Managing Business in Europe - Airbus versus Boeing - Research Paper Example

Managing Business in Europe - Airbus versus Boeing Introduction Airbus and Boeing are the two major manufacturers of airplanes not only in the European market but also in the world aircraft market. In particular, the competition has been quite rife between the aircraft manufacturers in the large commercial segment of the European aircraft market. The stiff competition between these companies has made them have duopoly power in the world airliner market beginning in the early 1990s (Irwin & Pavcnik, 2004). In addition, the competition has led the two firms to strategize with policies that would see them dominate both world and European aircraft markets. In addition to the mergers and acquisitions in the airline industry, pullouts of other players out of the aviation industry have been cited as the reasons for the dominance of the European airline market by Airbus and Boeing. While Airbus emerged as a conglomerate in Europe, Boeing (U.S-based) became a powerhouse in the airline manufacturing industry after acquiring its former rivals such as McDonnell Douglas in 1997 (Irwin & Pavcnik, 2004). Among the airline manufactures that pulled out in the U.S to pave way for the dominance of Boeing and Airbus are Convair, Lockheed Martin (both in the U.S), Dornier, and Fokker (Europe). The collapse of major aviation industry players in other regions of the world such as Asia also played a role in propelling Airbus and Boeing into dominance (Irwin & Pavcnik, 2004). One commercial factor that has influenced the competition and performance of the two organizations at home and international markets is the currencies in which the firms transact their businesses. The two main currencies used by Boeing and Airbus are the U.S Dollar and the Euro respectively. This paper thus analyzes the effects the Euro's monetary power/exchange rate on the Airbus company and the effects of the Dollar's monetary power/the exchange rate on the Boeing company. In addition, the paper compares the efficiency and the performances of the two firms, particularly in the European market. Effects of the Euro on Boeing and Airbus The formation of the European Monitory Union (EMU) and its subsequent policies stirred the aircraft manufacturing industry to a new level of anxiety and competition. At the forefront in these competition wars are the two major manufacturers of large commercial aircrafts, Boeing and Airbus. The success story or lack thereof of the euro poses a lot of challenges to the role the U.S dollar has played in the international aircraft market, more so in the European market. Most affected in this regard is Boeing, which carries out its production and sales using the dollar. The negative impacts of a credible euro on the dollar stems from the fact that the euro has become an attractive alternative to the dollar in the European aircraft market. However, the euro’s challenge to the dollar as the world’s leading currency in the aviation industry still attracts a lot of debates and uncertainty. On one side of the debate are those stakeholders holding the opinion that forces of inertia will still see the dollar maintain its role as the leading currency in the aviation industry for quite a long time. The euro-enthusiasts on the other hand foresee a situation in which the euro will soon rival the dollar as the preferred currency in the aviation industry’s manufacturing subsector. Besides the above lines of thought, there are those aviation stakeholders who assert that it is too early to postulate on the long-term impacts of the EMU on the role of the dollar or the euro on the manufacturers of aircraft such as Boeing and Airbus. Depending on how the EMU manages its financial policies, perhaps the most plausible scenario in which the euro eventually plays the Airbus to the dollar's Boeing would be achieved. Academic economists have cited the highest euro’s denomination of €500 as more attractive than the $100 bill, stating that the euro will eventually be more attractive than the dollar in the aviation market. Effect of Currency exchange rate on Boeing and Airbus In any analysis on the performance of Airbus and Boeing, the importance of the role played by the respective currencies in which the two firms operate cannot be overemphasized. Since every resources spent on the operations of the firms are valuated in the form of the respective currencies used, the losses or profits incurred must depend on the stability or lack thereof of the currency used. It should be noted that the two firms majorly use two different currencies although to survive in the international market, they have to use the other world major currencies when dealing in foreign business. For example, while Boeing uses the United States’ Dollar in most of its production and marketing operations, the Airbus uses the Euro. Of great importance to the analysis of the effects of major currencies on the airline manufacturer is the exchange rate of the currencies. When comparing the performance