Aviation Strategy - Assignment Example

? Aviation strategy Introduction Boeing launched the largest passenger aircraft in the world in the year 1970 and since then it has dominated the aviation sector. The monopolistic rule of the Boeing was challenged in early 2001 by Airbus with its launch of A380 that became the largest passenger aircraft with the capacity to seat more than 550 people. The ongoing rivalry between the two players in the aviation sector became the focus of many research studies and economic debates. The end of the monopolistic era of Boeing was seen as a turning point in the history of aviation since Airbus changed the rules of the game that was so far dominated by the supremacy of Boeing. The demand for new aircrafts is directly proportional to the estimated demand in the commercial aviation sector. The strategic perspectives of aircraft manufacturers focus on the estimated demand and growth potentials that can trigger the demand for aircrafts. The improvement in seating capacity has now emphasized the significance of long haul services in improving market shares and revenues for airlines operators. Both Boeing and Airbus have contradictory views on this perspective. While Boeing focuses on point to point services, Airbus believes in the hub-to-hub strategy. The viability and potentials of each of these strategic options are examined through this paper to provide a deeper insight into the strategic dimensions of both Airbus and Boeing. The paper explores these perspectives and analyses the strategic planning of these two players to provide conclude on the viability and future of the long-haul market. Organizational vision and strategic perspectives The Boeing Airbus has got two visions for its operations with the Boeing787 operate from point to point and the bigger airbus A380 having a hub to hub strategy. Boeing787 was quite successful with their strategy of point to point where their strategist were of the idea that passengers do not want to travel from hub to hub and will always prefer a nonstop direct flight to their respective destination. It is true that passengers from secondary cities have to travel more as they do not have a direct flight where they stop over in some transit hub and then proceed to their destination. This means that the cost is more both for the passenger and the aircraft company as they have to travel more and incur more expenditure. The success of Boeing787 was based on the strategy of travelling point to point from where they got a huge response with passengers opting for them as they had the convenience of reaching their destination at the shortest possible time and within affordable rates. Boeing had a second school of thought where the aircraft manufacturing giant came up with the Airbus A380 which was bigger aircrafts with more space, more passengers but operating on a hub to hub basis. The strategists for the Airbus A380 were of the view that bigger aircrafts would have the space and the higher capacity to take in more passengers which means more business at reduced costs. There is a 10-15% reduction in costs per seat in the Airbus A380 which is of principal two reasons. One is for the technologies being used for the airbuses were the aerodynamic performance has increased along with the engine performance which has a direct effect on the fuel consumption which has been reduced considerably. Second is the bigger the space of the aircraft, more the number of passengers and seats can be accommodated whereas the cabin crew, pilots and maintenance costs remains the same. Apart from the cost factors, the airbuses operate from hub to hub. The principal reason to do that is the airbus A380 travels long distances and operating from hub to hub is a better option. The second factor on its strategy list is that given the size of the aircraft, the aircraft terminals needs to be modified with runways and the boarding bridges, luggage handling etc comes into the picture which is generally not available in the smaller airports. Therefore the operation strategy of the Airbus A380 is always suited for the larger airports where the hub to hub concept prevails. Another operational strategy adopted by the Airbus A380 is to link its hub to hub concept with that of other airlines who will be able to book passengers from the smaller cities to the hub and forth as they embark on a longer journey internationally to other countries. Events since the launch of Boeing 787 and Airbus 380 “In December 2000, Airbus formally committed to spend $11.9 billion to develop and launch a 555-seat superjumbo plane known as the A380.” (Esty & Ghemawat, 2001). The Airbus A380 launch cost was itself $11.9 billion which represented 26% of the total industry cost in 2000. (Esty & Ghemawat, 2001) The Airbus A380 was launched for the super jumbo category where it is the world’s largest aircraft where the seating capacity is way higher than any