International Business Practicum, Essay Example

Competition between Boeing and Airbus Industrie

Introduction

Over the last 100 years since the invention of flights, hundreds of aircraft producers have entered and left the aircraft production industry. The financial side of the aerospace industry and the commercial aircraft industry in specific are marked by high start up expenses and the pressure to realize economies of scale so as to produce effectively. The low number of customers of commercial aircraft overpoweringly the airlines in the globe, together with governments and rich people -establish a demand structure whereby only the most effective, low cost manufacturers get a chance to compete for the available orders. While some manufactures simply ceased to exist, stronger companies took up the shares of others. The merging and consolidation of the firms which are based in both Europe and the United States, resulted in only three firms controlling the huge commercial aircraft manufacturing industry. These firms were: Boeing, Airbus and McDonnell-Douglas. This paper intends to analyze the competition between the two firms; Boeing and Airbus and the factors affecting market share in the commercial aircraft manufacturing industry (Kingsley-Jones, 2005).

Economic and Firm Structure of the Commercial Aircraft Industry

The commercial aircraft industry is exhibited by very large barriers to entry and companies are expected to sell a reasonable number of aircrafts for them to make any profits. The costs of producing a commercial aircraft are enormous. Boeing is expected to have spent almost $5 billion in manufacturing the 777, one of its latest all-new aircrafts. Airbus on the other hand is expecting to spend $11 billion in developing the super-jumbo aircraft- A380. Production runs are also small with Boeing manufacturing a total of 381 aircrafts in 2002 while the products are modified according to the client’s specifications in terms of size, the distance it can fly as well as its efficiency. The companies are also committed to provision of service and maintenance of the aircrafts that they produce over the entire life-span of the planes which is 20-30 years. The lengthy service life of the commercial airplanes together with the inconsistent nature of demand for flights exposes the commercial aircraft industry to cyclical swings in the market (Kingsley-Jones, 2005).

Consolidation of Firms in the American Market

At the beginning of 1960, America had 12 commercial aircraft producers. By 1980, due to exits from the market, only three had remained: McDonnell Douglas, Boeing and Lockheed. In 1981, Lockheed exited the industry as well due to failure of one of its projects- L-1011 Tristar project, in which the company had spent $2.5 billion over duration of 13 years. This left Boeing and McDonnell Douglas as the only commercial aircraft producers in America. After the exit of Lockheed from the commercial production market, Boeing’s share of the market rose significantly while its market share gains also rose at the expense of McDonnell Douglas. By 1993, McDonnell Douglas was commanding a market share of less than 20% (Michaels, 2009). The distribution of the market share for the three firms was as follows:

U.S. Commercial Aircraft Shipments and Market Share, 1975-1996 (selected years)

The creation of Airbus

Airbus was created as a result of European aircraft manufacturers’ fear that their intense competition among themselves will lead to continued U.S. control of the industry. European companies and governments concluded that only a coordinated method would yield a viable product. The firms and the governments thus adopted a cooperative approach in aircraft manufacturing. Plans were under by the year 1967 for a joint production of European aircrafts under the trade name Airbus. As a result of the failed merger between British Aircraft Company and French producer Sud Aviation on the Concorde project, where only 16 planes were manufactured at a cost of over £1 billion, the British government was reluctant to form another merger. .  France, however, viewed the Airbus project as a chance to reinforce its industrial control role in Europe (Quentin, 2006).  Germany also viewed Airbus as a method for creating economic leadership in Europe, as well as assisting in the resurgence of the German industrial sector. Airbus Industrie was officially launched in December 1970 and was established as a Groupement d’Intérêt Économique (GIE) within the French law. Under this set up the members who have contributed the capital normally receive profits which are commensurable to the amount of capital contributed. A GIE is not expected to pay taxes on capital gains-instead it allots its profits to its members on the basis of their capital contributions (Quentin, 2006).

Competition between Boeing and Airbus Industrie

The competition between the two firms; Boeing and Airbus Industrie was also affected by the presence of McDonnell Douglas in the aircraft industry. Airbus took only 10 years to shift from third to second in commercial aircraft manufacturing.  Between 1980 and 1981, it had 374 pending orders for the A300, A310 and A320, more than those of McDonnell Douglas’ though far much behind Boeing’s 1,217.  During the 1980s, the competition between Boeing and Airbus began to deepen, after the launch of Boeing 767 in the year 1982, the first tough competitor to the Airbus A310.  The two, 767 and A310 are within the high-capacity (about 220 passengers) medium-range (6,000-7,000 miles) class.  In order to outpace Boeing in this group, Airbus adopted a “Silk Route Strategy,” marketing intensively and productively for sales in the Middle East nations, where America was disadvantaged as a result of politics (Quentin, 2006).