of Airbus and Boeing, it is imperative that the exchange rate between the US Dollar and the Euro Mark be taken into consideration. As an illustration, an appreciation of the dollar against the euro implies that production a Boeing aircraft becomes more expensive compared to production of an Airbus aircraft. Conversely, when the dollar falls against the euro, producing a Boeing aircraft becomes cheaper relative to an Airbus aircraft. Besides the exchange rate, there are other currency factors that affect Boeing and Airbus in the airliner markets. These other factors include the various currency risks and benefits whenever an aircraft is sold. While the Boeing insists on using the U.S dollar to price its aircraft, the Airbus uses the euro, the dollar, and other regional currencies in areas such as the Middle East and Asia. The currency used notwithstanding, the fluctuation rates and trends between the time an airline manufacturer accepts an order and the time a finished aircraft is delivered determines the extra profit or loss earned by a firm. The assumption in this assertion is that the airline manufacturers have not insured themselves against the effects of such fluctuations. Exchange-rate misalignments and their effects in a duopoly such as the case of Boeing and Airbus have thus been an area of focus and interest for many a stakeholder of the aviation industry. In these analyses, it has become imperative for an assessment to be carried out on the effects of the misalignment of the two major currencies in the dollar-dominated large commercial aircraft market (Gunston, 1988). That the large commercial aircraft market is a duopoly is supported widespread use and influence of the dollar and the euro and is further evidenced by the fact that while the Boeing makes the market dollar-dominated, the more flexible Airbus prefers the euro. To deal with the effects of the fluctuations of the monitory power of the currencies used, Airbus and Boeing have developed simulation models by which they are able to adjust their prices. These simulation models help the firms to deal with the consequences of the temporary misalignments of the exchange rates, which are quite characteristic of the aviation industry (Reed, 1991). Importantly, how these exchange rate misalignments affect these organizations’ profit margins and volumes have been matters of great concern to their management teams. Moreover, competition effects of the fluctuating currency-power of the US dollar and the euro have been of great concern to the two firms. The fact that the large/commercial aircraft market is dominated by the U.S dollar implies that the Boeing passes a bigger portion of the exchange rate fluctuations onto its customers than Airbus does. This passage of the fluctuating exchange rates to customers often occurs in form of higher aircraft prices by the firm. There are many reasons for which even a slight fluctuation in the hitherto equilibrium-state in the currency exchange rate could cause long-term or permanent effects on the aviation industry. Two among these factors are the customer switching costs and learning-by-doing nature of the aviation industry (Reed, 1991). With each of the aircraft manufacturers experienced and skilled in analyzing their sales figures, it is crucial that each develops new and effective ways to project their earnings and growth rates. For large companies such as Airbus and Boeing, currency fluctuations have impacted on their foreign earnings, sales, and profitability. Currency fluctuations have therefore meant the underperformance or outperformance by the two major players in the airline manufacturing industry. For instance, between 2006 and 2007 when the euro appreciated against the U.S dollar by 20%, the Boeing realized divergence in profitability (Kemp, 2010). In fact, there was a rise in the demand and orders for Boeing’s Dreamliner jet in the same period. However, when the euro rose from 1.18 to 1.42 to the U.S Dollar, there was a shift in the demand and interest among foreign buyers. In the same period, Boeing’s key competitor in the European market, Airbus, suffered as the euro strengthened. In fact, the suffering of Airbus made the firm to announce an unexpected 10,000 job cuts in the third quarter of 2007. To reverse the $810 million loss it had suffered due to the strengthening euro, the Airbus accelerated its production of a new series of its aircraft called Superjumbo jet. The weakening and strengthening of the U.S dollar and the euro have also had far-reaching effects on the export and import transactions of the two firms. For instance, Boeing, which sells many of its aircraft abroad, performs well when dollar weakens. The other aspect of Boeing and Airbus in which they have benefitted due to fluctuating currencies is international exposure. For instance, when the dollar weakens, the accompanying foreign fluctuations would boost the Boeing’s foreign earnings. The same applies for Airbus. However, a strengthening of the dollar or euro would reduce the firms’ earnings. There are