The debate over the size of market for a new very large aircraft has become similar to a poker game; until the first cards are on the table, no-one knows which way the deck will fall.

During a recent briefing in Washington, Airbus Industrie's senior vice- president, commercial, John Leahy was again questioned over how it could be that the experienced forecasters of Airbus and Boeing have each analysed the potential market for a very large aircraft and come up with such completely different views. Not only that, but Boeing has issued dire warnings about the calculations being made by its European rival. Leahy smiled and replied: "It is strange, isn't it? I can only think that Boeing has become concerned for our financial welfare."

Intriguing as that possibility might be, the truth is more interesting. Neither manufacturer is wrong; what will prove critical over the next few years is the extent to which each of them is right.

There is truth at the heart of each side's argument. Boeing argues that the global aviation community will become increasingly liberalised. Greater liberalisation will, in turn, give airlines more freedom to make strategic route decisions, by-pass congested hubs and fly point-to-point. That is just what Southwest Airlines has been able to do in the USA since deregulation. Airbus points to the massive forecasted rise in traffic over the next 20 years and says that not all of that growth can be accommodated merely by adding frequency or flying point-to-point, especially given air traffic control restraints. Some key hubs, such as London, New York and Singapore, simply cannot fragment, it argues.

The most likely outcome is that there will be a mix of these events. Airbus is banking on there being sufficient growth in the large international hub-to-hub routes, along with increased demand from freight airlines, to justify the $12 billion it plans to invest in the A3XX project. Boeing has now made its first move in this "X-game", launching the 777X - the longer-range 777-200 and 777-300. By confirming early in the year that this aircraft is available, Boeing hopes make clear to the airlines that they have a choice - they can opt for a strategic decision and buy a few longer-range 747-400s and/or longer-range 777s. This would provide some flexibility in an ever-changing world rather than betting all in an ultra-large aircraft.

Boeing Commercial Airplane Group president Alan Mulally describes his company's policy as a "market-driven" decision (see page 46). The gamble is, that if Boeing's conclusion turns out to be far off the mark, it could lose some of its best customers - especially if those airlines purchase the A3XX and then take a top-down approach, sticking with Airbus to build a common aircraft fleet.

For now, Boeing insists it will not unveil a new very large aircraft of its own as a reaction to an A3XX launch, which is looking increasingly likely for the end of 2000 or very early next year. But until the A3XX card is on the table, no-one can be sure what surprise aces the players might suddenly produce.

One problem in assessing the scope of the very large aircraft market is that the airlines are playing their cards close to their chest. Today's airline chief executive is often as answerable to the shareholder as he is to the passenger and has to be a much more strategic animal. It no longer necessarily pays to do what everyone else is doing; the strategic chief executive finds a niche, exploits a new opportunity, and does not let competitors know what he is up to until the pieces are in place. That may help to support, for instance, Boeing's claim that it expects to be able to reveal several customers for the 777X later this year, but for now those airlines would rather stay anonymous.

Strategic manoeuvring might also prevent a rush to buy the A3XX, even if a handful of key, trend-setting airlines sign for it at programme launch. Fred Klein, president of GRA Aviation Specialists in Virginia, points out: "The airlines don't have such a herd mentality as they used to have. They are somewhat more sensible."

What is known, is that Airbus is talking up its commitment to an A3XX launch within the next 12 months. Lest there remain any doubters, Airbus president Noel Forgeard spoke with confidence during the Asian Aerospace show in Singapore in February of a "full industrial launch" by the turn of the year. "Our target entry-into-service date remains the year 2005 - I confirm that absolutely," he said. Forgeard is personally evaluating the results of talks held with "a number of key potential customers" about their commitment in terms of numbers of aircraft and timetables for deliveries. In the second quarter of this year there will be a review of the situation with Airbus shareholders. Another piece fell in place in March when BAE Systems, one of the Airbus consortium partners, announced it will receive an $840 million launch-aid loan from the UK Government towards A3XX development.

