Introduction To Airbus
Airbus is a subsidiary of European Aeronautic Defense and Space Company N.V. (herein referred to as EADS). The company is based in Blgnac, France (Compart, 2011). Airbus Company is credited with the production of close to half of all jet airliners in the world. Currently, the company has a workforce of more than 63,000 employees spread in over 16 sites. The company’s worksites are located in Spain, Germany, France, and the United Kingdom. The final assembly production of Airbus jets is based in four cities around the world. The four are Touluse in France, Seville in Spain, Hamburg in Germany, and Tianjin in China. Apart from the production plants, the company operates various subsidiaries around the world. The subsidiaries are located in India, China, Japan, and the United States of America. One of the major milestones characterizing the success of Airbus is the production of the largest airliner in the world, the A380 (Warwick, 2012). The production of this airliner has kept the company ahead of competition in the market.
Introduction To Boeing
Together with Airbus, the Boeing Company is a major player in the aircraft manufacturing industry. The company is a multinational aerospace corporation with headquarters in Chicago, Illinois, United States of America. It operates five business units under its brand. The five are Boeing Shared Services Group, Boeing Capital, which is the company’s financial arm, Engineering, Operations & Technology, Boeing Defense, Space & Security, and Boeing Commercial Airplanes. The company is Airbus’ main competitor in the aerospace market. In terms of value, the company is ranked the number one exporter in the United States of America (Olienyk & Carbaugh, 2011).
Introduction To The Study
In the current competitive environment, corporations are using diverse ways to gain a competitive advantage. It is noted that the rivalry between Airbus and Boeing is based on functional product differentiation. The differentiation is highly evident in the comparison between the Boeing 787 Dreamliner and the Airbus A380 (Knorr, Bellmann & Schomaker, 2012).
The differences between the two products simply display the disparities in the manner in which Airbus and Boeing perceive the future of the market. It is an indication of how the two companies regard future demand orientation in the market. Other distinctions, such as the size of orders and deliveries made by the two companies, are largely comparable. For example, and according to Yanamura (2012), between 2000 and 2009, Airbus received 6,452 orders, while Boeing had 5,927 similar orders. However, between 2003 and 2009, Boeing made 3,950 deliveries, compared to Airbus’ 3,810 deliveries within the same period.
The current paper is a comparative analysis of the investments made by these two leading aircraft manufacturers. The comparative analysis will revolve around four research questions. The four research questions were compiled after a comprehensive review of literature in the field and financial records of the two companies. An analysis of the performance of the two companies over the years also informed the formulation of the research questions.
- RQ1: How has national policy influenced the competition between Airbus and Boeing?
- RQ2: How has order size influenced the competition between Airbus and Boeing?
- RQ3: How has product differentiation impacted on the competition between Airbus and Boeing?
- RQ4: How has the expanding market impacted on the competition between Airbus and Boeing?
Structure Of The Paper
Apart from the introduction, the paper has four other sections that seek to provide information on the differences between the investments and economic standings of the two companies. The sections include literature review, data collection, data analysis, and conclusion. Under literature review, a critical analysis of literature in this field is provided. The aim is to locate the current study within the larger field of investments in the aerospace market. Another major aim of literature review is to identify knowledge gaps existing in the field, as well as establishing a link between the current study and other studies in the field. Under data collection, a review of the methods used to collect the data is provided. Under data analysis, the data collected for the study is compiled and interpreted to reveal common themes. In conclusion, a recap of the whole study is provided. It is important to point out at this juncture that the methodology adopted for this research paper involves a comparison of the most recent financial statements of both companies.
An oligopoly refers to an industry whose market is dominated by a few key players. The commercial aircraft industry is such a market. The market is dominated by two companies; Boeing and Airbus. Between them, the two companies control 100% share of the commercial aircraft market, making the industry a duopoly (Ahmedullah, 2012). In this section, the paper focuses on various factors that characterize the competition and investment of two of the largest aircraft manufacturers in the commercial aircraft industry.
Interdependence And Collusion
There are various oligopolies operating in today’s global market. They include such companies as Chrysler (General Motors) and Ford, Chevron and Texaco, Royal Dutch (Shell) and British Petroleum, Philip Morris Co. and R. J Reynolds, and Ligget & Myers and American Tobacco Co. One of the major factors characterizing these companies is that there is widespread interdependence and collusion among the firms (Warwick, 2012). To this end, the firms collude to set market prices and output to maximize their profits.
