BOEING AGAINST AIRBUS

Abdul Ruhulla, IFF 2-2

Financial University under the Government of the Russian Federation

BackgroundAirbus and Boeing have been involved in a fierce duopoly in the large jet airliner market since the 1990s. Airbus began as a European consortium while the American Boeing absorbed its former arch-rival, McDonnell Douglas in a 1997 merger

Manufacturers like Lockheed Martin, Convair and Fairchild Aircraft in the United States and British Aerospace and Fokker in Europe withdrew from the market as they were no longer in a position to compete effectively

Over the years, competition has been intense; each company regularly accuses the other of receiving unfair state aid from their respective governments.

Market Share• The competition between Airbus and Boeing has been characterized as a duopoly in the

large jet airline market since the 1990s.• In the 10 years from 2004 to 2013, Airbus has received 8,933 orders while delivering 4,824,

and Boeing has received 8,428 orders while delivering 4,458.• In the fiscal year of 2010,Boeing generated almost 64.31 billion US dollar in revenue

compare to 45.7 billion euros of Airbus.• And in 2014 Boeing manage to collect 90.8 Billion dollar revenue and Airbus collected

around 60 billion euros.

Airbus vs. Boeing: Net Orders Per Year

Annual Net Orders Received and Delivered by Airbus and Boeing

Reasons for DuopolyPrime Reason: Barriers to Entry

Barriers to entry exist for a number of reasons, but the end result is that there is limited entry into a market or industry because the hurdles that must be overcome are great, and therefore firms that are already part of the industry or market have an advantage and are insulated from competition from new entrants.

• Financing: The cost to design, prototype, build, and deliver a new LCA is immense. Boeing 777 the development costs were estimated to be $10 12 billon. The new ‐Airbus A380 had development costs of €12 billion ($16.2 billion).

• Engineering: Aircraft of the size produced by Boeing and Airbus require significant engineering experience and know how in order to successfully design, test, and ‐produce a viable jetliner. Boeing has only designed eight planes from scratch since they started building jetliners in 1955. Airbus has only designed four since 1969.

Barriers to Entry cont’d

• Technology: Commercial jetliners are behind military aircraft and space flight in terms of the volume of technological developments. It is how quickly, efficiently, quietly, comfortably, and safely a plane reaches its destination that matters which can be achieved only through technological advancement. New entrants can only expect to be competitive if they are able to produce and bring to market technology that improves upon the existing jetliners.

• Production & Logistics: Every jetliner contains lakhs of parts, ranging in size from rivets to seats to overhead compartments. These components must be manufactured and brought together into one aircraft in one place. The primary reason for the collapse of Douglas Aircraft was their inability to manage their supply chain and bring together airplanes at a reasonable cost Boeing’s trouble in the late 1980’s was majorly due to improper supply chain.

Porter’s Five Forces

Model

Competitive Rivalry

Threat of New

Entrants

Bargaining Power of Suppliers

Threat of Substitutes

Bargaining Power of

Buyers

Threat of New Entrants : Low• Humongous costs involved in setting up R&D.• Scarcity of Resources (Technological resources).• Capital intensive industry.• High loyalty to existing brands. i.e., Airbus and Boeing• Profits start to realize after a long time.

Bargaining Power of Buyers: Low• Limited choice for buyers as Boeing & Airbus together, hold nearly the entire airplane market.• The cost involved in switching airplanes (company) is very high due to aftermarket support/service

costs.

Threat of Substitutes : Low• No alternative for quick long distance journey. • Future requirements of aircrafts will only increase demand.• However for regional carriers focused on short distance transportation, threat is little bit higher. They

must focus on convenience, personal preference, time and money

Porter’s Five Forces for Boeing Vs. Airbus (Airplane Industry)

Porter’s Five Forces for Boeing Vs. Airbus (Airplane Industry)Bargaining Power of Suppliers : High• The airplane manufacture business is majorly dominated by Boeing & Airbus. So there’s no cutthroat

competition and hence these companies have upper hand over the buyers.• Also, the chances of carriers, opting for vertical integration are very unlikely.

Competitive Rivalry: High• Bidding for a limited, but very high value of contracts (aircraft orders) witness a very cutthroat

competition between these two rivals• Fuel efficient engines, cheaper maintenance, prompt services, pricing, etc. are the factors on which

these companies compete.

Strategies• Airbus’ Differentiation Strategy – ‘Hub-and-Spoke-Concept’• Boeing’s Differentiation Strategy – ‘Direct Point-to-Point-Traffic’• In duopolistic markets companies are assumed to avoid direct price wars and try to use

non-price methods to differentiate their products such as engaging in technological ‘leapfrogging’ by bypassing each others’ inventions.

• So the competitive strategy used by Boeing & Airbus, is totally based on product differentiation concept. Differentiating factors are:

1. Shape

2. Fuel Efficiency

3. Engine

4. Internal Design / Facilities

5. Cockpit Commonality

Shape• The 787 Dreamliner, developed by Boeing,

is a long-range, midsized, wide-body, twin-engine passenger airliner.

