Boeing's big year upstages Airbus

When top Boeing leaders converge next week for their annual executive retreat in Orlando, Fla., commercial-airplanes chief Alan Mulally can expect a welcome worthy of a prince at Disney's Magic Kingdom.

In a year when Boeing suffered a monthlong Machinists strike and turbulence in the boardroom after Chief Executive Harry Stonecipher was ousted over an affair with an employee, airplane orders kept rolling in without interruption. Barring an unlikely last-minute reversal, Boeing will top Airbus in 2005 commercial-jet sales for the first time in five years.

"The orders this year are ... an endorsement by the airlines of the world," Mulally said in an end-of-year interview. "What's being validated here is the Boeing Commercial Airplanes strategy for the last six years. That's the incredible story of 2005."

Mulally's triumphant perspective challenges the widespread industry view of his company over that time period. For most of the past six years, Boeing has seemed adrift, searching vainly for a strategy to slow the rise of its seemingly unstoppable European nemesis.

Until now. With the worldwide airline industry taking off everywhere outside the U.S., Boeing is set to surpass the total of 965 gross orders in 1988, its best order year ever. (Gross orders are the new firm orders for a year. In subsequent years, some of these orders may be canceled to produce a different "net order" figure for the year.)

So far this year, Boeing has announced 895 firm orders. The final tally will not be publicly released for a week or two after a flurry of last-minute deals are sealed. But according to a Boeing insider, an internal sales projection earlier this month forecast a 2005 total — counting an expected 68-jet order from Air India — of just over 1,000 gross orders.

That should handily best Airbus, which has so far announced 749 firm orders for the year.

Boeing won't quite hit an all-time record because there were more gross orders in 1989. However, so many of those orders were canceled after the Persian Gulf War that 1989 ranks as only the second best net sales year after 1988. (See the accompanying chart.)

Boeing has an even bigger lead over Airbus in the value of its 2005 orders. The year's sales skewed heavily toward the more expensive and more profitable wide-body jets. Based on list prices, Boeing's order book so far this year totals about $100 billion, $30 billion more than Airbus'.

Though Airbus is now flying the largest commercial jet in the world, the A380, sales of the plane have stalled. And outside that exclusive superjumbo niche, Boeing this year has established dominance in sales of big jets, especially the 777 and the 787.

Boeing's recent wide-body sales campaigns — with Emirates of the Middle East, Cathay Pacific of Hong Kong and Qantas of Australia — have been so successful that Airbus has to worry about a Boeing lock across a range of big-airplane categories.

After a tumultuous decline in Boeing's fortunes in the late 1990s that allowed Airbus to soar past its American rival as the world's No. 1 airplane manufacturer, Mulally can now reasonably claim to have turned things around.

How did Boeing do it?

Analysts on both sides of the Atlantic point to decisive advantages that have emerged in the Boeing lineup of airplanes and to a new aggressiveness in sales campaigns.

First, the new 787 airplane program has raked in orders all year.

"It's caught fire," said Boeing critic Philip Lawrence, a professor at the University of the West of England (UWE) in Bristol, who has worked as a consultant to Airbus and is the author of "Deep Stall," a highly critical history of Boeing commercial airplanes. "The concept of the airplane and the way it's been sold has captured the customers' imagination."

Boeing pitches the 787 as a lightweight, fuel-thrifty jet.

"When the buzzword in the industry is cost-saving, this is a good aircraft to be introducing," said Rob Spingarn, a financial analyst with investment-banking firm CSFB.

Airbus' direct response, the A350, is two years behind the 787 and is fighting the perception that it's a modified A330 rather than an all-new jet.

But Boeing's dominance this year also comes from the twin-engine 777 eclipsing the four-engine A340. That's partly due to Airbus' failure to deliver on performance promises for its long-range A340 models.

"It's a pretty open secret that the in-service reliability of these aircraft has disappointed customers like Virgin Atlantic and Cathay Pacific," said Lawrence, of UWE. "[Their] performance has let Airbus down and given Boeing a big opportunity with the 777."

This year's breakthrough sales wins clearly depended also on pricing. Boeing sales chief Scott Carson has led a series of decisive campaigns offering big discounts and closing deals against Airbus supersalesman John Leahy.

"For years, [Boeing] seemed to be in thrall to John Leahy," said Lawrence. "Carson and his team have done a great job. Boeing has clearly reinvigorated the whole sales side."

In July 2004, fast-growing Middle East carrier Emirates ordered eight long-range A340s, saying no to the 777. That morning, Boeing Vice President Dan Becker warned workers in a speech at the Everett factory that the 777 was too expensive to compete and that the program had to reduce costs dramatically.

The combination of Becker's cost-cutting and the newly aggressive pricing, with help from Airbus missteps, has succeeded big time. In November, Emirates placed a massive order for 42 777s.

Airbus is scrambling to produce a new A340 derivative that can stand up to the 777. Until it does, there's a huge market segment — airplanes with 300 to 550 seats — that is Boeing's for the taking.

Boeing smart all along?

Underlying Boeing's strategy for the past six years, said Mulally, has been its view of the future of aviation as requiring smaller airplanes for nonstop, point-to-point flights.

While Airbus boldly pushed ahead development of the A380 superjumbo, Boeing retreated from bigger versions of the 747 in the late 1990s and then again from its superfast Sonic Cruiser concept in 2002.

"We don't rush into things," Mulally said. "We watch [Airbus] very carefully. We don't make moves because of what they are doing. We make moves when it is time to make a move.

"That might look a little less flamboyant," he said, but, "... The important thing is focus and discipline and patience."

CSFB's Spingarn is not entirely convinced.

"It looks like Boeing made all these very intelligent decisions," he said. "The truth of the matter is they were pushed into some of them and got lucky because Airbus decided to put almost all its eggs into the [A380] basket."

Lawrence — whose book dismissing Boeing's strategic approach was published, unluckily, just as the turnaround took hold — dismisses Mulally's take as "complete rubbish."

Lawrence said even Boeing managers he talked to considered the company to be in a tailspin a few years back and lacking strategic direction.

"I'm prepared to be very open-minded about Boeing's great achievements over the last 12 months," he said. "I don't buy this revisionist history of their strategy before that."

Money to flow in

For now, "Boeing is in the catbird seat," as Spingarn puts it.

This year's feast of orders will translate in the next few years into a rapid ramp-up in production in Boeing's Puget Sound-area factories. A closely held internal analysis, provided by a company insider, projects that commercial airplane deliveries will jump from 290 this year to almost 400 next year, just shy of 500 by 2008 and beyond that in 2009 and 2010.

As planes roll out, cash will roll in.

This year the commercial side of Boeing's business will account for about 40 percent of revenue, with the military side dominant. But even though the commercial division shrank significantly in 2005 with the sale of its major parts plant in Wichita, Kan., the internal analysis projects that by 2008, the unit's revenue will be almost on par with the defense-side income.

As a result, by 2010, total company revenue is projected to be up more than 50 percent from this year. If that sky-high projection pans out, Boeing's roll is just beginning.

Dominic Gates: 206-464-2963 or dgates@seattletimes.com