Managing Editor, Leeham News & Analysis

Scott Hamilton

The events of the 9/11 terrorist attacks impacted businesses across most industries and around the globe. It's impact on major airframers Airbus and Boeing was especially acute. Each was faced with order cancellations or deferrals.&nbsp;
Airbus, then still closely tied to government funding, was less affected. Boeing, a true capitalist firm whose order book was heavily weighted toward U.S. carriers, faced a much more dire near-term future. But, more ominously, 9/11 set in motion a chain of events that would bring shame on the company, the wrath of one of the most cantankerous and powerful men in the U.S. Senate, and an international controversy that lasted for 20 years.
With far less market share in the U.S. than Boeing in 2001, Airbus was somewhat insulated from the negative impacts of 9/11. Outside the U.S., while passenger traffic declined, airlines weathered the fallout far better than America’s airlines did. Accordingly, so did Airbus. It was in the near-term post-9/11 years that Airbus overtook Boeing in orders and, soon, in deliveries. By 2004, Airbus began to eclipse Boeing.
<h2>New Air Force Tanker</h2>
Boeing’s post-9/11 collapse in customer demand had a profound impact on its finances. One way to offset this impact was to fall back on its defense unit, enlarged by the acquisition of McDonnell Douglas. The U.S. was going to war, and all its defense contractors would benefit. It was a solid affirmation of then-CEO Phil Condit’s vision to diversify Boeing’s revenue and customer base.
As a matter of routine, Boeing always had its eye out for market opportunities. One of these was the aging aerial-refueling tanker fleet used by the U.S. Air Force. Entry into service of the tanker was in 1957. The last KC-135 was delivered in 1965. Eight hundred and 25 tankers were delivered over the life of the program.
In 2001, Boeing examined the aging tanker fleet and correctly recognized that the Air Force needed to consider replacements. But with the majority of the defense department’s budget committed to other things, and now with a war to fund, there really wasn’t going to be room in the budget to buy a fleet of new tankers.
Boeing came up with an unusual solution: build a fleet of 100 tankers based on the Boeing plane closest in size to the KC-135, the 767-200ER, and lease them to the air force for 10 years. At the end of this time (basically in the 2010-2020 decade), so the thinking went, the service could either buy the airplanes or sell the tankers to the private sector and convert them into pure cargo airliners.
On its face, it was an innovative idea, a creative solution for the budget-strapped air force, and a shot in the arm for Boeing and its Commercial Airplanes division, thanks to the 767 connection.&nbsp; At that time, no U.S. defense service had leased airplanes in this manner. Under the circumstances driven by the Pentagon budget, Boeing’s idea wasn’t outrageous.
<h2>Scandal Erupts</h2>
A procurement process was initiated by the Air Force under the leadership of USAF officer Darleen Druyun, the principal deputy undersecretary of the air force for acquisition. The procurement process turned out to be fatally flawed. Boeing was awarded its lease deal in 2003, and Druyun was given a job at Boeing shortly after. She was given a salary of $250,000 (nearly $456,000 in 2026 dollars) and a signing bonus of $50,000 ($91,000). Boeing’s chief financial officer at the time, Mike Sears, a former MDC officer, was the point man on this endeavor. On its face, this move raised all sorts of questions. The lease deal was also criticized as being more expensive than purchasing the aircraft.
Eventually, Druyun and Sears, who hired her, pled guilty to criminal charges and served several months in jail. Boeing was fined hundreds of millions of dollars but avoided being barred from defense work. The KC-767 tanker contract was canceled. Boeing CEO Phil Condit wasn’t implicated in the scandal, but the embarrassing events happened on his watch. He resigned. Boeing’s board appointed Harry Stonecipher to replace him. Stonecipher had retired as president and chief operating officer of the company but had continued to serve on the board.
The air force launched a new competition. Airbus teamed with Northrop Grumman to offer the A330-200 MRTT. To the surprise of observers, Northrop won. In the standard debrief, Boeing discovered that the air force gave Northrop extra credit for the MRTT's larger fuel capacity and range compared with the KC-767. Boeing protested the award on the grounds of this non-disclosure during the competition. The award was overturned, and a new procurement was launched.
This time, Boeing won by bidding a price that was a whopping 10% lower than Airbus’ bid. (Northrop dropped out, leaving Airbus to be alone.) Few could understand how Boeing’s bid could be so dramatically lower. The reason: Boeing was willing to take a loss on the fixed-price contract, banking on the services contract and foreign sales to provide program profitability.
