'We were not prepared for an all-out war'
How Bombardier's C Series united Airbus and Boeing, and unleashed a battle that brought the Canadian icon to its knees
As the 2010 Farnborough Air Show wound down, Airbus Group SE was riding high.
The European giant had bagged about $13-billion (U.S.) worth of firm airplane orders, while Bombardier Inc., challenging Airbus and its fellow giant Boeing Co. in the single-aisle segment with the new C Series, won not a single order and squirmed while a potential customer went public with criticisms about the engine on the new plane.
John Leahy, chief salesman for Airbus, was so delighted that he offered his best wishes to Bombardier and other "little airline manufacturers that are trying to spring up around the world," declaring that if Airbus went ahead with a proposal to put more fuel-efficient engines on its A320 family of planes, there would be no business case for airlines to buy the C Series.
Mr. Leahy, chief operating officer-customers, for Airbus, is one of the most outspoken senior executives in the plane-making business, but as events have shown, he was not bragging. He is still at it, more than five years after that Farnborough show and the official announcement later in 2010 that Airbus would "re-engine" its A320 family. In the midst of a long drought of orders for the C Series, earlier this month he derided the aircraft as a "nice little airplane."
Those public pronouncements aside, Airbus took the threat from Bombardier seriously and set out to vanquish the challenger, provoking Boeing to take similar actions. Their responses have helped force one of the handful of Canadian global champions to its knees and thrown into doubt one of the most ambitious manufacturing projects undertaken in this country.
Airbus, recalling its own roots as an upstart rival to Boeing in the 1970s, defended its turf by taking advantage of economies of scale, its vast customer base, fears at airlines about the risks of brand-new technology, a fortunate turn of events on jet fuel prices and some mistakes by Bombardier.
The A320neo and the Boeing 737 Max have not quite succeeded in crushing the C Series, but they have made a major contribution to the program's current status as an aircraft that is on life support and has so far failed to make much of a dent in the Airbus-Boeing duopoly.
The C Series program, Bombardier's bet-the-company bid to disrupt that duopoly, is $2-billion over its original $3.4-billion budget and more than two years behind schedule. No new orders have been landed since 2014. The program has been such a drain on Bombardier that the Quebec government pumped in a $1.0-billion capital infusion last year and the company has asked for a federal contribution as well.
While Mr. Leahy has played bad cop, Tom Williams, Airbus's chief operating officer, offered the C Series a genuine compliment: It was a potentially competitive plane that threatened to eat into the bread-and-butter market occupied by the A320 family, the planes that are close to overtaking the Boeing 737 as the most popular large commercial jet.
"I always take the view that you should be paranoid and that your enemies are out to get you and you should always be ready to react," Mr. Williams told The Globe and Mail this month at the annual Airbus news conference in Paris. "So I think we did the right thing. … I think it is more difficult for Bombardier to sell the C Series against the 737 Max and the 320neo."
The C Series, whose two versions seat from 100 to 150 passengers, is the first entirely new plane in the single-aisle segment in decades. Although it was aimed at the smaller versions of the Airbus A320 and Boeing 737 that seat fewer than 150 passengers, it frightened Airbus.
When the C Series program was officially launched in 2007, Airbus took notice and asked a lot of questions.
With 20-per-cent better fuel economy and 15-per-cent lower cash operating costs than the existing A319, would it take over that segment? Crucially: Would the C Series eventually come in ever larger versions, allowing it to compete with the bigger A320 or even the A321, which are the true heart of the lucrative single-aisle market?
"When we launched the 320neo, it wasn't because we were particularly worried about what Boeing would do with the 737, because they hadn't done anything," Mr. Williams said. "We did it because we were worried Bombardier would come into the bottom end of the market and would begin to take away our market [by moving into bigger planes]. I can remember one of the catalysts, and the discussion around the table, was: How do we make sure that we're ready to compete, not with the smaller Bombardier airplane – the 130-seater is not terribly interesting. But the 150-seater starts to be an interesting airplane. It would be moving up market."
The result, said a former Bombardier executive, was a battle that the Canadian transportation company didn't expect and was loath to fight.
"They definitely underestimated the vigour with which Airbus was going to try to kill them," the former executive said. "What we didn't plan on was the massive pricing battle that they were able to do… . Without a doubt we were not prepared for an all-out war."
