Monday, October 07, 2013

Airbus Lands Japan Airlines Jet Order: Deal Valued at $9.75 Billion Upsets Boeing's Long-Held Exclusivity

Updated October 7, 2013, 12:20 p.m. ET


The Wall Street Journal

Airbus scored a landmark $9.75 billion order from Japan Airlines Co., breaking into territory long held exclusively by Boeing Co.

JAL ordered 31 A350 jetliners carrying a catalog price of ¥950 billion, with an option to buy 25 more of the long-distance planes, the companies said Monday. Deliveries will start in 2019 and roll out over six years.

The win for Airbus was the clearest example of the long-term effect on Boeing's relationship with stalwart customers after more than three years of delays for its flagship, the 787 Dreamliner, for which JAL was the second customer. The tension came to a head during the grounding of the jet earlier this year, with JAL executives questioning the exclusivity that had marked the airline's relationship with the U.S.-based plane maker.

European Aeronautic Defence & Space Co.'s Airbus unit has courted JAL and its Japanese rival ANA Holdings Inc. for decades, succeeding only in placing a handful of short-distance A320 jets with the latter.

JAL President Yoshiharu Ueki said the Dreamliner problems played no role in his company's decision to go with Airbus. Dreamliners were grounded for several months after lithium-ion batteries burned on two planes, one each operated by JAL and ANA.

Mr. Ueki said the A350 met JAL's criteria for a safe, high-quality aircraft, with the financial support of the manufacturer and a rollout timetable that matched the carrier's replacement cycle. JAL ordered 18 of the A350-900 model, which has a capacity of 314 passengers. The airline ordered 13 of the A350-1000, which holds 350 passengers.

"It was the best match for us," Mr. Ueki said at a Tokyo news conference.

Airbus Chief Executive Fabrice Brégier said he participated in the negotiations with JAL personally and wanted to assure the airline that its confidence in Airbus wouldn't be misplaced. The order was the largest-ever for Airbus in Japan.

"We are opening a new chapter in our relationship," said Mr. Brégier, sitting next to Mr. Ueki and two mocked-up A350s bearing the JAL logo.

EADS shares rose 2.2% in Paris, and those of Boeing were down 0.7% Monday afternoon in New York.

The lost order for Boeing comes as the manufacturer struggles to keep up globally with its European rival. Airbus garnered 1,062 net orders to Boeing's 890 for the year through September. Boeing regained the top spot from Airbus last year, holding more orders and deliveries for the first time in more than a decade.

The news could get worse for Boeing in Japan if ANA also shifts course with its next plane purchase. The parent of All Nippon Airways by April is expected to decide how it plans to replace its fleet of Boeing 777s, which are scheduled to start retiring in 2020. The airline has said it is considering the Airbus A350 as well as an upgraded version of the Boeing 777, tentatively called the 777X.

ANA is one of Boeing's most-loyal customers and was the first global carrier to order the 787 Dreamliner. The airline operates the largest Dreamliner fleet, and its executives expressed frustration about having to ground the planes this year because of the battery problems. ANA operates 17 Airbus A320s for short-distance flights.

"If other Japanese airlines are interested in our products, we will treat them equally well," Airbus's Mr. Brégier said.

Boeing may have to pay a price to hold on to long-standing customers.

"This would increase pressure still further on Boeing to lower prices on its planes," said Hideo Inagaki, a former JAL aircraft-maintenance specialist who is a principal analyst at consultant Japan Aviation Management Research. JAL has threatened to buy from Airbus before in price negotiations with Boeing, he said, and the order announced Monday would be the first time the airline followed through on the threat.

"The timing is interesting," Mr. Inagaki said. "Japanese airlines need to consider some major aircraft purchases to revamp their fleets with more fuel-efficient planes if they are to be competitive."

Boeing's partnership with Japan has stretched a half-century, dating to Japan's postwar reconstruction and involving almost every model of jetliner from the U.S. manufacturer since the early days of the jet age. Urged on by Japan's trade and finance ministries, the country's airlines in the 1970s and '80s became big buyers of U.S. planes, partly as a way to offset Japan's trade surplus with its closest and most powerful ally.

Boeing has steadily expanded its industrial relationship with Japan, working with the country's heavy industry on the manufacturer's last three all-new long-distance jets. Japan's industrial contribution makes up 35% of the 787 Dreamliner's value, including the jet's wings and several body sections.

"The world is changing. There is open competition everywhere," Mr. Brégier said. "This is the natural trend everywhere, and airlines have to select the best product everywhere."

More than 70% of JAL's fleet is made by Boeing, with the exceptions being smaller aircraft, largely for regional flights. The airline is one of the last global carriers, along with ANA, to have such a heavy dependence on one plane manufacturer. Airbus accounts for about 7% of ANA's current fleet. Both airlines face increased pressure from lenders to reassess the risks of relying on a single plane supplier.

JAL's order with Airbus came three years after the former flagship carrier filed for bankruptcy protection. JAL turned around its operation and now has one of the highest profit margins in the industry.

In recent years, Airbus has started to show signs of breaking through in the Japanese market. Airbus won a string of small deals with fast-growing upstart airlines, including budget carriers established by ANA.

Airbus earlier this year said 44 of its planes fly in Japan. And more are entering the market, including the double-decker Airbus A380 superjumbos, which low-cost carrier Skymark Airlines Inc.  expects to start flying next year.

—Mayumi Negishi contributed to this article.

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