A3XX interest on track

Leahy, meanwhile, added at Singapore that discussions with Asian carriers have confirmed "a lot of interest", but that North America and Europe are also looking like healthy markets. Airbus was "on track" to fulfil its goal of a launch with spread of quality customer airlines from each major market region, said Leahy.

With so much A3XX activity, it is a year for bullish talk from Airbus. "This will be the flagship of the 21st century," says Leahy, who believes that 22% of the revenues over the next 20 years will come from this segment. "It's purely a matter of compounding," he says. "Travel levels will increase by 4.9 trillion revenue passenger kilometres over the next 20 years. There will be both consolidation and fragmentation. But there are a lot of key hubs that you will not be able to fragment; big city pairs which are flying 747s wingtip to wingtip. Other markets, like Denver to Osaka, can be fragmented. But the windows at these airports that offer the time schedules that business travellers want will always bunch up flights."

Neither does Leahy agree that 600 seats marks such a massive hike in capacity. The A3XX offers as "a small and natural step up in market size of about 35%", which he believes the airlines can easily accommodate. "The 747 was a little too big in the beginning, but it's too small at the end," he says. "We can handle five to six years of growth in this industry just by substituting A3XXs for 747s. That's based on 5% annual growth and without any increase in noise."

More fanciful talk emerges when Leahy imagines the configuration possibilities for such an aircraft. "This will be more akin to a cruise ship than an aircraft; that's by design," he says. "Part of that is the ability to walk around; there will be space to move around, at least in the first, business and full economy cabins. You might see flying pubs, duty free shops, or even a beef burger franchise if the airlines want to put one in. That's the sort of options the three levels give you; the third level might also be for sleeping cabins."

Even allowing for a technology leap that overcomes the problem of turbulence sufficiently to allow for onboard fast-food fat fryers and free-roaming passengers, a closer analogy might be a car ferry rather than a cruise ship. Some analysts believe that where the A3XX will attract customers is in its lower per-seat direct operating costs - 12% lower, says Airbus - which could allow major flagship carriers to separate their high and low-yield traffic. Low-yield passengers on heavily travelled hub-to-hub routes might be packed into a very large aircraft, while more frequent direct flights with smaller aircraft will be the preserve of premium travellers. The tough sell here, to airline boards and analysts alike, is justifying the A3XX's $212 million price tag for ferrying leisure travellers.

Excited talk from Airbus about a freighter version of the A3XX seems more grounded in reality, however. Leahy says the company is talking to Atlas Air and FedEx about this possibility. "They say they want to be a freighter launch customer sooner rather than later," he says. In particular, they are looking for a 9,250-11,000km (5,000-6,000nm) range at lower operating costs for Pacific routes. Singapore Airlines Cargo and CargoLux are also said to be interested. The $12 billion development costs include a freighter variant. Leahy says there could be a simultaneous launch of a -100 and a -100F. Also included in the development costs are a -200 and either the -50 shrink or the long range -100R.

Airbus will go to its board in mid-2000 for authorisation to offer and says it will also secure its launch customers this year - one or two major Asian carriers and at least one in Europe and in North America. "We have not yet decided how many aircraft we need to launch. It's the quality and the geographical distribution of the orders that count, not the numbers," says Leahy. Final definition will be completed in 2001; the first flight accomplished in mid-2004; with service entry following in October 2005.

Boeing doubts remain

So far, the enthusiasm and apparent firm commitment from Airbus has not prompted Boeing to change its view of the very large aircraft market. Boeing Commercial Airplanes' vice-president, marketing, Randy Baseler, says the divergence is based on a "philosophical difference" in the two companies' forecasts for fleet growth. While each agrees that the growth rate in world air travel over the next 20 years will average 4.7%, Boeing believes this will lead to a need for 20,000 new aircraft by 2018, of which 4,000 will be replacement aircraft and the rest will accommodate growth, while Airbus puts the total number closer to 18,000. Boeing's forecast is based on a projection that the fleet mix will change to meet evolving demands and that a greater number of smaller aircraft will be needed. The biggest change comes in the regional jet segment, which Boeing says will grow from 10% today to 17% of the fleet. The next most significant change will be in the intermediate size twin, which will grow from 18% to 23% of the fleet. The percentage of aircraft the size of a 747 or larger will decrease from 8% to 6%, says Boeing.