• In 2006 Airbus began to consider a wider body, a larger wing, more powerful engines, a higher cruise speed and many other changes to satisfy the airlines. So, Airbus presented the A350 XWB with entirely new design.

• The new wider Airbus A350 XWB body will enable the plane to accommodate slightly wider economy seats than its rival. The new design maximizes usable volume.

Shape

Fuel Efficiency• With the price of oil continuing to rise,

airlines are in continuous pressure in terms of their fuel costs. This in turn it has become an incentive for the aircraft manufacturers to develop the most fuel efficient planes possible.

• Airbus originally had picked up the banner of fuel efficiency as a means of gaining an edge over Boeing. As Airbus matured and gained success, they became risk averse. ‐Unfortunately, fuel efficiency is a relative to time. That which was considered ‘fuel efficient’ a decade ago may now be a ‘gas guzzler’ today.

Engine

• As the era progressed, innovations in engine design earned a substantial chunk of competitive advantage.

• Boeing with it’s high‐bypass turbofan engines gained an edge over Airbus, after losing out to Airbus for a short while.

Internal Design / FacilitiesWhen airlines can choose between more seats and a gym/cocktail lounge, out goes the gym and cocktail lounge.Boeing focused on more seats in 787 Dreamliner while Airbus focused on more luxurious amenities in A380.Carriers ordered 159 A380s, and almost twice as many 787s.

Cockpit Commonality• In 1978 when Airbus was

preparing to launch the development of a new LCA, it had only one product, the A300. At the same period in time, Boeing had a diverse product set ranging from the 727, 737, 757, 767, and 747.

• Airbus had only two offerings so it differentiated on the basis of cockpit commonality. Each of Boeing’s planes had different cockpit configurations.

• Airbus saw an opportunity to configure common cockpits For airlines, this meant increased flexibility and decreased training costs.

Challenges to Duopoly• The global civil aerospace

market has long been a classic duopoly. The sector has been dominated by European company Airbus and the US giant Boeing, with only limited competition in the regional markets.

• The Major Competitors are:• Bombardier Cseries (Canada)• COMAC C919 (China)• Embraer (Brazil)• Sukhoi Superjet 100 (Russia)• COMAC ARJ21 (China)

• Bombardier Aerospace is a division of Bombardier Inc. The company competes with Brazilian rival Embraer for the title of the third largest aircraft manufacturer after Boeing and Airbus. It is headquartered in Dorval, Quebec, Canada.

• Bombardier is a global transportation company that is present in over 60 countries on 5 continents. They operate two businesses: Aerospace and Rail Transportation.

• It's high-performance aircraft and services are seen in a number of different markets including, Business aircraft, Commercial aircraft, Amphibious aircraft.

• Revenue generated by bombardier in year 2014 was $9.6 billion.• Number of employees in the company were 38350 in the year 2014.

• Embraer S.A. is a Brazilian aerospace conglomerate that produces commercial, military, executive and agricultural aircraft and provides aeronautical services. It is headquartered São José dos Campos, São Paulo State.

• The company currently competes internationally with Canadian rival Bombardier for the title of third-largest airplane maker after Airbus and Boeing.

• Embraer has become one of the main aircraft manufacturers in the world by focusing on specific market segments with high growth potential in commercial, defense, and executive aviation.

• Revenue generated in 2013 was $5.7 billion.• Number of employees in the company were 19116 in the year 2014.

Worldwide indicators

Outsourcing•Airbus and Boeing increased global outsourcing to Japan, China, India, Middle East, Eastern Europe. These are growing markets and hence profitable.•Large Asian and middle eastern carriers are now major customers (Singapore Airlines, Emirates)

Airbus Outsourcing

• New comer in Japan and China• Difficulty getting orders from Japanese Airlines but has contracted work

with Japanese Suppliers• Problem - Euro Vs. Dollar - Dollar weaker, manufacturing costs in Euros

but planes sold in dollars.• China - Sales jumped from 56-219 aircrafts in 2005, overtook Boeing• Tianjin - First assembly plant outside Europe• Plan to expand production to India - Presence of engineering talent• Production of A320s in China - Need to be close to large markets• Production of aircraft parts to Maghreb - Low cost labour

Boeing Outsourcing• Outsources to multiple places and producers hence parts not perfect fits. • Complicated supply chain• Outsourcing of new innovation not existing technology• Outsourced wing of 787 to Japanese Heavies- Mitsubishi Heavy Industries, Fuji

Heavy Industries, Kawasaki Heavy Industries.• Boeing lacked know-how about plane construction earlier • Improved supply chain management by ensuring own employees on the ground

worked with suppliers• Tiered structure of suppliers - tier 1 assembled parts made by tier 2 and 3- tier 1

did not have enough know how to assemble, Boeing forced to buy one of the tier 1 suppliers (Vought Aircraft industries) to give expertise to other suppliers

• Poor design of contractual agreement

Thank you for attention

Referenceshttp://www.slideshare.net/arjunparekh/duopoly-boeing-versus-airbus?qid=90919b4f-b341-4d82-8f75-3474f9f15e57&v=&b=&from_search=16