Bombardier spokeswoman Marianella de la Barrera said she could not comment on rivals' intentions toward the C Series. She said Bombardier's development of the aircraft, the first clean-sheet design single-aisle plane in close to 30 years, has forced the industry to reflect on its own technology.
"The aircraft is certified. It's proven. Its performance is exceeding expectations. And airlines are taking notice and they are endorsing the aircraft," she said. "So this could be irking the competition, sure. They've had a stronghold for some years, and now there's a new kid on the block that's doing everything it said it would do. But as airlines right-size their fleets, the C Series is making more and more sense. And we're hearing that and seeing that more and more."
Darren Calabrese for The Globe and Mail
Price is a powerful weapon in the Airbus arsenal.
The official list prices of airplane manufacturers are fiction – Airbus and Boeing have discounted heavily and battled on price in the single-aisle segment since the A320 first flew in 1987.
But the discounting got heavier as the two giants turned their fire on Bombardier.
Reductions from list prices were typically in the range of 45 per cent to 50 per cent before the arrival of the C Series, industry sources said. That has grown to as much as 55 per cent in competitive sales campaigns, but Airbus and Boeing typically provide additional discounts to customers buying their wide-bodied planes – A350 and Boeing 787 jets respectively – as well as single-aisle aircraft. That's another advantage they have over Bombardier, which can offer only C Series.
"It used to be to get a 50-per-cent discount you had to be a really special customer and order 200 planes," said one industry source with experience in plane purchasing. "Now you're probably getting a 50-per-cent discount if you're ordering 10 planes."
The economies of scale enjoyed by Airbus and Boeing because of their existing market domination allowed them to discount heavily and yet still turn profits.
Riding the success of their re-engined planes, both Airbus and Boeing are raising production rates. Airbus plans to crank out 60 of its A320 models a month by 2019, while Boeing will boost 737 output to 52 monthly by 2018. Bombardier will produce 10 planes a month at full production.
During the time it was still developing the C Series and until a new management team was put in place last February, the Montreal-based company refused to get into the heavy discount game to land a high-profile order – despite urging from people inside the company and calls from some senior officials in the industry that it do exactly that.
"The No. 1 thing we failed to do, we did not want to take our prices low enough and we should have," the former Bombardier executive said.
Pierre Beaudoin, who was chief executive officer until the shake-up last year, said in 2012 that there was no reason to "give the C Series away."
Mr. Beaudoin and management insisted the plane's game-changing attributes, including fuel-saving engines and advanced materials, should command a premium price compared with rival aircraft. The thinking was that once the company marked down the price of the plane, it would be difficult to push it back up.
But the difficulty the company has experienced in winning sales campaigns has altered that view. Now, management appears to acknowledge that it can't bank on the merits of the airliner's technological cachet alone.
Alain Bellemare, who replaced Mr. Beaudoin as CEO, has suggested Bombardier is willing to take a bath on profitability in the short term if it means the company can clinch an order from a customer that can build buzz and win industry confidence for the plane over the longer term.
Landing an order with a major U.S. carrier early in the game, however, would have given the program instant credibility, industry sources said, as well as giving other potential customers confidence that Bombardier would establish a better support network for the training of pilots and cabin crew and a spare-parts infrastructure.
"Bombardier, I don't think, really understood that the fact that the A320 and 737 have been around for so long means that all of these things are things that you as an airline don't have to invest in," said one industry source.
Another key decision by Airbus was to offer a choice of new engines on the A320neo family, unlike Bombardier, which offered only the breakthrough Pratt & Whitney geared turbofan engine.
Airbus allows airlines to choose between a version of that engine and the LEAP-1A produced by CFM International Inc., a joint venture between General Electric Co. and Safran SA of France.
Airlines negotiate deals with engine makers separately from their discussions with the manufacturers of the air frames. So when they're buying an A319 or A320neo, they can get the engine makers to engage in a bidding war.
"On an aircraft where the engine is dual sourced, you say to the two engine manufacturers: 'What maintenance cost guarantee will you offer me?'" said the airplane buyer. "Engines have life-limited parts in them. You may say: 'Can I have extended-life parts and things like this thrown in for me?'"
The decisions to offer new engines instead of building entirely new airplanes saved Airbus and Boeing billions of dollars, shifted much of the costs of developing competitive products to engine makers and drastically reduced the time it took for both companies to get their responses to the C Series to market.
Because Airbus responded to C Series more quickly than Boeing, the first A320neo was delivered to Lufthansa AG last week. The first flight of the Boeing Max plane took place Friday.
