Competition: Airbus And Boeing

The History of the Boeing can be traced back to the year 1916. The Boeing defined the modern jetliner. It is committed to be the leader in commercial aviation industry by making and offering airplanes and services that offer high quality design, efficiency and value to customers all over the world. More than 12,100* Boeing commercial jetliners are in are in operation currently It flies passengers and freight more efficiently in comparison to the other carriers in the market.

The Airbus

Airbus was made official in the year 1970. The aircraft was given the name “Airbus” because it was an aviation term used by the airline industry for commercial airlines. Also, it was an acceptable term for the French linguistically (Wikipedia, 2006).The airline made its first maiden voyage in the year 1972, its first production model being the A300.

History of competition between Airbus and Boeing

Boeing is the world’s largest aerospace company in the world and a stiff competitor to the Airbus in the commercial aircraft industry.

The rival companies do not share comfortable diplomatic relations.

In 1992, an agreement between the companies stated the extent to which subsidies were allowed from their respective governments. This agreement has proved to be futile.

Both companies blamed one another for not following the rules and regulations of the agreement. The Boeing filed a formal complaint in October 2004 (WTO, 2006).

The current project status says that the A380 aircraft is intended to go head on with the Boeing 747. For the first time the Airbus had surpassed rival Boeing for delivering the more number of aircrafts in a single year.

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Airbus introduced in January 2005 the double-decker A380 in hopes of being taken back to the market once again. The A380 is the world’s largest passenger plane with two decks and seating for 555-840 people.2005 was the fifth year in a row that Airbus swept over fifty percent of the market share in order intake. However, problems with the A380 are likely to bring this streak to a halt this year. The delays in the manufacturing and delivering of the A380 are 24 proving to be very damaging.

In June of this year, Airbus had mentioned a second delay in the delivery of expected aircrafts, which is leading to a decrease in orders and shares.

FedEx reversed its order for ten A380’s listed at $300 million dollars each.

Instead, the company will purchase fifteen of Boeing’s 777 freighters listed at $235 million each (Wilber, 2006).

Airbus still has 166 orders listed, but further delays and frustration can easily cause Airbus to lose more sales to Boeing. The year 2006 is the biggest year yet in the battle between Airbus and Boeing for market share.

1.2 Compare the development of aircraft-models between the two companies. Are there trends in the movements of profits, planes sold, planes produced etc. between these two firms over the last 20 years ?

Airbus

The first airplane introduced by Airbus was the 300 seats A300. The A300 was the world’s first twin-aisle aircraft with two engines. Then in 1984, Airbus announced the production of the A320 series aircraft. The A320 is smaller than the A300 because it seats about half as many people. The A320 has the widest single-aisle fuselage on the market. It is also the most modern because of its fly-by-wire technology used in the cockpit. In 2004,Airbus for the first time had surpassed rival Boeing for delivering the most aircrafts in a single year. Airbus introduced in January 2005 the double-decker A380 in hopes of taken back the market once again. The A380 is the world’s largest passenger plane with two decks and seating for 555-840 people.

Airbus falls under the umbrella of its parent company EADS. Their source of revenue is derived from two sectors of operations. Civilian aircraft manufacturing, lead by Airbus, accounted for 78% of its sales in 2005, and its military division the other 22%.Sales by countries and regions break down as follows: France 10%, Germany 9%,United Kingdom 8%, Europe 12%, North America 26%, Asia/Pacific 22%, Middle East6%, Latin America 3%, and others 4% (Euronext, 2006).In 2005, Airbus experienced their best year in company history, acquiring 1,055firm new orders for aircraft valued at around $95 billion. That gave Airbus a bigger market share in terms of aircraft units at 52% and 45% in terms of value (Airbus Annual Review, 2006). The addition of these firm orders enabled Airbus to maintain a strong backlog of 2,177 aircraft valued at $220 billion, the highest it has ever been, continuing to be ahead of the competition for the sixth consecutive year (Airbus Annual Review,2006). A majority of the orders came from Asia and the Middle East, in addition to many in Latin America and several low cost carriers in Europe. The largest orders came from China, with a boost from the orders for the A380, bringing the total to 219 aircraft. Leasing companies accounted for another 195 aircraft (Airbus Annual Review, 2006).

Boeing

The Boeing 747, the original “jumbo jet” with its distinctive upper-deck profile, is among the fastest airliners in service. The four-engine airplane, with seating capacity of more than 400, has been crisscrossing continents for four decades.Currently, Boeing engineers are developing a new and improved member of the 747 family. The larger 747-8 will offer the lowest operating costs and best fuel-efficiency of any large passenger freighter airplane. At the same time, the jet will set a new environmental benchmark with a substantially cleaner and quieter footprint than competitors in the large twin-aisle market.

