To build a better airliner

Whenm you walk down the jetway into the plastic and fabric interior of a commercial airliner, you're having your closest contact with the cutting edge of high technology.

Modern commercial aircraft, with their hundreds of miles of wire and millions of parts, are among man's most complicated machines. They are also the product of one of the most sophisticated, high-risk industries the world has ever known.

In order to build new jetliners, aircraft manufacturers routinely place multibillion-dollar sums, often their entire companies, on the line. They assume that they'll be able to sell hundreds of copies of their latest planes to the world's airlines - airlines whose economic fortunes are tightly linked to the ups and downs of the world economy.

In this space-age industry, risking the entire company is called being ''sporty.'' And those who are sporty - and succeed - are viewed with admiration. But in recent years the risks in this have risen dramatically.

According to the McDonnell Douglas Aircraft Planning Department, it took only 42 percent of the firm's equity to introduce the four-engined, propeller-driven DC-6 in 1946. But the DC-10 jumbo jet, which first flew in 1970, required an investment equal to 155 percent of the company's equity.

This picture - similar for other aircraft builders - has prompted George W. Ball, a former undersecretary of state and now a director at the investment firm of Lehman Brothers Kuhn Loeb, to observe that there is no historic precedent or current parallels for the degree of financial risk US aircraft manufacturers face.

The skyrocketing stakes have already taken a heavy toll.

In the post-World War II period, the commercial aircraft industry was dominated by four or five American companies. The value of all commercial jet aircraft and engines produced or sold in the world to date has been roughly $50 billion. Of this, US manufacturers' share has been $45 billion. But the corporate equivalent of gambler's ruin has weeded out all but the Boeing Company of Seattle, Wash., which dominates the market, and McDonnell Douglas of St. Louis, hanging on despite major losses on its DC-10. And they are being strongly challenged by Europe's Airbus Industrie.

Airbus - a partnership of the governments of France, West Germany, Britain, and Spain, with the Netherlands and Belgium as associates - has rewritten the rules of this high-tech competition. What has emerged is a highly visible clash between the American form of private enterprise and European state capitalism.

The size of the pot in this competition is enormous: Congress's Office of Technology Assessment has estimated a potential market for 6,500 to 8,500 short- and medium-range aircraft between 1980 and 2010. During the same period, there also may be demand for 2,200 to 3,300 transcontinental jetliners. The total value for this market is estimated to be $385 billion in 1979 dollars.

Although Airbus has captured 20 percent of all new aircraft orders in recent years, jetliners still represent the second largest export of the United States. But this market has changed in ways that make it much more difficult for US companies to compete.

In the 1950s and '60s US airlines bought 70 percent of all new jetliners sold. Air traffic and airline revenues rose steadily. ''The really good years in the industry were the result of air traffic growing faster than GNP (gross national product),'' explains Charles Tillinghast, past president of Trans World Airlines, now president of Merrill Lynch White Weld. ''Ten or 15 years ago, airline people believed that air traffic was destined to grow by 15 percent annually. No one believed more strongly that exponential growth could continue indefinitely.''

These projections led first to flirtation with supersonic flight. Then, when the prospect of ferrying passengers faster than sound dimmed, the industry began building larger aircraft, culminating in the jumbo jet. These two approaches were justified by the argument that either faster or larger aircraft were needed to move the ever-swelling hordes of vacationers and businessmen.

During this era, US airlines would buy the newest aircraft, keep them 15 years, then sell them to foreign airlines who couldn't afford new equipment. Their basic profits protected by federal regulations, the US airlines competed by acquiring the newest equipment. Airline executives played manufacturers against each other in design competitions to keep down the price of new aircraft. Airframe makers and jet engine manufacturers vied with each other by producing more sophisticated and powerful products.

In the late 1960s, for instance, the airlines staged a head-to-head competition between McDonnell Douglas and Lockheed for a wide-body jet smaller than Boeing's 747. Airline executives split evenly between the two planes, so both were built. But the market was only big enough for one model. As a result, McDonnell Douglas, which dominated the industry in the 1950s and '60s, was substantially weakened, and Lockheed, which built the wide-body L-1011, eventually dropped out of the commercial business altogether.

By the mid-1970s, however, the expansionist dream was foundering on the hard realities of a faltering, increasingly unpredictable world economy. Airline economics, based on cheap fuel, received a traumatic jolt from the rapid rise in oil prices following the 1973-74 Arab oil embargo and the fall of the Shah of Iran in 1979. Airline ticket prices began to rise and passenger growth declined.

Says Mr. Tillinghast, ''Now 5 percent growth projections are reasonable, if you underline the fact that no one really knows.'' These changes created an opening for which European aircraft builders had long been waiting.

''Since World War II, the Europeans have had as good aircraft technology as the US,'' acknowledges Thomas R. Riedinger, director of marketing communications for the Boeing Commercial Aircraft Company. ''But the Europeans took the Henry Ford approach: 'We have one color and it's black.' ''

In the late 1970s, however, Airbus had an airplane design that proved to be just what the market wanted: a fuel-efficient, twin-engined wide-body - its A- 300.

''Before 1978, Europe's Airbus appeared to be a typical European airliner - well designed, well built, and a commercial flop. Only 38 had been sold - to just four airlines - since deliveries began in 1974,'' recounts John Newhouse in his book, ''The Sporty Game.'' But soaring fuel costs and strengthening competition among airlines reversed this picture with startling speed. In the next two years, A-300 sales rose to more than 300, a record for a European-built jetliner.

Airbus pressed its advantage aggressively. This zeal is clearly reflected in a statement made at the time by Bernard Lathiere, president and chief officer of Airbus: ''If we don't have a place in high technology in Europe, we should be slaves to the Americans, and our children will be slaves. We have to sell . . . we must fight and fight. . . .''

