CASE 4-2 Iberia 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. the large Latin American market. They weren't toys. 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 encounter 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 soft-spoken career finance man, first needed Airbus and Boeing may own the jetliner market, with projected to woo Boeing to the table. The U.S. producer had last sold Iberia 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 Bocing considered not even competing. But in late two 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. Once the underdog, Airbus has closed the gap from just four Iberia truly wanted two suppliers, not just Airbus. The Boeing sales chief was skeptical, and he recalled think- years ago-when Boeing built 620 planes to Airbus's 294-and ing at the time, "You're running out of ways to show us." Having this year the European plane maker expects to overtake its U.S. worked as Boeing's chief salesman in Europe, Airbus's home turf, rival. For Boeing, Iberia was a chance to stem the tide. For Airbus, he had heard similar lines from customers who eventually bought Iberia was crucial turf to defend. Airbus planes. So he wondered: "Are we being brought in as a Iberia and a few other airlines are financially healthy enough stalking horse?" to be able to order new planes these days, and they are all driving Yet replacing Iberia's old 747s with new 777s would be Boeing's hard bargains. Enrique Dupuy de Lome, Iberia's chief financial last chance for years to win back Iberia. The argument against Boeing officer and the man who led its search for widebody jets, meant was that an all-Airbus fleet would make Iberia's operations simpler from the start to run a real horse race. "Everything has been struc and cheaper. Still, going all-Airbus might weaken Iberia's hand in tured to maintain tension up to the last 15 minutes," he said. future deals. Airbus would know that the carrier's cost of switching to Throughout the competition, the participants at Iberia, Boeing, Boeing would require big investments in parts and pilot training. and Airbus gave The Wall Street Journal detailed briefings on the In early November, Airbus and Boeing presented initial bids pitches, meetings, and deliberations. The result is a rarity for the on their latest planes. The four-engine Airbus A340-600 is the secretive world of aircraft orders: an inside look at an all-out sales longest plane ever built. Boeing's 777-300ER is the biggest twin- derby with globetrotting executives, huge price tags, and tortuous engine plane. negotiations over everything from scats to maintenance and cabin- The new A340 can fly a bit farther and has more lifting power noise levels. The rivals' offers were so close that on the final day than the 777. The new Boeing plane is lighter, holds more seats of haggling, Iberia stood ready with multiple press releases and and burns less fuel. The Boeing plane, with a catalog price around extracted last-minute concessions in a phone call between the $215 million, lists for some $25 million more than the A340. airline's chair and the winning bidder. Dupuy, whose conference room is decorated with framed By that point, both suitors felt like they'd been through the awards for innovative aircraft-financing deals, set his own tough wringer. "With 200 airlines and only two plane makers, you'd terms on price and performance issues including fuel consump think we'd get a little more respect," said John Leahy, Airbus's top tion, reliability, and resale value. He wouldn't divulge prices, salesman. but people in the aviation market familiar with the deal say he Airbus, a division of European Aeronautic Defense & Space demanded discounts exceeding 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 he might even Whoever hits its target, wins the order. The race was on. 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 Iberia for three new Airbus A340 widebodies. person in January 2002, pitched the Boeing 777 as a "revenue But Dupuy made Leahy fight for the order-and so enticed machine." He insisted that his plane could carn Iberia about $8,000 Boeing to compete more aggressively. Then, "just to make things more per flight than the A340-600 because it can hold more seats interesting," Dupuy said, he 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 Boeing out of college as an acrospace 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 price undervalued his plane. Iberia is one of the industry's few highly profitable carriers, At Airbus, Leahy also fumed at Iberia's pricing demands. thanks to a thorough restructuring before the national carrier was A New York City native and the company's highest-ranking privatized in early 2001. The world's number 18 in passenger traf- American, he pursues one goal: global domination over Boeing. fic, with a fleet of 145 planes, it has benefited by flying few routes Last year he spent 220 days on sales trips.Part 6 Supplementary Material To Iberia, he argued that his plane offered a better investment Within Iberia, another debate was ending. Dupuy heard from return because the A340 is less expensive to buy and is similar to Iberia's other Airbus planes. From a hodge-podge of 11 models in his managers the results of a yearlong analysis of the rival 1997, Iberia now flies five types, and replacing the old 747s