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Haven't Shareholders Had Enough Chicken?

Wed Apr 04, 2001 11:45 pm



Column: Haven't Shareholders Had Enough
Chicken?

Wall Street Journal 04/04/01
author: Holman W. Jenkins Jr.

Did the longest-running game of corporate chicken just get longer?

Boeing's chips have always been stacked on preserving its 747 monopoly
as long as possible, just as it was always Airbus's job to nervously weigh
the $10 billion risk of launching a successor. On one thing, though, both
sides agreed: The market would never be big enough for two new aircraft,
so fighting it out head to head would be mutual suicide.

These facts being so, the outcome was never in doubt. Boeing deserves a
big hand just for dragging out the joust for the better part of a decade,
especially since it labored under an inevitable handicap in any game of
corporate chicken -- the fact that its financing comes from private
investors.

Nixon found it a blessing that the Soviets considered him a little bit crazy,
but widows and orphans don't take kindly to managements playing
recklessly with their life savings. Hence the moment of reassurance after
the McDonnell Douglas acquisition in 1997, when Boeing found it
necessary to disavow any idea of challenging Airbus with a costly new
"superjumbo" of its own. The stock jumped $7 in a few minutes.

Since then, Boeing has only had one fright wig to wave in front of Airbus,
an enlarged "747X," but it quickly was obvious the airlines weren't
interested in warmed-over technology. When Airbus officially launched its
new plane in December, it had piled up dozens of firm orders to Boeing's
zero.

Far from being an ignominious defeat for Boeing, every game of chicken
ends in a tie. The only question is whether the contestants finish face down
on the pavement together or safely sailing past each other.

Shareholders or no, Boeing's rational course was always to milk the 747
and then swerve out of the way at the last minute. But credit the company
with finding a way at least to make the inevitable surrender go down more
agreeably than anyone expected. Last week it used the occasion to delight
media with a new eyefull, nicknamed the "sonic cruiser," offering an
artist's conception of futuristic, swept-wing beauty and talk of "changing
the way the world flies."

Is this a serious commercial proposition or just another attempt to bluff
Airbus and its potential customers?

The sonic cruiser's speed would be a plus. The plane would fly just below
the speed of sound, though at its operating altitude of 45,000 feet, this
means about 660 miles per hour, barely 100 mph faster than today's big
jets.

Even more threatening is its potential to divert the cream of the traffic from
Airbus's superjumbo. In theory, the plane would cut travel times by as
much as 20% simply by flying faster. But it would save a lot more time by
allowing premium passengers to fly directly from, say, Podunk, USA to
Podunk, China, without trekking through two hub airports on the way.

This reflects Boeing's view of the future. For several years the company
has been deriding the superjumbo as too much, too late. Passengers have
always preferred to fly direct, but now the combination of congested hubs
and a new generation of twin-engined long-haul jets is making such "long,
thin" routes the true growth opportunity of the future, or so Boeing says.

This sounds plausible enough, but the company already is exploiting such
opportunities with its 777, which currently flies the longest commercial
passenger route in the world, New York to Hong Kong, in 16 hours.
Cutting off another couple hours with a zoomy Concorde look-alike would
be nice, if such a plane could be delivered at an affordable cost. Here,
though, anyone might wonder if the media are being gaslighted along with
Airbus.

There are good reasons why current models don't fly just below the speed
of sound. Developing the requisite thrust would consume gobs of fuel,
adding directly to costs and squeezing out payload.

Whether picking up an extra 100 mph is worth the cost of clearing these
hurdles is hard to guess. Boeing says existing engine technology would
serve nicely, but daring new designs for the wing, fuselage and flight
controls would be necessary. On many routes, however, an easier way to
save time and passenger aggravation might be to improve airport capacity
and air-traffic control systems -- a business that even Boeing has lately
seemed to like better than commercial aircraft.

Too, barely a year ago press reports had Boeing all but shutting down the
group responsible for advanced designs like the sonic cruiser.

Airbus must also be wondering how to read the sonic cruiser in light of
Boeing's other big announcement, its decision to decamp senior
management from the Seattle headquarters so the top echelon can no longer
share intimate evenings with the guys from the commercial airplane
division.

This was a message aimed directly at shareholders, whose lack of appetite
for a suicide pact has already been demonstrated. And Boeing learned
another bracing lesson in shareholder realism two years ago, after making
a dreamy-wishy decision to expand output at its overtaxed factories rather
than relinquish market share and concentrate on profitability. The result
was a disastrous production snafu that hurt the company's reputation for
quality and left shareholders on the hook for billions of dollars in
unprofitable plane deliveries.

Though it has become impolitic to say so, such concerns still don't apply to
Airbus. It now has private shareholders but they're still playing with
government capital, in the form of low-interest loans from various
European states, which in a pinch would likely become no-interest loans.

Trade theorists have worked up explanations about why such state
capitalism can be efficient, but the theories depend on governments being
more omniscient and judicious than they usually are. Not that a trade war
would serve any useful purpose. Airbus builds a nice plane, and Boeing at
this point probably benefits from having an established competitor to
discourage, say, Japan or China from trying to get into the market.

Any game of chicken ends well that doesn't end with both players carried
out on stretchers. The sonic cruiser may someday fly, but Boeing certainly
is in no hurry to renew the death match.

--Holman W. Jenkins Jr.

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