Airbus-Boeing battle for the American sky escalates

June 29, 2012: 11:46 AM ET

A new plant based in the U.S. will help the European giant compete in commercial aircraft. It could also seriously threaten Boeing's grip on the American defense establishment.

By Cyrus Sanati, contributor

FORTUNE -- EADS, the parent company of jet maker Airbus, has upped the ante in its long-running blood feud with Boeing, setting the stage for a messy battle between the two aerospace giants. According to a person with knowledge of the matter, the European conglomerate is set to announce the construction of a new manufacturing facility for its Airbus aircraft in the heart of Dixie -- Mobile, Alabama. It would be Airbus's first manufacturing plant in the western hemisphere, threatening Boeing's grip over the US jet market.

But while the facility will be at first tuned to construct Airbus's new A320 single-aisle aircraft, the potential for EADS to also use the facility to manufacture military equipment could end up becoming a nightmare for Boeing (BA). EADS could easily expand or convert the future plant to support its growing defense businesses, like its popular Eurocopter attack helicopters or its cutting-edge jet fighters and support aircraft. With a facility up and running in the US and already staffed with thousands of American workers, EADS could nab quite a few lucrative military contracts away from Boeing, raising the stakes in the global aerospace wars.

The battle for the single-aisle jet market has raged for over a year now with both Boeing and Airbus competing fiercely for new customers wanting newer and more fuel-efficient models. While the single-aisle jet market hardly grabs headlines, it is actually the biggest profit center for the two companies' commercial aviation divisions. So while Airbus' superjumbo A380 and Boeing's futuristic 787 are important, the truth is, they aren't the big money makers. For example, Boeing's single-aisle 737 aircraft accounts for around 40% of the US aerospace giant's commercial aviation revenue and well over half the division's profits last year.

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Boeing estimates that the single-aisle market could be worth nearly $2 trillion over the next 20 years. The majority of that demand is expected to come from Asia, which is why both Boeing and Airbus have announced plans to construct new commercial aircraft manufacturing plants in China. For both companies, the Asian plants would be their first commercial aircraft manufacturing facilities to be located outside their respective home markets.

But while Asia is a rapidly growing market, the US is still home to the largest commercial aviation fleet in the world. Years of underinvestment by US airlines means that they are in dire need of new equipment, making the US the second largest market for new jet aircraft behind Asia.

Boeing aircraft still has the upper hand in the US market, but Airbus has been slowly taking market share. Boeing sustained a big hit last year when American Airlines, which had maintained a Boeing-only fleet for decades, announced it was ordering 260 new single-aisle A320s from Airbus. It could soon get worse. United Airlines (UAL), which absorbed Continental Airlines last year, is expected to announce a new order for 100 single-aisle aircraft at the Farnborough airshow in the United Kingdom next month. There is talk that Airbus could snatch even more market share in that deal.

It is no wonder that Airbus would want to then create a new production facility in the US. With the facility scheduled to reportedly pump out four to six new single-aisle jets a month, it could construct American's 260 and the United's potential 100 aircraft orders in five to seven-and-a half years. New orders from other airlines, like US Airways, which already extensively uses Airbus aircraft, could keep the plant humming for a decade or more.

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But while it may bruise Boeing's ego to have its biggest commercial aircraft competitor roll out new planes in its own backyard, it isn't that big of deal, financially speaking. After all, Boeing already lost those American orders, so it really doesn't matter if the planes are constructed in Mobile or in Toulouse.

What Boeing should be worried about is EADS using this Airbus expansion to augment its influence in Washington. After all, while commercial aircraft is important for the two companies, their defense and space business is almost as, or even more important to their respective bottom lines. For Boeing, its revenues and profits are split nearly equally between the two business lines, while at EADS defense and space makes up two-thirds of its revenues and profits, with the other third coming from Airbus.

Boeing and the other US defense subcontractors have been able to maintain their dominance over the US market by maintaining very close relations with their representatives in Congress. EADS also lobbies Congress and pushes for contracts, but it always had one fatal flaw – it didn't maintain a big manufacturing presence in the US. Boeing and other US subcontractors kept the bulk of their manufacturing at home, so a vote for them was a vote for US jobs.

EADS got smart and realized that if it wanted to gain a bigger presence in the US it had to relocate its production facilities to the states. When it opened up an assembly plant for its Eurocopter helicopter division in Mississippi in 2004, EADS saw its US market share of attack helicopters double.

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High off its Eurocopter victory, EADS later challenged Boeing for a $40 billion contract to build refueling tanker aircraft for the US military. EADS promised to build its tanker in Mobile, but it hadn't built the facilities yet. Meanwhile, Boeing's facilities were already built - it planned to use a modified version of one of its commercial aircraft to do the job. After years of back and forth, EADS ultimately lost out to Boeing in a multi-year drama that cost the company hundreds of millions of dollars.

The grueling experience competing with Boeing over the tanker contract would have been enough for most companies to simply give up and run back home. But EADS is a tough competitor. It knows that if it wants to push the needle in both it's commercial and defense businesses it has to build its market share in US.

But promising to build a facility doesn't seem to be good enough -- it needs to built. The political drive to save thousands of jobs by handing a new contract to a facility that is already humming is far more powerful than handing the contract to a facility that has yet to be built or staffed.

By establishing a full manufacturing plant now and employing thousands of American workers, EADS is setting itself up to be as "American" as Boeing the next time it chooses to bid on another government contract. Wiping out the national champion advantage, along with some strategic lobbying in Washington, should effectively level the playing field for EADS. Boeing would be wise to step up its game as it could soon find itself on the defensive on both of its main business lines.

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