1. Critique the negotiation strategies and tactics of all three key executives involved: Dupuy, Leahy, and Bright.
2. Critique the overall marketing strategies of the two aircraft makers as demonstrated in this case.
3. What were the key factors that ultimately sent the order in Airbuss direction?
4. Assume that Iberia again is on the market for jet liners. How should Bright handle a new inquiry? Be explicit.
CASE lberia Airlines Builds a BATNA MADRID One day last April, two model airplanes landed in the to North America, where air travel is in tatters, and by dominating offices of Iberia Airlines. They weren't tays. The Spanish carrier was shopping for new The Spanish carrier was looking to replace six Boeing 747-200 jetliners, and the models were calling cards from Boeing Co. and jumbo jets more than 20 years old. It wanted as many as 12 new Airbus, the world's only two producers of big commercial aircraft. planes to complete a 10-year modernization program for Iberia's It was the first enoounter in what would become a months-long long-haul fleet. Based on list prices, the 12-plane order was valued dogfight between the two aviation titans- and Iberia was planning at more than $2 billion. to clean up. Iberia's Dupuy, a sot-spoken career finance man, first noeded Airbus and Boeing may own the jetliner market, with projected to woo Bocing to the table. The U.S. producer had last sold Iberiz sales of more than $1 trillion in the next 20 years, but right now planes in 1995 , and since then, the carrier had bought so many they don't control it. The crisis in the air-travel industry makes the Airbus jets that Boeing considered not even competing. But in late twi manufacturers desperate to nail down orders. So they have July, Dupuy met Toby Bright, Boeing's top salesman for jets. Over grown increasingly dependent on airlines, engine suppliers, and dinner in London, according to both men, Dupuy told Bright that aircraft financiers for convoluted deals. Iberia truly wanted two suppliers, not just Airbus. Once the underdog. Airbus has closed the gap from just four The Boeing sales chief azs skeptical, and he recalled thinking at years ago when Boeing built 620 planes to Airbus's 294 and the time, "You're running out of wiys to show us." Having worked as this year the European plane maker expects to overtake its U.S. Bocing's chief salesman in Darope, Airbus's home turf, he had beard rival. For Boeing, Iberia was a chance to stem the tide. For Airbus, similar lines from customers who eventually bought Airbus planes, Iberia was crucial turf to defend. So he wondered: "Are we being brought in as a stalking borse?" lheria and a few ather airlines are financially healthy enough Yet replacing Iberia's old 747 s with new 777 s would be Boeing's to be able to order new planes these days, and they are all driving last chance for years to win back Iberia. The argument against Bocing hard bargains. Enrique Dupuy de Lome, theria's chief financial of- was that an all-Airbus flect would make Iherias operations simpler ficer and the man who led its search for widebody jets, meant from and cheaper. Still, going all-Airbus might weaken Iherias hand in the start to run a real horse race. "Everything has been structured future deals. Airbus would know that the carrier's cost of switching to to maintain tension up to the last 15 minates," he said. Bocing would require big imestments in parts and pilot trining. Throughout the competition, the participants at Theria, Bocing. In early November, Airbus and Boeing presented initial bids on and Airbus gave The Wall Street Journal detailed briefings on the their latest planes. The four-engine Airbus A 340600 is the longest pitches, meetings, and deliberations. The result is a rarity for the plane ever built. Boeing's 777-300ER is the biggest twin-engine secretive morld of aircraft orders: an inside look at an all-out sales plane. derby with glabetrotting executives, huge price tags, and tortuous The new A340 can fly a bit farther and has more lifting power negotiations over everything from seats to maintenance and cabin- than the 777 . The new Boeing plane is lighter, holds more seats noise levels. The rivals' offers were so close that on the final day and burns less fael. The Boeing plane, with a catalog price araund of haggling, lberia stood ready with multiple press releases and $215 million, lists for some $25 million more than the A340. extracted last-minute conoessions in a phone call between the air- Dupuy, whose conference room is decorated with ftamed line's chair and the winning budder. awards for innovative