Boeing vs. Airbus: Can't we all just get along?March 19, 2013: 2:35 PM ET
Airbus beat out Boeing for a $24 billion contract to supply long-time Boeing customer Lion Air. What does that mean for the American aircraft maker's competitive advantage?
FORTUNE -- In 2011, President Obama watched Boeing's senior vice president Ray Conner pen a deal in Bali with Rusdi Kirana, CEO of Indonesian airline Lion Air. The deal secured almost $22 billion worth of business to the American airplane manufacturer. Lion Air, a low-cost carrier for the booming Southeast Asian market, had always done business with Boeing.
This Monday, the same scene took place, only with different players. Kirana was still there, but this time, he was signing a deal with Boeing rival Airbus' CEO Fabrice Bregier, while French President Francois Hollande, not Obama, looked on.
Low-cost carriers don't typically switch business allegiances like this, says Morningstar analyst Neal Dihora, because it is expensive to maintain and fly two different types of planes. So why would Lion Air make the switch? And what does it mean for Boeing?
Worst case for Boeing (BA): The Dreamliner's battery woes have hurt its reputation, says Richard Aboulafia, vice president of consulting firm Teal Group. But, he adds, that scenario is also the least likely. All new plane launches have problems that analysts and eventually customers usually forgive. Besides, Boeing's business is big, with a market cap of about $65 billion. It is also one of two companies, the other being Airbus, that can supply anyone looking to buy planes that seat more than 100 people.
Boeing has had a big year. This January, it bested Airbus on total number of planes delivered for 2012. The company also delivered a record-breaking 601 planes while Airbus, close behind, delivered 588.
And yet, the bulk of the companies' business is in undelivered aircraft. Both companies delivered about 600 planes, but each has a backlog of more than 4,000 that isn't going anywhere soon. Part of that is because Boeing and Airbus use subcontractors to build most pieces of their planes – often the same subcontractors, in fact. So, no matter how many planes airlines and other customers order, these suppliers can only produce so many plane pieces at any given time.
Because of such backlogs, small, growing companies like Lion Air that are looking to diversify their fleets often have a tough time procuring planes.
One way to expedite the process, suggests Dihora, is to sign big splashy deals such as the $22 billion one in 2011 and the $24 billion one this week. The recent deal with Airbus, at its most innocent, is merely an example of Lion Air ordering from both Boeing and Airbus because one couldn't handle the demand by itself. Another possibility, suggests Aboulafia, is that the little company is pitting the two air titans against each other.
Airbus and Boeing are waging a brutal price war to access emerging markets and to roll out new aircraft. So their customers can take advantage, says Aboulafia: "I think there's this realization that they should strike while the iron is hot and get that upfront pricing."
Speed is of the essence, in this case. Lion Air's Kirana is looking to give Malaysian-based rival AirAsia a run for its money, and he needs to get more planes fast, which probably trumps any obligation to order exclusively from Boeing.
Lion Air could set an example to others if this model works. If the airline got a good enough deal from Airbus to outweigh the higher maintenance and training costs, other companies might also diversify their fleets, deepening the Boeing-Airbus rivalry.
"It's kind of surprising that they fight so much because they could be a nice oligopoly," Dihora says. In other words, if the two companies quit competing so fiercely for orders, they wouldn't have to offer such steep discounts, he says. But unfortunately, "This is what happens in competitive dynamics. One of the reasons why they compete so aggressively is that they don't know how else to win an order anymore."
Perhaps the two companies could spend the money they use on those discounts to improve the future of flight. But, of course, old rivalries die hard.