Boeing’s commercial fleet consists of 14 models spread across 5 aircraft families. It has built approximately 85% of the industry’s current fleet and, until recently, regularly captured 60-80% of orders and deliveries. The flagship of the Boeing fleet, the 747-400, holds 412 passengers in the standard three-class configuration and as many as 550 in certain “high-density,” all-coach configurations used mainly on Asia routes. More than three decades after the jumbo was introduced, demand for it remains strong. Boeing delivered 25 747’s in 2000, down from47 planes in 1999, and had an order backlog for 80 more.4 At the corporate level, Boeing had revenues of $51.3 billion, net income of $2.1 billion, an equity market capitalization of $58 billion, and 198,000 employees at year-end 2000. Sales of commercial aircraft generate almost two-thirds of total revenue while sales of military aircraft, missiles, and space systems account for the rest. In addition to being the US government’s second

1.3 What are the facts and what are the main arguments in the dispute between the two companies over subsidies/governmental support

In the news recently Airbus and Boeing have been feuding with each other over subsidies. These subsidies make it possible for the two companies to make a new plane that will not be released for up to five years. It take almost five years from the time it is approve to be in production until its delivered to its customers (testing and research and7development are added into the five years). During this stage in the process from designing to delivery, Airbus and Boeing compile very large debt until the planes are sold and they make the money back. In 2002, the European Union (EU) and the United States agreed to keep subsidies fair between the two companies. Although Boeing consistently argues that Airbus has received too much government aid, while Airbus complains that Boeing receives bogus research and development subsidies from NASA and the military. The World Trade Organization (WTO) is consistently mediating Boeing and Airbus to settle these claims against one another. However, these two companies try not to let it affect their relationship as stated in Wikipedia (2006), Rob Portman (from the USA) and Peter Mandelson (from the EU) issued a statement jointly, “We remain united in our determination that this dispute shall not affect our cooperation on a wider bilateral and multilateral trade issues. We have worked together well so far, and intend to continue to do so.” As you can see, Airbus and Boeing rely on each other to make the best product they can and to make the largest profits possible. Airbus and Boeing both cooperate in reverse engineering with each other (Rothman, 2004).

2. Let us say that the market for huge passenger aircraft is a duopoly market. What kind of a duopoly market is it? Is entry of new producers something to worry about ? Are the various planes good substitutes to each other? It is often asserted that the market is “segmented”. What will that mean ?There could also be an element of “cannibalism” in the market – meaning that a new product from producer X may hurt not only its competitor, but also producer X itself. Explain this in some detail.

Structural Estimates of Aircraft Demand and Mark ups

The market for aircraft is typically divided into two product categories: narrow-body and Wide-body aircraft. Narrow-body aircraft are single aisle, short-range aircraft (up to 6,000 km) that typically carry between 100 to 200 passengers. The leading aircraft in this category are the Boeing 737, the Boeing 757, and the Airbus A-320.

Wide-body aircraft are double aisle, medium to long-range aircraft (up to 14,000 km) that can carry between 200 to 450 passengers.

The leading aircraft in this category are the Boeing 747, the Boeing 777, and the Airbus A-300.Within the wide-body market, planes also differ significantly in terms of their characteristics depending on whether they are aimed at serving the medium range (as, for example, Boeing 767,5 the Airbus A-300 and A-310, DC-10, and L-1011) or long-range market (as, for example, Boeing747 and 777, the Airbus A-330 and A-340, and the MD-11). As a result, we can view narrow body, medium-range wide body, and long-range wide body aircraft as imperfect substitutes for one another because the planes are designed to serve different markets, and competition is much more intense within each category than between them. We focus mainly on the wide-body segment of the aircraft industry in part because most of the international trade disputes have centered on competition in this product range. The increase in international travel since the 1970s has made this a rapidly growing segment of aircraft demand. The wide-body market has also been very profitable: the Boeing 747, for example, is said to account for as much as a third of Boeing’s entire profits in certain years. As aresult, Airbus, for example, entered the aircraft market in this segment with the A-300 in 1974,and only later began competing in the narrow-body market with the launch of the A-320 in 1988.

There are fewer product lines in wide-body segment of the market, and the number of aircraft sold is much smaller than in narrow-body segment. The cumulative output of the best selling wide-body Boeing 747 has only reached about 1,185 units in 1998 (it was introduced in 1969),and the best selling Airbus aircraft A300 sold only 481 units between 1974 and 1998. As a result, competition tends to be more intense in wide body market because, since from the firm’s perspective, each additional sale generates valuable revenue. In contrast, narrow-body planes often sell well above 1,000 units over their lifespan, with Boeing 737 selling over 3,200 units until 1998.

Two can be an awkward number, as many a prom-goer can attest. That also is true in markets with only two producers. Managers of such firms face difficult choices, and so do their customers. When they make any major decision, they must always consider how their one competitor is going to react.