It didn’t work out that way. Aside from Japan and Israel, no other foreign government selected the KC-46A. Boeing has written off around $8 billion on the fixed-price contract for the first 179 tankers ordered by the USAF. The program has been plagued with delays, technical problems and quality control issues.
<h2>False Starts at Boeing Commercial Airplanes</h2>
In the years preceding 9/11, Boeing dabbled with several airplane programs. It conceived derivatives of the 747-400, called the 747-500, 747-600 and 747X, to respond to Airbus’ proposed A3XX, which later became the A380. Singapore Airlines selected the A380, rejecting the Boeing derivatives.
With much fanfare, Alan Mulally, then the CEO of Boeing Commercial Airplanes, unveiled the futuristic Sonic Cruiser. The 250-passenger airplane would cruise at Mach 0.97, just below the speed of sound, with the same fuel economy as the Boeing 767 it was intended to replace.
There were practical and operational challenges to the feasibility of the Sonic Cruiser, whose business model relied on shaving a few hours off long-haul flights. But that became moot after 9/11.
Given the survival-threatening financial losses that U.S. airlines were facing, speed was no longer important. Instead, significantly reducing costs was the prime directive that airlines gave Boeing.
The company, as is its standard practice, was studying not just the Sonic Cruiser. It was also studying a highly efficient airplane made of composites. When Singapore Airlines chose the A380 instead of a 747-400 derivative, Boeing’s salesman on the account, Ray Conner, was downcast. CEO Condit assured him, don’t worry. There was another airplane in the works that would more than make up for the loss of Singapore’s order.
In December 2003, Condit’s successor, Harry Stonecipher, announced that Boeing would proceed with that highly efficient composite airplane, code-named the 7E7 (E for Efficient). The following April, the program was formally launched and named the 787.
<h2>Airbus Overtakes Boeing</h2>
With so much of its customer base tied to the U.S. market, Boeing’s future was impacted by the years-long recovery of U.S. airlines.
Airbus was less impacted. Its share of the U.S. market was much less than it is today. Boeing cut back airplane production, and deliveries were stunted. Airbus continued to produce airplanes at its current rate. It also saw the emerging markets in Europe, Asia, and Latin America for new low-cost carriers. With its government backing as well as an extremely aggressive “super salesman," John Leahy, Airbus was willing to place risky bets.
By 2004, with America’s airlines still struggling to survive, Airbus overtook Boeing for the first time in new airplane orders. Within a few years, Airbus overtook Boeing in annual deliveries.
Boeing never recovered its sales or delivery market share to pre-9/11 levels, and Airbus has never looked back.
This account, which first appeared in AIN Media Group's Leeham News and Analysis, is an edited excerpt from the books,&nbsp;<a href="https://www.amazon.com/Air-Wars-Global-Combat-Between/dp/1737640503/ref=sr_1_1?crid=1X0ENSBNAKC9K&amp;dib=eyJ2IjoiMSJ9.3mQXoHIXBGfq25dZkdv75dJworyukjZvcOOTHKD80UuQMYaOEDc2KWiBpOFCZ41G_Gg2GHG8EvWUw38NnlEsXLqV6AVdOJ0MbKEGaafeJV8YwQWlz93AoBkOYa0f9HYV08q6vxBuJHGqeTOXi3zfgA.jJNXOF8FRSahkjYFFLwlXe-BITclnqFGGO-NPvqmSIk&amp;dib_tag=se&amp;keywords=air+wars+scott+hamilton&amp;qid=1786030925&amp;sprefix=air+wars%2Caps%2C223&amp;sr=8-1">Air Wars, The Global Combat Between Airbus and Boeing</a>, and&nbsp;<a href="https://www.amazon.com/Rise-Fall-Boeing-Way-Back/dp/1737640538/ref=sr_1_1?crid=1Q2ZUHHFNCZPS&amp;dib=eyJ2IjoiMSJ9._Luxi6fBJC72_iNCKCM-iSJ24h0rnnynZXesaunPQ8g.YB1HfwUAk702OzmUY3XSQ3IAww7h9z-JRwFv_9OTqlI&amp;dib_tag=se&amp;keywords=the+rise+and+call+of+boeing&amp;qid=1786025777&amp;sprefix=the+rise+and+call+of+boeing%2Caps%2C177&amp;sr=8-1">The Rise and Fall of Boeing and the Way Back</a>, and <a href="https://www.amazon.com/50-Years-Commercial-Aviation-Memories/dp/1737640554/ref=tmm_pap_swatch_0">50 Years in Commercial Aviation, Memories and Inside Stories</a>, by editor at large Scott Hamilton. Additional reporting is included above.
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