(FORTUNE Magazine) – Forget Ford vs. Chevy, Pepsi vs. Coke, or Nokia vs. Motorola. The most intense corporate rivalry now, with the biggest prize, is the one between Airbus and Boeing. "Feast or famine" doesn't begin to describe it. Every plane that Boeing sells is one that Airbus doesn't, and vice versa. Since airliners sell for $50 million and up--and total deliveries are expected to reach $33 billion this year alone--the stakes are huge. Losers get nothing.

So it will be with more than the usual exuberance that Airbus's 48,500 employees will celebrate the end of 2003. When the books close on Dec. 31, the company that began in 1970 as an unwieldy confederation of four European aerospace firms will, for the first time, replace 89-year-old Boeing as the world's largest manufacturer of commercial aircraft. Airbus is on course to deliver 300 new airplanes this year, vs. 280 or so by Boeing. As recently as 1998, Boeing delivered more than twice as many planes (see chart).

The ascension of Airbus is not a historical blip, like the Chicago Cubs and the Boston Red Sox's almost facing off in the World Series this year. The $20.3 billion company has an order backlog of 1,500 planes, 400 more than Boeing. And Airbus is just about as profitable, with an operating return on sales last year of 7%, vs. 7.1% for Boeing. Airbus is succeeding in part by doing to much older rivals what upstart airlines have been doing to established carriers: taking advantage of youth to be nimble and different. Airbus began with a clean slate, unhindered by old ways of doing business. It created a new product line, with modern features, made in new factories. Boeing was wedded to an arcane production system dating to World War II. Worse, it couldn't match Airbus's advances--such as wider fuselages, cockpits designed for use in more than one aircraft, and electrical rather than mechanical flight controls--without redesigning its aircraft at prohibitive cost.

Those features have helped Airbus win customers like New York--based JetBlue, which plans to order as many as 115 additional Airbus 320s to go with the 41 it is flying and 46 others on order. JetBlue CEO David Neeleman says he likes Airbus planes because they are "safe, economical, and comfortable." Although JetBlue is staffed with former employees from Boeing as well as former executives from airlines that fly Boeings, Neeleman says he was won over by the forthright negotiating style and competitive ardor of the European firm.

If all this doesn't put to rest lingering questions about which company is the world leader in commercial aviation, an event scheduled for the first quarter of 2005 should. That is when Airbus will send the A380 down the runway for its first flight. The largest commercial airplane in history, the A380 is designed to carry 555 passengers--35% more than Boeing's 747--on two full-length decks. It will also be the most economical plane in the air, with a cost of 2.5 cents per seat-mile. That, says Airbus, is 20% less than Boeing's flagship 747, whose original version started flying in 1969.

Beating Boeing won't help Airbus solve the industry's most pressing problem: the financial health of its customers. Battered for the past two years by terrorism, war, recession, and SARS, traffic on the world's airlines has shrunk to 1999 levels. Travelers increasingly search for the cheapest possible seats, which is easier than ever to do, thanks to the Internet. "The world airline industry managed to lose almost $30 billion since 2001, even with federal subsidies provided in the aftermath of Sept. 11," writes Richard Aboulafia, vice president of analysis at the Virginia-based Teal Group, an aviation consultant.

Airbus is nevertheless optimistic. President and CEO Noel Forgeard predicts that deliveries of new airplanes will improve beginning in 2005. "We are in a state of transition to a clear trend upwards," he said in an interview in his sunny but spartan office at Airbus headquarters in Toulouse, France. "Traffic is recovering, but it is still very low. I see a very cautious posture for most airlines until they rebuild financial strength."

One big surprise for Forgeard has been which companies are carrying the traffic. Traditional hub-based airlines like American and Air France are hunkered down, while point-to-point, low-cost carriers--Southwest, Frontier, AirTran, and JetBlue in the U.S. and Ryanair and EasyJet in Europe--are picking up passengers. Budget carriers already hold more than 20% of the U.S. market, quadruple their share in 1990. Forgeard finds the trend unsettling, since the majors are more likely to buy large, high-margin planes like the A380. "Two years ago I believed in low-cost carriers, but I wouldn't have believed they would take such market share," he says. "But like the dot-coms, they will not grow to the sky." He expects growth at the low-cost airlines to slow as they saturate their natural markets and are forced to compete over longer, international routes.

The emergence of the low-cost carriers has only inflamed the Airbus-Boeing rivalry. In an era of intense competition, the airlines have become expert at pitting the two companies against each other to get the best deal. Aboulafia estimates that Airbus and Boeing discount their catalog prices by 40% or more. After EasyJet decided last year that it needed 125 airplanes--which is about 40% of either manufacturer's annual production--plus options for another 125, Airbus won the bidding amid speculation that it took a loss to do so--a charge the company denies. "It is cash-positive, and it is a profitable deal," says executive vice president John Leahy, the American who is Airbus's top salesman.

