Boeing Case Analysis

Boeing/Airbus Case Write Up

Competition in the Commercial Aircraft Business

With only a few large companies across the globe (Boeing, MD, and Airbus), the commercial aircraft industry essentially exhibits the qualities of an oligopolistic competition with intense rivalry. Here is an analysis of competition in the commercial aircraft business using Porter’s Five Forces.

Figure 1: Porter’s Five Forces Applied to Aircraft Industry

Barrier to entry: - High barriers to entry, to a certain extent help understand the risks involved in operating in the aircraft industry.

1. Initial Capital Requirements: - Huge initial development period and very high investment costs, tooling costs, and WIP are necessary even before the company starts producing and selling aircrafts. It takes over 5 years of development and production costs before company starts earning revenues. Commitment to buy and investments from launch customers are crucial.

2. Economies of Scale: - Company had to have a substantial amount of orders in order to earn economies of scale. Otherwise the cost of production would usually be more than the selling price of the aircraft.

3. Government Role: - Government is an important stakeholder for the aircraft business. Government subsidies and protection play a huge role in the aircraft business. (Discussed later in the write up)

4. Learning Curve: - The learning curve is very steep. Companies learn from year by year’s development and by internalizing the lessons learned. Boeing was formed in 1916 and Airbus in 1970. Both these companies have progressed step by step learning from each product and technology they have built and also from their failures.

Buyers: - It’s essential for aircraft manufactures to have a global presence and to attract buyers from all over the world. Buyer power is usually high.

1. Few Buyers: - Although there are various airline companies, they are still small in number. For aircraft manufacturers it is important to have as many buyers as possible. The breakeven is estimated at selling 400 pieces. Gaining and retaining large market share is important to maintaining profit margins.

2. Substitutes: - There are three big aircraft manufacturers. Losing a buyer to competitor could prove very expensive and extremely beneficial to the competitor. Profit margins were generally large. Profit on each Boeing 747 was 45 million (25%) in 1991.

3. Quality of products: - Safety of the aircrafts is a huge factor for the airline industry for continued operations.

Suppliers: -

1. Switching Costs: - Aircraft companies work closely with the suppliers to manufacture parts and designs specific to their requirements. Switching costs were usually high.

2. Joint Ventures and Alliances: - Since suppliers are critical to aircraft manufactures, aircraft manufactures usually form joint ventures or other types of business alliances with their suppliers.

3. Number of Customers: - There are few aircraft manufactures. Losing a customer might mean lose of a large portion of the business to suppliers.

Substitute

1. Aircraft is plays a huge role in travel today. It saves time and even money. Although travel on road and by ship can be viewed as substitutes to air travel, they aren’t usually practical.

Rivalry: - Since there is a lot at stake, the rivalry among the aircraft manufactures is intense and bitter.

1. Industry Growth Rate: - Since there are few large buyers, Boeing and Airbus often resorted to extreme measures to acquire new customers. The case mentions how Airbus snatched an airline Indian Airlines right from under Boeing’s nose.

2. Industry Growth Stage: - The airline industry is probably in its mature stage. There were huge barriers to entry into the airline industry as well. Product innovation and new product development is crucial to increase sales.

3. Government Involvement: - Governments are closely involved in their country’s aircraft manufacturing industry (as can be seen with US governments and EC governments with their respective aircraft industry). One might think of it as country’s pride being at stake. It could almost be viewed as a power game between governments.

4. Sunk Costs: - Big sunk costs. It is difficult to exit from the industry. Surviving and beating competition is the only way to do business.

Airbus and A380: Risks Involved and Sensitivity Analysis

Airbus was planning to introduce the A380 in direct competition to Boeing 747 to compete in the large aircraft sector. The rivalry between Airbus and Boeing was already intense. Boeing’s market share reduced from 70% in 1974 to 45% in 1990 while Airbus’s market share had increased from 1% to 34% during the same time (Exhibit 5). Encouraged by this increase in market share, Airbus was contemplating the introduction of A380. Development of new product line is extremely expensive in the Aircraft sector. Following is a quantitative analysis of the project to calculate the risks involved in introducing a new line of Aircrafts.

Please refer to the attached excel file for NPV and sensitivity analysis. All assumptions are stated in the excel files.

Four scenarios are examined and the following is the summary of results for each of them.

Scenarios Discount Rate11% Discount Rate 6%

Basic NPV Analysis $ (2458.71) $ 1927.24

Decrease in sales price to $180 million $ (3366.54) $ 31.74

Increase in sales volume to 16% $ 189.32 $ 8633.58

Decrease in sales volume to 8% $ (3505.71) $ (647.00)

Decrease in Profit Margin to 20% $ (3457.32) $ (227.64)

• The most glaring conclusion that can be drawn from the above numbers is the fact that government subsidies and reduced interest rates play a huge role in the success of the A380 project. Since the European governments have been backing Airbus since its conception, it would be safe to assume that the governments will continue to support Airbus in the future as well.

• Reduction is sales price also affects the project