That shift in fleet mix hinges on a global move away from regulated markets to liberalised environments as open skies policies spread, perhaps leading to multilateral agreements. "It's not enough to look at how fast markets are growing," says Baseler. "We have to look at the changing competitive environment." Baseler points to the transatlantic market as an example of fragmentation leading to a preference for smaller aircraft. In 1987, 60% of transatlantic service by US carriers was operated with 747s and the routes were concentrated on US East Coast gateway cities. In 1999, less than 3% of US flights on transatlantic routes used 747s; 66% used Boeing 767s and 777s, which offer a capacity better suited to the large number of city pairs that have been created under various open skies agreements and to the increased frequencies on traditional city pairs. "This is a dramatic shift," says Baseler. "We think this trend will continue and that aircraft the size of the 767 and the Airbus A330 will dominate. These aircraft will open up over 160 airport pairs that did not receive non-stop service in 1998."

Fragmentation trend

Boeing believes the same trend will occur in transpacific markets now that longer-range aircraft such as the 777-200ER and Airbus A340-300 are available. While liberalisation is a slower process in Asia, it is happening - the USA and Japan have a new bilateral, giving carriers in both countries greater access to each other's markets. Boeing believes this agreement will be key to opening new non-stop city pairs, such as Atlanta-Seoul and Dallas-Nagoya. Meanwhile, open skies agreements have been signed with several Asia-Pacific countries, including Malaysia, New Zealand, Singapore and Taiwan.

Even in the Asia-Europe market, Boeing projects a shift to more frequency on heavy routes and the opening of new non-stop city pairs. It believes there will be 170 such new pairs by 2018, of which 40-50% will be operated by aircraft in the 777/A340 size. "The 747 has become a niche airplane and the niche is Asia," says Baseler. "But the question many Asian airline chief executives are asking themselves after the economic crisis is how flexible is this asset?"

Others are asking questions, too. GRA Aviation's Klein points out that all of the 747-400s in service are operated by just 32 carriers. "That's the operating base for the biggest aircraft in service today and they are all big, strong carriers because to fly that aircraft you have to have lots of passengers, lots of routes and a pile of money. I suspect that the market for an even bigger aircraft is somewhat narrower than that. My gut feeling is that there is a market, but it's less of a market than Airbus makes out."

Some Asian carrier executives also side with Boeing's argument that liberalisation will spread and change the market-place. Sandy Liu, president of China Airlines, told a Washington audience in February: "I believe the trend of globalisation is one of no return." Another trend that has occurred since the launch of the 747-400, and which shows no sign of a reversal, is alliance building, which gives carriers more options. As Liu points out: "Alliances allow airlines to expand their markets and to service more destinations without huge capital investment. In the face of economic uncertainty and increasing competition in Asia, allying with partners for codeshare flights, combined marketing efforts and other facilities are tempting alternatives."

By any definition, the A3XX will be a huge capital investment - perhaps one that a carrier can afford to avoid if its alliance is working well. As one analyst points out, even as a launch customer an airline will have to put up some $1 billion to add just six A3XXs to its fleet. "That's a lot of money - I would not be interested in being the leasing company that finances that deal," he says.

Other industry observers, however, think Leahy's prediction that the very large aircraft market will command 22% of revenues over the next 20 years could yet prove to be close to the mark. If the programme is a success, the A3XX would then be critically important, perhaps allowing Airbus to dominate this sector. The recent interest surrounding a freighter version might also prove key; the predicted boom in air cargo could link neatly with the A3XX's scheduled in-service date and make this attractive.

This will be the year the players in this high-stakes poker game will reveal their true hands. How much is really on the table to win or lose may not become clear for years to come, but as one observer puts it: "It's going to be fascinating to watch."

Source: Airline Business