Comparison of the deliveries between Boeing and Airbus Industrie

Airbus’ first project into the competitive market, the A320 was immediately a shift into the large scale narrow-body market niche and a shift against the madly triumphant Boeing 737. Though the two were manufactured to ferry about 150 passengers, the A320 had a superior range of 3,400 miles compared to the 2000 to 3,000 range of the 737. The new A320 also proved to be a strong competitor of the McDonnell Douglas’ MD-80 narrow-body. The subject of consistent contention between America and Europe in future in terms of producing the A320 was strongly subsidized by France and Germany which contributed 75 percent and 90 percent of the start up capital for the development of Aérospatiale’s and Deutsche Airbus. Between the years 1985 and 1990 Boeing market share in reference to new orders was about 50 percent and remained consistent for the whole period. Airbus and McDonnell Douglas competed for the remaining half of the market share. While Boeing sustained its position as the leading firm in the industry in the 1990s, Airbus succeeded in the industry at the expense of McDonnell Douglas.

In 2005 Airbus got orders for 1111 aircraft and gathered revenue of €22.3 billion. Boeing production lines at that time were 737, 777 and 747 while Airbus production lines were A330, A340 and A380. Boeing received orders for the production of 1031 planes and managed to garn revenue of $22.7 billion. In 2004 Boeing launched the production of 787 Dreamliner with 50 confirmed orders from All Nippon Airways of Japan. The venture amounted to about $6 million at list prices and the completion was expected to begin in 2008. In the same year, after a reasonable speculation, Airbus announced that it will produce A350 to match the Boeing’s 787. The A350 was organized to be a derivative of the previous A330, improved with a new wing, highly efficient fuel engines and many other technologies (Quentin, 2006).

Trade Agreements and Conflicts over Subsidies

As a new competitor to the commercial aircraft market, Airbus required high levels of government aid to fund the manufacture of new models and to offer attractive bargains to its customers. Though American manufacturers claimed that the subsidies gave the firm an unfair advantage in the industry, they were themselves getting export support via the Ex-Im Bank and Foreign Sales Corporation and gained from military contracts, work on the space shuttle and other advanced programs within the National Aeronautics and Space Administration (NASA).

Comparison between the American and European Competition Policy

American antitrust law and EU competitive law have a lot in common. Both intend to sustain a competitive market environment by averting abuse off a leading or monopoly position and to safeguard consumers by sustaining the free flow of goods and services. In both cases, competitive laws have been developed to meet particular needs within the market. There is a significant disparity in the application and enforcement of competition policies since the laws have a reasonable amount of variations (Michaels, 2009).

Conclusion

The competition between Boeing and Airbus is still prevalent in the commercial aircraft manufacture industry. Competition authorities in both the U.S and the European Union have established strategies to investigate the actions of any company that might have an impact on their economies. These include the strategies to investigate the effects of mergers that take place outside their jurisdiction area but have an impact on either U.S commerce or the EU market. The commercial aircraft industry remains competitive due to its narrow market irrespective of the few players (Michaels, 2009).

References

Kingsley-Jones, M. (2005). “A380 powers on through flight-test”. Flight International.   Retrieved on March 3, 2010 from http://www.flightglobal.com/articles/2005/12/20/203708/a380-powers-on-through-flight-test.html.

Michaels, D. (2009). “Strong Euro Weighs on Airbus, Suppliers”. Wall Street Journal. Retrieved on March 3, 2010 from             http://online.wsj.com/article/SB10001424052748704317704574503291415066898.html?mod=googlenews_wsj.

Strong Euro Weighs on Airbus, Suppliers, Wall Street Journal, October 30, 2009, p.B3

Quentin W. D. (2006). “Airbus bust, Boeing boost”. Washington Post.  Retrieved on March 3, 2010 from http://www.washingtonpost.com/wp-dyn/content/article/2006/11/07/AR2006110701506.html. Retrieved on March 3, 2010