Large passenger aircraft constitutes just such a market. The U.S.-based Boeing and Europe’s Airbus are the only producers with any significant market share. As competitors, they each must think several steps ahead when deciding whether to spend billions on a new plane. The profitability of such investments always depends on what the other firm does.

Airbus recently celebrated the first flight of its new A380 jumbo jet. Boeing made a decision some time ago not to develop a new plane that would directly compete with the A380. Instead, Boeing is concentrating efforts on its 787 Dreamliner and announced large sales of this model to Air India and Air Canada as the new Airbus taxied out.

Boeing’s first-quarter 2005 earnings, however, were down 14 percent on current business. Orders for passenger 747s – as opposed to cargo versions -have dried up. With many major airlines facing financial difficulties, how these two firms will fare over the next five to 10 years is not at all clear.

Economists call these market situations “duopolies,” and they are a specific subset of oligopolies, which refer to markets with more than a single producer but in which the number is still very small.

In duopolies, the two producers are not the only ones who must think strategically – their customers must also. A large airline may see particular advantages to the new A380. However, it also realizes that it would suffer if Boeing lost so much business to Airbus that the U.S. firm went out of business.

If Boeing bit the dust, Airbus would be a monopolist with much more power to raise prices. Airlines want to get the best plane for their money, but they also want to see that at least two competing aircraft suppliers remain in business.

This dilemma is not limited to the airlines. It has been true for railroads and locomotive builders for more than a century.

Competition in the wide-bodied aircraft industry has attracted attention not just because of the controversy surrounding the Airbus subsidies, but because of the industry’s unusual market structure, in which economies of scale are enormous relative to market demand. The aircraft sector provides a textbook example of an industry in which trade policy could affect the strategic interaction between a domestic and an international rival and shift profits in favor of the domestic firm, as proposed in Brander and Spencer’s (1985) canonical model of strategic trade policy.

Competitors’ moves will be clearly delineated by technological lumpiness, and exhibited strategic interdependence: thus, it seems clear that if each competitor developed a brand new model both would incur very large losses and that intense competition in the pricing

The aircrafts will not be considered as perfect substitutes because while boasts of being a low cost carrier the other concludes that it’s fuel efficiency is greater and it can accommodate more passengers. Each requirement compliments one another and hence cannot be substituted for another.

Segmented Market

A market segment is a sub-set of a market made up of people or organizations sharing one or more characteristics that cause them to demand similar product and/or services based on qualities of those products such as price or function. A true market segment meets all of the following criteria:

• It is distinct from other segments (different segments have different needs),
• It is homogeneous within the segment (exhibits common needs)
• It responds similarly to a market stimulus and
• It can be reached by a market intervention.

The term is also used when consumers with identical product and/or service needs are divided up into groups so they can be charged different amounts. These can broadly be viewed as ‘positive’ and ‘negative’ applications of the same idea, splitting up the market into smaller groups.

Cannibalism

Do the new Airbus and Boeing aircraft have a role in the revival of the air transport market? Yes, they both will, but in different ways. Neither aircraft is right nor wrong, it depends on market size and growth rate. However, while both aircraft have similar range capability, there are consequences from making the wrong choice. If the aircraft is too big and the break-even load factor is not reached, then losses will occur or frequency will be lost in an attempt to maintain load factor that will also impact on yields. If the aircraft is too small, because the number of frequencies will rise, direct operating costs will rise, and in many markets competitive pressure may mean that yields cannot be increased. This is a particularly likely outcome for the Australia-UK market.Dynamic fleet management provides a way to manage this problem. There are at least three commercial computerised systems available to achieve dynamic and real time fleet management, but airlines in the past have performed the function manually. This process is about matching aircraft and configuration to changing market patterns on a short-term basis. Dynamic fleet management works well in a domestic or short-haul international context where open skies, or at least capacity and type flexibility, exist. In long-haul operations, however, there isalso the need to consider:

• rewing problems when aircraft types are changed,
• directional market issues,
• bilateral issues,
• code-share and alliance issues.

There is a ‘golden rule’ of aircraft sizing: when a capacity shift is to take place, the revenue to be earned from the smaller aircraft must be equivalent to the break-even revenue point of the larger aircraft, otherwise, there is no point to the substitution. The challenge is to capture the market without generating over capacity by substitution. The context is one of temporal, seasonal and directional

demand imbalances. Using either the B787 or the A380 as a substitute for the other is a real challenge and the A380 has, depending on the configuration adopted for either aircraft, twice the capacity.

3. Describe A-380 and Boeing 747 and compare the two planes. (A little more personal : Where is the future ? Will huge planes, with 800-1000 passengers, with bars and showers and…. dominate the long-and medium-range market or will the future belong to planes with 200-300 seats ? Pro and contra ?)