aircraft-financing deals, set his own tough By that point, both suitors felt like theyd been through the wringer. terms on price and performance issues including fuel consump. -With 200 airlines and anly two plane makers, youd think we'd get a tion, reliability, and resale value. He wouldn't divulge prices, but little more respect," said John Leahy, Aitbus's top salesman. people in the aviation market familiar with the deal say he de Airbus, a division of European Aeronautic Defense \& Space manded disoounts excoeding 40 percent. Co., reckoned it had a big edge. It had sold Iberia more than 100 As negotiations began, Dupuy told both companies his rule: planes since 1997. Leahy thought last summer that be might even. Whoever hits its target, wins the order. The race was an. bag the contract with minimal competition. In June he had clinched Bright, who had been appointed Boeing's top airplane sales. a separate deal with lberia for three new Airbus A 340 widebodjes. person in January 2002 , pitched the Boeing 777 as a "revenue maBut Dupuy made Leahy fight for the order-and so enticed chine." He insisted that his plane could earn Theria about $8,000 Boeing to compete more aggressively. Then, "just to make things more per flight than the A340600 because it can hold more seats interesting," Dupuy said, be upped the pressure by going shopping and is cheaper to operate. A burly 50 -year-old West Virginian, for secondhand airplanes. These are spilling onto the market at Bright joined Bocing out of college as an aerospace designer. He cut-rate prices as the airline industry's problems force carriers to knew the new Airbus would slot easily into Iberia's fleet. But he ground older jets with their higher operating costs. also felt that Dupuy's target prioe undervalued his plane. Theria is one of the industry's few highly profitable carriers, At Airbus, Lealy also fumed at Iberia's pricing demands. A thanks to a thorough restructuring before the national carrier was New York City native and the company's highest-ranking Ameriprivatized in early 2001. The world's number 18 in passenger traf- can, he pursues one goal: global domination over Boeing. I.ast fic, with a fleet of 145 planes, it has benefited by flying few routes year he spent 220 days on sales trips. To Iberia, be argued that his plane offered a better irvestment The Airbus was cheaper than the Boeing, and the A.340's four enreturn because the A340 is less expensive to bay and is similar to gines help it operate better in some high-altitude Latin American lberia's other Airbus planes. From a hodgepodge of 11 models in airports. But Iberia managers had decided they could fit 24 more 1997, Iberia now flies five types, and replacing the old 747 s with seats on the Boeing, boosting revenue. And Iberia engineers calA34 s would trim that to four-offering savings on parts, mainte- culated that the 777 would cost 8 peroent less to maintain than the nance, and pilat training. A.340. Maintenance on bug planes costs at least $3 million a year, Even before presenting Airbus's offer, Lealyy had flown to so the sevings would be huge aver the life of a fleet. Madrid in October to make his case. On November 18, he once Unaware of theria's analysis, the Bocing tean arrived in Duagain took a chartered plane for the one hour flight from Airbus puy' office on the morning of December 11 with three bound beadquarters in Toulouse, Franoe, to Madrid. For two hours that selling documents. One contained Boeing's revised ofter, titled evening, be and his team sat with Dapuy and other Theria man- Jmagine the Possibilities... Therias 777 Fleet." Knowing Dupuy agers around a table in Dupuy's office, debating how many seats as a numbers guy, the Boeing team peppered him with data show can fit on a 777 . Those numbers were crucial to the deal because ing passengers would choose Iberia because they prefer the 777 . each seat represents millions of dollars in revenue over the life of Dupuy told the salespeople their price was still too high. a plane but also adds weight and cost. By mid-December, Theria chairman Xabier de Irala was getting Boeing had told Theria that its 777 could hold 30 more seats impatient and wanted a decision by the end of the year. On Decemthan the 350 lberia planned to put on the Airbus plane. Leahy ar- ber 18 , Boeing's Bright flew to Madrid. Over a long lunch, Dupury gued that the Boeing carries at most five more seats. "Get giar- reiterated his price target. antees from Boeing" on the seat count, Leahy prodded the Tberia "If that's your number, let's give this up," Bright said. Talks managers. continued