“Airbus vs. Boeing in Super Jumbos: A Case of Failed Preemption”

To put the sandbagging hypothesis in perspective, note that if it were correct, thefourth event listed in Table V should have resulted in a negative return for Airbus’principal parent, EADS (European Aeronautic Defense and Space Company), as well as apositive return for Boeing. 55 Interestingly, EADS experienced a positive, albeitinsignificant 2-day abnormal return of 4.68% around that event (producing an abnormalchange in market value of $640 million). 56 By taking a positive view of the net effects ofBoeing’s simultaneous cancellation of the intermediate product and announcement of a(possible) Sonic Cruiser on Airbus, investors apparently placed more emphasis on thebenefit to Airbus of the cancellation and less on the threat from the Sonic Cruiser. Thiscapital market reaction casts doubt on the “sandbagging” interpretation. So, too, docomments about the fourth event from industry analysts. According to one analyst, “Thisnews is extremely important for Airbus and EADS as it significantly increases theprobability that the A380 will be a commercial success.” 57Of course, the Sonic Cruiser could pay off for Boeing without necessarily hurtingAirbus. Addressing this possibility requires assessing the basic economics of the SonicCruiser which are still murky, not least because the development program is a year or twoaway from being initiated even if Boeing does decide to proceed with the plane. 58Positive factors include time savings valued not only by passengers but also by airlines asenablers of more trips/plane and an extended range: 9,000 to 11,000 nautical miles versus8,100 for the A380. On the other hand, there are significant issues with the Sonic Cruiseras well. Its total development and launch costs are projected to be $8 to $10 billion,smaller than the amount Airbus is budgeting for the A380, but still large enough torequire a very large profit stream to be justifiable. 59 Furthermore, the Sonic Cruiser isperceived to require more new technologies than the A380 and, as a result of the implied“unknown unknowns,” to be prone to proportionately larger overruns. Otherdisadvantages include high operating costs associated with traveling at speeds just belowthe sound barrier and a probable need to focus on high-end passengers such as businesstravelers (which implies aggregation challenges). The Concorde, capable of flying twiceas fast as the proposed new plane when it is allowed to break the sound barrier,exemplifies in extreme form how limiting these disadvantages can be. Also, if the SonicCruiser is launched, it will cannibalize demand for some of Boeing’s most profitable33