of its competitors. Airbus is owned by Airbus Industrie which is a consortium of the leading manufacturers from France, Britain, Spain and Germany. On the other end, Boeing has been the leading manufacturer of aircrafts for more than 50 years. The Launch of the Boeing 787 was delayed by three years after it was launched in 2011. The Boeing 787 is the new generation of airplanes where Boeing has given considerable effort in making it technologically superior. Boeing had outsourced 70% of its aircraft parts to companies which they feel gave way to quality of the parts as well as made it cost efficient. The Boeing and Airbus have adopted the ETOPS (extended twin engine operations). “ETOPS is especially important for point-to-point traffic where Boeing offers the 787 and 777 and Airbus offering the A330 and A350. Currently Boeing holds the record for the highest ETOPS rating with 207 minutes ETOPS certification on their 777 model.”(Cannegieter,2008). With the ETOPS certification coming in, it is a major step in the aviation industry with the aircraft manufacturers adopting the twin engine model with larger capacity and better operability. The Boeing 787 has launched itself very well where the passengers have greater space, remarkable viewing experience with bigger windows, larger toilets where travelling from point to point has become really pleasant. “The Boeing 787-8 Dreamliner is the first airplane to provide both long distance capabilities with mid-size capacity (210-250 passengers in a three-class seating), allowing airlines to open new, non-stop routes preferred by the traveling public. The airplane is 20 percent more fuel efficient than similarly sized airplanes.”(Boeing,2011). It has also the best speed and distance capabilities as per the weight of the airplane where Scott Fancher, Vice President and General Manager of the 787 program announced “Speed and distance capabilities are fundamental to the value the 787 brings to the market”. (Boeing,2011) Post launch, the Airbus A380 has done very well in its own segment where it became the largest carrier in the world to travel long distances. “It is clear the A380 is the right solution for congested airports in Europe, Asia and North America. Airlines will have no choice other than to offer more seats per aircraft to these congested airports.” (Cannegieter,2008). It is important for these congested airports to take in more passengers from these worldwide hubs like London, New York, Frankfurt etc. However despite good reviews there are technical issues which are highlighted which needs to be worked out by the Airbus. “The general verdict is that the A380 has delivered a significant operational boost to the airlines' marketing teams and has equalled or bettered performance guarantees but continues to experience technical delays caused by problems that Airbus acknowledges it should have got on top of by now.”(Jones, 2009) Fuel efficiency, space and speed are acknowledged by all in the industry using the A380. The forthcoming launch of the Airbus is the A350 and the Boeing 747-8 which launched in 2005 are slated to be the finest of the aviation industry coming packed with the latest technology, lesser fuel prices. The airbus A350 will continue to be the leader in the larger capacity segment which makes sense for their strategy to transfer a large number of passengers in a single flight and suits their hub to hub model. On the other hand the Boeing 747-8 has already stepped into the shoes of the much advanced 787 dreamliner model. “The 747-8 Intercontinental passenger airplane will be stretched 3.6 m (11.7 ft) compared to the 747-400 to accommodate 34 additional seats in a typical three-class configuration.”(Boeing,2005). Analysis of current situation The current situation is that the aviation industry is experiencing a steady increase in growth with the world economy being getting over the recession stage and the emergence of the emerging economies like China and India. World Economy had its up and downs in the last decade but going forward the pace has increased and there is an increase in the passenger levels with the globalization of business and trade where inter-continental visits have been on the upward trend. “While Boeing sees an annual passenger traffic increase of 4.8% between 2005-2024, Airbus sees a slightly higher annual increase of 5.3% between 2004-2023. Boeing foresees a worldwide passenger fleet of 35,300 aircraft by 2024 while Airbus sees an increase to 21,759 aircraft by 2023.”