cordially, but the men left doubtful they could close At Boeing, Bright was eager to soften Iberia's pricing demand. the gap. That Friday, December 20, Dupuy told Jheria's board that His account manszer, Steve Aliment, had already made several prices from Airbus and Boeing were still too high, and he would visits to pitch the plane, and in late November, Bright sent him push the used-plane option harder. once again to protest that Iberia didn't appreciate the 777's revenue By the start of the year, Airbus's Lealhy, growing frustrated, ar. potential. Bocing desperately wanted to avoid competing just on ranged a Saturday meeting with Dupuy. On January 4 , the lberia price, so Bright pushed operating cost and comfort. executive interrupted a family skiing holiday in the Pyrenees and On the Airbus side, Leahy also was feeling pressured because drowe two haurs along winding French roads to meet Leahy for a past sales tactic was coming back to baunt him. In 1995, when lunch. lberia was buying 18 smaller A.40s and Dupuy expressed concern Leahy spent four bours trying to cocvince Dupuy and a colabout their future value, Leahy belped seal the deal by guanantee- league that Airbus couldn't offer a better deal. Dupuy arguod that ing him a minimum resale prioe, which kicks in after 2005. If Ibe- Airbus had just given steep discounts to British airline easylet, ria wants to sell them, Airbus must cover any difference between so it should do the same for Iberia. Annoyed, Leahy said media the market price of the used planes and the guaranteed floor price. reports of a 50 percent price cut for easyJet mere nonsense. The guarantee is one of the tools that Leahy has used to boost "You get Boeing to give you a 50 peroent discount and l'll send Airbus's share of world sales to about 50 percent tody from you a bottle of champagne," he told the lheria executives. 20 percent in 1995. Boeing rarely guarantees resale values. Bright was frustrated too. In the first week of January, Dupuy Dupuy had wanted gaarantees because they lower his risk of proposed visiting Seattle, where Bocing builds passenger planes. buying and thus cut his cost of barrowing. What mattered naw Bright's reply= If lberia was unwilling to budge, there was little was that the guarantees also freed him to sell the planes at a good reason to come. So when Dupuy said he would make the 14 -hour price. Early in the competition, be suggested to both Airbus and joumey, Bright was encouraged. Bocing that he might eventually replace all of Tberia's A.340s with On January 14, Dupuy and two colleagues arrived in Seattle. Bocing - and potentially stick Airbus with most of the tab. In the private dining room of Cascadia, a high-end downtown "If we didn t have the guarantees, the position of Airbus mould restaurant, they met for dinner with the Bocing salespeople and be very strong," Dupuy said in an interview. Instead, "we have a Alan Mulally, the chief executive of Baeing's commercial-plane powerful bargaining tool on future prices." division. Dupuy was impressed by Mulally's eagerness and was On December 4, Leahy flew again to Madrid to try to persuade pleased when he urged Bright's team to find a way to close the gap. lberia to close a deal by year's end. Running through a presentz- The next day, the Boeing salesmen offered a new proposal -in. tion in Dupuy's offioc, Leahy and five colleagues ticked off fuel cluding a slightly lawer price, improved financing and better terms and maintenance costs for their plane. They asserted that passen- on spare parts, crew training, and maintenance support from Gengers prefer the plane because it is quieter than the 777 and has no eral Electric Co., the maker of the plane's engines. middle seats in business class. When Dupuy left Seattle on January 16, Bright felt Iberia was Dupuy then rattled Leahy's cage with a new scenario: lberia relenting a bit on price and that Dupuy wanted to "find a way to managers would be flying off next week to look at used Bocing do the deal." Dupuy was also optimistic about striking a deal with 747400 jumbo jets. Singapore Airlines had stopped flying the Boeing. planes and was offering to lease them at bargain prices. Back in Madrid the next day, he raced off to join Iberia's chair- Leahy chided Dupuy, saying that was "like buying a used car," man Irala for a meeting with Leahy and Airbus President Noel where a bargain can easily backfire. Dupuy repliod that sometimes Forgeard. Irala, a bear of a man who is credited with saving Iberia buying used makes sense because it offers the flexibility of other from bankruptcy eight