Business strategy

BOEING vs AIRBUS

SUBMITTED TO: SUBMITTED BY: Group VII, Finance “A”

Prof. Ray Titus Ankit Nagelia

Alliance Business School Arafat Mullick

Avneet Arora

Chandan Jain

Shushma D’lima

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INTRODUCTION
In today's marketplace, distinct differences in the way competitive products work have become
increasingly rare. But functional product differentiation is exactly what the rivalry between the
Airbus and the Boeing.

The battle between Boeing and Airbus is one with long tradition and one that never loses on its
interestingness. The airplane manufacturer industry is one that requires the companies to be
flamboyant, adaptable and aggressive.

The Airliner Wars is a result of the two companies' domination of the large jet airliner market
since the 1990s, which is itself a consequence of numerous corporate failures and mergers within
the global aerospace industry over the years.

In 2003-2004, for the first time in the history of commercial aircraft manufacturing, Airbus
delivered a larger number of planes than Boeing, and since 2000 Airbus managed to obtain a
larger number of aircraft orders than Boeing.

These two airplane manufacturers are always swapping for first place in this highly competitive,
and expensive, industry. The two firms are accenting two niche markets with a pair of flagship
products, neither of which are in direct competition with each other. This will allow for the
firms to stave off price competition in the short term by differentiating product lines, which is
desirable given the recent increase in buyer power gained by low cost airlines.

INDUSTRY ANALYSIS
Porter’s Five Forces Model

Threat of New Entrants

The Commercial aircraft manufacturing sector

is capital intensive and highly cyclical.
Commercial airframe manufacturers tend to be
in the business for the long-haul. Years of
investment are required before any profits can
be seen. Launch investment costs typically fall
into three categories: 40% development, 20%
tooling, and 40% for work-in process and
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overhead costs. Manufacturers try to book as many launch orders as possible to break even, but
more often than not, it does not happen. Manufactures have to sell 400 units to recuperate launch
costs and it takes 12 to 14 years with a 25% gross margin. There are significant learning effects
in aircraft production. On average, unit costs fall by about 20% each time cumulative output of a
specific model is doubled. The assembly of aircraft is a enormously complex process. Several
times, problems with the supply of critical components have held up production schedules.
Airbus receives direct government subsidies to its aircraft programs whereas after acquiring
McDonnell Douglas Corporation Boeing started receiving indirect subsidies from US
government.

Rivalry among the Industry

The analysis of the large commercial aircraft industry shows that there intense competition
between Airbus and Boeing. Scattered around the world are scores of other small passenger
63aircraft manufacturers such as ATR in Toulouse, France and Gulfstream in Georgia, US. Like
the high flyers, small aircraft manufacturers are involved in a global business. The industry is
extremely concentrated.

Bargaining power of buyers

Commercial airlines usually buy big jets under long-term fixed price contracts. There are stiff
penalties for the jet manufacturers if they do not deliver on time. Long term contracts favor the
buyer; this allows for the transfer of the financial risk from the buyer to the seller.

Due to increased competition the real yield is decreased for the airlines and that’s why they are
focusing on reducing their operating cost. This is a buyers’ market, the airlines know it, and they
put additional pressures on manufacturers to reduce prices.

Demands of commercial jet aircraft tends to reflect the financial health of the commercial airline
which is prone to boom and bust cycle. E.g. 2001-2005 downturn, the industry was incurring
loss. Though these two companies incurred loss in 2006, it was better than 2005 as the economy
started recovering.

Bargaining Power of Suppliers

The major suppliers can be split in two different groups, based on their relative bargaining
power. Engine manufacturers represent the single most significant group of suppliers and it can
be assumed that their bargaining power is going to significantly increase as they undergo
consolidation. However, this power is somewhat negated since airlines can enter into separate
negotiations with the engine suppliers to determine the choice of the engine for their airplanes.

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The planes are usually designed for more than one engine type. On the other hand, the required
fuel efficiencies, increased reliability needs (especially for twin engine transatlantic wide
bodies), and greater power output for the new large body aircraft require aircraft manufacturers
to enter in joint development programs.

Similar to what defense contractors are facing, avionics and material suppliers are also dealing
with a shrinking military market and trying to find commercial application for their products.
Therefore, the bargaining powers of these companies can be considered low as they compete for
market share in the commercial sector.

