Weekly interest and loan rates | Northwest stock contest 2003 Tax tips | Consumer affairs | Home values

Japan won't be shoo-in as 7E7 buyer, bankroller

By David Bowermaster
Seattle Times aerospace reporter

E-mail this article Print this article Search archive

In exchange for thousands of jobs and the prestige of building the 7E7's sophisticated wings, the theory goes, the Japanese government will help pay to develop the plane, and Japanese airlines will be launch customers.

But airline executives and government officials interviewed here are adamant that despite their long and friendly ties to Boeing, neither sales nor subsidies are a sure thing.

Skepticism about the 7E7 from All Nippon Airways (ANA), Japan's second-largest airline, could prove especially problematic.

Shinichiro Ito, an ANA board member and the airline's senior vice president of marketing, said in an interview last week the 7E7 may be "a bit too big" for ANA's massive domestic network.

And an official of Japan's influential Ministry of Economy, Trade and Industry says that while there is a request for research-and-development funding for the 7E7, the government has more questions to be answered before any money can be approved.

Thousands of jobs

To be sure, sake will flow in Tokyo today if Boeing, as expected, confirms that Japanese manufacturers Mitsubishi, Kawasaki and Fuji will build much of the 7E7's fuselage and wings.

It would be the first time Boeing designed a jet with wings to be built by a subcontractor. That unprecedented outsourcing could mean the eventual loss of thousands more Boeing jobs in the Puget Sound region.

It is widely assumed such sacrifices could help win launch orders from either of Japan's two biggest airlines. All Nippon and Japan Airlines (JAL), the country's biggest carrier, are among the biggest and most respected in the world, and are longtime loyal Boeing customers.

Both fly scores of mid-size Boeing wide-bodies, such as the 767 and 777, on short but congested routes inside Japan, such as Tokyo-Osaka and Tokyo-Sapporo. The airlines also use 767s — which the 7E7 is aimed at replacing — on their rapidly expanding international routes to China, South Korea and other parts of Asia.

In part to make the 7E7 attractive to Japanese airlines, Boeing unveiled a major shift in strategy this month, saying it would simultaneously build long- and short-range 7E7 models, rather than phase in the short-range model later.

'Probability is high'

Boeing's board of directors is expected to decide next month whether to move ahead with the 7E7 and permit its sales team to begin offering contracts to potential customers. Boeing Chairman Phil Condit said last week the "probability ... is high" for approval.

The board will evaluate the expense of designing and building the 7E7 against projections from Boeing's commercial-airplanes group of how many jets might be sold over the 20-year life of the program.

Those sales projections are sure to include predictions of substantial 7E7 sales to ANA and JAL.

Fumio Tsuchiya, executive officer in charge of corporate planning for Japan Airlines, said the carrier feels no additional pressure to buy the 7E7 because the plane will have Japanese roots.

"As a Japanese citizen, I think (the supplier work) is a very good thing," Tsuchiya said this week at JAL's headquarters in Tokyo's Shinigawa neighborhood. "But for our company, it has nothing to do with our decision" on the 7E7, he said.

All Nippon's Ito also was adamant that ANA will select aircraft based solely on what is best for its network, not as payback for the award of Boeing supplier contracts to Japanese companies.

The plane could prove useful on ANA's rapidly increasing international flights, he said. But if the 7E7 is not easily transferable to domestic routes, the plane may not work for ANA, which is reducing the number of aircraft models it flies to cut costs.

"We ideally would like to remove the domestic-international distinction from our aircraft," Ito said.

Too close in size

Ito, interviewed in his office on the 39th floor of Tokyo's gleaming new Shiodome City Center building, said the airline's primary concern is that the short-range 7E7, which would hold 300 to 340 seats in ANA's domestic configuration, would be too close in size to the Boeing 777-200, which carries 382 passengers for ANA.

"The (smaller-capacity) 767 we can use both internationally and domestically. In terms of its replacement," Ito continued, "we want an aircraft we can use in the same way. And the fewer types we have, the better our cost performance."

Tsuchiya of Japan Airlines acknowledged news reports that JAL has asked for proposals from Boeing and Airbus to replace its older Boeing 767s and Airbus A300s.

He, like Ito, was concerned the 7E7's capacity could be closer to the 777's than the 767's.

But he said JAL was pleased earlier this month when Boeing said it would build a shorter-range, lighter-weight model of the 7E7.

Tsuchiya noted that airport-landing fees in Japan are based on weight. The base 7E7 would be more than 40 percent heavier than the Boeing 767-300. Consequently, JAL had been concerned that higher landing fees for the 7E7 as originally planned would wipe out much of the anticipated fuel-cost savings.

Boeing is looking for more than sales from its relationship with Japan.

Analysts believe the 7E7 will cost around $10 billion to develop, but Boeing says it will not spend nearly that much, as it plans to enlist suppliers from Japan and around the world as cost-sharing partners.

The Japanese government has indirectly supported previous Boeing airplane programs such as the 777 by doing its own primary aerospace research, and by funding research and development performed by Japanese aerospace giants such as Mitsubishi, Kawasaki and Fuji.

Some promising signs

Boeing hopes both trends continue with the 7E7. The early signs look promising.

Japan's Ministry of Economy, Trade and Industry has requested 2.8 billion yen — about $26 million — from the Ministry of Finance in its budget for fiscal 2004, which begins April 1.

But a Ministry of Economy official said the funding will not be approved until the government is confident the 7E7 will be built and Boeing offers precise details about what Japanese suppliers will do.

"Since the money is coming from Japanese taxpayers, the project must be very meaningful, it must be very challenging," said Hiroaka Ichinose, deputy director of the ministry's aerospace- and defense-industries division. "If the project is similar to previous work (for Boeing), the government will not do anything."

Wings are coup

This view helps explain why the 7E7 wings are going to Japan. The Japanese government is anxious to increase the country's aerospace design and engineering skills, and the wings are considered the most sophisticated part of any airplane.

Today's outsourcing awards are not enough to start money flowing from the Japanese government, however.

The Ministry of Finance will debate the 2004 budget early next year. Meanwhile, it will keep a close eye on 7E7 developments.

"Until we are very sure the program will go ahead with very little risks, the government will just be watching," Ichinose said.

David Bowermaster: 206-464-2724 or dbowermaster@seattletimes.com

Copyright © 2003 The Seattle Times Company