Two important innovations evident in Airbus planes by the late 1980s were fly-by-wire and the use of composite materials like carbon fiber to make planes lighter and therefore more fuel-efficient. After the two oil crises of the 1970s and the huge hike in the price of jet fuel, fuel efficiency became essential for competitiveness and profitability, for the manufacturers, as well as their customers, the airlines. Fly-by-wire meant the replacement of mechanical pilot controls with digital electronic controls.
In the early 2000s, Airbus steadily gained market share with the A320 narrowbody jet. In 2011, Airbus introduced a redesigned A320 with a new engine, christened the A320neo. The new engine, combined with the introduction of winglets (vertical structures rising from the tips of the wings) made the jet substantially more fuel-efficient and quieter.
At the Paris Air Show in June 2011, the A320neo created a sensation. The show was a huge triumph for Airbus, at the expense of its large competitor. At the show’s end, Airbus had received 730 orders compared with just 132 for Boeing. The A320neo accounted for 600 of Airbus’s 730 orders. On the final day of the show, AirAsia announced a mammoth order of 200 A320neo planes. (1)
One month later, Boeing received another blow. American Airlines, one of the world’s largest airlines, and up to then a Boeing-only airline, placed a huge order for 460 narrowbody jets, including 260 Airbus and only 200 Boeing 737s. Today American operates a mixed fleet with the majority of its planes from Airbus.
The A320neo and subsequent additions to the 320 family won market share from Boeing due to multiple product innovations in the 320s that improved the economics for their airline customers, i.e. enabled them to carry more passengers for longer distances with greater fuel efficiency. Scott Hamilton, author of Air Wars, a study of the Airbus-Boeing rivalry, attributes Airbus’s victory to the strategic planning of Airbus’s head of sales, John Leahy. Leahy (now retired) is an American and was a veteran of Boeing before joining Airbus.
Leahy had Airbus target the largest U.S. airlines because he believed Airbus needed to aim for at least 50% of the world market and could not get there without major U.S. wins. He also understood the culture at Boeing. He believed that Boeing was stingy with its research dollars. If Airbus could win with the A320neo and A321neo, it would drive Boeing to rush out a competitor which would be a spruced up 737 rather than a completely new jet, designed from the ground up to incorporate all the available innovations. In Hamilton’s words:
“The multi-billion dollar, high-stakes gamble Airbus and Leahy played to force Boeing into re-engining the 737, instead of launching a new, clean-sheet airplane to replace it, paid off. Leahy’s win at American—and Boeing’s decision to launch what would eventually be named the 737 MAX—established the single-aisle market for at least the next 15 years. It cemented Airbus’s lead over the 737. (2)
In 2012, Airbus launched a takeover bid for British defense contractor British Aerospace. The bid was blocked by the German government, which feared loss of German jobs or dilution of German influence over Airbus or both. Airbus CEO Tom Enders made no secret of his frustration. Enders engineered a corporate reorganization of Airbus which reduced the power of the French and German governments in the company. This was a very positive development made possible by the fact that with three governments involved (France, Germany, and Spain), each recognized that political pressure might one day hurt their interests. So they backed Enders’ proposal for a unified structure. The new, simplified structure fostered faster decision-making and gave Enders more of a free hand to act like a private sector chief executive. Enders also implemented a reduction in management staff and workers to boost profitability. Having achieved size and scale compatibility with Boeing, Enders next wanted to raise profitability to fund more investment in future products.
In 2016, the reorganization was complete. Instead of two headquarters, Airbus now had one, in Toulouse (France). France and Germany each held about 10% of the company’s equity and Spain around 5%. The balance trades on the major European stock exchanges.
As Figure 1 and Figure 2 show, Airbus’s airplane orders and total revenue are roughly equivalent to Boeing’s. Since around one third of Boeing’s revenue comes from the defense market, a market that Airbus doesn’t play in, Airbus actually has a substantial lead in revenue.
Airbus: State-Owned Success Story and Proof Industrial Policy Can Work
KEY POINTS:
Airbus is the greatest success of industrial policy in modern history. It is the world’s most successful commercial airplane manufacturer, with a global workforce of 121,000 people around the world. It is currently hiring in Europe and Alabama. It has been responsible for major innovations in airplane design. It has a superior safety record. It is a major contributor to the prosperity of many cities around the world, foremost among them Toulouse in France, Hamburg in Germany and Mobile, Alabama in the USA.