with planes. The Airbus was cheaper than the Boeing, and the A340's four engines help it operate better in some high-altitude Latin A340s would trim that to four-offering savings on parts, mainte- American airports. But Iberia managers had decided they could nance, and pilot training. fit 24 more seats on the Boeing, boosting revenue. And Iberia Even before presenting Airbus's offer, Leahy had flown to engineers calculated that the 777 would cost 8 percent less to Madrid in October to make his case. On November 18, he once again took a chartered plane for the one-hour flight from Airbus maintain than the A340. Maintenance on big planes costs at least $3 million a year, so the savings would be huge over the life of a fleet. headquarters in Toulouse, France, to Madrid. For two hours that Unaware of Iberia's analysis, the Boeing team arrived in evening, he and his team sat with Dupuy and other Iberia manag- Dupuy's office on the morning of December 11 with three bound ers around a table in Dupuy's office, debating how many seats can fit on a 777. Those numbers were crucial to the deal because selling documents. One contained Boeing's revised offer, titled "Imagine the Possibilities . . . Iberia's 777 Fleet." Knowing Dupuy cach seat represents millions of dollars in revenue over the life of a plane and also adds weight and cost. as a numbers guy, the Bocing team peppered him with data show- ing passengers would choose Iberia because they prefer the 777. Boeing had told Iberia that its 777 could hold 30 more seats Dupuy told the salespeople their price was still too high. than the 350 Iberia planned to put on the Airbus plane. Leahy By mid-December, Iberia chairman Xabier de Irala was get- argued that the Boeing carries at most five more seats. "Get guar- ing impatient and wanted a decision by the end of the year. On antees from Boeing" on the seat count, Leahy prodded the Iberia December 18, Boeing's Bright flew to Madrid. Over a long lunch, managers. Dupuy reiterated his price target. At Bocing, Bright was eager to soften Iberia's pricing demand. "If that's your number, let's give this up." Bright said. Talks His account manager, Steve Aliment, had already made several visits to pitch the plane, and in late November, Bright sent him continued cordially, but the men left doubtful they could close the once again to protest that Iberia didn't appreciate the 777's revenue gap. That Friday, December 20, Dupuy told Iberia's board that prices from Airbus and Boeing were still too high, and he would potential. Boeing desperately wanted to avoid competing just on push the used-plane option harder. price, so Bright pushed operating cost and comfort. On the Airbus side, Leahy also was feeling pressured because By the start of the year, Airbus's Leahy, growing frustrated, a past sales tactic was coming back to haunt him. In 1995, when arranged a Saturday meeting with Dupuy. On January 4, the Iberia Iberia was buying 18 smaller A340s and Dupuy expressed concern executive interrupted a family skiing holiday in the Pyrenees and drove two hours along winding French roads to meet Leahy for lunch. about their future value, Leahy helped seal the deal by guaran- Leahy spent four hours trying to convince Dupuy and a tecing him a minimum resale price, which kicks in after 2005. If Iberia wants to sell them, Airbus must cover any difference colleague that Airbus couldn't offer a better deal. Dupuy argued that Airbus had just given steep discounts to British airline easyJet, between the market price of the used planes and the guaranteed so it should do the same for Iberia. Annoyed, Leahy said media floor price. The guarantee is one of the tools that Leahy has used to boost reports of a 50 percent price cut for easyJet were nonsense. Airbus's share of world sales to about 50 percent today from "You get Bocing to give you a 50 percent discount and I'll send you a bottle of champagne," he told the Iberia executives. 20 percent in 1995. Boeing rarely guarantees resale values. Dupuy had wanted guarantees because they lower his risk Bright was frustrated too. In the first week of January, Dupuy proposed visiting Seattle, where Boeing builds passenger planes. of buying and thus cut his cost of borrowing. What mattered now was that the guarantees also freed him to sell the planes Bright's reply: If Iberia was unwilling to budge, there was little reason to come. So when Dupuy said he would make the 14-hour at a good price. Early in the competition, he suggested to both Airbus and Boeing that he might eventually replace all of Iberia's journey. Bright was encouraged. A340s with Boeings-and potentially stick Airbus with most of On January 14, Dupuy and two colleagues arrived in Seattle. the tab. In the private dining room of Cascadia, a high-end downtown "If we didn't have the guarantees, the position of Airbus would restaurant, they met for dinner with the Boeing salespeople and be very strong." Dupuy said in an interview. Instead, "we have a Alan Mulally, the chief executive of Boeing's commercial-plane division. Dupuy was impressed by Mulally's eagerness and was powerful bargaining tool on future prices." 