According to industry analysts, no one in the world can produce commercial jets as efficiently as can the giant Boeing Company. Boeing has analyzed the Airbus operation and figures that it can turn out aircraft at a cost 25 percent less than the European operation. Still, Airbus has priced its aircraft competitively. Through the government-controlled banks of its member nations, Airbus was able to offer cut-rate financing as well. It was financing that led Eastern Airlines to become the first US air carrier to join the Airbus fold. As Eastern's president, Frank Borman, told employees: ''If you don't kiss the French flag every time you see it, at least salute it. The export financing on our Airbus deal subsidized this airline by more than $100 million.''

Two years ago, to stave off an all-out international financing war, Airbus governments and the US signed an international ''Commonline Agreement'' that limits the terms of financing from government sources.

This agreement and falling interest rates have reduced the importance of financing in aircraft deals in recent months. But another change in the jetliner market continues to aid the Europeans in their bid for dominance.

In the 1970s, the demand for new aircraft from American airlines began to level off. This general trend has been compounded by deregulation, which has led to tough competition among US airlines. The resulting financial flood of red ink has so weakened many air carriers that they cannot buy the new aircraft they need. This led Robert Oppenlander, Delta Airlines senior vice-president for finance, to comment in a speech last year that ''most other carriers badly need aircraft: In the not too distant future, their need will grow to even greater proportions. However, it is difficult to see how they will be able to finance these purchases.''

At the same time, foreign air carriers have increased their demand for new aircraft. In the past, foreign airlines accounted for 30 percent of aircraft sales, but are expected to make up 60 percent in the future. Many of these overseas airlines are government controlled. As a result, the market has become increasingly politicized.

In the Middle East, countries that traditionally bought from Boeing have turned to Airbus to express dissatisfaction with US foreign policy. Diplomacy has also helped tip deals in favor of Airbus. A Trans-Australia Airlines purchase of A-300s was accompanied by a European agreement to purchase more Australian mutton. When a Korean airline placed an order with Airbus, it also got landing rights in Paris. In Pakistan, an aircraft purchase was linked with a deal on a French nuclear reactor.

These developments have created consternation in the executive offices of Boeing. The firm is competing head-to-head with Airbus with two new fuel-efficient models, the 757 and 767. In this competition, the two Boeing aircraft have garnered a slim lead over the Airbus 310, a wide-body very similar to the 767. Eighty percent of the orders for the A-310 have come from government-controlled airlines; the Boeing products have been the clear favorite of private air carriers.

This is a crucial period for both new aircraft. During the four to five years it takes to design and set up manufacturing for a new model, an airplane company spends and borrows billions of dollars. That cost for Boeing's new 767, for instance, was somewhere between $2 billion and $10 billion. Even at $40 million to $50 million a copy, the manufacturer must sell more than 300 aircraft in the first 10 years to break even. Because of parts and maintenance considerations, airlines have a powerful incentive to use only a few basic aircraft models. As a result, for each initial sale a manufacturer makes, there are an average of three follow-up orders. Moreover, in many parts of the world, airlines share parts and maintenance operations at remote airstrips. So when one airline decides to buy a particular aircraft, other airlines in the region have an incentive to follow suit.

Faced with sagging demand for aircraft, Boeing and Airbus are engaged in a ferocious, discounting sales war. Both have cut prices so far that industry observers doubt whether either actually makes any money when an infrequent sales victory is scored.

This helps explain the shrillness of the charges and countercharges flowing across the Atlantic. Boeing officials have charged Airbus with ''dumping'' its aircraft at prices below cost of production. They also have charged that the European governments have been tying aircraft sales with other agreements in violation of international trade pacts. Airbus spokesmen have countered by emphasizing the research subsidies American companies have received from the National Aeronautics and Space Administration and the US Defense Department, and point to equally sharp business practices that American aircraft companies have employed.

Actually, Boeing and Airbus are fighting a third competitor: used aircraft. ''Right now a new aircraft's toughest competitor is used aircraft,'' says David Raphael, director of SRI International's Travel Dynamics Program. In the past, two-thirds of new aircraft sales have been to replace used equipment. But airlines that once got rid of airplanes after 15 years are holding onto them for another five years. This buys the airlines the equivalent of four to five years of world aircraft production, he explains. And with stable or dropping fuel costs, airlines have been in less of a hurry to get rid of older, less fuel-efficient aircraft. In addition, a current glut of used jetliners on the market has lowered their resale value. This is one consequence of a serious overcapacity problem facing US airlines. Traffic would have to increase by 10 percent in order to utilize the existing fleet fully. Current projections estimate a 4- to 8-percent growth this year. And the new airplanes on order will exacerbate this problem.

Most of this overcapacity is in the large transcontinental aircraft that many US carriers have favored. There is a need for smaller short-haul aircraft. Some airlines, like Delta, want manufacturers to come up with a new twin-engine 150 -seat airplane to fill this niche. This is smaller than Boeing's 757 and McDonnell Douglas's new DC-9-80, which has been showing considerable sales strength. But industry analysts say the airline industry, which lost more than $ 1 billion last year, probably can't support a new aircraft of this sort.

Airbus, Boeing, and McDonnell Douglas all have designs for such an aircraft. And several consortia of engine manufacturers have been working on jet engines to power it. Airbus appears to be the closest to producing such an aircraft, but ''if they go ahead with a 150-seater, they will be taking a big risk,'' Mr. Raphael maintains.

While the time may not be ripe for a 150-seater now, there is little doubt that such a plane will be the arena for the next round of competition in this ''sporty game.'' Its outcome is likely to have a major effect on the relative trading positions of the United States and Europe, as well as the brand of airplanes in which the air traveler of the future will be riding.