Boeing Versus Airbus

1. The Turbulent, High-Stakes Aircraft Business

The decision to build a new LCA alerts boards of directors and shareholders to impending deficits, big ones.

Betting the company. The large commercial aircraft (LCA) business is characterized by immense financial risk, where developing a new airplane costs billions and can determine a company's fate. Success relies on a mix of market guesswork, political maneuvering, and industrial expertise, often involving "smoke and mirrors" to manage expectations.

Unpredictable market. Airlines plan to use aircraft for decades but face constantly changing market conditions, making forecasting difficult. Suppliers must bet on designs that meet both short- and long-term needs, knowing that break-even points are often elusive and list prices are rarely paid due to massive discounts, especially for launch customers.

Instinct and timing. More than economics, the business is driven by instinct and psychology; airlines order when confident and stop when not. Deliveries often coincide with economic downturns, leading to cancellations or postponements. Timing is critical for both buyers and sellers in this unforgiving environment.

2. Boeing's Decline and Airbus's Methodical Rise

For much of that time, Boeing held a commanding lead, its supremacy not really contested.

Trading places. In the 1980s, Boeing was the dominant, world-class player, while Airbus was seen as a government-subsidized European "wannabe." However, over the next two decades, their fortunes reversed as Boeing became complacent and risk-averse, losing its feel for the game, while Airbus stressed fundamentals and gained credibility, eventually surpassing Boeing in sales.

Self-inflicted troubles. Boeing's decline stemmed partly from arrogance and changes in corporate culture that dulled its edge in taking necessary risks and investing in new models. Despite having a strong product line, its reliance on older designs and production methods lagged behind Airbus, which methodically built families of aircraft spanning the market.

Airbus's ascent. Led initially by figures like Jean Pierson, Airbus focused on product development, customer care, and controlling costs, eventually building airplanes more cheaply than Boeing. Its success, initially doubted due to its consortium structure and perceived reliance on subsidies, became a metaphor for Europe's ability to compete against established American industries.

3. Divergent Product Strategies: Jumbo vs. Point-to-Point

In arguing that its Dreamliner is more responsive to current market trends than the A380, Boeing is right.

Clash of concepts. Boeing and Airbus gambled massively on two radically different new airplanes: Airbus's superjumbo A380 and Boeing's midsize 787 Dreamliner. The A380 is designed for the hub-and-spoke model, carrying huge numbers of passengers between major centers, aiming for lower seat-mile costs.

Point-to-point advantage. Boeing's 787 is designed for point-to-point travel, carrying fewer passengers but flying directly between cities, avoiding hubs. This strategy aligns with a trend towards passenger preference for direct flights, saving time and avoiding connection issues, making the 787 potentially more responsive to current market demands.

Market fit uncertainty. While Airbus believes the A380's size is necessary for future traffic growth and airport congestion, critics question if the market is ready for such a large aircraft now. Boeing's 787, with its focus on efficiency, comfort, and direct routes, appears to have gained early market traction, challenging Airbus's hold on the lucrative middle segment.

4. The Persistent and Hypocritical Subsidy War

Each side exaggerated.

Endless dispute. Boeing and Airbus have engaged in a long-standing, often acrimonious dispute over government subsidies. The 1992 US-EU agreement aimed to cap subsidies but didn't end the accusations, with each side claiming the other received unfair government support, either directly (Airbus launch aid) or indirectly (Boeing military R&D, tax breaks, Japanese support).

Mutual accusations. Boeing accused Airbus of receiving billions in illegal launch aid, enabling it to underprice aircraft. Airbus countered that Boeing benefited from military technology spillover, NASA research, and foreign government support for its suppliers, arguing that US support was less transparent but equally significant.

Political maneuvering. The subsidy fight became highly politicized, with both companies leveraging their governments. While the dispute was framed as a trade issue, it often served other purposes, such as diverting attention from corporate problems or gaining political sympathy. Despite threats of WTO litigation, a resolution remains elusive, as both sides benefit from some form of state support.

5. Airlines' Self-Inflicted Wounds and Low-Cost Disruption

HE WHO DIES WITH THE BIGGEST MARKET SHARE WINS.

Deregulation's chaos. The 1978 Airline Deregulation Act, while intended to lower fares through competition, led to irrational behavior among legacy carriers. They engaged in mindless competition for market share, over-expanded fleets, took on massive debt, and negotiated unsustainable labor contracts, weakening their financial base.

Low-cost revolution. Low-cost carriers (LCCs) like Southwest and JetBlue disrupted the market by focusing on efficiency, low costs, and customer service, often doing the opposite of legacy airlines. They avoided complex hub systems, maintained simpler fleets, and managed labor costs and work rules more effectively, proving that profitability didn't require chasing market share at any cost.

Legacy struggles. Despite periods of profitability, legacy carriers continued to struggle with high costs, debt, and labor issues, exacerbated by events like 9/11 and rising fuel prices. Their attempts to compete with LCCs, including creating "airlines within an airline," largely failed, leaving them vulnerable and facing potential extinction unless they fundamentally change their business model.

6. The Engine Makers' Fierce and Complex Competition

“We don’t sell engines, we make concessions,” says a key figure at GE.

Hidden battle. The competition among the three major engine makers—GE, Pratt & Whitney, and Rolls-Royce—is as intense as the airframe rivalry, but less visible. They too have traded places in market dominance over time, influenced by product development, pricing strategies, and government support.

