Feud Deepens As Boeing Grabs Key Airbus Client

August 5, 2012

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Airbus was reeling on Friday from the defection of a high-profile customer to Boeing, prompting European accusations of aggressive tactics amid renewed evidence of a jet price war.

Silkair, the regional arm of Singapore Airlines, said it had placed the biggest order in its history with a tentative deal to buy over 50 Boeing 737 jets worth USD$5 billion.

This came as figures showed Boeing outselling Airbus by more than two to one in the first seven months of the year, reversing a deficit seen last year when Airbus broke industry records with a fuel-saving version of its competing A320 jet.

The world's dominant plane makers have been locked in a see-saw contest for market share since late 2011, cutting prices to take maximum advantage of the chance to lock in customers for the A320neo and Boeing's response, the 737 MAX.

"They are in a huge market share war between the MAX and the neo, and I think that's going to be reflected in price," said Alex Hamilton, director of research with EarlyBirdCapital.

Such 150-seat medium-haul jets are the bread and butter of low-cost airlines and feed the hubs of large network carriers, with potential sales of USD$2 trillion over the next 20 years.

SilkAir said it had agreed to buy 23 Boeing 737-800 aircraft, Boeing's current benchmark model, and 31 of the upgraded versions called 737 MAX 8, plus options for more.

The A320neo and 737 MAX offer fuel savings of roughly 15 percent together with other improvements, sparking a rush of demand from airlines seeking to ease their highest cost in an industry that suffers from chronically slim profit margins.

The airline did not disclose the price of the deal, but carriers typically receive hefty discounts, sometimes bringing total concessions to more than 50 percent of list prices, according to analysts and estimates derived from leasing data.

Airbus and Boeing have each accused the other of heavy-handed pricing as the frontier between the big Western jet makers - which typically split the market for medium-haul jets - takes some time to stabilise after the upheaval of new products.

"We have no comment to make on the purchase decision by Silkair. However, Boeing has clearly made an extremely aggressive offer to win this deal in an attempt to catch up with the huge success worldwide of the A320 family," said Airbus spokesman Stefan Schaffrath.

Boeing spokesman Marc Birtel said: "Our customers recognise the difference between products and make decisions that suit their needs. Price alone is not always the discriminator for the services and packages that appeal to our customers. While we will be competitive in negotiations and want to win, there are limits to how deeply we'll discount an order."

Shares in both companies rose amid a broad market rally.

FLIP FIGHT

After a number of losses to Airbus, including part of a historic order by American Airlines last year, industry sources have said Boeing would fight back as the pair engage in the sport of "flipping" or converting selected customers.

Such deals must overcome the cost of retraining pilots.

The latest scalp comes days after Boeing grabbed an USD$11 billion Aeromexico deal and is a boost for new Boeing commercial planes chief executive Ray Conner after last month's debut Farnborough Airshow yielded a smaller spree than some predicted.

Other big contests are looming in Turkey and Asia where the head of Philippines Airlines said it would soon decide whether to pick Airbus or Boeing. Industry sources say the carrier wants dozens of A320-type jets plus around 10 mid-sized.

In Turkey, Airbus is said to be heavily wooing low-cost Boeing operator Pegasus but faces an uphill battle at the other end of the scale as Boeing pushes its 747-8 to Turkish Airlines.

Separately, China Southern said its subsidiary Xiamen Airlines had also agreed to buy 40 Boeing 737 aircraft as it expands internationally.

That deal will be seen as more routine as major Chinese carriers tend to give roughly equal treatment to Airbus and Boeing over time for narrow-body jets, though a diplomatic row over carbon rules has disrupted orders for larger Airbuses.

But it added to a poor day for Airbus as the EADS unit said it had sold 301 jets in the first seven months, giving it less than a third of the market as Boeing rebounds from a record loss in last year's ritual order race.

Boeing sold 736 aircraft in the same period and is set to recover the No. 1 spot in 2012 for the first time since 2006.

Both plane makers launched their upgrades from mid-decade in a successful bid to clip competition from China and Canada, only to slip into a battle for market share to avoid the other side running away with the very real cost benefit of higher volumes.

Insiders say a serious concern is that lopsided shares in a duopoly such as Airbus and Boeing's can lead to panicky pricing.

Whereas deals may be won or lost within USD$1 million on a jet notionally worth USD$80 million but often sold for half, industry sources said the gap between the two sides was wider than normal.

Aerospace analyst Scott Hamilton said Boeing had on occasions underbid Airbus by 10 percent as it catches up with the European company's success in the past 12 months, though European sources concede blood has been spilled on both sides.

EasyBird's Alex Hamilton said price fears should ease as immediate demand for the latest jets exhausts itself and the cycle - driven by Asian growth and US modernisation - peaks.

(Reuters)