There is a stark contrast with Boeing. Boeing has yet to recover from a series of fatal and non-fatal accidents that have damaged its reputation and cost it billions of dollars in lost sales. Its net income last year was negative $2.2 billion. Airbus is now selling more planes and taking more orders than Boeing. Troubled Boeing has no visible turnaround plan and is still hunting for its next chief executive. According to the Aviation Safety Network, since 1975, there have been 149 fatal accidents with Boeing airplanes but only 24 on Airbus planes.
Airbus was founded in 1967 by the governments of France, Germany, and the UK. The goal of the three governments was to relaunch European commercial airplane production and avoid becoming completely dependent on U.S. plane makers. In the preceding years, several European plane makers failed, making it clear that Europe couldn’t compete with Boeing, Lockheed, and McDonnell Douglas.
In those early years, much of the talk of the European politicians focused on preserving and creating jobs, leading Americans to view Airbus as yet another European jobs program. But behind the political pronouncements, Airbus management and engineers focused on research and development (R&D) to generate real innovation. Airbus management recognized that to challenge the American manufacturers in a global market required genuinely new and different products.
Key Innovations
Two important innovations evident in Airbus planes by the late 1980s were fly-by-wire and the use of composite materials like carbon fiber to make planes lighter and therefore more fuel-efficient. After the two oil crises of the 1970s and the huge hike in the price of jet fuel, fuel efficiency became essential for competitiveness and profitability, for the manufacturers, as well as their customers, the airlines. Fly-by-wire meant the replacement of mechanical pilot controls with digital electronic controls.
In the early 2000s, Airbus steadily gained market share with the A320 narrowbody jet. In 2011, Airbus introduced a redesigned A320 with a new engine, christened the A320neo. The new engine, combined with the introduction of winglets (vertical structures rising from the tips of the wings) made the jet substantially more fuel-efficient and quieter.
At the Paris Air Show in June 2011, the A320neo created a sensation. The show was a huge triumph for Airbus, at the expense of its large competitor. At the show’s end, Airbus had received 730 orders compared with just 132 for Boeing. The A320neo accounted for 600 of Airbus’s 730 orders. On the final day of the show, AirAsia announced a mammoth order of 200 A320neo planes. (1)
One month later, Boeing received another blow. American Airlines, one of the world’s largest airlines, and up to then a Boeing-only airline, placed a huge order for 460 narrowbody jets, including 260 Airbus and only 200 Boeing 737s. Today American operates a mixed fleet with the majority of its planes from Airbus.
The A320neo and subsequent additions to the 320 family won market share from Boeing due to multiple product innovations in the 320s that improved the economics for their airline customers, i.e. enabled them to carry more passengers for longer distances with greater fuel efficiency. Scott Hamilton, author of Air Wars, a study of the Airbus-Boeing rivalry, attributes Airbus’s victory to the strategic planning of Airbus’s head of sales, John Leahy. Leahy (now retired) is an American and was a veteran of Boeing before joining Airbus.
Leahy had Airbus target the largest U.S. airlines because he believed Airbus needed to aim for at least 50% of the world market and could not get there without major U.S. wins. He also understood the culture at Boeing. He believed that Boeing was stingy with its research dollars. If Airbus could win with the A320neo and A321neo, it would drive Boeing to rush out a competitor which would be a spruced up 737 rather than a completely new jet, designed from the ground up to incorporate all the available innovations. In Hamilton’s words:
“The multi-billion dollar, high-stakes gamble Airbus and Leahy played to force Boeing into re-engining the 737, instead of launching a new, clean-sheet airplane to replace it, paid off. Leahy’s win at American—and Boeing’s decision to launch what would eventually be named the 737 MAX—established the single-aisle market for at least the next 15 years. It cemented Airbus’s lead over the 737. (2)
In 2012, Airbus launched a takeover bid for British defense contractor British Aerospace. The bid was blocked by the German government, which feared loss of German jobs or dilution of German influence over Airbus or both. Airbus CEO Tom Enders made no secret of his frustration. Enders engineered a corporate reorganization of Airbus which reduced the power of the French and German governments in the company. This was a very positive development made possible by the fact that with three governments involved (France, Germany, and Spain), each recognized that political pressure might one day hurt their interests. So they backed Enders’ proposal for a unified structure. The new, simplified structure fostered faster decision-making and gave Enders more of a free hand to act like a private sector chief executive. Enders also implemented a reduction in management staff and workers to boost profitability. Having achieved size and scale compatibility with Boeing, Enders next wanted to raise profitability to fund more investment in future products.
