By Alex Taylor III

(FORTUNE Magazine) – THE OPENING OF THE PARIS AIR SHOW in mid-June could signal the emergence of a new top gun: Boeing. Yes, after years of scandal, both sexual and ethical, along with a general corporate paralysis, the aerospace giant may finally be righting itself. The popularity of its new 787 twin-aisle airliner has helped Boeing open up a big lead over Airbus in orders this year, with 245 planes sold vs. 145. Less noticed is that Boeing, currently led by interim CEO James Bell, has maneuvered Airbus into a strategic cul-de-sac that could handicap the European consortium for years.

The reason is that the Airbus A380 is beginning to look like the aviation equivalent of Moby Dick. Just getting the 555-seat plane off the ground, as Airbus did in late April, was an achievement, and the plane appears to be on schedule for delivery in the second half of 2006 to the first customer, Singapore Airlines (153 others have been ordered). But Boeing smartly avoided competing with Airbus's $12 billion baby and instead developed the smaller 787. Though it won't begin service till 2008, Boeing has already logged 261 orders. With a list price of $240 million, "the market demand for an airplane the size of the A380 is 340 to 400 planes," says Denver-based aviation consultant Michael Boyd. "Boeing's building an airliner that fits an existing niche--replacement for 1,500 to 2,000 airliners in the 175- to 250-seat range"--at roughly half the price of an A380.

Boeing's rise represents the latest phase of an epic dispute between the two companies about what airline customers want. Airbus has long believed that high-density routes, overcrowded airports, and limited travel budgets create demand for giant haulers like the A380. Boeing is betting passengers will opt for more frequent trips in smaller planes that fly direct between less-traveled city pairs like Seattle--Seoul. Instead of reaching for economies of scale, it is developing advanced materials and engines that reduce weight and fuel costs.

Smaller planes also give Boeing more flexibility. Both Boeing and Airbus forecast sales of some 2,600 planes, with capacity between 300 and 450 passengers, over the next 20 years. But Airbus left that range all but unprotected while it worked on the A380; meanwhile, Boeing sells two planes in that segment and is planning a third.

For years Airbus has taken shots at Boeing for its reluctance to develop new airplanes and its less than aggressive sales force. Now Boeing is firing back. In April the company released a report to a pair of journalists in Britain that it had commissioned from independent analysts. The report says that Airbus is heavily discounting A380s, selling planes that cost $199 million to produce (in 2001 U.S. dollars) for as little as $130 million in an effort to reach its sales targets. Result: negative cash flow of more than $8 billion on the plane well into the next decade. An Airbus spokesman calls the study "flawed in its assumptions."

The newly aggressive Boeing is surprising the industry. "They are finally doing something after taking a ten-year holiday," says Teal Group vice president Richard Aboulafia, who expects Boeing to pass Airbus in production next year. Analysts expect Boeing to soon announce plans to modernize the 35-year-old 747 with new engines, enabling it to compete with the low seat-mile costs of the A380, with lower trip costs on less-popular flights. Next could come a carbon-fiber version of the single-aisle 737, the most popular jet airliner ever. Boeing expects sales of 737-sized airplanes to reach more than 14,000 in the next 20 years--60% of the total market. That should be a lot more lucrative than trying to harpoon another white whale. -- Alex Taylor III