally turned into jingoistic nationalism between Europe and the United States, has resulted in surprisingly low-profit margins. Neither company is making excessive returns and aircraft pricing remains aggressive.

However, these two giants are about to be challenged by upstarts from Brazil, Canada, China and Russia who are looking to gatecrash the market for narrow-body jets – aircraft with 100 to 200 seats and a single aisle. With an estimated 20,000 narrow bodies worth $1.6 trillion (Dh5.87trn) forecast to be built over the next two decades, it is little wonder that rivals want a slice of the Boeing-Airbus pie.

The first of the new challengers is Embraer, the Brazilian manufacturer, which launched its E190 and E195 aircraft four years ago while another new entrant will be Bombardier's CSeries when it makes its first flight next year.

However, the biggest threat may come from Russia and China as both countries want to develop their aerospace industries to grab high-tech and well-paid jobs from Europe and the United States.

Comac-AVIC in China is building the C919 – a 156 seat aircraft scheduled for first flight in 2014 – while the United Aircraft Company (UAC), a collection of several Russian aircraft manufacturers, will fly its Irkut MS-21 the same year.

Even further in the future, manufacturers such as Mitsubishi and Honda may look to establish themselves in this market while Sukhoi (part of UAC) could build on its Superjet 100 aircraft and go head-to-head with Boeing and Airbus.

Given the technical challenges involved in creating a modern aircraft, it is a safe bet that not all of the new entrants will succeed. If their planes are unable to match the aeronautical efficiency of Boeing's 737 and Airbus's A320, airlines will avoid them no matter how large the discounts offered to entice customers from the established manufacturers.

Safety is also a big consideration for airlines and they will not buy jets from companies they do not trust. It was safety and reliability that did for the Soviet Union's attempts to build an export market for its commercial aerospace industry in the 1960s and 1970s. Something similar could happen again if China and Russia are unable to match the environmental and safety standards of the Western-built planes.

So far, Airbus and Boeing have been dismissive of the threat from these new entrants but it is notable that both have put in place plans to "re-engine" their narrow body aircraft. New engines will improve the efficiency of these aircraft by up to 10 per cent, maintaining their lead over the newcomers and ensuring that Boeing and Airbus can continue to charge higher prices for their products.

However, this will only be a temporary solution and both companies will ultimately have to introduce next generation versions of their planes in order to retain control of this market. Airlines want these next generation models to be at least 20 per cent more efficient than the current aircraft and such an advance will require a huge leap forward in technology.

At the moment, that technology does not exist so these next-generation models are unlikely to appear until well into the next decade – giving the new entrants plenty of time to win market share.

According to UBS, the best case scenario for Airbus and Boeing over the next two decades would be that their market shares drop from 47 per cent and 43 per cent respectively to 38 per cent. Embraer would keep its share at 10 per cent with the Chinese grabbing 14 per cent.

In the worst-case scenario put forward by UBS, Airbus and Boeing could each end up with market shares of 19 per cent by 2030 with the Chinese on 17 per cent and then a host of other manufacturers on about 10 per cent. While fragmentation of the narrow-body market seems inevitable in the coming decades, it is unlikely that Boeing or Airbus will see much challenge to their wide-body aircraft – long haul jets like Airbus's massive A380 or Boeing's 787.

For a company without the engineering and aerospace background that Airbus has accumulated over the past 40 years, the costs would be at least double that. Such an aircraft would be highly unlikely to be economical and would have to rely heavily on government subsidies.

At the moment, most passengers do not care or even notice what sort of plane they are boarding but as new entrants start taking a share of the narrow-body market this might become a more important consideration. Will travellers be happy flying in an aircraft built in Russia, China or Brazil (particularly if there are a few crashes in testing)?

I suspect that a stratified market will emerge where airlines who operate Airbuses and Boeings are able to charge a premium. But even if these two companies become the BMW and Mercedes of the plane market, they are unlikely to stop knocking lumps out of each other in the ruthless competition for new orders.

- The author is business correspondent of The Times of London. The views expressed are his own

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