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BOEING vs AIRBUS
Avneet Arora
Chandan Jain
Shushma D’lima
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
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.
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.
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.
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
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
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
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
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.
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.
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.
Opportunities
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.
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.