Business Week 02/11/02
author: Carol Matlack
Airbus Industrie can't seem to get a ticket to the hottest party in its own neighborhood--the rapid expansion of no-frills air travel in Europe. None of the region's discount carriers, from Ryanair to easyJet to Virgin Express, owns an Airbus plane. And there was little surprise on Jan. 24 when rival Boeing Co. (BA ) landed an order for up to 150 Boeing 737-800s from Ryanair, a deal that ensures the Dublin-based carrier will remain all-Boeing for at least the next 10 years.
Airbus, based in Toulouse, France, faces an uphill fight to win over Europe's discount airlines, which are expected to buy as many as 300 planes over the next 10 years, even as European flag carriers such as the bankrupt Sabena and Swissair have canceled dozens of Airbus orders.
Why can't Airbus grab a piece of the action? Its A320 model, the chief competitor to the 737, lists for only $54 million, compared to about $60 million for the Boeing plane. But the A320 has nine fewer seats than the 189-seat 737, which works out to $1 million less annual passenger revenue per plane. Most important, the 737 has been flying since 1966, some 22 years longer than the A320. That has created a large supply of secondhand 737s for discount carriers starting up on a shoestring.
And once a no-frills airline gets hooked on one plane, it stays hooked. Discount carriers usually fly only one model of plane to keep down maintenance and training costs--an approach pioneered by the leading U.S. discount carrier, Southwest Airlines, which flies exclusively 737s. Ryanair bought its first batch of 737s in 1994 and has stuck with them ever since. The story is much the same at easyJet Airline Co., the No. 2 European discounter, and at Britain's Virgin Express. London-based Go also uses the 737, as does KLM's Buzz. "The 737 is the aircraft of choice for low-cost carriers," boasts Toby Bright, executive vice-president for sales at Boeing.
Airbus is caught in a corner. To sell these carriers the A320, it would not only have to match deep discounts being offered by Boeing but also throw in extras such as discounted spare parts and free training for pilots and mechanics. In better economic times, Airbus might have done just that. But with aircraft orders worldwide expected to drop 60% this year, Airbus can scarcely afford such generosity. Indeed analysts say Boeing's margins on recent sales to discounters have been razor-thin.
That's why the betting is on Boeing to win a big order soon from easyJet. The London-based carrier announced recently that it wants to buy 75 planes and will consider the Airbus A320. But most industry analysts figure easyJet is just trying to squeeze a better price out of Boeing, which is estimated to have sold the 737-800 to Ryanair for less than $40 million per plane. Airbus says it will bid aggressively on the easyJet deal. But, says Airbus commercial director John Leahy, "We have no intention of being drawn into a price war."
Airbus has had better luck breaking into no-frills travel in the U.S. than on its home turf. It has found a loyal customer in New York-based JetBlue Airways Corp., a two-year-old carrier that has a fleet of 22 Airbus A320s, with up to 132 more on order. And two years ago, Airbus persuaded Denver-based Frontier Airlines Inc. to phase out its fleet of 24 Boeing 737s and switch to two smaller Airbus models, the A318 and A319. Frontier and JetBlue say the Airbus planes are more fuel-efficient and offer wider seats. "I see no reason why, worldwide, we won't eventually have the same kind of market share with the discount carriers that we have with other carriers," Leahy says. In Europe, though, it's still Boeing's party.