To shore up margins in this environment, Forgeard said he would cut 10% from Airbus's $17.4 billion cost base by 2006. He also insisted on reducing the time required to assemble each plane--from nine months to six months for the A320, for example. It was a characteristically decisive response. While the unassuming Forgeard appears to run Airbus with a quip and a smile, he has a steel fist. In 2001 he replaced the company's unwieldy confederation of owners in Germany, Spain, Britain, and France with a streamlined structure. Today Airbus is 80% owned by EADS, the publicly traded European Aeronautic Defense & Space company, and 20% owned by British Aerospace. This more flexible arrangement enabled Airbus to raise the $10.8 billion it needed to begin the A380 program. Of the total, Airbus put up a little less than half ($5.1 billion), European governments almost a quarter, and suppliers the rest.

In its current form, Airbus is less than three years old and therefore lacks a long-lived corporate culture. It makes up for that by cultivating a singular enemy. None of the traditional courtesies given to a respected rival seem to apply to Boeing. The Seattle planemaker is frequently dissed in Toulouse; Airbus executives rarely finish a conversation without directing one pointed remark or another at their competitor.

Airbus, for example, takes pride in making just airplanes, unlike Boeing, which has diversified into defense and space systems; these operations now make up almost half the company's $54.1 billion in revenues. "Diversification was extremely demoralizing for Boeing employees," says Forgeard. Not so, says Boeing's Randy Baseler, vice president of marketing: "What affects morale right now is that we are in a down cycle." Airbus executives also deride Boeing for using its cash to buy back expensive stock, as many U.S. companies did until the fourth quarter of 2001. EADS chairman Philippe Camus figures that Airbus has put 8% to 9% of its revenues into R&D for the past several years, vs. just 3% to 3.5% at Boeing (a figure Boeing does not dispute).

Airbus says Boeing's low rate of investment means that its fleet will be largely uncompetitive once the A380 arrives. Since 1988, Boeing has introduced only two new airplanes, the long-range 777 and the 737 Next Generation, a single-aisle plane. Airbus has launched four. "Boeing hasn't been very dynamic in the last few years," says Forgeard. What is the difference between Boeing and Airbus? "Innovation," says Camus flatly.

Although Boeing considered several new projects, including the fast-flying Sonic Cruiser and a stretch version of the 747, it did not put any into production. Airbus employees call those false starts "paper airplanes." Boeing's standard retort is that it was unable to develop a business case for the airplanes that would have repaid its investment. "Model for model, we've built more new airplanes than Airbus since 1990," says Baseler. "It just depends on how you want to count them."

Boeing's latest effort is the 7E7, a 200-to 250-seat twin-aisle plane. Built largely of lightweight carbon fiber, it is designed to fly with 20% less fuel and to cost 10% less to operate than today's equivalents. Boeing is thrilled with its new baby; Airbus execs are dismissive and maintain that the gains in operating costs are trivial compared with the A330-200. "It is not going to scorch world markets," says Airbus market strategist Adam Brown. "It is not a very impressive airplane." Less partisan observers are waiting until the plane actually flies before passing judgment.

What makes the Boeing-Airbus rivalry so compelling is that it's not just about whose order book is bigger. It is, fundamentally, about who sees the future correctly. Boeing predicts a growing preference for smaller, speedier airplanes that fly point to point with greater frequency. That is the market the 7E7 is designed to reach. Airbus agrees that this kind of fragmentation will occur, and says its 150-seat A320 fits the bill. But it also sees more demand for large planes that use relatively less fuel, are cheaper to operate, reduce airport congestion, and diminish environmental stresses. Airbus predicts that airlines will buy 1,144 superjumbos (planes with more than 500 seats) by 2020, and it hopes to sell 750 of them. Boeing forecasts a need for just 320 superjumbos over the next two decades. The company that is right will be the dominant airplane maker for decades.

Confident in its predictive powers, Airbus created the A380. The plane is scheduled to be delivered to its first customer, Singapore Airlines, in the second quarter of 2006. Launching the world's largest, most expensive airplane (cost: about $286 million) into the teeth of a travel depression has been stressful. Yet Airbus has already booked 129 orders, more than half the number it needs to break even. Forgeard insists that there have been no cut-rate deals to draw in early buyers. And since Airbus writes off development costs in the year in which they occur, profits could be booked soon after delivery.

The A380 is best suited to flying large numbers of passengers on long routes, such as across the Pacific. United and Northwest would be logical customers, but both companies are struggling. Other major carriers, like British Airways and Japan Airlines, are also sitting on their wallets. Still, Forgeard is sanguine. "It is not a major concern," he says. "The big wave of orders will come when it flies." He estimates that the A380's top ten customers will need 400 of them over the next 20 years.

