◼ BUSINESS Bloomberg Businessweek August 10, 202012
● Astheirairlinecustomersstruggle to survive,
planemakersgambleoncontinued productionAirbus and Boeing Play
TheLong Game
Fordecades,thecompetitionbetweenAirbusSE
andBoeingCo.hascenteredonissuessuchaswhich
couldbuildthebiggestjumbojetorlogthemost
multibillion-dollarsaleseachyear.Thenthecorona-
virushit.Nowtheworld’stwodominantplanemak-
erswillbattletoseewhichonecanbestweatheran
unprecedenteddownturninairtravelthat’semp-
tiedthewalletsoftheairlinesthatbuytheirplanes.
Withnewordersdormant,thechallengeisto
cutcostsandprotectcashwhilekeepingfactory
systemsandglobalwebsofsuppliersoperatingat
a highenoughpacetoretainessentialskillsandbe
readytobouncebackwhenthecrisispasses.Getting
thebalancerightwillbetough,giventhatAirbus
andBoeingtogetheremployalmost300,000peo-
pleandsellaircraftthattypicallytakea yeartobuild.
Walkingthistightropeis alsoexpensive:Inthesec-
ondquarter,Boeingburnedthrough$5.6billionin
cash;Airbus,$5.2billion.Andthingsaresettoget
tougher,asa freshsurgeininfectionspromptsnew
travelrestrictionsworldwide.THEBOTTOMLINE Theairlinesareexpectedtolosemorethan
$100billionthisyearandnext.If a coronavirusvaccineisn’tfound
soontocalmtravelers,thatdireforecastmayneedtobeevenhigher.Airbus and Boeing are sharply reducing output,
announcing plans to reduce staff and trimming costs
in research. They’ve also entered into what Airbus
Chief Executive Officer Guillaume Faury calls “dif-
ficult” discussions with customers, negotiating to
stretch out delivery schedules while prodding air-
lines not to walk away from commitments.
That risks creating a dynamic that pits the plane
makers against ailing carriers, as they try to get them
to honor contracts and accept jets they can’t afford
and don’t need. If they don’t press carriers to pay
for at least some of the planes ordered during flush
times, then the airframe manufacturers will have to
burn more cash to keep their operations humming.
But if they push too hard, they could further hob-
ble some customers financially—endangering future
sales or even driving them toward bankruptcy, jeop-
ardizing existing contracts. “It’s more about finding
ways to deal with the situation together,” Faury says.
Even at lower production levels—a roughly
40% drop at Airbus alone—it’s unclear whetherAsiamaybeendangeredbya splurgeonroute
expansion and aircraft orders. Auditor EY has cast
doubt on the viability of Malaysia’s AirAsia Group
Bhd. and its AirAsia X Bhd. unit, a specialist in the
kind of low-cost, long-haul travel that may now be
moribund. Similar pressures are playing out in India,
until recently the fastest-growing aviation market,
where budget carrier SpiceJet Ltd. is struggling with
liabilities of more than 500 times its cash in hand.
India’s government has ruled out assisting airlines
as it confronts the world’s fastest rate of infections.
In Europe, Norwegian Air Shuttle ASA’s bid to
penetrate the lucrative North Atlantic market was
struggling under a mountain of debt before the
pandemic. The carrier has restructured its bor-
rowing, but by shifting its strategy to emphasize
short-haul routes, it faces being squeezed between
healthier discounters such as Ryanair Holdings Plc
and full-service airlines like Air France-KLM and
Deutsche Lufthansa AG—flag carriers that have been
propped up by a combined €20 billion ($23.5 billion)
in state aid. Even the three giant U.S. carriers are
under pressure after borrowing ballooned in April.American Airlines Group Inc. is seen as the most
at risk, with the upfront cost of insuring its debt in
the credit-default swaps market implying an almost
100% chance of default in the next five years. The
odds stand at 59% for United Airlines and 47% for
Delta Air Lines Inc.
The extent of the crisis may be most apparent in
the number of aircraft set to permanently exit fleets.
Some 980 planes have been retired, and IBA proj-
ects a total of 5,000 will follow this year and next.
“It’s a very worrying time,” says Willie Walsh, CEO
of IAG, which owns British Airways, Iberia, and Irish
carrier Aer Lingus. The holding company reported
on July 31 that all of its airlines suffered substantial
losses in the second quarter. “The figures speak for
themselves,” Walsh says. “British Airways has lost
more in one quarter than the record loss it made
in a year. This is by far the biggest crisis we have
ever faced.” �Chris Jasper, with Anurag Kotoky,
Justin Bachman, and Mary Schlangenstein