Trouble on The Horizon

By Barbara Rudolph

Amid all the hand wringing about the huge U.S. trade deficit, Americans have at least been able to point with pride to their jet builders. Boeing and McDonnell Douglas won more than 65% of world orders for commercial passenger planes last year. But that dominant position grows more precarious by the day. Europe's Airbus Industrie, which once seemed like a tiny speck on the horizon, is closing fast with hot new planes and cut-rate prices. Subsidized by European governments and charged by its rivals with making underhanded deals to win sales, Airbus has brought fiercer competition to an industry that has never been tranquil. It has also sparked a serious trade dispute between the U.S. and its allies across the Atlantic. The stakes involved are enormous: an estimated 2,000 planes worth $250 billion will be sold in the next 13 years.

Airbus has been soaring especially high as a result of its new A320. This technologically advanced short- to medium-range (up to 3,500 miles) jet, unveiled in February, will carry as many as 150 passengers. The world's airlines, including two American carriers, have made commitments to buy about 440 of the A320s, making it the fastest-selling new plane in aviation history. Moreover, Airbus is already taking orders for the A330 and the A340, two larger intercontinental planes that are only on the drawing board. To the astonishment of Boeing and McDonnell Douglas, Minneapolis-based Northwest Airlines placed a giant $2.5 billion order for up to 30 of the A330 and A340 models. Says Wolfgang Demisch, who follows the industry for First Boston: "Airbus is now in the big leagues."

And rising swiftly in the standings. The European firm last year won nearly 25% of worldwide jet orders, up from 11% in 1985, according to the Montreal- based International Civil Aviation Organization. At the same time, Seattle's Boeing has watched its share of the business dip from 58% to 49%. St. Louis- based McDonnell Douglas, meanwhile, has slipped into third place with 17%, down from 19% the previous year, although some industry analysts believe McDonnell Douglas may regain its No. 2 position in 1988.

Airbus' current success is all the more surprising because it was slow to get off the ground. Created in 1970, the consortium is funded by publicly and privately owned aircraft builders in France, Britain, West Germany and Spain. But it did not sell a single jet to a U.S. airline for seven years. Says Robert Kugel, an aerospace analyst at the Morgan Stanley investment firm: "U.S. carriers wouldn't touch European airliners with a ten-foot pole. They had a reputation for poor quality and maintenance." That perception gradually changed. By 1987 some 360 of the medium-range A300 (up to 375 passengers) and the A310 (250 passengers) were flying under the banners of 58 airlines around the world, including such U.S. carriers as Eastern and Pan Am.

But the A320 outsold its predecessors even before it was ready for commercial takeoff. The first models, which are now being assembled at the Toulouse production facilities of Aerospatiale, the French state-owned aircraft company, should be delivered by next spring. The A320's most impressive claim: the first fully computerized flight-control system. Among other things, the equipment prevents the plane from stalling or exceeding speed limits.

The A320 is drawing sales away from some of the bread-and-butter planes made by U.S. manufacturers -- Boeing's 737 and McDonnell Douglas' MD-80. But the Americans are planning to fire back some shots of their own. McDonnell Douglas estimates that by 1991 its MD-91X, a new version of the MD-80, will be flying. It will be powered by an energy-efficient engine known as an unducted turbofan, which features twin sets of rotor blades located at the rear of the engine. Boeing, meanwhile, is developing a new medium-range aircraft, the 7J7, which will also have an unducted turbofan engine. Projected launch date for the 7J7: 1992.

Until now, Airbus has steered clear of the long-range (more than 5,000 miles) market. But that could change with the arrival of the A340. Though the European backers have not given final approval to the proposed plane, which will be developed in tandem with the A330, a medium-range jet, Airbus is proceeding with development plans. Industry observers expect the company to get the go-ahead -- and some $3 billion worth of launch money -- by this summer. Airbus has already lined up 124 orders for the A330 and A340 for delivery in 1992 or 1993. It hopes ultimately to snare 25% of the long-haul market.

This new generation of Airbus planes could threaten McDonnell Douglas' planned MD-11. An upgraded version of the DC-10 jumbo jet, the MD-11 should go into service in 1990, about two years ahead of the proposed Airbus jets. Boasts McDonnell Douglas Aircraft Division President Jim Worsham: "The MD-11 is a bird in hand. Airbus is a long way from that." Boeing plans to compete against the MD-11 and Airbus' A330 and A340 by modifying its 767. The new 767-300 Extended Range will have a range of 6,600 miles, compared with 5,700 miles for its current counterpart.

Even as Boeing and McDonnell Douglas answer the Airbus challenge, they complain that the fight is unfair because of the subsidies their competitor reaps from European governments. Since its start, the consortium has received at least $10 billion in public funds and never made any money. One reason: Airbus jets are allegedly sold for 15% to 25% less than their American-made counterparts. A Boeing 747 sells for $120 million, for example, while Airbus is offering the rival A340 for about $80 million.

In response, Airbus executives point out that U.S. aerospace firms have benefited from billions of dollars in Government defense contracts. That might be seen as a form of indirect subsidy, since the funds have enabled aircraft companies to develop new designs that can be used in commercial manufacturing. European supporters of Airbus suggest that, with some 65% of the market, American companies have little cause for complaint.

U.S. manufacturers also accuse Airbus of unfair trade practices. Members of the consortium are said to arrange for foreign airlines to win landing rights at European airports in exchange for buying Airbus planes. Some industry insiders charge that, in trying to sell the A340, Airbus offered a potential customer a no-interest $10 million loan. Airbus officials flatly deny these charges.

McDonnell Douglas has a particular grievance against Airbus: using "predatory" practices in trying to persuade customers who had already ordered the MD-11 to switch to the A340 instead. Scandinavian SAS airlines had signed a letter of intent to buy a dozen MD-11s and had put down a deposit on the order. Then Airbus jumped in with attractive concessions to SAS on a deal (the details are undisclosed) to buy A340s. The airline has delayed its final decision.

Confronted by such cutthroat competition, McDonnell Douglas has discussed making a truce with Airbus several times during the past few years. The American company suggested that the competitors form a joint venture to build long-range jets together and thus combine forces against Boeing. Says McDonnell Douglas' Worsham: "Instead of being lean dogs fighting for the same piece of meat, we could strengthen ourselves with cooperation." So far, though, Airbus has declined the offer.

The international aircraft rivalry has become a major source of contention between U.S. and European trade representatives. Washington is naturally alarmed that the American aerospace industry, which generated a surplus of $12 billion in its overseas trade last year, could be damaged by unfair subsidies to a foreign competitor. The Administration is negotiating with the Europeans in an effort to persuade them to them to curb the Airbus subsidies. Said U.S. Trade Ambassador Michael Smith last week: "We want to defuse the tension."

As diplomats negotiate, Boeing and McDonnell Douglas executives are peddling their planes more aggressively than in the past. Says Dean Thornton, president of Boeing's commercial-plane division: "We used to sell 727s like you sell Mercedes. This one's nice and there's the price on the window, take it or leave it. But times have changed." Now both American aircraftmakers offer better service, supply spare parts in advance and guarantee maintenance costs.

No one expects Airbus to surpass its U.S. rivals anytime in the foreseeable future. But if the European competitor keeps soaring, it is bound to clip more than a few American-made wings. For Boeing and McDonnell Douglas, prestige and big money are on the line, and the jet builders have no intention of giving up their dominance of the skies without a dogfight.

With reporting by Robert Ball/Toulouse and Edwin M. Reingold/Los Angeles