Threat of Substitutes

A substitute performs the same or a similar function as an industry’s product by a different

means. E.g. Videoconferencing is a substitute for travel. Substitutes are always present, but they
are easy to overlook because they may appear to be very different from the industry’s product:
To aircraft ships can be a substitute but as they are entirely different product thee threat of
substitute is very low in this industry.

AIRBUS
SWOT Analysis

“Setting the standards” This philosophy is used by everyone at Airbus since 1967 and continues
to hold true to this day. By “Setting the standards” they mean anticipating the market, offering
innovation and greater value, focusing on passenger comfort and creating a true family of
aircraft. Airbus, the first truly European company, is one of only two aircraft manufacturers in
the market for large commercial airliners. The central office for Airbus is located in Toulouse,
France.
Airbus has comparatively less projections over next 20 years. Airbus believes large aircrafts will
be robust. Traffic between major airlines hubs has grown faster than traffic between other city
pairs & at the same time it is assumed that urban concentration will continue to grow.

Strengths

i. Corporate Culture: Airbus has a decentralized organizational structure

ii. Marketing: Dominant market share, and direct sales support and tax benefit.
iii. Finance: Growth in sales and profit was the result of two developments: rigorous cost-
cutting measures and substantial cost savings.
iv. Research and Development: Technology innovation, product diversification, and
customer satisfaction.

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 v. Product Diversification: Airbus has broadened its scope and product range by applying
its expertise to the military market, extending its portfolio of freighter aircraft.
vi. Direct Subsidies from government: Airbus receives direct government subsidies to its
aircraft programs.
vii. Human Resources: Airbus has relatively lees employees per aircraft (143 Vs 211
employees per aircraft) due to availability of skilled workforce.

Weaknesses

i. Finance: High maintenance cost, product design cost and development cost have caused
increased long term debt for the company. Fluctuation in currency also affects the cost of
production due to decentralized manufacturing.
ii. Time Consuming: Decision making is very time consuming.

Threats

i. Price of the fuel: The fuel cost has a greater impact on the sales of aircrafts. It needs to
produce fuel efficient planes.

ii. Government Regulation: If the government stops subsidizing the company, it becomes
a trouble. As they have increased long term debts, it becomes difficult for them to
continue with the production.

Opportunities

i. More growth in defense: Airbus is into the production of commercial aircrafts and
defense seems to be unexplored field. So, it has more opportunities in that field.

ii. Favorable air traffic growth: The growth in air traffic gives a positive signal. Also, the
unexplored market like Asia has high chances of air traffic growth. Based on this forecasts,
the sales may go high.

iii. New Technology demands: The demand for new technology in production and also in
operating in flights has opportunities.

PEST ANALYSIS

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Political
Since Airbus is a European consortium of French, German, Spanish, and U.K. companies, the
EU has a huge stake in seeing Airbus remain a successful corporation. Airbus is support through
tax breaks, financing, loan guarantees, and R&D support. The assistance is given because Airbus
is a huge generator of economic activities such as jobs, technology development, ancillary
companies, and spin-offs. The European Association of Aerospace Industries (AECMA) reports
at least 435,000 direct jobs in Europe’s aerospace sector in 2001 with over 1.2 million total jobs
supported directly or indirectly by the industry. Airbus’ compensation of huge subsides from the
European Union has strain relationships between the US and EU. The US government and
Boeing consider the subsidies unfair and no longer necessary since Airbus has become the
leading aircraft manufacturer in the world. They considered the introduction of the A380 to be
proof that Airbus can stand on its own without any government aid. However, Airbus and
European governments have response that the US government does the same with its subsiding
of Boeing. In addition, the EU is challenging a $3.2 billion tax break that the state of Washington
has promised Boeing and its suppliers. However, Airbus’ launch plans for A350 is adding more
tension to the situation since Airbus is pledging to look for a new round of government loans
equaling roughly $US 1.6 billion for the aircraft. The political situation is far complicated
because of the role that aircraft play in national security and economic stability of both the US
and EU.