Concessions and aftermarket. Engine makers often sell engines at a loss, offering huge discounts and incentives to airlines. They make up for this through lucrative aftermarket services, particularly the sale of spare parts and maintenance, which can generate two or three times the engine's initial value over its lifetime, making it a "razor/razor-blade industry."

Interplay and tension. Engine selection is critical for airframers and airlines, affecting performance, fuel burn, and operating costs. Disputes often arise between airlines, airframers, and engine makers over performance guarantees and penalties. Engine companies also compete fiercely for exclusivity deals on specific aircraft models, which can significantly impact market share.

7. Corporate Culture Clash and the Boeing-McDonnell Douglas Merger

“McDonnell Douglas has just bought Boeing with Boeing’s money.”

An awkward marriage. The 1997 merger between Boeing and McDonnell Douglas (McDac) was seen by many Boeing heritage employees as a disastrous clash of corporate cultures. Boeing, traditionally run by engineers focused on product excellence, merged with McDac, seen as a financially driven company with a strong defense focus and a more autocratic style.

Shift in focus. The merger, driven partly by Boeing's desire to diversify into defense and McDac's need for rescue, led to a significant shift in Boeing's priorities. The influence of former McDac executives, particularly Harry Stonecipher, pushed Boeing towards a greater emphasis on financial metrics, cost-cutting, and defense contracts, sometimes at the expense of its commercial aircraft business and traditional values.

Loss of equilibrium. Many felt the merger cost Boeing its equilibrium and problem-solving culture. While it provided financial cushioning and expanded the defense portfolio, critics argued that Boeing paid too much for a struggling company and absorbed a culture that contributed to later production problems and ethical scandals, leading some to feel that McDac had effectively taken over Boeing.

8. Production Meltdowns and Management Stumbles

“Our production system is broken.”

Ignoring fundamentals. In the mid-1990s, despite warnings, Boeing's management, particularly under Ron Woodard, prioritized increasing production rates and cutting costs without adequately investing in factory modernization or addressing underlying inefficiencies. This approach contrasted with Airbus's earlier adoption of lean manufacturing techniques.

Tsunami of problems. A combination of factors, including early retirements of skilled workers, a major strike, and the rapid hiring of new employees, overwhelmed Boeing's outdated production system. Factories seized up, airplanes were out of sequence, and suppliers couldn't keep up, leading to significant delays, penalties, and a $2.6 billion write-off in 1997.

Consequences and cover-ups. The production meltdown exposed deep flaws in Boeing's operations and management, leading to the firing of Woodard and a shareholder lawsuit alleging that the company had hidden the extent of the problems. The crisis damaged Boeing's reputation and highlighted the disconnect between management's financial goals and the realities of the factory floor.

9. Asia: The Crucial Battleground Market

The strategic thinking of both Airbus and Boeing is driven by the Asian market, starting with China.

Growth engine. Asia, particularly China and India, has become the primary growth market for commercial aircraft, expected to account for a significant portion of future sales. Both Boeing and Airbus view success in this region as crucial for their long-term dominance, leading to intense competition and strategic maneuvering.

Political leverage. Aircraft sales in Asia are often intertwined with political considerations. Countries like China use large orders as leverage in trade negotiations or to signal political favor, while governments in the US and Europe actively lobby on behalf of their airframers, linking sales to broader diplomatic or economic agreements.

Market access vs. technology transfer. Gaining market access in Asia often requires commitments to local production, joint ventures, and technology transfer. Both Boeing and Airbus have engaged in extensive outsourcing and partnerships in countries like Japan and China, raising questions about the long-term implications for their core competencies and the potential emergence of future Asian competitors.

10. Outsourcing Core Competencies and Future Challenges

Has Boeing tilted the playing field against itself?

Shifting roles. Boeing has increasingly adopted a "systems integrator" model, outsourcing the design and production of major components, including the 787's composite wing and fuselage sections, to partners like Japan's "three heavies" and Italy's Alenia. This shifts financial risk but also transfers critical technical knowledge and manufacturing expertise.

Risk of knowledge loss. Critics, particularly Boeing engineers, worry that outsourcing core components and licensing advanced technologies, like composite manufacturing, risks a "brain drain" and the loss of essential "systems know-how." They fear that suppliers could eventually become competitors, leveraging the knowledge gained from Boeing programs.

Future landscape. The extensive outsourcing by both Boeing and Airbus, particularly in Asia, raises questions about the future structure of the aircraft industry. While it provides market access and shares costs, it could potentially pave the way for new players, possibly an "Asian Airbus," combining foreign technology with low-cost production, challenging the current duopoly.

11. Scandals Expose Ethical Lapses and Political Influence

“This state of corruption won’t change until we start putting people in jail,” McCain said early in 2004.

Defense sector issues. Boeing faced significant scandals related to its defense contracts, including the theft of documents from Lockheed Martin and the manipulation of the Air Force tanker lease deal. These incidents exposed ethical lapses and a culture where the lines between corporate interests and government procurement became blurred, particularly after the merger with McDonnell Douglas.

Iron Triangle dynamics. The scandals highlighted the problematic relationship between defense contractors, the Pentagon, and Congress—the "Iron Triangle." This system, characterized by revolving doors, campaign contributions, and a lack of transparency, allowed deals like the tanker lease to be pushed forward despite questionable terms and processes.

Consequences and reform efforts. The scandals led to investigations, indictments, and the jailing of executives from both Boeing and the Air Force, including former CFO Michael Sears and procurement official Darleen Druyun. These events damaged Boeing's reputation and prompted efforts under new leadership to address ethical standards and corporate culture, though the systemic issues within defense procurement remain a challenge.

Last updated: May 2, 2025