Airbus cocks a dollars 4.5bn snook at Boeing: Michael Harrison looks at a European coup in the US manufacturer's own backyard

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The Independent Online
LAST WEEKEND, while Toulouse was still cut off from the rest of France by the lorry drivers' blockade, a tall and gangling executive of a US airline flew in secretly to visit the nearby headquarters of Airbus Industrie, the four-nation aircraft manufacturer.

By the time he left on Monday, bound for the United States on board an Air France Concorde, Stephen Wolf, chairman of United Airlines, had sewn up a deal that was to stun the aviation world.

After two days of hard bargaining with Jean Pierson, managing director of Airbus, Mr Wolf had agreed to acquire up to 100 A320 aircraft - an order ostensibly worth dollars 4.5bn ( pounds 2.4bn). The deal was rubber-stamped on Tuesday by United's board in Chicago and announced on Wednesday evening.

The significance of this huge order to Airbus and its partners, among them British Aerospace, cannot be overstated. Although the consortium had been making steady advances into the US airline market, here was Airbus clinching its first order with America's second-largest carrier in head-to-head competition with its biggest supplier, Boeing.

There was further joy for the Europeans in the shape of United's decision to power its fleet of A320s with engines from International Aero Engines, in which Rolls-Royce has a one-third stake.

To add injury to the insult of the Airbus order, United had already decided to postpone delivery of 122 jets worth dollars 6.7bn over the next three years, most of them Boeings.

For Airbus and Europe, there are likely to be several ramifications. On the one hand, the consortium has established itself beyond doubt as a serious competitor in Boeing's backyard. On the other, the Airbus coup, delivered on the same day that the Americans and Europeans failed to resolve their trade dispute through the Gatt, is almost certain to rekindle the row over the subsidies Airbus attracts from its partner governments in Britain, France, Germany and Spain.

With the United deal - which involves 50 firm orders and options to purchase a further 50 A320s - Airbus aircraft now have a presence in the fleets of every major American airline. A total of 360 are on firm order from eight US carriers. More importantly, Airbus has demonstrated its ability to steal a valuable customer from under Boeing's nose.

Until Wednesday night, United represented a virtual captive market for Boeing. Of the 486 jets in its fleet all but 54 are Boeings, and United has a further 500 aircraft on order or option from Seattle. As one observer said yesterday: 'If Airbus can persuade Boeing's biggest customer to buy its jets then it is clearly going to help when Airbus talks to Boeing's other customers.'

Quite how it persuaded United to buy European is another matter. Although the notional value of the deal is dollars 4.5bn, United will not end up paying anything remotely resembling that sum, partly because of the number of aircraft it is buying, but also because of the financing arrangements agreed with Airbus.

Neither side was prepared yesterday to discuss the details. But it is known that Airbus offered United a highly flexible deal that requires it to put very little money up front and allows it generous terms should any aircraft be cancelled or returned.

As a United source said: 'We all know how good Airbus is at putting together tempting deals. This was one that United just could not miss.'

Boeing simply says: 'We gave it our best shot within the confines of what we felt was prudent business, but clearly we couldn't match Airbus.'

With conventional aircraft deals, the airline pays a deposit on signing a firm order, usually representing 10 per cent of the value. Further stage payments during the construction of the aircraft take this to 20 per cent. When the aircraft is delivered the balance is paid off. In the case of the United order, the airline is not paying directly, but instead leasing its A320s through a third party. Airbus denies that it has helped to finance the order in any way, although it says it has assisted United in arranging the lease finance.

Such deals have become increasingly commonplace in the commercial aircraft market and are entered into by all manufacturers. They are attractive to airlines because they take some fleet financing commitments off the balance sheet.

If Boeing decides to complain about the Airbus-United deal through the General Agreement on Tariffs and Trade, then the Europeans are likely to reply that Airbus has also had its fair share of disappointments.

Last year Airbus lost out on a British Airways order for long-haul jets, potentially worth dollars 3bn, because of the terms offered to BA by Boeing and the US engine manufacturer, General Electric. Airbus complained vigorously and pleaded its case before the European Commission and the Office of Fair Trading, but the deal stood.

Skirmishes such as these are likely to multiply as Boeing and Airbus, now firmly positioned as the world's second aircraft manufacturer, slug it out for a bigger share of a world jet market projected to reach dollars 600bn between now and 2005.

(Photograph omitted)

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