CAL could be the next to benefit from the US company's tactic of buying back nearly-new Airbuses to secure 777 orders

Two years ago, at the end of the 1999 Paris air show, Singapore Airlines (SIA) chose to make an announcement several thousand miles away that it was exercising options adding a further 10 Boeing 777s to its fleet.

The move seemed nothing more than coincidence, but when Airbus executives read paragraph three of the statement from Singapore they realised this was no ordinary announcement.

"A commitment has been made by Boeing to purchase the 15 A340-300 aircraft in SIA's fleet and the two remaining aircraft on order," the airline said.

The Airbus executives could hardly believe what they were reading. Boeing had agreed to buy 17 nearly-new Airbus widebodies to clinch a sale of its rival product. At first it seemed like a one-off offer aimed directly at securing yet more business from the bluest of blue chip airlines.

It has since emerged, however, that Boeing has offered to cut a similar buy-back deal with China Eastern Airlines and most recently has now offered it as an option to China Airlines (CAL), which is mid-way through deliveries of new A340-300s (Flight International, 21-27 August).


The Taiwanese carrier has four A340s in service with a further three aircraft to be delivered. The buy-back option is part of a Boeing bid to secure an order from CAL for up to 20 widebody twins destined to serve some of its high density regional routes.

Two years ago, Boeing was known to have pleaded with SIA not to refer to the A340 buy-back in its 777 order announcement and the US company later publicly played down the significance of the trade-in. It now talks more openly about this sales technique in connection with the proposed CAL offer.

The European manufacturer reacted angrily to the SIA news, threatening to withdraw technical support for Boeing-owned A340s. It even unilaterally cancelled a briefing on A340 product developments it had been due to give SIA a few weeks after the Paris air show.

Talking about the deal, Airbus said: "Contrary to comments made by Boeing executives, the purchasing of competing products, especially aircraft which have not even yet been produced, is absolutely not usual practice and has never been undertaken by Airbus.

"From a manufacturer's point of view, we are of course concerned by the scale of the precedent which has been set by Boeing and the impact the repetition of such practices could have on the overall future profitability of the industry", said the European aircraft maker.

Boeing categorically rejects any suggestion that such trade-in deals are anything other than legitimate and fair business practice. "If we do something a little different and creative - that's part of business," says the US manufacturer.

Furthermore, Boeing claims buying Airbuses that have been ordered but not built yet is "really a technicality" and "the same thing" as buying back a used aircraft. "We would do it again if it made economic sense," it says.

No-one disputes, however, that Boeing has moved the goal posts in its battle with Airbus. Traditionally, only older aircraft nearing the end of their useful lives have been accepted as trade-ins, but Boeing has signalled its willingness to effectively buy market share for the 777 family by taking newer aircraft as well.

There have been one or two instances in the distant past of such a strategy, most notable of which was probably Boeing's 1984 deal with Kuwait Airways to take its outstanding Airbus A310s orders in return for a 767 contract.

This saw the US manufacturer taking delivery of several new A310s from Airbus, which it later placed with Pan Am.

The effect of the SIA deal is to inhibit the ability of Airbus to sell new A340-300s, while simultaneously increasing the 777's market share and thereby creating the impression that the Airbus is an inferior product.

"Taking other people's aircraft is win-win for Boeing," says one analyst. "It increases its new sales market share, and it increases its aftermarket and financial business base. Of course, this might not translate into profits but it's a good approach," he says.

Boeing's tactic may be a valid attempt to establish the 777 as the dominant product in its market, but the danger is the impact this will have on the profitability of the industry itself as more carriers demand that the manufacturers buy their existing fleets to sell them new aircraft.

Indeed, it was the potential of the SIA deal to set a precedent in the market that most concerned Airbus executives.

Boeing also risks failing to make an adequate return on the multi-billion dollar asset that the 17 A340s represent, particularly in a soft, recession-hit market which the airline industry is moving headlong into.

To date Boeing has offloaded three of the SIA aircraft to Cathay Pacific and has a further 14 listed for sale, although technically the aircraft do not become Seattle's responsibility until they are withdrawn from service by SIA - a gradual process not expected to be complete for some time. Of the 14 aircraft, 12 are in service with SIA and the remaining two have yet to be delivered.

The problem for Airbus is deciding how to counter-attack. It claims to have never had a Boeing aircraft on its books but has agreed tore-market its competitor's products. Boeing says it will continue to take back new Airbuses where it makes commercial sense and that Airbus has to decide whether to engage in the practice as well.

The question of whether Boeing's strategy is unfair comes down to whether or not the company can be accused of using its financial muscle to artificially increase the 777's market share by killing the A340-300, industry observers believe.

Unfortunately for Airbus, this is an argument that will perhaps be difficult to sustain given the controversy surrounding the government-backed loans it is receiving to develop the A380.

Source: Flight International