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. Iberia to close a deal by year's end. Running through a presenta- The next day, the Boeing salesmen offered a new proposal- tion in Dupuy's office, Leahy and five colleagues ticked off fuel including a slightly lower price, improved financing and better and maintenance costs for their plane. They asserted that passen- terms on spare parts, crew training, and maintenance support from General Electric Co., the maker of the plane's engines. gers prefer the plane because it is quieter than the 777 and has no When Dupuy left Seattle on January 16, Bright felt Iberia was middle seats in business class. Dupuy then rattled Leahy's cage with a new scenario: Iberia relenting a bit on price and that Dupuy wanted to "find a way to do the deal." Dupuy was also optimistic about striking a deal with managers would be flying off next week to look at used Boeing Boeing. 747-400 jumbo jets. Singapore Airlines had stopped flying the planes and was offering to lease them at bargain prices. Back in Madrid the next day, he raced off to join Iberia's chairman Irala for a meeting with Leahy and Airbus President Leahy chided Dupuy, saying that was "like buying a used car," where a bargain can easily backfire. Dupuy replied that sometimes Noel Forgeard. Irala, a bear of a man who is credited with saving buying used makes sense because it offers the flexibility of other Iberia from bankruptcy eight years ago, told the Airbus execu- tives that Dupuy's price target remained firm. When the Airbus options. The message: Iberia could dump its Airbus fleet. men relented on a few points, Irala yielded a bit too and spelledCases 4 Developing Global Marketing Strategies out Iberia's remaining targets for Airbus. Forgeard said a deal economics of the deal. Airbus had already agreed to most of looked possible Dupuy's terms on asset guarantees and, with engine maker As the meeting broke up, Dupuy was pleased. He felt that Rolls-Royce PLC, agreed to limit Iberia's cost of maintaining the Boeing and Airbus were digging deep. And no wonder. The world jets. Forgeard asked if relenting would guarantee Airbus the deal. air-travel market was sinking deeper, and fears of war in Iraq and Irala replied yes, pending board approval-and looked over with terrorism had slashed global bookings. a grin at Dupuy, who sat nearby with his laptop open. Forgeard In the next few days, the sales teams from Boeing and Airbus acquiesced. Dupuy plugged the new numbers in his spreadsheet. each huddled to refine their offers. Both remained about 10 percent Airbus had hit its target. above Dupuy's price targets. Each called him several times daily, That evening, Bocing got a call from Iberia saying the airline pushing for concessions. Dupuy didn't budge. On January 23, would soon announce it had agreed to buy nine A340-600s and he told Iberia's board that both companies could do better. The taken options to buy three more. Hours later, Boeing posted on board scheduled a special meeting for the following Thursday, its website a statement criticizing Iberia's choice as "the easiest January 30. decision." Bright said later that he simply couldn't hit Dupuy's Energized by the Seattle meetings, Bright pushed his team numbers and "do good business." "to go all out to win this bid," and they worked around the clock. In the end, Airbus nosed ahead thanks to its planes' lower price Bright phoned Dupuy daily from Seattle and occasionally fielded and common design with the rest of Iberia's fleet. By offering his calls at 3:00 a.m., Pacific time. By late January, Boeing had guarantees on the planes' future value and maintenance costs, plus cut its price by more than 10 percent after haggling over engine attractive financing terms, Airbus edged out Boeing's aggressive price with GE and financing with leasing firms. The 777 was now less than 3 percent above Dupuy's target-so close that Mr. Bright package. The deal's final financial terms remain secret. At Airbus, Leahy was relieved, but he faced one last slap. asked for a gesture of compromise from Iberia. Iberia's news release crowed about Airbus's price guarantees Dupuy was impressed by Bocing's new aggressiveness. But on the planes-a detail Leahy considered confidential. Iberia's Airbus was also closing the gap so quickly, he said, that he could Dupuy said he wasn't rubbing it in. But he had, he boasted, won offer no concessions. To Leahy, he talked up Boeing's willingness "extraordinary conditions." to deal. "I was just talking to Toby . . .," Dupuy told Leahy dur- ing several conversations, referring to Bright. Airbus improved its offer further. QUESTIONS On Wednesday, the day before the deadline, Boeing 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 offered to trim Boeing's price 4. Assume that Iberia again is on the market for jet liners. How further if Dupuy could guarantee that Boeing would win the deal. should Bright handle a new inquiry? Be explicit. "I can't control Forgeard," Dupuy replied, referring to the Airbus president, who was due to talk soon with Irala. Bright made the price cut without the concession. "You're very close," Dupuy told him. Source: Daniel Michaels, "Boeing and Airbus in Dogfight to Meet Stringent Terms Later, Forgeard got on the phone with Iberia's Irala, who of Theria's Executives," The Wall Street Journal Europe, March 10, 2003, p. Al. said he still needed two concessions on the financial terms and Copyright 2003 by Dow Jones & Co. Inc. Reproduced with permission of Dow Jones & Co. Inc. via Copyright Clearance Center