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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

July 19, 2010 at 10:00 AM

The turning point behind the coming 737 battle

Reading the story about new competition for the venerable 737 by the Seattle Times’ aerospace reporter Dominic Gates, I wondered for just a moment if this were 1970 all over again. Instead of the Big Three, substitute the Big Two: Boeing and Airbus.

Anyone who’s read David Halberstam’s magisterial The Reckoning knows how that story turned out. GM, Ford and Chrysler were fat and complacent, totally unprepared for the import competition that would eventually help destroy one as an independent company and force another into bankruptcy protection and a shell of its former greatness (and backbone of the American middle class).

The differences are important. In the 1960s, auto management and union bosses were smug co-conspirators in driving the American auto industry into trouble. They were inward-looking, failed to invest in new technology, allowed quality to drop dramatically and stuck with flawed, inefficient business structures and arrangements. That’s certainly not Boeing.

Still, as Gates’ story makes clear, a seismic shift in competition is headed for Boeing’s reliable cash cow and its 10,000 workers in Renton. It will come not only from Canada’s Bombardier, but also from China (which just surpassed the United States as the world’s largest energy user after America held that position for a century) and Russia. One wonders if Brazil can’t be far behind. China, with its huge market, leverage through vast foreign debt and reserves, and state capitalism is a sea-change challenge.

Boeing knows all this, and won’t be caught napping a la Henry Ford II. But history doesn’t repeat itself; sometimes, as Mark Twain said, it rhymes. One of the critical underlying forces that did in the old Big Three was the lack of preparation or even thinking about discontinuity. The 1973 oil shock, when America hit national peak and became dangerously dependent on imports from the Mideast, caught the old order napping. Now discontinuity is our future, and has it been factored in to all those optimistic forecasts of future airliner demand?

Leasing has rebounded, a happy consequence of that financial bailout that left such a bad taste. But America’s economic growth is fragile at best. Europe faces retrenchment. Asia is growing again but can’t cut itself off from slow growth in its top export markets (i.e., the West). Meanwhile, energy prices will eventually head higher. That’s a plus for the energy-efficient 787. But a price shock will rattle the airlines as it always does.

High-speed rail has already taken away airline market-share in Europe. It will do the same in parts of Asia where it’s being built aggressively. Rail is the more energy efficient and climate-friendly choice in some cases. That won’t be the case in America; we’re paralyzed and can’t imagine a different, even better, future. Otherwise, 200-mile-per-hour corridors would already be operating between Seattle and Portland; Phoenix and LA; Dallas and Houston, etc. etc. Unfortunately, that same paralysis will help keep us growing slowly.

You can follow Dominic’s live coverage of the Farnborough air show here).

Today’s Econ Haiku:

With record cash reserves

Business still won’t do hiring

A rainy day fund?

Comments | More in Aerospace/Boeing

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