Economic
The commercial aircraft industry expected to be worth US$ 2 trillion over the next twenty year,
which will require an addition of 16,600 new aircraft into service. World passenger traffic is
projected to grow at a 5.3% annual rate between now and 2023. The greatest demand for these
aircraft will come from airlines in the United States, China, and the United Kingdom. The
greatest demand for air travel will come from emerging and developing countries with China and
India leading the way. Substantial growth is also expected for the Middle East. It is estimated
that China, with its fast growing economy and emerging middle class, will alone need 2,200
aircrafts to meet their domestic and international air travel needs. In addition, there is expected
growth to occur in the international freight sector with an expected increase of 253% in the next
twenty years.

The EU governments and Airbus are both unwilling to give up government "launch aid" because
the assistance has been instrumental in the plane maker's rapid ascent to becoming the world's
leading supplier of commercial jets. Airbus has been able to tap into $15 billion in government
loans since its inception in 1970, including $3.2 billion for the A380. Airbus is not required to
pay back the loans if the aircraft program is unsuccessful. The launch aid received by Airbus
has helped it to shift risk away from the market unlike Boeing and any other commercial
competitor. The true benefit of the loans is that Airbus is able develop any program it wants and

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discount whatever it wants without the fear of losing it shareholders. However, Boeing, which
is dependent on its shareholders and has to answer to earning reports, cannot do the same.

Airbus’ plans the A350 does have some industry analysts worried because it could be the doom
of the A330, which the closest thing in Airbus’ portfolio to the 787. There is also the problem of
timing since the A350 will not enter service until 2010, a full two years after the 787. The
situation is further hinder since the A380 is currently running 2 billion over its projected budget.
Any future funding for the A350 may have to come from outside the EU. Airbus would need
seek partnerships with foreign firms that can win state financial support similar to what Boeing is
doing with the 787. Boeing signed contracts with Mitsubishi Heavy Industries and other
Japanese firms that will construct a third of the aircraft. The Japanese government is expected to
loan the suppliers at least $US 1.5 billion, which would cover most of their development costs.
Partnerships with Japanese companies may prove to be difficult for Airbus since Boeing
dominates the market. Airbus may turn its attention towards China where Airbus has recently
negotiated a $US 26 billion aircraft sale to two Chinese airlines and signed a $US 100 million
deal with the state-owned China Aviation Industry. However, orders for the 787 have begun to
pick up after a slow start. Boeing says it has 263 orders and commitments for the plane, which
could lead to Boeing regaining market leadership by year’s end and result in Airbus rethinking
its long-term strategy and its need for future launch aid.

Socio-Cultural
Airbus operates on the principles of thinking ahead and listening to their customers, passengers,
and employees in building constantly more comfortable and efficient aircrafts. These principles
are seen as fundamental to the company’s future success. The three main points of Airbus’
corporate culture are innovation, creativity, and freethinking with the focus of
internationalization and globalization. Diversity of culture and languages is considered a
competitive advantage for the company. Through the creation of effective teams with different
nationalities, backgrounds and skills, Airbus’ growth, and development can be secured. English
is the working language, unifying about 80 different nationalities speaking over 20 languages.
Although different cultures and nationalities in may cause problems of communication and
understanding, it also makes it possible to reach customers all over the world in knowing their
culture and speaking their language.

Until recently, air travel demand has been driven mainly by convenience. However, the trend is
now changing with consumers basing their travel decision primarily on price. Increasing cost
and competitive generated by a new generation of “low-cost” carriers is having an effect on the
major airlines. Business travel, once a stable of revenue, is now being conduct by corporate
travel guidelines. As a result, airlines are consolidating their networks to exploit economics of
scale, minimize environmental impact, and provide smaller markets with new or improve
services.

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As side note, Boeing changed the classification of the 7E7 to the 787 to stay within tradition.
However, the change could have made because of Chinese associating the number 8 with luck.
In addition, the sound of number 8 is very similar to the sound for the word for money in
Japanese. This has work to their advantage since 140 787s have been sold to China and Japan in
past few months.

Technological
In the aerospace industry, there are huge costs associated with research and development for new
aircraft. European government investments support European technology R&D sector, just as US
government R&D schemes have sought to do, through NASA, FAA, Department of Defense
(DoD), and export tax relief programs. However, the EU government support is three times as
less compare to the US. At the time of program launch. Airbus receives repayable launch
investment, not grants. Boeing has estimated that launch cost of the 787 will be in the order of
$US 9 billion while the cost of Airbus’s A380 will be even higher at $US 12 billion.