The largest A380 customer is one that wasn't even on the list when the program began in 2000: Emirates Airlines, which operates out of a new airport in Dubai. In an effort to establish itself as a major carrier between Europe and Asia, Emirates used its petrodollars to order 41 planes. The next-biggest customer, Lufthansa, requested 15. The only American customer so far is FedEx, which ordered ten planes to fly freight.

The A380 gives new meaning to the word "cramped." Flying coach will be like sitting in a packed movie house with a very low ceiling. There will be 35 rows of ten-across seating. Airbus insists the plane will occupy no more airport space than a 747, park at the same jetways, and take off and land on the same runways. But some runways and terminals need to be refurbished, so Airbus is working with 16 priority airports that will spend $70 million to $80 million each to get ready for the plane. Among them: Tokyo-Narita, Sydney, Singapore, Hong Kong, Dubai, Frankfurt, Paris, and London's Heathrow. Airbus has designed the plane to use three jetways--two for the main deck, one for the upper deck--and envisions a day when first-class and business passengers will board directly from their lounges. For now, however, most airports will use only two jetways.

The A380 is on schedule and will meet its budget, says Charles Champion, the program executive. That is remarkable, because assembling the A380 is a technological feat of mind-warping complexity that involves engineering centers in four countries and the most cumbersome logistics imaginable. Airbus builds pieces of the plane in modules at different locations, then assembles the pieces at one central point. That allows the company to use specialized technicians; it also helps satisfy political considerations by distributing the work among vendors in different countries. (Boeing plans to use a similar strategy for the 7E7.)

Though no A380 is finished yet, the assembly goes something like this: Employees at an Airbus facility in northern Wales use 750,000 bolts, rivets, and other fasteners to attach pieces of the wings. The fuel system and landing gear arrive on trucks from another Airbus facility in Bristol, 115 miles away. Once the components are joined, workers transport the completed structures to a port on the Irish Sea and load them onto specially designed freight carriers for a five-day journey to Bordeaux.

At Bordeaux the wings take another water voyage--12 hours on the Garonne River aboard barges equipped with a variable ballast system that enables the wings to pass beneath an 18th-century bridge. "We had to protect the bridge regardless of what happened to the airplane," says Champion, an intense 48-year-old French engineer. At the end of the river cruise, the wings are hoisted aboard specially designed trucks for a three-day drive to Toulouse. The route through 13 villages and towns has been computer mapped; to minimize disruptions, the trucks travel only at night.

The wings meet other sections of the plane in Toulouse, where everything is assembled in a vast new building--the largest industrial structure in Europe--that is still under construction. A quarter-mile in length, it contains eight airplane bays: four for production, the others for service and maintenance. After the engines are attached to the wings, and the wings and tail attached to the fuselage, the still-raw airplane is flown to another Airbus facility in Hamburg. There the cabin is fitted, the seats installed, and the plane painted. Finally, the finished product is flown back to Toulouse for certification and delivery.

Airbus has other variations of the A380 on the drawing board, including a super-superjumbo that seats 650 people. In the meantime, Forgeard has his eye on the lucrative U.S. military market. Historically, politics has kept foreign companies out of the U.S. defense business, but Forgeard believes the market will open up because U.S. companies want a similar opportunity to sell to European military contractors. He is already devising a scheme to sell aerial refueling tankers by building raw planes in Europe and then sending them to the U.S. for outfitting by an American contractor.

Forgeard is delighted that Airbus has overtaken Boeing, but he has no intention of running up the score. "We do not pursue any goal of domination," he says. "The duopoly is stable. We do not chase market share per se." Having 50% to 60% of the business is fine with him. Any more would invite political retaliation. And despite his company's No. 1 position, Forgeard wants to keep what he calls the "mentality of a challenger."

The folks at Airbus appear almost wistful about their triumph because it comes at a time when their rival seems asleep at the switch. Airbus has spent so much energy getting to the top, and now that it has, Boeing simply won't acknowledge it. The U.S. aerospace giant has, in fact, long treated Airbus as an arriviste artificially supported by government subsidies. Although it's true that Airbus never would have gotten off the ground without massive financial backing from European governments, it's also true that Boeing gets a steady supply of treats from Washington, such as a controversial $21 billion air tanker lease deal that is under review. The larger truth, though, is that Airbus is building more planes that airlines want to buy than Boeing is.

For both companies, the biggest challenge is the troubling financial condition of so many of their customers. The number of orders for new planes has slipped dramatically in the past few years, and this year it will fall below the number of deliveries. As aviation navigates its way through this turbulent time, look for more dogfights between Airbus and Boeing.

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