The Airbus

Airbus is the great ingenuity of the major European countries coming to gather to create one giant company to compete worldwide against the United States’ Boeing. Airbus is a formation of smaller companies all combine into one. Recently, Airbus has done very well in gaining global market share for airplanes. Airbus is continually trying to expand its market share by trying to reach out to new emerging markets. These new markets like China and India will play a big role in the future for Boeing and Airbus.

The A380 is the world’s largest passenger plane with two decks and seating for 555-840 people. It generously incorporates lighter composite materials. Its jet engines produce more thrust and lift more weight. By minimizing fuel consumption, the A380 gives its operators slight but much appreciated wiggle room in the binding that ties them to oil prices. Airbus made the decision to build the 800-seat capacity airplane believing the commercial carriers want to carry more people on fewer airplanes on point-to-point long-distance flights. Though none of theA380 launch customers have chosen a passenger cabin fitted anywhere close to that many seats. Take an airplane 33 percent bigger than a 747 and fill it with just 25 percent more passengers and a slightly more spacious environment will be the result.

The Boeing

Boeing traces its history to aviation pioneer William Boeing who, in 1916, built the company’s first airplane, a seaplane for two with a range of 320 nautical miles (515 km). Since then, Boeing has defined the modern jetliner and introduced the twin-aisle cabin, the glass cockpit and countless other innovations. Today, Boeing Commercial Airplanes offers a family of technologically advanced airplanes, including one that can seat more than 500 and another that boasts the longest range in the world, at more than 9,300 nautical miles (14,966 km).

The Boeing 747, the original “jumbo jet” with its distinctive upper-deck profile, is among the fastest airliners in service. The four-engine airplane, with seating capacity of more than 400, has been crisscrossing continents for four decades.

Currently, Boeing engineers are developing a new and improved member of the 747 family. The larger 747-8 will offer the lowest operating costs and best fuel-efficiency of any large passenger freighter airplane. At the same time, the jet will set a new environmental benchmark with a substantially cleaner and quieter footprint than competitors in the large twin-aisle market.

Market Share and Future Trends

The A380 and B747aircraft are not alternatives, but complementary. They can be used and misused in markets than can absorb them. The further they are flown, the faster unit costs fall, the more often a market is served, thehigher the yields, and, by flying intelligently, total fleet costs can be reduced. As both have lower fuel costs per passenger kilometre than existing aircraft types of the same broad size, they will help maintain markets in a time of high fuel costs and regional political instability that has produced new travel deterring security measures. The long delay in deliveries of A380 is having a significant impact on carriers, their fleets and their schedules. It was initially thought that the A380 would have been in service in 2006.In 2006; Airbus confirmed that Singapore Airlines will have its first delivery in the second half of 2007 and all other carriers are scheduled to receive their initial aircraft in 2008. It may be that the recovery will have plateaued, especially as the US economy remains uncertain. With major technical problems resulting in delayed delivery the end result may be that the A380 will have a short-term role in the recovery. The B747 will help carriers’ costs but may not stimulate new traffic The benefits may go to the carriers rather than passengers. There are no alternatives: Boeing has no orders for its developed and slightly larger version of the B747-the dash 8-and Airbus has yet to announce a firm commitment to its new mid-sized aircraft, the A380 (extra wide body) that is slated for 2012 delivery. If the recovery is to continue until significant fleets of the two, perhaps three, new types become available, and then it will be on the basis of aircraft now flying or enhanced variants such as versions of B777 and an allegedly improved Airbus —.

1. Go back to the dispute over subsidies. Consider the market for wide-body long-range aircrafts, and assume that A-380 and Boeing 747 are the only possible competitors in that market. Assume further that both aircrafts have the cost structure as given in part 4. above. Explain that it is most efficient from a global perspective that only one type of plane is produced

Consider now the game between Airbus and Boeing before neither firm has decided to enter this market. Each firm has two strategies :

• Do not enter the market

•                  or

• Enter the market and produce 2000 planes.

• To determine the market price in the various situations we assume that the total demand in the market, directed towards both planes, is given by the demand function in part 5.(We consider A-380 and Boeing 747 to be perfect substitutes.) Calculate the market price and the profit of the two planes in the four possible outcomes. Describe this Competitive situation as a two-person non-cooperative game in Simultaneous moves and solve the game. Consider next the situation Where Boeing has the first move – meaning we have a sequential game With Boeing as the first mover. Solve this game.

  Then let the relevant European governments decide to give Airbus a subsidy equal to ( a little more ) than Airbus fixed costs for A-380 if they start producing the A-380 – and this subsidy is independent of what Boeing is doing. Solve the two games described above when this subsidy is promised and compare the situations with and without this subsidy.