various levels or scales in which Airbus and Boeing operate in the European market. Major among these levels/scales is the outsourcing approach. Competition by Outsourcing in the Aviation Industry One of the ways in which the major players in the large commercial aircraft manufacture compete in the European market is by outsourcing. In this regard, both firms have taken to the outsourcing of the production of certain parts or segments of their aircraft to other manufacturers. Targeted by these outsourcing policies and strategies are the countries in which the Boeing and the Airbus attach strategic importance to their businesses. In fact, this strategy is applied even in regions outside Europe. For instance, Japanese firms such as the Mitsubishi and the Kawasaki Heavy Industries have been contracted by Boeing to manufacture certain parts of its aircraft for Boeing to gain competitive advantage in the Japanese market (Newhouse, 2008). In the context of outsourcing, the Boeing has outperformed the Airbus, mainly because of the latter’s origin as a consortium of European companies, implying fewer opportunities to outsource the manufacture of vital parts of its products in firms operating inside and outside European. Since the emergence of Airbus and Boeing as the two major competitors in the aviation industry’s manufacturing sector, technology has been the other front in which the two have fought for competitive advantages in the European market. Specifically, the provision of engine choices has been the number one area of competition between Airbus and Boeing in the European market. The main engine manufacturers which the Boeing and the Airbus strike deals with for engine and other technology choices are General Electric, Rolls-Royce and Pratt, and Whitney (Newhouse, 2008). The unbending competition between Boeing and Airbus has resulted in mixed results in the past years. However, the latest reports indicate positive results for both aircraft manufacturers despite the stiff competition in the European market. The other strategy that Boeing uses to win the strategic contest with Airbus in Europe is by leveraging its Commercial Finance Unit. This entails making more use of the firm’s capital finance to assist in selling its aircraft to carriers in Europe where lining up capital is tougher compared to other regional markets. Since most aircraft customers, particularly carriers would want manufacturers who are more involved in assisting them secure finances, Boeing’s strategy to use its capital arm as a tool to gain an edge on strategic competitions would be quite effective (Pandey, 2010). For instance, Boeing leases hundreds of aircrafts to its carrier customers, implying they do not commit their own capital for the planes. A lot of concern about the availability of capital in European, especially with the European banks has been the driving force behind this strategy by Boeing (Pandey, 2010). Comparing Boeing and Airbus; Efficiency and Performance One of the mechanisms by which the efficiency and the performance of the two main rivals in the one of the largest duopolies in the world is by assessing and monitoring the performance and efficiency of their systems and products. In this regard, to compare Airbus and Boeing, their two equivalent products, the Boeing's 787 Dreamliner and Airbus' A380 may be compared. One aspect of the two aircraft that may distinguish their performance is the fuel-conservation strategies in the two airplanes. With a capacity of over 520 passengers, the Airbus’ A380 has two decks, each with dual isles to achieve a new level of airborne mass transit (Newhouse, 2008). The A380 is thus designed for longer trips besides the increased passenger capacity. It thus seeks fuel conservation by consolidation. In the contrary, the Boeing’s 787-3 Dreamliner planes have large capacity but are designed for short distance journeys. In addition, the 787-8 and 787-9, although of smaller capacity, are longer distance aircraft (Wagner & Norris, 2009). The position and the functions of the two makes of aircraft do not particularly overlap, a possible indication that Boeing and Airbus avoided direct competition in their latest models of aircraft. Although the Boeing 787-3 and the A380 are close in statistics, the latter has one and a half times the capacity and nearly three times the range of the former (Newhouse, 2008). To further avoid direct competition with its rival, Boeing built the smaller and more fuel-efficient planes in the 787-8 and the 787-9 models. The performance of the two aircraft-manufacturers could also be assessed on the basis of the number of companies that invest in them and those that have signed deals and contracts with them. For instance, while Boeing has contracts with companies such as Thales, Goodrich, and General Electric, Airbus has signed deals with DHL and Honeywell among others (Newhouse, 2008). The above mentioned firms are particularly important to Boeing and Airbus because of their role in creating and supplying aircraft parts such as engines, transportation