Monday, October 7, 2013
JAL's Decision To Buy Airbus Planes Marks A Huge Blow For Boeing
TOKYO -- It was a scene unthinkable just ten years ago: the CEO of Airbus appearing at a swank hotel conference room here, shaking hands with his Japan Airlines Co. (9201) counterpart, the two company logos intertwined on the wall behind them as they hoisted together a model Airbus 350 sporting the JAL trademark red crane, the country's national bird.
The real significance of the Monday press conference announcing JAL's next-generation purchase was the company absent: Boeing Co., which had claimed every previous JAL long-haul aircraft contract of the past half century.
"We have had a longstanding relationship -- it's a heartbreak," said Kostya Zolotusky, managing director of capital markets and leasing at Boeing Capital Corp., Boeing Co.'s finance unit, at an industry conference in Barcelona a few hours after the news broke.
JAL's decision to buy Airbus planes marks a huge blow for Boeing, which dominated the Japanese market for decades. It also means a transformation at Japan's flagship carrier, which once flew more 747s than any other operator in the world, with a fleet more than 70% made by Boeing.
Glen Fukushima, who served as president of Airbus Japan from 2005 to 2012, remembers looking around at a meeting of the Association of Asia Pacific Airlines shortly after he joined the European company, noting that Airbus supplied 16 of the 17 member carriers. JAL was the only one of the region's airlines to have never bought an Airbus.
"That's how close JAL and Boeing have been," Mr. Fukushima said. "It was considered revolutionary for JAL to even say it was even considering Airbus."
Boeing's vice-like grip over Japan's aeronautical industry can be traced back to Japan's attempts to rebuild after World War II, with American military and industrial support. The rapid recovery of companies like Mitsubishi Heavy Industries Ltd. and the predecessor of Kawasaki Heavy Industries Ltd. were helped with license agreements to make fighter jets or helicopter parts for Boeing.
Boeing's first sale of commercial aircraft followed, with orders coming from both JAL and its chief domestic rival, All Nippon Airways, in 1964, the year Tokyo hosted the Olympic Games. The first of the 129-person Boeing jets inspired pop songs, races between airlines and bullet trains, and remain forever associated with Japan's rapid postwar growth.
JAL's 1966 order for Boeing 747 jumbo jets--only the second placed by any airline--cemented the JAL-Boeing relationship. In the years that followed, JAL took delivery of more than 100 747s, adopting the 747-400 as its signature plane, before retiring them in 2011 as part of a restructuring process after it filed for protection from creditors.
Over the 1970s and 1980s, Japan became the world's best market for the American manufacturer outside the U.S., as the country's powerful trade and finance ministries urged airliners to buy more U.S. planes, partly - industry insiders say - to help offset a huge trade imbalance. National carrier JAL --the government didn't sell off its full stake until 1987--was particularly prone to listen to the bureaucrats, they said.
Meanwhile, Boeing gave Japanese manufacturers increasingly large parts of its planes to build, providing Japan's industrial policy mandarins further incentive to protect Boeing's lock on the market. Japan's aerospace industry "built a part of every single one of Boeing's commercial airplanes," Nicole Piasecki, former president of Boeing Japan, said in a speech given in 2009. Mutually dependent, the partnership--cemented further with subsidies and support from the Japanese government--looked impossible to breach by outsiders.
But Boeing's grip eventually began to loosen, amid deregulation, and other shifting economic forces. Airbus quietly accumulated suppliers in Japan, denting Boeing's political advantage as a generator of jobs in Japan. About 20% of the A350 is made from components produced by Japanese suppliers such as Ishikawajima-Harima Heavy Industries Co. and Mitsubishi Heavy, according to Airbus.
Japan is now trying to develop its own fuel-efficient regional passenger jet, making Boeing as much a rival as a partner among Tokyo's trade ministry.
Meantime, the once-government-steered JAL has become much more cost-conscious, having emerged from a 2010 bankruptcy-protection filing to return to public trading last year with an IPO heavily promoted to foreign investors. Indeed, JAL is now in open warfare with the government that once controlled it, publicly accusing Japanese officials last week of unfairly denying it coveted slots recently created at Tokyo's Haneda airport, and demanding a revision.
"What surprises me is not that they've ordered the A350, it's that Boeing was able to hold onto their monopoly for so long," said Henri Courpron, chief executive of International Lease Finance Corp., the aircraft-finance unit of leasing giant American International Group Inc. and the world's second-largest airplane leasing company. "I think the Japanese airline industry will benefit over the long-term" due to increased competition between Boeing and Airbus for Japanese orders. Being able to play Airbus and Boeing off against each other should improve the terms that JAL and potentially others Japanese airlines are able to negotiate, said Mr. Courpron, who previously was a senior Airbus salesman.
Boeing further hurt itself in the Japanese market with long delays of its new flagship 787 Dreamliner, followed by months-long grounding of the planes after battery fires.
On Monday, in a sign of Boeing's diminishing clout in Japan, JAL President Yoshiharu Ueki said he didn't take into account Boeing's history or supplier relationships here and the company felt no need to consult with the Japanese government before deciding on Airbus.
"In making this decision, JAL was the only factor," said Mr. Ueki, in response to a question about whether it took into account the impact that Boeing has on Japan's airplane manufacturing industry before it placed the order with Airbus.
Airbus CEO Fabrice Bregier, standing alongside his new partner, Mr. Ueki, said winning over JAL was a sign that the Japanese market, like the rest of the world, was becoming more open to competition. But he carefully avoided echoing the same complaints made by other Airbus executives in the past that the Japanese customer didn't give Airbus a fair shot.
"If you believe that from Toulouse, you can convince people here who have flown the competitor for 30, 40 years that you have the best product, then you are just damn wrong," said Mr. Bre9gier, referring Airbus's hometown in France. "The problem wasn't Japan or Japanese customers. The problem was probably Airbus."