Fly-by-wire is an electronically managed flight control system, which make aircraft easier to
handle while further enhancing safety , is now the industry standard. Fly-by-wire technology has
made it possible for Airbus to develop a true family of aircraft, from the 107-seat A318 to the
555-seat A380, with near identical cockpit designs and handling characteristics. This makes crew
training and conversion shorter, simpler, and highly cost-effective for airlines and allows pilots
to remain current on more than one type simultaneously.

According to Airbus CEO, Noël Forgeard, their biggest challenges is not the lost of market
share or subsidies, but rather productivity. Airbus being a younger company with a newer
product line and more modern production facilities has long enjoyed an efficiency edge over
Boeing. Airbus is pushing to slash final assembly time on the 737's competitor, the A320, by
30%. However, Boeing has started to adopt lean manufacturing process for future aircraft
production and is promising even more dramatic efficiency improvements with the 787.

BOEING
SWOT Analysis

Boeing was founded in 1916 in the Puget Sound region of Washington State. It became
a leading producer of military and commercial aircraft. It undertook a series of strategic mergers
and acquisitions to become the world’s largest, most diversified aerospace company.
Boeing believes that hubs will become congested and many travelers seek to avoid them.
Passengers prefer frequent non-stop service between the cities they wish to visit. Liberalization
of regulations governing airline routes around the world will allow for the establishment of more
direct flights between city pairs. It believes that regional jets (100 seats) would be in demand.

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Strengths

i. Corporate Culture: Committed employees. Engineers were very committed to the company
and its culture. For example, in 2000, engineers protested because they felt that no new designs
were being developed and management kept emphasizing cutting costs in order to increase
productivity. As a result, engineers felt that the company was changing its culture away from an
engineering driven company and they felt they have become reluctant..
ii. Marketing: Dominant market share, and direct sales support and tax benefits.
iii. Finance: Technology leverage, by subsidizing smaller less profitable airplanes with
bigger and more profitable ones.
iv. Research and Development: Technology innovation, product diversification, and
customer satisfaction.
v. Operations and Logistics: Location of manufacturing facilities, Human Resources
Management, and skilled labor force. Lean Production is the key of the stong operations
and logistics of Boeing.
vi. Indirect Subsidies from Government: After acquiring McDonnell Douglas corporation
Boeing started receiving indirect subsidies from US government.

Weaknesses

i. Marketing: Damaging brand name reputation and Cost leadership strategy. Regarding
reputation with customers, Boeing’s airplanes were very well accepted by the world’s
airlines, but when production disruption started, it affected airline’s capability to expand
their flying routes into new cities and their relationship with customers weakened.
Regarding reputation with suppliers, there was poor planning between Boeing’s increased
production line and suppliers not having enough capability to manufacture the required
level of parts. This disconnect brought in consequence production disruption in Boeing’s
manufacturing plants.
ii. Finance: Decreased ability to service short-term obligations and increased long-term
debt.
iii. Research and Development: High cost of technology innovation, not having an
integrated family of products, poor product development planning, and high maintenance
cost for airplanes.
iv. Operations and Logistics: Poor manufacturing efficiency and product safety, poor
implementation of improvements in manufacturing process, and excess of
personnel/employee per aircraft (211 employees per aircraft.)
v. Human Resources Management: Labor problems when trying to improve
manufacturing processes and emphasis on cutting cost.

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Threats

i. Weak demand for jets:

Airlines are the main purchasers of new jets. Current conditions: high fixed costs, cut throat
pricing and large capital expenditures have made airlines more prudent when it comes to
purchasing new jets. The airline industry remains very competitive. Competitive pressures and
fare reductions have combined to cause a long-term downward trend in passenger revenue yields
worldwide. Europe’s market liberalization has increased the amount of low fare carriers entering
the market. These factors result in continuous price pressure for jet manufacturers.

ii. Commonalities enhance the value proposition of Airbus’s aircraft:

Airbus’s ability to gain market share, aside from discounting, is the shared characteristics among
their family of aircrafts. As an example, Airbus’s 320, 330, 340 families have virtually identical
flight decks, systems and handling characteristics. This is a very attractive feature for airlines; it
reduces the training necessary for pilots to transition from one type of aircraft to another, flight
crews are reduced, lower maintenance and spare parts cost.

iii. Weakening of the economy

Demand for new aircraft is driven by traffic growth and fleet replacement. If the economy
weakens, traffic growth would be stifled reducing the amount of future jet purchases.

