Airbus and Boeing head into next week's Farnborough Airshow locked in their fiercest market share battle for up to a decade, slashing prices to win key orders for their latest narrowbody jets and storing up potential trouble for future profit margins.
From Australia to Indonesia, the United States to Norway — and most recently, Reuters has learned, Turkey — the marauding plane giants have spent months taking or defending market share, with world number one Airbus aiming deep inside Boeing's territory and its rival publicly vowing to defend a traditional 50-50 split.
While Airbus unveiled an assembly plant in Boeing's backyard this week, the battle behind the scenes — described as "hand-to-hand fighting" from airline to airline by one participant — has implications for the business case of the A320 jets to be built on US soil as well as the profitability of Boeing's rival 737.
Its outcome could shape the leadership of new bosses at both jetmakers: Frenchman Fabrice Bregier of Airbus and Boeing's Ray Conner, cautious and publicity-shy insiders who reach the July 9-15 pageant facing pressure to draw a line under a period of risk and give investors a sober ride with predictable margins.
The latest firefight involves a back-and-forth battle for 40-50 jets worth $4-5-billion sought by Istanbul-based budget carrier Pegasus Airlines, with Boeing resisting Airbus efforts to poach one of its customers in a duel known as a "flip fight," according to several sources familiar with the matter.
The airline is one of many looking to jump on a 15% improvement in fuel burn and therefore a significant reduction in costs offered by the latest revamped models of jets offered by Europe's Airbus and its US rival Boeing.
As with a series of other duels in the last year, according to multiple sources who spoke on condition of anonymity, Boeing has been fighting back after seeing one of its clients targeted by its competitor. Airbus maintains this is normal competition.
Contacted by Reuters, Ali Sabanci, Pegasus chief executive, said, "we are negotiating; no decision has been taken".
Airbus and Boeing compete for the lion's share of a jet market estimated at $100-billion a year.
Although economies are stuttering, aircraft demand remains relatively strong as airlines modernise fleets to survive high fuel costs and the balance of growth shifts towards Asia, prompting Boeing to raise forecasts last week.
Best-selling single-aisle or narrowbody models — the 150-seat medium-haul A320 and Boeing 737 which serve airlines worldwide — sell for about $80-90 million each at catalogue prices but like most models are sold at undisclosed discounts.
Analysts say underlying discounts have risen as the aircraft makers seek to establish new fuel-saving versions known as the A320neo and 737 MAX, fitted with new engines from mid-decade.
"Our markets intelligence suggests single-aisles are being offered at discounts of as much as 50% depending on the customer," said independent aerospace analyst Scott Hamilton.
This cannot be determined for sure and price is not the only factor in negotiations. But cross-checking the leasing value of new jets suggests the data is not far out for the most contested sales, according to Hamilton and several aircraft financiers.
Who started it?
One thing is for sure: if there is a price war, nobody can agree who started it. Each accuses the other of dragging down prices but acknowledges being hurt in the process.
Although jets are sold at a discount to list prices, the business case for the revamped models relies on forecasts that they will get more than the base models. But analysts say each side faces the risk these premiums could narrow to a sliver.
"I would say that today as we look at the single-aisle market, the pricing has been aggressive. We've felt some pressure," Randy Tinseth, marketing vice-president at Boeing's commercial division, told reporters in London last week. "I think especially as we go through this process of introduction of new airplanes and some launch pricing from some competitors, hopefully that will work out and stabilize over time."
Airbus insists it was Boeing that destabilised the market in an effort to catch up with the A320neo, which led Airbus to a record margin of victory over Boeing in last year's order race.
"They have started a price war. I think that shows the desperate situation they find themselves in. The MAX is unequal to the neo. They are discovering this and having to discount," said the European firm's New York-born sales chief John Leahy.
The spat comes a decade after a price war over the sale of similar models to low-cost carriers such as Europe's easyJet, documented in a row between the United States and Europe over subsidies. The world's largest trade dispute stirred to life in angry exchanges on the eve of next week's air show.
"With most R&D paid, they are 'cash cows' and any extra you can get [on price] will hopefully fall to the bottom line."
Any damage to margins on the revamped models would not be felt until they get delivered from 2016-17 but some worry the models currently in production could come under pressure too.
Starting with downpayments, cash from the 737 and A320 funds larger and riskier developments like the A380 and Boeing 787. In recent years that cash fountain is having to pump harder to pay for overruns in the larger programmes at both companies.
Conducted out of suitcases and airport lounges by a nomadic population of aircraft sellers at both companies, the battle is nonetheless about strategy as much as tactical wins and bonuses.
In a duopoly, it is a case of keeping your enemy close.
Neither side can afford to let its share of this part of the market — estimated at $2-trillion over 20 years — drift far below the typical 45-55% band seen in a duopoly.
Doing so would let the other run away with efficiencies of scale and benefits of experience or learning curve. From there it is hard to recover as Douglas found when it lost independence through a 1997 merger between Boeing and McDonnell Douglas.
"Boeing is adamant there is a price war with Airbus coming into their territory and that they can't accept a 58/42 or 60/40 split," said Nick Cunningham, managing partner of London-based researchers Agency Partners.
"That would mean Boeing selling two thirds as many planes as Airbus, giving Airbus an insuperable cost advantage which means you go into a death spiral," he said, adding that Boeing had the firepower to prevent this by using the price lever.
Boeing is rebounding after losing a year to the A320neo, designed to fend off new challengers such as Canada's Bombardier . It hesitated over whether to respond with a more ambitious design, but backed down when Airbus made inroads into American Airlines and put out the re-engined 737 MAX as a match.
Having stepped back from an arms race over developments, it has taken longer than expected for the two companies to settle back into their tense but more or less stable duopoly.
An Airbus source accused Boeing of "fighting every hill", but opponents say it is Airbus that uses more guerrilla tactics.
A ceremony last November to seal a record 201-plane order for Boeing from Indonesia's Lion Air in front of US President Barack Obama told part of the story. Behind the scenes, Airbus had struck early and come close to wresting away a major client.
Another blockbuster order from Boeing-friendly Norwegian Air went partly to Airbus, following a bruising contest.
"The long term consequences of such price wars are a backlog which includes a chunk of badly priced orders which would have been best avoided," said Cunningham.
How far that hurts profits depends on how broad and long-lasting the feud is and whether each side can hold down costs.
On the other hand, after 2 000 firm or provisional sales in a year and weaker demand, it may not be long before the parties retire to lick their wounds, said Société Générale's Khan.
And US and European export credit financing, which is said to have facilitated many of the battles, will get more expensive next year as a result of an international agreement.
Boeing is playing down expectations of massive orders in Farnborough, but eyes will be on briefings by the new Airbus and Boeing top management and any threats or peace offerings the companies might issue over the heads of media to each other.
"Airbus and Boeing are a duopoly and can't collude, but they can signal to each other. And Boeing is sending a clear signal to Airbus that 'if you price down to get market share we are not getting to let it happen so we both get hurt'," said Cunningham.