services, logistics, tires, information systems, and landing systems among other parts. Nonetheless, these firms are found to work with both Boeing and Airbus in some cases. For instance the aviation systems producer Rockwell Collins and Goodrich, an electric/landing systems manufacturer work with both Airbus and Boeing. The performance of Boeing and Airbus may also be assessed on the basis of orders and backlogs to be cleared by the firms. That is, the company that best fulfills its contracts would be declared more efficient and better performer. In June of 2005, Airbus announced a six-month delay in meeting the order demands, which was followed by further delays in June and October of 2006. Consequent to the delays, Airbus’ delivery dates were pushed back and the number of deliveries/shipments reduced (United Business Media, 2011). Internal wiring problems and airline customizations were some of the reasons given by Airbus for the delays and delivery reductions. Boeing has also had its fair share of delivery delays and production backlog. In April 2008, Boeing delayed the production and timely delivery of its 787 Dreamliner due to unspecified design flaws (Pandey, 2010). The seemingly continuous delays battered the image of Boeing in recent past leading to the loss of its first 787 order by Azerbaijan Airlines, which had to reduce its original order from three to two (United Business Media, 2011). Despite the delays that characterized Boeing and Airbus in the first years of the 21st Century, a lot of improvement is evident in recent times. The latest performance reports (Third Quarter of 2011) for Boeing indicate a strong performance in which the earnings per share ranged between $4.30 and $4.40. Completing the development and certification of the 787-8 Dreamliner, Boeing managed to strengthen its foundation for accelerated growth, which has been characteristic of the company. In addition, Boeing launched the new 737 MAX in the same third quarter of 2011. The positive results could also be attributed to the firm’s tradition of increasing the production rates of its commercial airplanes. Similarly, despite the stiff competition, Airbus also posted positive results for the third quarter of 2011. In fact, Airbus’ momentum for the production of commercial airplanes remained strong during the said period. Nevertheless, the firm’s defense-related orders were somehow down, as had earlier been anticipated (EADS, 2011). Stiff competition from its bitter rival, Boeing could be cited for the pressure on the defense orders. However, the order intake for Airbus stood at € 93.9 billion while the order book record showed a level of € 503 billion (EADS, 2011). Operational improvements from the firm’s Eurocopter and Airbus commercial activities and favorable phasing in Airbus and in Headquarters have been cited for Airbus’ revenues that stood at € 32.7 billion for the third quarter of 2011 (EADS, 2011). Generally, the group’s efforts to improve its overall performance have been the driving force for the realized results, which were beyond expectation. Conclusion The aircraft manufacture industry is one of the industries that have highest level of duopoly in the world. Two major players in the industry, Boeing and Airbus continue to indulge in top-level competition to dominate the world market. The lucrative European market has offered a fertile ground on which Airbus and Boeing wage their competition wars. Outsourcing, technology, and striking contracts with as many partners as possible have been the main levels in which Boeing and Airbus compete. Currency (dollar and euro) fluctuation has been a central factor affecting the performance of the two firms in the European market. Nonetheless, both firms have recorded positive performance in recent times, mainly due to lack of competition from other players. References EADS. (2011). Improving Performance: EADS Reports Nine-Month Results 2011. Retrieved on November 14, 2011 from http://www.eads.com/eads/int/en/news/press.5e57db10-0f56-40e3-ac7f-0645e27207a0.html. Gunston, B. (1988). Airbus: the European triumph. Osprey Publishing Company. Irwin, D. A., and Pavcnik, N. (2004). Airbus versus Boeing Revisited: International Competition in the Aircraft Market. Journal of International Economics, 1(4), 254. Kemp, K. (2010). Flight of the titans: Boeing, Airbus and the battle for the future of air travel. Virgin Books. Newhouse, J. (2008). Boeing versus Airbus: the inside story of the greatest international competition in business. Vintage. Pandey, M. R. (2010). How Boeing defied the airbus challenge: an insider's account. CreateSpace. Reed, A. (1991). Airbus: Europe's high flyer. Society of Automotive Engineers Inc. United Business Media (2011). Boeing Reports Third-Quarter Results and Raises 2011 EPS Guidance. Retrieved on November 14, 2011 from http://www.marketwatch.com/story/boeing-reports-third-quarter-results-and-raises-2011-eps-guidance-2011-10-26. Wagner, M., and Norris, G. (2009). Boeing 787 Dreamliner, first edition. Zenith Press. Read More