INTERVIEW: Airbus Sees Alliances Among Airframe Manufacturers

By David Pearson

Of DOW JONES NEWSWIRES

PARIS (Dow Jones)--Alliances among commercial aircraft manufacturers are increasingly likely in coming years when new entrants such as China and Russia find their business models don't generate sufficient profits to sustain future product development, but Airbus isn't on the lookout for partners just yet, a senior Airbus official said.

The world market for commercial aircraft of more than 100 seats is expected to see robust growth in the foreseeable future, with the emerging markets outside of the U.S. and Europe providing the growth. The prospect of massive demand in the 100- to 150-seat market has enticed manufacturers such as China's Commercial Aircraft Corp. of China Ltd., or Comac, and Russia's SuperJet International Co. in recent years to carve out for themselves a share of what they see as a potentially lucrative market. Canada's Bombardier Inc. (BBD.A.T) and Brazil's Empresa Brasileira de Aeronautica SA (ERJ, EMBRA3.BR), or Embraer, have longer-standing ambitions in this segment.

"The question is, if there's enough oxygen in the room for all those ambitions," Christian Scherer, Airbus executive vice president and head of strategy and future programs, told Dow Jones Newswires in an interview at the Paris Air Show last week.

"I would say no. If you add up all the financial ambitions that stand behind decent profitability of all these aircraft programs, there probably is not growth to sustain a big Chinese standalone business," he said.

Scherer also was skeptical about the life expectancy of the Superjet 100, manufactured by a joint venture between Russia's Sukhoi Civil Aircraft Co. and Finmeccanica SpA's (FNC.MI) Alenia Aeronautica. "I doubt the ultimate profitability of the Superjet project. It's a pretty good airplane, but it goes into a marketplace that's already very crowded. Everybody is in the 100-seat jet category. You have Mitsubishi popping out of the woodwork, you have the established manufacturers like the Canadians and the Brazilians, and now you have the Superjet."

Airbus and U.S. rival Boeing Co. (BA) are more focused on larger aircraft with 150 seats or more, while the newer manufacturers are focusing on smaller aircraft, for now. "I think that the 100-seat market is in for a bloodbath, and I see the same phenomenon in the move up to the bigger market of planes with 150 to 160 seats. It could get a little dicey for some people," Scherer said.

He predicted that economics will force alliances in the industry, with "big guy, small guy" collaborations starting to emerge through necessity. "I can conceive that Airbus might team up with someone else. I'm not going to tell you that we're in a deal-making mode, but, conceptually, that is absolutely in the cards," he said.

Bombardier and Comac recently linked in a partnership to cross-market their single-aisle aircraft, and Boeing Chief Executive Jim McNerney, in a recent interview with Aviation Week, said Boeing was studying possible cooperation with Embraer. "We are open to folks who play in different spaces but want to abut that space," he was quoted as saying. However, Embraer has said that it prefers to stay small and independent.

The Airbus executive said airframe manufacturers would be keeping an eye on their supplier bases, where consolidation is also happening. "We're seeing the emergence of some pretty big powerhouses, so the manufacturers are going to have to watch out that their first-tier supply base doesn't become more powerful or have more integration ability than we have," he added. The industry was likely to see broader consolidation, both vertical and horizontal, he said.

"I'm absolutely not saying we're going to acquire a big supplier, or team up with Embraer. It's just that there are pressures in that direction, and the pressure is more on the new guys and the small guys than on Airbus and Boeing," he said.

Scherer said that Boeing would be foolish to choose to develop an all-new replacement for its medium-haul 737 rather than emulate Airbus, which has gone for a cheaper solution to offer fuel-efficient engines on its A320. The A320neo, which is due to enter service in 2015, has received a massive endorsement from airlines that have ordered 1,029 in the space of six months. Scherer was in no doubt about what he would have done if he had been in charge at Boeing: "I would have already re-engined the 737."

If Boeing decided to invest $10 billion or more to develop an all-new 737 replacement, he said, "It will be fantastic news for Airbus" as demand for current 737s will evaporate, leaving Airbus free run of the single-aisle market with fully amortized assembly lines. At the same time, Airbus's new wide-body A350 program will be up and running and no longer absorbing resources, and the A380 superjumbo would be profitable, so that Airbus will be in a much stronger financial position in the latter part of the decade.

The new Boeing plane would be delivered around 2020 but wouldn't offer the real step-change in operating costs that airlines want and that Airbus says won't be possible until 2025 when a new generation of engines and aerostructure technology becomes available. Airbus then plans to roll out its "A30X Plan B" a new-design jet that would leapfrog the Boeing plane and steal its market, Scherer said.

-David Pearson, Dow Jones Newswires; +331 4017 1740; david.pearson@dowjones.com

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