Opportunities

i. Growth prospects for U.S defense Industry

The U.S Department of Defense represents nearly 50% of the world’s defense budget and is the
biggest client for missiles and fighter jets. The U.S military, along with militaries worldwide, are
focusing on ways to transform their forces and the way they operate.

ii. Favorable air traffic growth:

Air traffic growth is important, airlines plan for their jet purchases based on air traffic forecasts.
Economic growth drives air traffic, the more robust the economy the higher the air traffic. Global
air traffic projections expect a 5% growth.

iii. Slow Growth for MRO (Maintenance, Repair and Overhaul):

The long term forecasts for the $39.5 sector are based on the expansion of the global commercial
fleet; the older the fleet the more maintenance required. AVITAS predicts that the global
commercial fleet will grow at a 3% CAGR (compound annual growth rate) over the next 20

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years. This means that new purchases will be greater than those planes retiring causing the
average age of the world’s commercial fleet to decrease.—this means less time in the hangar.

iv. Fuel Efficiency

Fuel is the airline industry's second largest expense, exceeded only by labor. As a result, airlines
are in need of fuel efficient aircraft to help reduce their operational costs in these days that
competition is so stiff.

PEST ANALYSIS

Political Factor

• Policy and regulatory decisions by governments can also have a dramatic impact on the
demand for civil transport aircraft.
• The United States Government and its Federal Aviation Administration (FAA) are
particularly influential in this regard since they oversee the largest air transport market in
the world. Regulations by the United States and European governments may prove to be
a major driving force for orders for new aircraft and engines in the years to come.
Similarly, the deregulation of European airlines, already begun in the early 1990s, holds
the promise of expanded market prospects for smaller regional jets. Trade in larger
commercial jetliners has been virtually tariff-free since 1979 under the General
Agreement on Tariffs and Trade (GATT).
• The high-level political intervention also has an important impact on the sales of aircraft.
Different buyer’s decisions of spending such a huge amount of money always rely partly
on the political reasons since the support and interference of government could affect the
future of buyers. For example: currently China is the biggest market for Boeing and it is
expected to remain so for the next 20 years. In fact, China, through its considerable
purchases of Boeing planes, has managed to gain a lot of political leverage in the U.S.

Economic Factor

• Aircraft manufacturers rely heavily on subsidies. Recently, Boeing and Airbus are on the
debate of unfair subsidies.
• Likelihood of increasing fuel costs, congestion and other environmental restrictions, as
well as the prospect of higher security and insurance costs to reflect the risk of terrorism.
The fuel cost is increasing in the future. International Air Transport Association
estimated that airlines' fuel costs would rise by 31% in 2005. IATA, which represents
95% of the world's airlines, also predicted that the industry would lose $6 billion.

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 • With several airline companies closing down and the global tourism industry in
recession, aircraft prices are down by around 20 per cent. Airbus had quoted around 15
per cent less than Boeing for the IA contract during the bidding earlier in the year.

Social Factor

• Anti-US feeling feelings generated by the events of the past two years had adversely
impacted on Boeing's sales, especially in West Asia, which is a lucrative market for the
industry.

Technological Factor

• The supersonic transport is also an opportunity because an entirely whole new segment of
the market will form. Commercial carriers will buy many of these supersonic aircrafts in
order to satisfy the consumer’s need to reach destinations quickly and on time.
• The biggest and most cost effective technological advancement for the commercial
aircraft industry is designing planes faster. The increased production time will save costs
on labour and enable better resource usage for each plane made. Boeing has utilized this
technological advancement by building a new model, the Boeing 777, by using computer
technology to build a prototype. This is tremendously cost effective because the company
does not have to absorb the cost of the prototype that they normally would have to build.
• Technological advances will also help companies use resources more efficiently.
Airplane manufacturers have been using robots to achieve this. Robots are a very
efficient tool in creating airplanes.
• Lighter materials are another way companies are trying to utilize their resources
effectively. Research has said that lighter materials used in airplanes are better in
aircrafts. Conventional airplanes are made of metal, which adds a great deal of weight. In
the past couple of decades, scientists have come up with a new material called composite,
a synthetic material made of carbon fibbers.

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