How plane giants descended into global ‘price war’

Monday, 9 July 2012 00:00 - - {{hitsCtrl.values.hits}}

Reuters: 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 No.1 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 U.S. 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 percent improvement in fuel burn and therefore a significant reduction in costs offered by the latest revamped models of jets offered by Europe’s Airbus (EAD.PA) and its U.S. rival Boeing (BA.N).

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 modernize 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 some $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 percent depending on the customer,” said independent aerospace analyst Scott Hamilton.