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Monday, October 31, 2005

Why Boeing is More Economical than Airbus

Over the past year doomsayers have been claiming that Airbus’ double-decker jetliner rang the toll of Boeing’s demise. Sure, Boeing will linger around as a defense contractor, but the golden-age of 7*7 series jetliners had set course into the sunset. Airbus created the bigger plane which must mean that airliners will flock to it. Minor problem; everyone it seems is buying Boeing jets. In the November 7th issue of BusinessWeek Stanley Homes and Carol Matlack report in their article “Boeing Roars Ahead” that three more Airlines are swinging towards buying jets from that doomed company that is Boeing. How could this be? Three possible ideas from economics may hold the answer.

The first idea isn’t all that unique to economics; in fact, neo-classical economics has trouble dealing with it. That being technological improvements. Yes supply and demand models (even macro models) can shift supply curves to handle changes in technology, but tech is not inherent in the model. As Homes and Matlack reported:

Indeed, Boeing's move to twin-engine planes couldn't have come at a better time. Rising fuel prices have prompted carriers to seek out more efficient jets -- and two engines are a whole lot cheaper to operate than four. The 777 burns about 24% less fuel per seat-mile than Airbus' four-engine A340. That's a huge difference, and some airlines flying A340s -- such as Air Canada (), Austrian Airlines, Singapore and possibly Qatar -- are looking to replace them with 777s.

It seems to me that while Airbus chased the static goal of bigger is better, Boeing chased the elusive prey of technological advancement and succeeded. While Airbus was content to build gas hogs, Boeing recognized that Airlines want more efficient planes, and with the recent surges in oil prices the balance drastically shifted towards the lucky seven company. Yet this isn’t the only time Boeing played soothsayer.

The traditional structure of the Airline market is the ‘hub and spoke’ where a few mega-airports (Los Angeles, Tokyo, London, and New York to name a few) are connected together by flights and then smaller airports are connected to the network by flights to these hubs. Boeing thought that this market might change and designed aircraft not for the ‘hub and spoke’ routes of yesterday, but for a more even network where routes connect more like a woven fabric. According to the article in BusinessWeek:

Boeing execs determined -- correctly as it turned out -- that the market was changing. They predicted passengers would prefer to fly nonstop rather than fly through a hub and switch from a big jet to a smaller one. Filling that demand, Boeing figured, would require fleets of smaller, twin-engine planes rather than Airbus' four-engine A340.

Instead of viewing the market for airliners as static (or reliably stable) as other might, Boeing believed that it might just be subject to dynamic forces such as economic and population growth. Cites that might have gone unnoticed just a few years ago have become important destinations. The growth of Singapore is an example of a city that, at the dawn of the jet age, was a simple city in Asia, but has now has boomed to be an important destination of airliner traffic. Dynamics has one more appearance to play.

Unlike Boeing (a single corporation), Airbus is a conglomeration of European airspace companies. When groups get together expect there to be friction. Stanley and Matlack describes this friction for airbus as such:

Boeing's resurgence comes at a time when Airbus is stalling badly. Delivery delays of its 555-seat A380 super-jumbo jet have angered key customers. And an inability to settle on the final design of its new A350 has given the 787 and 777 an even bigger head start.

While Airbus brought together the greatest minds in the European aerospace this federation has the problem of dynamic friction. With each member of the group having different objectives this friction will stall the group objective; in this case allowing those pesky Americans off the ropes and back to the top of the Airliner industry. In a sense these two companies may serve as a metaphor for economic thought: Airbus is the static neo-classical thought that models show how to manipulate the market, while Boeing is taking a more dynamic track that the market will change and the best way to survive is to flow with it. Time will tell who will dominate the skies.

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