years ago, told the Airbus executives that options. The message: lberia could dump its Airbus flect. Dupuys price target remained firm. When the Airbus men relented Within Iberia, another debate was ending. Dupuy heard from on a few points, Irala yielded a bit too and spelled out Iheria's rebis managers the results of a yearlong analysis of the rival planes. maining targets for Airbus. Forgeard said a deal looked possible. As the meeting broke up, Dupuy was pleased. He felt that of the deal. Airbus had already agreed to most of Dupuy's terms an Boeing and Airbus were digging deep. And no wonder. The world asset guarantees and, with engine maker Rolls-Rayce PLC, agreed air-travel market was sinking deeper, and fears of war in Iraq and to limit Iherias s cost of maintaining the jets. Forgeard asked if reterrorism had slashed global bookings. lenting would guarantee Airbus tho deal. Irala replied yes, pending In the next few days, the sales teams from Boeing and Airbus board approval-and looked over with a grin at Dupuy, who sat each huddled to refine their offers. Both remained about 10 percent nearby with his laptop open. Forgeard acquiesced. Dupuy plagged above Dupay's price targets. Each called him several times daily, the new numbers in his spreadsheet. Airbus had hit its target. pushing for concessions. Dupuy didn't budge. On January 23, That evening, Boeing got a call from Iberia saying the airline he told Iheria's board that both companics could do better. The would soon announce it had agreed to bay nine A340600 s and board seheduled a special meeting for the following Thursiday, taken options to bay three more. Hours later, Boeing posted an its January 30. Web site a statement criticizing lberia's choice as "the easiest deci- Energized by the Seattle meetings, Bright pushed his team sion." Bright said later that he simply couldn't hit Dupuy's num"to go all out to win this bid," and they morked around the clock. bers and "do good business." Bright phoned Dupuy daily from Seattle and oceasionally fielded In the end, Airbus nosed ahead thanks to its planes' lower price his calls at 3:00 a.m., Pacific time. By late January, Bocing had and common design with the rest of therias fleet. By offering cut its price by more than 10 percent after haggling ower engine guarantees on the planes' future value and maintenance costs, plus price with GE and financing with leasing firms. The 777 was now attractive financing terms, Airbus edged out Bocing's aggressive less than 3 peroent above Dupuy's target - so close that Mr. Bright package. The deal's final financial terms remain secret. asked for a gesture of compromise from lberia. At Airbus, Leahy was relieved, but he faced one last slap. IheDupuy was impressed by Bocing's new aggressiveness. But ria's news release crowed about Airbus's price guarantees on the Airbus was also closing the gap so quickly, be said, that be could planes - a detail Leahy considered confidential. Iberia's Dupuy offer no concessions. To Leahy, be talked up Boeing's willingness said he wasn't rubbing it in. But be had, he boasted, won "extraorto deal. "T was just talking to Toby...." Dapay told Leahy dur- dinary conditions." ing several cocversations, referring to Bright. Airbus improved its offer further. QUESTIONS On Wednesday, the day before the deadline, Bocing and Airbus were running about even. In Seattle, Bright threw some clothes 1. Critique the negotiation strategies and tactics of all three key in his briefcase and proposed to Dupuy that he hop on a plane to executives involved: Dupuy, Leahy, and Bright. Madrid. Dupuy said the choice was his, but what really mattered 2. Critique the overall marketing strategies of the two aircraft was the price target. That day, Dupuy told Bright and Leahy that makers as demonstrated in this case. their bosses should call Irala with any final improvements before 3. What were the key factors that ultimately sent the order in the board meeting. Airbus's direction? On Thursday morning, Bright aftered to trim Boeing's price further if Dupuy could guarantee that Boeing would win the deal. 4. Assume that Iberia again is on the market for jet liners. How "I can't control Forgeard," Dupuy replied, referring to tho Airbus should Bright handle a new inquiry? Be explicit. president, who was due to talk sonn with Irala. Bright made the price cut without the concession. "You're very close," Dupuy told him. Sourw: Doniel Micheok, "Boeing and Airtous in Dogftght so Meet Stringenk Terms of still needed two concessions on the financial terms and economics Co finc. via Copyriphit Clowanoe Cemor