(Cannegieter,2008) Cannegieter has projected a 20 year forecast based on the current trends where there is customer acceptability for the Boeing 787 and the Airbus A380. Both the aircraft manufacturers operate on two widely debated concepts of the aviation industry with the Boeing concentrating on the point to point transfer of the passengers where they can have a direct nonstop flight. This theory has worked well over the years as the passenger segments that need to travel non-stop choose the 787 to go over to their respective destinations. Since the maximum demand in this section is to travel shorter distances, it is easier to manage for Boeing to accommodate 250 passengers in a single flight. Though Boeing has increased the seating capacity with the 787 dreamliner but the Airbus has far more seating capacity than the Boeing. The sectors chosen by A380 are the longer flights from the hubs where they can get access to a large number of passengers in the busiest airports of the world. The passengers get the space, the comfort, the much needed sleeping arrangement to comfortably reach their Trans country and continent destination. If A380 would have operated from point to point then it would not have make sense to operate such a huge capacity fleet and do not get the requisite passengers. Therefore the model chosen by both the airplane manufacturers are right in their respective domains. The current situation is that the Boeing 787 dreamliner is giving all the amenities to the passenger to ensure a smooth, intriguing, pleasant and comfortable journey experience. Apart from this the Boeing 787 is equipped with the latest technology in the aviation industry which has reduced bumps, emissions and lesser fuel usage thereby increasing the quality of travel and reducing the cost at the same time. There was a time when the rise in the cost of fuel was slowing down the economy with the airliners increasing costs and the passengers count lessening down to such a level where some airliners where on the verge of declaring bankruptcy. The situation has changed with the latest state of the art technology which has changed the cost factor and reaped huge benefits to the customers. The Airbus A380 is also equipped with the latest technology where they have considerably improved the aerodynamic performance of the air foils and increased the drag/lift ratio. This is combined with enhanced engine performance which leads to lower fuel usage. The combination of all this with a principal factor of increasing the seating capacity of such a large airbus has made a considerable increase in the profitability of A380 and they are even to break even with lesser number of passengers leaving a good room of profit. In comparison the rate of break even passengers of Boeing 787 will be higher than the Airbus A380. The higher the productivity of these aircrafts means lower the operating costs which has a direct implication on the profitability of the companies. A380 with its larger number of passengers have the flexibility of maintaining the same operations cost as they have a larger seating accommodation with marginal increase in cost, say the number of air hostesses might be increased but the other costs like maintenance and pilots would be the same. The current situation of both the aircraft manufacturers are heartening as they are doing their basics right with the combination of technology and the right strategy in their segment to be the leaders of the aviation industry. Long haul market future According to a study by Peter Murphy and Trace Harrison-Hill (2005) the long haul flight market is one of the greatest contributors to the tourism business in Australia. Similar observations have been made by Dr Christopher Brutzel (2007) who analyzed the market potentials of long haul services in the low cost flying segment. The future for long haul market thus looks promising with airline services focusing more on meeting the growing travel needs of customers to seek low cost options and reduced travel time for flying from one destination to another. However, there are some key challenges facing the long haul travel market and these include airport development, aircraft technology, airline alliances, frequent flyer programs, loyalty programs, risk management and risks associated with long haul travel (Murphy & Harrison-Hill, 2005). Long haul market requires supportive infrastructural facilities beginning with airports that have the capacity to deal with super jumbo jets and cater to the needs of nearly 100 million passengers every day. The present economic environment has witnessed a growing focus on developing high capacity airports and infrastructure that has the essential requirements to meet the needs of the growing number of passengers and high capacity aircrafts. The hub and spoke network used by airlines today to improve their accessibility across different destinations globally has increased the strategic emphasis on mergers and alliances. The strategic alliances between airlines services to improve passenger services and meet the demands for long haul travel has also intensified pressure on expanding existing airport infrastructure and upgrading technical facilities to handle the needs of high-end aircrafts. “In short, the growing demand for air travel will keep raising requirements for