The first C Series is scheduled to be delivered to Lufthansa subsidiary Swiss International during the second quarter of this year.
The C Series launch triggered a big debate within Airbus about whether to develop an entirely new A320 family or simply put new engines on the existing airframe. A new plane would be as much as 30-per-cent more efficient, but would cost a fortune and soak up more than a decade of research and development time. The alternative was much faster and much less costly.
"If you put on the winglets, as we did on the A320, and we put on the new engine, we get 15-per-cent fuel-burn improvement," Mr. Williams said. "So half as good, but at 12 to 15 years earlier in the market and we're spending a relatively small sum of money in aircraft development terms, because a new airplane is always a $10-billion ticket."
That turned out to be the critical decision, and it sparked Boeing's customers to lobby the Chicago-based aerospace giant to match Airbus and develop a more fuel-efficient version of the the 737.
Offering re-engined aircraft instead of developing a new plane meant airlines already operating the 124-seat A319 or the larger A320 could buy replacement planes from an existing supplier instead of making a risky decision to give the nod to a company that was entering the large commercial jet market for the first time.
"What the large commercial operators really worry about is risk," said one industry source. "No one ever got fired for ordering A320s or 737s."
That need to stay safe with tried and true aircraft is backed up by an airplane buyer at a major North American airline.
"To be on the forefront [of new technology] is pretty risky and sitting on the sidelines and watching the challenges [Bombardier] has had, the program has slipped several years; it's over budget and so we certainly couldn't take that risk," said the source, who spoke on condition that neither he nor the airline he works for be identified.
Darren Calabrese for The Globe and Mail
The deal Airbus made in 2011 to sign up Republic Airways Holdings Inc. as one of the early customers for the A320neo underscores the actions the manufacturer and its partners took to blunt the Bombardier threat.
Republic, whose 2010 order for 40 CS300 planes and 40 options makes it the single biggest customer for the C Series, ordered LEAP engines for its Airbus planes, which were scheduled to be delivered to its Frontier subsidiary.
One part of the deal with CFM, the engine maker partly owned by GE, included a reduction in the cost of overhauling existing Airbus engines, documents filed with the U.S. Securities and Exchange Commission show.
As part of the same deal, GE Capital Aviation Services LLC, another arm of GE, agreed to reduce the average monthly lease rates on 18 existing A319 planes and to accept the return of four other leased Frontier A319s.
The Airbus order went with Frontier when Republic sold the carrier in 2013.
As Bombardier took on the industry's biggest players, one factor none of the companies in this drama could have accounted for was luck. For Airbus it was mostly good luck: A C Series engine fire in May, 2014, stalled flight testing that Bombardier was counting on to show customers what the plane could do. Later, the collapse in the price of oil – and thus jet fuel – made the challenger's sales pitch that it offered the most fuel-efficient plane in the 100 to 150-seat segment less persuasive.
Nonetheless, Bombardier maintains that C Series has won half the orders for new planes in that segment since 2008. That may be true, but it fails to take into account the extent to which airlines have upsized the planes in their fleets.
EasyJet, for example, the fast-growing low-cost carrier based in Britain, operated a fleet of 185 A319s, 30 A320s, 4 A321s and a handful of 737s in 2010, back when the C Series was still on track to meet its original delivery schedule and the industry was buzzing about its potential. But in 2013, easyJet ordered 100 of the A320neo and has since ordered more of that version of the A320 and some A320s with older engines.
"One of our largest areas of opportunity will come from fleet up-gauging," easyJet chief executive officer Carolyn McCall said in November on the airline's 2015 financial results conference call. "The program to move from 156-seat A319s to 180-seat A320s is now well in train and is delivering already meaningful savings."
Whether that's because traffic is expected to grow that rapidly in the stagnant European economy or Airbus convinced easyJet that larger planes were a better deal isn't clear. But replacing A319s with A320s gives the carrier more seats at essentially the same cost and thus more revenue if the larger planes are flying full.
Airbus and Boeing have a strong case with easyJet and other airlines that operate large fleets of the smaller single-aisle aircraft, said one industry source.
"You offer them the largest airplane, then the larger airplane with better economics and they get a double benefit," the source said. "That's a pretty compelling story."
But if airlines are wondering who made a major contribution to their inexpensive fleet replacement programs of recent years, they can thank world demographics first and, the source said, "they ought to thank the C Series because it created the first alternative and all the rest was competitive response."