Boeing vs. Airbus: Quick Thoughts

Economics is fundamentally a very abstract science, despite its explanatory power.  It is not the best predictor, because the study of economics, at its base, a historical inquiry.  Human behavior no doubt changes, and economics is not designed to predict with stunning accuracy what those changes will look like.  Still, simple models such as supply and demand have been powerful predictors of human decision-making.  Every now and then, however, scenarios exist where predictions are quite prescient.  Nowhere, I think, is this more clear than the strategies employed by Boeing and Airbus.

Airbus' projections suggest that more travel will be done through the hub-spoke system.  In other words, if I were to travel from Boston, MA to Tokyo, Japan, I would have to take a flight from Boston to New York's JFK, where I would then take another flight to Tokyo.  Because many people from the New England area who wish to travel to Tokyo would have to travel through JFK, the A380 would be useful in transporting large numbers of passengers from JFK to NRT.

The A380 is indeed useful in that it transports 500+ people across long distances.  Theoretically this is a boon for airlines - they can now carry many more people per route relative to the 747-400.  This should mean two things.  First, more profits, since more seats are available to purchase.  Because it is more fuel efficient than the 747-400 (by 16%, I believe), this translates to it being more cost-effective.  But all this assumes that demand for air travel remains high.  Indeed, Airbus' projections indicate a demand for about 1,000 A380s in the next 20 years.  These aircraft will be put into service between transit hubs such as JFK, LAX, NRT, HKG, FRA, etc. 

The problem with their projections, I think, was that they made their projections in the late 1990s. Manufacturing began in 2002, and delays have led to the first plane being delivered to Singapore Airlines in 2007.  All this, by the way, was before the Great Recession.  With the recession, demand for travel fell, and even those traveling began traveling more cheaply (e.g. purchasing economy class fare instead of business).  The problem with the A380 is that empty seats translate to lost profits.  The aircraft is most cost-effective when it is nearly full.  


Furthermore, not that many transit hubs exist in the world.  In China, for instance, the cities that can serve as serious transport hubs number 5 at most.  Few routes are so saturated that they require the services of an A380.  The most notable one would be the London-Sydney route with a stopover in between.  This is where many Asian/Middle-Eastern airlines make their money and employ their A380s.  But aside from the Kangaroo Route and a few others (e.g. Hong Kong to Los Angeles), these planes are useless.  


Boeing's projections suggest a very different story.   For them, more travel will be done directly; that is, more people would want direct flights from major cities (e.g. Boston) to other major cities (Tokyo).  The numbers do not justify huge planes like the 747, or even the 777.  So, the 787 Dreamliner was designed to travel long distances, but yet carry less than 300 people, so that these direct routes can be cost-effective.  Boeing's gamble is that airlines will use the 787 to open new routes and enter new markets successfully.

Like Airbus, Boeing is also quite correct in their projections.  Indeed, All Nippon Airways and Japan Airlines began to open new routes from Tokyo to Seattle (ANA), Silicon Valley/San Jose (ANA), Boston (JAL), and San Diego (JAL) - these cities have significant Japanese populations.  United Airlines plans to open a route between Denver and Tokyo with their 787.  But even in a recessionary environment, these plans can easily replace larger planes like the 777 to maintain cost-effectiveness.  One time I went with United from their Singapore to Hong Kong to Chicago route.  The Singapore-Hong Kong route was about half-full.  United could have saved quite a bit by utilizing a 787 on that route instead of a 747, saving the 747 for the busy Hong Kong to Chicago route.

Here, I think Boeing got lucky.  In a recessionary environment, the demand exists for smaller planes in order for planes to maintain competitiveness.  In such situations, airlines would be foolhardy to replace a 777/747 with a bigger plane (A380); they would downsize to a smaller one.  Thus, the Dreamliner can double as a "recessionary aircraft," flying passengers between locations that has suffered lower passenger numbers.

Unfortunately, these projections have long-term effects.  Airbus sought to dominate the super-large aircraft category and so poured most of its energy into the A380.  Boeing has left the super-large aircraft market long ago, and its new 787-8 is merely a small upgrade to the 747-400.  Most of its energy was put towards developing the Dreamliner.  Airbus insists that by 2015 the A380 program will break even, but with the slow growth in the global economy, this is doubtful.  The only airlines that would benefit from the A380 are not airlines like United or Delta, but carriers like Emirates or Singapore Airlines with very few (if any) domestic operations.