In 2016, the reorganization was complete. Instead of two headquarters, Airbus now had one, in Toulouse (France). France and Germany each held about 10% of the company’s equity and Spain around 5%. The balance trades on the major European stock exchanges.
As Figure 1 and Figure 2 show, Airbus’s airplane orders and total revenue are roughly equivalent to Boeing’s. Since around one third of Boeing’s revenue comes from the defense market, a market that Airbus doesn’t play in, Airbus actually has a substantial lead in revenue.
Figure 1: Airbus overtook Boeing in airplane orders in 2011 and has continued to hold a lead.
Figure 2: Airbus and Boeing revenue are roughly equal, but if Boeing’s defense-related revenue is excluded,, Airbus is well ahead in the commercial market.
As Figure 3 shows, Airbus lagged Boeing substantially in net income until 2021. But after the two Boeing Max airplane crashes of 2019-2020, Boeing struggled with canceled orders, repeated reputational missteps, and management’s apparent inability to address its problems. One result of Boeing’s reputational problems has been loss of airplane sales, which has pushed Boeing into losses every year since 2019. On May 23rd, Boeing said it would be cash-flow negative this year, as it struggles to fix its supply-chain problems and increase production.
Figure 3. Airbus is now generating over $4 billion in annual profit, while Boeing struggles with multi-billion dollar losses.
One of the biggest beneficiaries of Airbus’s success has been the city of Mobile, Alabama. Last year, Airbus announced that it would be expanding its Mobile production facility with a $150 million investment and adding 1,000 employees, to a total of 2,800. According to the Mobile County Commission, Mobile is now the world’s fourth largest commercial airplane manufacturing center. A year ago, Connie Hudson, the president of the Mobile County Commission praised Airbus as a huge contributor to the economic welfare of the region. In a press release, she pointed out that Airbus’s pay scale starts at $65,000 a year, some $15,000 more than the median pay in the Mobile region. According to Hudson:
“The growth of Airbus at Brookley Aeroplex in Mobile has had a ripple effect throughout our local economy, not only contributing to the region’s manufacturing sector but also stimulating other sectors such as logistics, hospitality, retail, and professional services. The increased economic activity generates tax revenue for the county, supports small businesses, and fosters prosperity of Mobile County, the region and our state. (3)
Like most elected officials in Alabama, Commissioner Connie Hudson is a Republican. In Washington, many Republicans are critical of industrial policy and the idea of state-owned businesses. At the local level, it’s a different story. Mobile provided millions of dollars of local funding to lure Airbus, along with the good jobs and high-tech ecosystem it brings. The success of Airbus is undeniable.
Conclusion
Airbus is the world’s most successful state-owned company outside of China (and Chinese companies play by different rules). State ownership in many countries has failed (after a disastrous nationalization in the late 1960s, Britain today has no British-owned carmakers), and state subsidy has often failed (Solyndra). But the success of Airbus shows that state ownership can succeed, if it is conducted in a relatively hands-off manner and with clear, ambitious yet achievable goals. Also, it must not succumb to excessive patriotism. Airbus’s decision to hire an American at the top of its sales organization and target the U.S. market was audacious and ultimately hugely successful.
Airbus’s achievements are due to several factors that are not often found in state-run and state-owned businesses:
Ironically, in light of Airbus’s success and Boeing’s continued struggles, one is tempted to turn the usual question on its head and ask why a large, stock market-owned multinational like Boeing seems unable, after five years, to find a way out of its engineering, sales, management, and reputational struggles. The Boeing board of directors has failed to take aggressive action to address the deep problems from which Boeing suffers. For large institutional shareholders, who own most of Boeing’s stock, it is far easier to simply sell the shares than try to implement change at the company. The stock has fallen 49% in the last five years, while the S&P 500 has risen some 90%. Boeing CEO Calhoun earned $32.8 million last year, clearly excessive reward for a company whose reputation and stock price fell yet again in 2023.
Boeing is a century-old company behemoth that has fallen from the senior position in a global aerospace duopoly to a junior, struggling, position. However the dependence of the U.S. Department of Defense on Boeing still gives it enormous clout in Washington (in 2017, Boeing moved its headquarters to Arlington, Virginia, less than a mile away from the Pentagon). The dilemma of how to replace a senior management and a board resistant to change poses a huge challenge to U.S. corporate governance.
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