Review of the Boeing VS Airbus Case Study Introduction In the market for large aircraft demand the emerging niche for very large aircraft (VLCT aircraft seating more than 400 passengers) saw only two competitors: Boeing and Airbus. Even though both competitors’ moves were clearly marked by technology enhancements, and different target markets but both exhibited strategic interdependence. Option with Boeing:
Boeing being the market leader for almost a decade as a manufacturer of large commercial aircraft and had also reached economies of scale, the need to sustain its market share it presumed that “customers might demand for new”. Any potential growth was only through taking super leap and making VLCT jumbo aircraft which needed huge investment beyond Boeing’s financial reach (that too for an uncertain future market) Boeing had the technology advantage over airbus because Boeing had already tested and launched Boeing 747 (a large passenger carrier).
Only stretch of design was needed to build up “jumbo dream line VLCT aircraft”. But being a private firm and not state run the kind of investment required to develop new carrier and also the uncertainty of the future market were problems. It had the option to continue to manufacture famous “Boeing 747” and not go for VLCT Jumbo. But the VLCT superjumbo was a strategic commitment of more than average interest because of its sheer size, irreversibility and potential impact on industry structure if nothing goes bad.
VLCT was seen as a potential to reduce congestion at airports as maintenance cost at airports is high and flight delays due to congestion adding more to the cost. So Boeing had all the reasons to go for making of new VLCT. Option with Airbus: On the other hand competitor Airbus also had potential to grow and flourish in Europe market and also had strong political lobby in support. But difficulty with Airbus was the new technology development altogether and the time constraint that will go into getting the new design.
The capital, investments were very high but the riskiness of expenditures of this magnitude was magnified by the fact that Airbus has to spend essentially the entire amount before it makes its first delivery in an industry which was still growing not like Boeing. If, however, the launch succeeds, Airbus was expected to dislodge Boeing as the market leader in commercial aircraft after more than 40 years of market dominance by the latter. So Airbus also had all the favors to build a VLCT Carrier.
It seemed clear that each competitor had the power to develop a brand new VLCT independently irrespective of time and cost, fact that huge massive investments and capital were required, the fact that both can incur very large losses in case of uncertainty of future market which otherwise can be mitigated working together and the fact that if succeed in launching independently the intense competition in the pricing that will follow up between the two for same customers.
Given these considerations, question is : SHOULD THE 2 GIANTS BOEING AND AIRBUS COLLABORATE IN MAKING OF THE VLCT DREAM LINE JUMBO? ANSWER IS: NO. 1. Nash equilibrium /Game Theory – • Boeing being market leader having first move advantage of technology and integrated supply network will ask for higher share than Airbus. Differential sharing cannot be agreed. • Boeing approached two of the weakest links in the Airbus consortium for negotiation. This move made Airbus fear that Boeing trying to break the onsortium and target its market. Hence Airbus doesn’t trust. • Both knew they were Monopolies in their respective markets. Collusion was never an option. 2. Talks also failed due to subsidizing issues and European government financing cheap loans . Boeing opposed to undue subsidies as unhealthy competition. 3. Also buyers and suppliers in both the markets have different benefits altogether. Boeing had profit sharing integrated with the network of suppliers. Airbus had different departments, each having independent profit sharing.
Michael porter’s 5 force model analysis of aircraft industry as follows: 1. ENTRY BARRIER (HIGH) • High capital requirements to establish +huge set up+ large investments + economies of scale/scope: Boeing having advantage over Airbus in large commercial aircraft sector. • Access to distributers/suppliers/manufacturers: • Fear of retaliation • Competition due to market expansion • Learning curve has to be steep, i. e. Cost reduction has to be fast with change in technology • New entry has to match up with level of technology + new innovations 2.
EXIT BARRIER (HIGH) • Cost of shutting down is high 3. THREAT OF SUBSITUTES IN VLCT AIRCRAFT MANUFACTURING INDUSTRY- (LOW) • No substitutes- High perceived level of technology and economies of scale ,easy substitutes difficult to find. Boeing being market leader because of Boeing 747 fuel efficient long range jets . Airbus having total power in Europe no easy substitute as government involvement and support. • Establishing relations with new dealers, suppliers networking is tough. • Switching cost is high-changing suppliers, shipping sources is tough. Propensity of buyer to switch to other alternatives is low because cost like – pilot training cost + mechanics + engineers +maintenance cost are also high. • No switching between low range fleet and large fleet because –larger fleet preferred usually as “the larger the plane , the cheaper it was to operate on a per seat basis” • Commonality with other models made by same manufacturers- airlines don’t switch to other manufacturers and prefer to manage homogeneous fleets through same manufacturer as it is seen as an incentive in reducing cost 4.
DEGREE OF RIVALRY (LOW) The competition is similar to ‘ Cournot Duopoly Market ‘-“given rivals output what best I can produce”. Not a Bertrand competition as there is no price war between the two. Also not monopolistic competition as product differentiation does not matter and not much advertising difference. Value proposition in commonality > value of proposition in product differentiation • Boeing and Airbus both into up end as VLCT assembly smanufacturers (compared to buyer suppliers low bargaining power) and not on downstream supplier of aircraft parts side.
All the parts of airlines sourced from outside through suppliers. • The target market is different: ? Boeing serves international market (62% outside U. S. ) Where commonality is the most important factor for demand. ? Airbus is servicing for European home market where customer still look for little differentiation. • The target segment is also different: ? Boeing aiming at point to point secondary hub market. Boeing was targeting second hand market too at the same time. ? Airbus aiming at point to point Mega hub market 5.
BARGAINING POWER OF SUPPLIERS (HIGH) • Forms the core business in the aircraft industry. Supplier is not an option for aircraft but a reason for their business • Bargaining power highest due to strength of distribution. Most of sources ex: titanium mines, are state driven. Negotiation with states and procurement new supplies is difficult. • Dedicated assets: customized aircraft parts. • High switching cost • Highly concentrated – only few large supply firms serving customized product to a buyer / supplier entry barrier because buyers prefer not to witch • Supplier network needed to be established in advance as suppliers are spread out and fragmented. • Long term contract or flexi price contract +post-delivery aircraft maintenance • Pay ups to aircraft parts making suppliers in advance by the buyers. Disadvantage for buyers because as manufacturers they only get value until delivery of the assembled aircraft to an airline company. • Because of high bargaining power with the suppliers they can demand High value for new customized designed aircraft parts from aircraft buyers for every unit sold / Suppliers have advantage of demanding for high equity share + cheaper financing cost for manufacturing dedicated design aircrafts parts. • Value proposition in commonality > value of proposition in product differentiation 6. BARGAINING POWER OF BUYERS (HIGH) Bargaining power high –aircraft parts supplier gives discount for bulk buying of same design or buying family of different design for a fixed price irrespective of inflation/no-inflation. A buyer is always at an advantage for fixed price deal, as price fluctuation is always on rise. Buyer willing to pay for: No differentiation. Commonality with its exiting designs + superior technology • Long range travel / lesser noise • Maintenance + cheaper spare + easy replacement • Low switching cost • Economy of scope (low cost when share same assembly line for different design ) • Secured suppliers • Lighter aircrafts • Fuel efficiency • Faster aircrafts/time difference is minimum • No White tales – Bad if aircraft stands in hanger. No company to buy it. Manufacturers have to connect to buyer’s choice. Price and product differentiation are not benchmark here for profit selling