However, collusions are difficult to maintain because at one time or the other, one of the companies ends up “cheating” on the other. Interdependence refers to the practice of sizing up the market of the other firm (the competitor) before making strategic decisions. Warwick (2012) is of the view that the result of interdependence is uniform pricing. Boeing and Airbus have engaged in various joint ventures. Most of the collaboration ventures between the two companies involve the development of a super jumbo. However, the joint efforts failed to yield any fruits. Airbus pulled out and developed the A380. The joint ventures seemed to be concerned more with learning about the technological advancements of the competitor as opposed to coming up with a super jumbo (Bahrami, 2012).
Oligopolies exist in industries that have set strong barriers against new entrants. Some of the barriers are due to the industry’s complex nature, as in the case of automobiles. However, in other industries, barriers are artificially set by the market players, as is the case in the tobacco industry (Yanamura, 2012). There are various entry barriers in the commercial aircraft industry. Some of them are analyzed in the section below:
The cost of designing and producing a Large Commercial Aircraft (herein referred to as LCA) is huge. For example, Boeing spent between 10 and 12 billion USD to produce the 777, while Airbus spent 16.2 billion to develop the A380. In addition, it takes many years to make a plane, and there is always a high level of uncertainty because the companies begin constructing planes without the exact figure of how much it will cost (Bénassy-Quéré, Fontagné & Raff, 2011).
In order to produce a LCA the size of the 787 Dreamliner or the A380, a company must have engineers with a wide experience in the industry. The task involved explains why Airbus has only managed to design four planes from scratch since 1969 (Eads.com, 2012). On its part, Boeing has made eight planes from scratch since 1955 (Boeing.com, 2012).
The commercial aircraft industry is one of the industries in the global market that is characterized by the use of complex technologies. For a new entrant, it is very difficult to keep track of changes taking place in the industry. For Boeing and Airbus, the competition between them is at another technological level, where each of them is striving to make the safest, quietest, most efficient, and most comfortable plane (Bénassy-Quéré et al., 2011).
Logistics and production
Each plane has hundreds of thousands of components that vary in size. All the parts, from rivets to overhead compartments, must be built and assembled into one plane. The task is very enormous and sophisticated, and it is one of the main reasons why other market participators, such as Douglas Aircraft, gave up. The crisis that hit Boeing in the 1980s was mainly as a result of challenges in managing logistics and procurement of parts (Olienyk & Carbaugh, 2011).
Price and non- price competition
All firms operating in a given market want to set, rather than take, prices. The intent is always profit maximization. The same case applies in oligopolies. Here, the price for the products is fixed by the dominant entity, and the other players follow suit. In non- price competition, firms can decide to allow each other to dominate certain sets of products. For instance, in a duopoly, the firms can agree that one of them should concentrate on the production of planes with between 135-145 seats (Flottau, 2011), while the other concentrates its efforts and resources in another field. It is obvious that in a competitive industry, participants must compete on the basis of price at some point. On the other hand, in non- competitive industry, competition is based on other factors. In the case of Boeing and Airbus, competition is based on the price of some product lines, such as the 737 and the A320. However, the 747 had not encountered any challenge from any other aircraft for close to three decades. The spell was broken when the A380 was introduced in the market in 2005 (Bahrami, 2012)..
During development, the manufacturer sets the price of the plane, but after it is produced, customers are offered discounts. The discount offered to the customers by either Boeing or Airbus is a secret between the buyer and the seller. In this case, the price charged to Air France is different from that charged to Fly Emirates, depending on their ability to negotiate for discounts (Bénassy-Quéré et al., 2011).
A380 is regarded as a game changer in the industry. Before its inception, the capacity of the planes produced by Airbus was very limited. For example, none had the capacity to ferry more than four hundred passengers over a distance of more than ten thousand miles. The A380 came and changed all this, emerging as a major milestone in the development of the company. Because of lack of competition, the charges made by Boeing were quite high. The A302 and 737 are quite similar as far as their passenger capacity and the distance they can travel is concerned. Consequently, the two jets compete for customers. As a result, the prices offered to airlines purchasing the two products are significantly lower than those of other models (Bénassy-Quéré et al., 2011).