airport carrying capacity, and the ability to use landing and takeoff slots to their maximum potential” (Murphy & Harrison-Hill, 2005). This is one of the primary reasons behind the privatization of airports since government funding to meet the expansion needs in most economies seemed inadequate to the growing demand for enhanced infrastructural facilities. A key factor propelling the airlines services in the current economic environment is the growing demand for low cost and frequent business travel by customers across the world. Boeing and Airbus have influenced the way airline services operate and meet the demands of this sector through their technical breakthroughs. The success of the B747 with enhanced seating capacity and the power engine to accommodate long haul flights spelled a new era in the airlines sector. The point to point service aircraft design was ideal for catering to the growing demand for air travel. The next breakthrough was the Sonic Cruiser that was designed for point to point service with a seating capacity of 250, comparatively lower than other aircraft models, but having 20 percent more speed than any other commercial aircraft. The focal strategic point was reducing the time to travel and ensuring the business travellers with increased comfort. While such strategic perspectives do sound logical, the fact that frequent travelers will not want to spend too much on availing comfort is a reality faced by most airlines services. The demand for low cost long haul services has been growing and holds the key to future market potentials. Airbus has based its strategies on the fact that the success of airlines services depends on catering to the mass market and provides them competitive rates of flying through increased seating capacity and providing them with long haul flights. However, there are other factors and perspectives that influence the demand for long haul flights among customers globally. Air travel safety conditions and precautions are yet another aspect driving the viability of long haul flights. Passengers with health problems with avoid long haul flights and prefer point to point services. Potential risks and threats from terrorist attacks are some of the important considerations driving the demand for long haul flights. The increased cost and time to travel from one destination to another can inhibit passengers from taking these choices and in such cases the demand for short haul flights is more. The growing cost of fuel has been eating away the profits and this provides new challenges to the airlines services globally. Fuel cost and other considerations discussed in this paragraph make the viability of long haul flights limited but the future potentials depend on the innovative capacity of Boeing and Airbus to address these issues and provide the customers with a low cost long haul travel option with minimized risks. Conclusion It can be concluded from the discussion above that the Boeing with its short haul flights and the Airbus with its model of long haul flights are serving two different segments where the customers have the option to go from point to point as well as hub to hub option. The Airbus A380 offers larger seating capacity and the technology where they can reduce fuel costs and give the passengers an affordable cost of travelling. A380 goes for the long haul flights where they have the ability to carry a large number of passengers from the busiest hubs in the world. On the other hand the Boeing 787 does not have the large numbers to carry but they give the much needed point to point service which is required by the passengers as they want to reach their destination in the shortest possible time and these are the short haul flights. References 1. Brutzel, Dr. C. 2007, Long-haul low cost – market opportunities and threats, Aviation Consulting. 2. Canniegieter, R. 2008, Long haul vs ultra high capacity: ranging capabilities, Aerlines Magazine, Issue 31. 3. Esty, B. & Ghemawat, P. 2002, Airbus vs Boeing in super jumbos: a case of failed preemption, Harvard Business School. 4. Fong, M., Vong, K., Wong, K., Li, V., Chae, J.W., & Eslao, J. 2008, Boeing strategic analysis report. 5. Murphy, T. & Harrison-Hill, T. 2005, Long haul flight market – its future and implications for Australia over the next 20 years, CRC for Sustainable Tourism. 6. Nielsen, H. 2001, Boeing versus Airbus, Nielsen Innovation SARL. 7. Boeing.2005, Boeing 787 Dreamliner set Speed, Distance Record available from http://boeing.mediaroom.com/index.php?s=43&item=2062 8. Jones, M.G. 2009, A380’s stellar performance undermined by ongoing technical issues: operators available from http://www.flightglobal.com/news/articles/a380s-stellar-performance-undermined-by-ongoing-technical-issues-operators-334396/ 9. Boeing.2005, Boeing 787 Dreamliner makes international debut available from http://www.boeing.com/news/releases/2005/q4/nr_051114h.html Read More