JAL's Airbus Purchase Upsets Half-Century Relationship With Boeing: 'It's a Heartbreak,' Says Executive With U.S. Aircraft Maker

The Wall Street Journal 

By  Mayumi Negishi and  Daisuke Wakabayashi

Updated Oct. 7, 2013 12:41 p.m. ET

TOKYO—It was a scene unthinkable just 10 years ago: the chief executive of Airbus appearing at a swank hotel conference room, shaking hands with his Japan Airlines Co. counterpart as together they hoisted a model of an A350 jetliner bearing the JAL red crane.

The real significance of the Monday news conference was that JAL's order iced out Boeing Co., which had claimed every previous JAL long-distance-aircraft contract of the past half century.

"We have had a long-standing relationship—it's a heartbreak," said Kostya Zolotusky , managing director of capital markets and leasing at Boeing Capital Corp., the aircraft maker's finance unit.

Boeing's shares fell 51 cents to close at $116.69 Monday on the New York Stock Exchange. Shares of Airbus parent European Aeronautic Defence & Space  Co. rose 2.2% to close at €50.30 ($68.19) in Paris.

JAL's decision to buy Airbus planes with a list value of $9.75 billion, marks ablow for Boeing, which dominated the Japanese market for decades. It is also a transformation at Japan's flagship carrier, which has a fleet that is 70% made by Boeing.

The decision was born out of JAL's 2010 bankruptcy, according to people familiar with the situation. Kazuo Inamori , the wealthy founder of ceramics giant Kyocera Corp. and telecommunications company KDDI Corp., took over the airline and shook up its traditional culture, bringing it out of bankruptcy last year. In an interview with The Wall Street Journal shortly after his retirement in March, Mr. Inamori publicly questioned JAL's reliance on a single airplane supplier.

Airbus CEO Fabrice Brégier was heavily involved in the negotiations with JAL, which started to solidify over the summer, the people said.

JAL joins a group of carriers that have bought from both Boeing and Airbus, among the last major global carriers to do so. Splitting orders often means securing better terms for deals at increasingly competitive prices. Among the remaining full-service carriers that have pegged their fleets solely to one manufacturer, El Al Israel Airlines Ltd. and Grupo Aeromexico SAB for Boeing and Ireland's Aer Lingus Ltd. and TAP Air Portugal for Airbus. Many budget carriers like Southwest Airlines Co. and AirAsia Bhd. still operate fleets entirely made up of aircraft from a sole manufacturer.

Airbus gained a new advantage when it began flying the A350 in June, which gave it hard data on the plane's performance in flight tests to show customers. Boeing's 777X, which it is developing as a competitor to the A350, won't be airborne until 2018 or 2019 at the earliest.

Mr. Brégier, standing on Monday with JAL President Yoshiharu Ueki in front of the companies' intertwined logos, said winning over JAL was a sign the Japanese market, like the rest of the world, was opening to competition.

It was important, he said, for the plane maker to make its pitch in Japan, rather than from Airbus's base in Toulouse, France. "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," Mr. Brégier said. "The problem wasn't Japan or Japanese customers. The problem was probably Airbus."

Boeing's viselike grip over Japan's aeronautics industry can be traced to Japan's attempts to rebuild after World War II with American support. The rapid recovery of companies like Mitsubishi Heavy Industries Ltd.  and the predecessor of Kawasaki Heavy Industries Ltd. got a boost from license agreements to make parts for Boeing.

Boeing's first sale of commercial aircraft to JAL and its chief domestic rival, All Nippon Airways, was in 1964, the year Tokyo hosted the Olympic Games. The first of the 129-person Boeing jets inspired pop songs as well as races between aircraft and bullet trains, and remain associated with Japan's rapid postwar growth.

JAL's 1966 order for Boeing 747 jumbo jets—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 the airline's signature plane.

The aircraft were retired in 2011 after JAL filed for protection from creditors.

n the 1970s and '80s, Japan became the world's best market for Boeing outside the U.S., as Japan's trade and finance ministries urged airlines to buy more U.S. planes, partly, industry insiders said, to help offset a huge U.S. trade deficit. National carrier JAL—the government didn't sell its full stake until 1987—was particularly susceptible to bureaucratic influence, they said.

Boeing, in turn, gave Japanese manufacturers increasingly large parts of its planes to build, giving policy makers in Tokyo further incentive to protect the aircraft maker's lock on the market. Japan's aerospace industry "built a part of every single one of Boeing's commercial airplanes," Nicole Piasecki , a former president of Boeing Japan, said in a 2009 speech.

The mutually dependent relationship—cemented with subsidies and other support from the Japanese government—looked impossible to breach by outsiders.

Glen S. Fukushima , the president of Airbus Japan from 2005 until last year, recalled attending a meeting of the Association of Asia Pacific Airlines shortly after he joined Airbus and noting that the company supplied 16 of the 17 members. JAL was the only one that had never bought an Airbus plane. "That's how close JAL and Boeing have been," Mr. Fukushima said. "It was considered revolutionary for JAL to say it was even considering Airbus."

But Boeing's hold eventually began to loosen amid airline deregulation and other shifting economic forces. Airbus retained suppliers in Japan, denting Boeing's political advantage as a job generator. 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. And Japan is trying to develop its own fuel-efficient regional passenger jet, making Boeing as much a rival as a partner.

And JAL, with the government no longer at the helm, has become more cost-conscious since it emerged from bankruptcy protection last year with an initial public offering that was heavily promoted to foreign investors.

Indeed, the carrier is in open warfare with the government, last week accusing Japanese officials of unfairly denying JAL coveted slots that were assigned at Tokyo's Haneda airport.

"What surprises me is not that they've ordered the A350, it's that Boeing was able to hold on to its monopoly for so long," said Henri Courpron , chief executive of aircraft-leasing company International Lease Finance Corp. "I think the Japanese airline industry will benefit over the long term."

Playing Airbus and Boeing against each other should improve the terms that JAL, rival ANA Holdings Inc. and perhaps others Japanese airlines will be able to negotiate, said Mr. Courpron, a former Airbus salesman.

Boeing further hurt itself in Japan with long delays for its new flagship, the 787 Dreamliner, followed by groundings after batteries burned on JAL and ANA planes this year.

In a sign of Boeing's diminishing clout in Japan, Mr. Ueki, the JAL president, said Monday that he didn't take into account the U.S. company's history or supplier relationships in Japan and that the company had no need to consult with Tokyo before selecting Airbus. "JAL was the only factor," he said.

—Daniel Michaels  and Jon Ostrower  contributed to this article.

Source:  http://online.wsj.com