The success of Boeing’s 787 Dreamliner is mainly attributed to the high number of orders the company has received from airlines in East Asia. The customers from East Asia include, among others, the Chinese government, All Nippon Airways, Quantas, and Vietnam Airlines. Airbus was able to support the project of developing the A380 because of the high number of orders placed for private jets. The customers for the private jets included wealthy members of the royal family in Middle East (Bahrami, 2012).
The direct subsidization of Airbus by European governments and the indirect subsidization of Boeing by the United States of America have emerged as a bone of contention in the competition between the two companies (Goold, 2010). Airbus was a product of the ‘consorted’ efforts of the legislature in France, Germany, and the United Kingdom (Warwick, 2012, p. 45). During the first twenty years of its existence, the company received significant subsidies from the governments. Schofield (2011) is of the view that the costs of launching A300 and A320 were entirely catered for by the subsidies.
Up to date, it is not clear whether or not Airbus paid back the money to the respective governments. The A380 was launched through interest-incurring subsidies. Before venturing into LCA, Boeing was producing military planes. The company used the technical knowhow it had garnered from making military planes to make its first LCA. Up to date, Boeing is the largest contractor for the US military. It is also insinuated that most of the military technology possessed by Boeing is used in its jet liners (Schofield, 2011).
When firms are colluding to set prices and control other aspects of a given market, they try as much as possible to avoid innovation. The reason is that with innovation, change is introduced in the market and all firms have to spend money to compete. With regard to innovation, there is a trend unique to the case of the competition between Boeing and Airbus. Boeing was dominating the industry, and the company was obsessed with its past success in the market as Airbus took the lead. As Airbus dominated the industry, it was obsessed with its past success in the market and Boeing took the lead again. The trend is determined by the different levels of innovation that the two companies have adopted over time (Olienyk & Carbaugh, 2011).
One of the main innovations in the industry is the fly-by-wire system. Boeing’s 707, 727,737, and 747 were all built with cockpit peddles connected to control surfaces. Airbus was unable to adopt such a system in the A320 because the wing, fuselage, cockpit, and wing box were made by different companies. The different companies used drafting systems that were not compatible with each other. Because of such challenges, the designers of the plane decided to find a solution to the problems encountered controlling A320’s flight surfaces. Airbus adopted the fly-by-wire technology, which proved more efficient and one that required less calibration and maintenance compared to other systems. Since then, Airbus incorporates the technology in the design of all its jet liners (Knorr et al., 2012).
In late 1970s, Airbus was making preparations to launch its LCA. At the time, the company only had the A300. Boeing had more than five sets of the 700 series. It was difficult for Airbus to compete in such an environment. However, all the planes manufactured by Boeing were characterized by varying settings, especially with regard to the control panels. Therefore, a 727 pilot could not fly a 747 plane. Airbus took the advantage of configuring its cockpits to make sure that all the pilots could fly models developed in the future. While most of the 767 and 757 pilots were flying less frequently, Airbus pilots were always in the air (Mecham, 2011).
The configuration of the engines of aircrafts manufactured by both companies has come a long way. Before early 1990s, it was not possible to cross the Pacific or Atlantic oceans on one engine. As a result of this, the A340 was fitted with four engines and it was used to cover long distances, while the A330, which was used for short distances, had two engines. The fuel and maintenance cost of four engines was quite high. Provoked by the success of A340 and A330, Boeing developed the 777, which used the high-bypass technology engines. It was cheaper to operate such engines compared to earlier models. As a result, Boeing regained its dominance in the global market (Olienyk & Carbaugh, 2011).
The cost of fuel has been increasing over the years, which has shifted the basis of competition in the aerospace industry. To this end, the firm that produces the most fuel efficient plane gains competitive advantage over the other. Airbus was the fuel efficiency champion at the beginning. However, the company became a ‘risk averter’, unwilling to abandon its conventional technology. Boeing, on the other hand, developed the 777 and the 787 Dreamliner, which are the most fuel efficient planes up to date. Fuel efficiency will remain an important determinant of competitive advantage as the prices of crude oil continue to rise in the global market (Olienyk, & Carbaugh, 2011).
For the purpose of this research paper, data was collected from the financial statements of Boeing and Airbus companies. The data was complemented by secondary data from twelve peer reviewed articles. The objective of gathering the information was to answer the four research question. The four questions are restated below:
- RQ1: How has national policy influenced the competition between Airbus and Boeing?
- RQ2: How has the size of order influenced the competition between Airbus and Boeing?
