Boeing Is Grounded in More Ways Than One

(Bloomberg Opinion) -- The coronavirus-fueled collapse in air travel has made it highly unlikely that airlines will be adding new jets to their fleets anytime soon. But when the world’s carriers are ready to take deliveries of airplanes and place new orders again, the odds are increasing that those planes will be made by Airbus rather than Boeing.

There are no coronavirus winners in the aerospace market. Airbus SE has said it will cut production by a third and some analysts think even that may not be enough. CEO Guillaume Faury has warned employees that the company is “bleeding cash” and needs to drastically cut costs. Boeing Co. will reportedly announce job cuts and plans to take monthly production of its 787 Dreamliner into the single digits when it announces earnings later this week. Some 17,000 planes — about 64% of the global fleet — are now grounded, according to industry analytics company Cirium. Airlines have warned demand will remain depressed into at least 2021, so we’ve likely only seen the first wave of cancellations and order deferrals. But once people do start to fly again, the emphasis is going to be on smaller, fuel-efficient models. Boeing has little to offer on that front right now. 

The planemaker announced over the weekend that it’s canceling a joint venture with Embraer SA’s commercial jet program. The $4.2 billion deal was formalized in 2018, and the companies repeatedly expressed confidence it would close by the end of 2019, even as Boeing grappled with the consequences of a prolonged grounding of its 737 Max following two fatal crashes. In a sign of investors' frustration over the company's handling of that crisis, Boeing shareholders voted Monday to require an independent chairman, crystallizing a structure already put in place late last year with the appointment of Dave Calhoun as CEO and Larry Kellner as head of the board.

Meanwhile, pushback from European Union regulators kept the Embraer deal in limbo, and now Boeing has much more pressing needs for that cash. Canceling the deal is a prudent move on Boeing’s part and the sacrifice may make it more palatable for the government to backstop the company, but it’s a strategic loss.

The Embraer tie-up was defensive from the start: Boeing’s plan to stymie competition from Bombardier Inc. by getting tariffs slapped on its planes backfired and pushed Bombardier  into a deal with Airbus in 2017, forcing Boeing to find a regional jet partnership of its own. Walking away now means ceding yet another sliver of the commercial jet market to its European rival. While Airbus is delaying plans to ramp up production of the Bombardier regional jet — now dubbed the A220 — it remains committed to investing 500 million euros and 1 billion euros in the program this year. Airbus agreed in February to pay $591 million to increase its stake in the A220 to 75%.

Meanwhile, Boeing can’t deliver some 400 Max jets sitting in storage until regulators lift a grounding order, and the timeline for when that will occur continues to slide. The plane now isn’t expected to return until late summer or early fall, the Wall Street Journal reported Friday, as the Federal Aviation Administration continues to review two software fixes and coronavirus travel bans hinder efforts to collaborate with international pilots and regulators. With the grounding now having passed the one-year mark, it’s easier to cancel Max orders than those for Airbus jets.

Airbus saw nine cancellations for its A320 series in March, compared with 150 lost orders for the Max the same month, according to Bloomberg News. Airbus is cutting production of the A320 line to 40 planes per month. If it can hold that rate, it should eke out a 55% to 45% lead over Boeing in the narrow-body market through 2023, according to estimates from Jefferies analyst Sheila Kahyaoglu.

Airbus’s longer-range version of the A321neo – the A321XLR – could be a much needed stop-gap option for airlines that need more flying capacity than a narrow-body offering but aren’t sure they can fill the seats of a wide-body jet. Boeing’s plans for a middle-market aircraft of its own have been shelved for now, essentially allowing the Airbus offering to stand on its own, as my colleague Chris Bryant has noted. 

It’s in airlines’ interest to maintain a duopoly between Airbus and Boeing, so the balance of power can only tilt so far in one direction. But once Boeing and Airbus can move beyond survival mode, the latter is clearly in a better position to capitalize on a rebound in travel demand.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.

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