- RQ3: How has product differentiation influenced the competition between Airbus and Boeing?
- RQ4: How has the expanding market influenced the competition between Airbus and Boeing?
National Policy Instruments
Jetliners have an intrinsic relationship with high-technology. The liners need a large number of highly competent employees. They are also linked to national pride. Therefore, making of commercial aircrafts has turned into a national policy instrument adopted for a long time in the United States of America (in the case of Boeing) and in the United Kingdom, Germany, and France (in the case of Airbus).
High-technology has become a symbol of nationalism in the developed world. Jetliners have a close relationship with the military, and they have the capacity to implement sophisticated technologies. Both the US and the European Union are very clear on their objectives of promoting technology. Boeing and Airbus are chief examples of how firms in these nations are venturing into new technological frontiers (Schofield, 2011; Warwick, 2012; Yanamura, 2012).
Building LCAs requires a large workforce. What this means is that when the two companies are handling a large number of orders, the citizens of the respective nations benefit from many years of employment. As a result, the governments are known to influence the sale of planes in other nations to keep their citizens in regular employment (Ahmedullah, 2012).
National pride and prestige
Americans love Boeing, while the Britons, Germans, and the French are proud of Airbus. The national pride is understandable because it takes a lot of time and other resources to produce a plane. In this regard, the two companies continue to be in operation for more than economic reasons (Goold, 2010).
Air travel is becoming less expensive today compared to the way it was in the past. The reduction in expenses is brought about by no-frill-low-cost airlines, meaning that the number of orders for the two companies has increased tremendously (Warwick, 2012). It is difficult for the two companies to estimate the cost likely to be incurred during the development of LCAs. In efforts to maintain stability, the two companies have resolved to generate orders for future delivery. Customers pay part of the price when they place an order, and the remaining amount is paid upon delivery. By the end of 2011, the backlog of orders at Boeing was 3,684 aircrafts (Boeing.com, 2012). On its part, Airbus had a backlog of 4576 orders (Eads.com, 2012). Both companies are currently producing between 375 and 475 planes annually. Most of the payments for the aircrafts will be done in the future. As a result, the two companies are guaranteed of a constant flow of income several years to come.
The products of the two companies, unlike in the case of most oligopolies, are very complicated and different in design. The planes manufactured by the two companies take passengers from one point to the other, but they are different with respect to such details as the width of seats, air humidity, and entertainment options (Warwick, 2012). While Boeing has embraced yoke piloting, Airbus uses a joystick. The difference in design is what makes one airliner choose Boeing over Airbus and vice versa. The industry needs are also diverse, meaning that the airlines need larger planes that can travel over long distances and others that can be used for short distances. Furthermore, the customers who want to buy large planes are the same customers who need small aircrafts, meaning that the products are differentiated (Flottau, 2011). It appears as if the two companies have decided to specialize in the production of different kinds of planes, which serve a specific segment of the market only. However, the two companies make aircrafts that are intended to meet the needs of all airlines. With this approach, the airlines can retain the same maintenance crew to handle planes made by Boeing and Airbus.
Air travel has experienced a tremendous growth in the recent past. Since 2005, both companies have received a high number of orders. For instance, in 2005, the orders for both companies tripled the orders that they had received in 2004 (Boeing.com, 2012; Eads.com, 2012). Such drastic growth has presented new opportunities to Boeing and Airbus, such as the new markets in East Asia. The increase in air travel in the developing and transitional economies, such as Malaysia, India, and China, has created opportunities for both companies to achieve growth in the regions. Airbus is developing the A350, whose launch is scheduled for around 2014. The A350 is expected to rival the 787-8, which received the European Aviation Safety Agency (herein referred to as EASA) and Federal Aviation Administration (herein referred to as FAA) certifications in August, 2011. Boeing began the production of 787-9 in early 2012, and the liner is expected to be delivered by January, 2014. As the two companies plan to release their new products, they will continue to fight for dominance in the emerging markets (Boeing.com, 2012; Compart, 2011; Eads.com, 2012).
Airbus and Boeing are the main players in the commercial aircraft industry. The industry will remain a duopoly for a long time because of various entry barriers. Both companies have used innovation and the backing of their home countries to drive competition. Although they operate in a duopoly, their efforts to collaborate are largely futile. The main drivers of competition, which have informed the investments made by Airbus and Boeing, are national policy, order size, product differentiation, and the expanding market.
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