Boeing Versus Airbus: The Inside Story of the Greatest International Competition in Business - Assignment Example

Introduction: The launching of Boeing 777 has revolutionized air travel. It can carry up to 300 passengers and travel between 5235 to 9,380 nautical miles although there are variations depending on the model. The triple seven is famous for its large turbofan engine with six wheels on each landing gear and circular fuselage. Eight air lines were consulted before they started to work on this plane aiming to replace other airlines and producing the first computer based commercial aircraft. The Boeing 777 became one of the best selling models due to its fuel efficient engine and was used increasingly on the long haul . On the other hand, the airbus A380 is a subsidiary of EADS, the world's largest passenger airline. It is a double-deck with four engines manufactured by the European Airbus and a wide body. Many airports around the world had to amend their current resources to accommodate this aircraft. A380 aimed to challenge, triple seven's monopoly in the large air craft market. The first maiden flight of A380 was on 27 April 2005 and entered into proper commercial service with Singapore Airlines in October 2007. In the early stages, the aircraft was known as Airbus A3XX until it received the title of A380. A380's upper deck extends the length of the fuselage which has a width equivalent to the wife body of the aircraft permitting for an A380-800's cabin with 478 square meters of floor space; offering 49% more space than the airline which is currently the second largest and a seating arrangement for 525 people in the three class configuration or 853 in all of the economy class configuration. The design range goes up to 15,400km of the A380-800, carrying passengers from New York to Hong Kong at a speed about 900 km/h or 560mph. In November 2011 about 238 orders has been made for the A380 and until now, around 67 of them have been delivered to different airlines. The largest order was by Emirates of 90 aircrafts. In 2006, analyst of two leading companies predicted that in 2006, A380 sales would increase at an alarming rate by 2025. They felt that the Airbus had intense market analysis of commercial aviation hence being able to justify for its VLA known as a huge aircraft with over 400 seats available. They also felt that the increase of midsized air craft's made VLA's only for the niche market making such plans unjustified. Both analysts' had differing opinions related to market forecasts in incorporating spoke-hub and point to point models. The Airbus demanded for 1283 passenger planes of the VLA category in 2007 for the next 20 years if airport congestion stayed at the level that it currently is now. Based on these estimations, demand could have reached up to 1771 VLAs and the main reason behind that demand will be because of rapid growth and urbanization in Asia. It was also planned that A380 will be used for relatively fewer routes as compared to before and that too between the most saturated airports. Currently, there are estimates being made for an increase in demand of 415 freighters in the category of 120-tonne plus. Nevertheless, Boeing 747-8 offers competition that calculated that the travelers requirement for VLAs at 590 and that the freighter VLA at 370 for the period 2007-2026. There was a time when the A380 was being considered to replace the current Boeing VC-25 working as Air Force One, however in January 2009; Eads stated that it would not bid for any more contracts as assembling as few as three aircrafts in the US would not be sensible at all, especially economically. There was a time when A380 was thought as a replacement for the existing Boeing VC-25serving as Air Force One, In February 2011, 244 orders for the A380-800 were made. Initially, the breakeven cost was calculated which came up to around 270 units for the A380 but delays and falling exchange rate of the dollar made it rise to 420 units. In 2010, Peter Ring of EADS stated that costs incurred could be covered till 2015, although there could be delays; based on current estimates, 200 deliveries will be made around that time. Body: Moving on, the length of the flight is termed as the time above the ground for a flight in aviation. A local flight is generally group into flights of no longer than 1.5 hours of duration, which explains that all domestic flights within a small country like the United King don are considered as short haul. Based on this criterion, it is important that the destination airport should also be in the same country as the departure airport. Also in some countries, domestic flights can be much longer as compared to others as some countries are obviously larger than others. Thomas Cook Airlines defines a short-haul flight as a flight which is less than 3 hours. However Cathy Pacific claimed that examples of short-haul flights were those that were between Hong Kong and Tokyo or Korea or between Vancouver and New York. The UK Treasury defined short-haul flights as those that cover less than 2000 miles in distance. HM Treasury levy Air Passenger Duty on all flights in the United Kingdom by banding by distance. A medium-haul flight is one which is defined as a flight between 3 to 6 hours. Flights between Egypt and the United Kingdom are such examples. There flights are about 4 hour's longs. Long- haul flights are those that usually cover long distance and the aircrafts have wide-bodies. The time for these flights goes beyond six and a half hours in length and are usually of course non-stop . Usually aircrafts prefer to take routes that will minimize the duration of flights. The most direct route that should be taken for long-haul flights is the great circle around the curvature of the earth. Aircrafts that travel west between continents will follow paths that are going towards arctic region, as a result when this route is shown, it looks like a curve. The great-circle distance between airports may therefore give an approximation of flight length. Also, It is important for flight routes to keep in mind the weather conditions and of course the air currents. A transcontinental flight is more likely to take a more southerly route to benefit from the jet stream. There has always been a competition between Airbus and Boeing because both companies are equally big and dominant in the jet airliner market since the 1990's. This happened because of mergers within the aerospace industries since years. The Airbus was more of a European production whereas the Boeing was American. Other manufacturers like Lockheed Martin and Convair from the United States and Dornier and Fokker in Europe, had pulled out of the civil aviation market because of dropping sales figures and other economic lapses. After the collapse of the Soviet empire, the Eastern Bloc and the Comecon was a great disadvantage to the aircraft industry. Although Antonov, Ilyushin, Sukhoi, Tupolev and Yakovlev still worked towards developing new passenger planes and they did have a small market share. This left Boeing and Airbus in a duopoly in the world market for these jet plans that had a variety of wide and narrow bodies and jumbo jets. Embraer has earned market shares in the narrow-body aircraft in the Embraer E-jets series. There is also prominent competition in the jet manufacturing market between Bombardier Aerospace and Embraer. (Air finance, 2012) In October, there was a delay in the production of A380 as FedEx cancelled their orders of A380. Certain customers cancelled their orders for A380 and instead preferred to use the 747-8 or 777F aircraft. (Air Finance, 2012) Boeing advertised that they had a more suitable package as compared to the Airbus stating that there was a 21% cost reduction per passenger and a seat mile cost was 6% less when it was compared with the Airbus. The 747-8F's is estimated to be 80 tones lighter and 24% less fuel is consumed per ton with contributing to 21% lower trip costs and 23% reduced ton-mile costs as compared to A380F. In reaction to this, the Airbus decided to offer more take off weigh as compared to the Boeing permitting a better range performance. Emirates along with British Airways are amongst the first airlines to accept this offer. From April 2009 to until now, no airline has ever cancelled orders for the passenger version of the Airbus. On the other hand, Boeing at the moment is only restricted to two commercial airlines which are Lufthansa and Korean Air Lines. An announcement was made in early 2008 stating that Boeing lost US$40 billion in refueling aircraft contract to Northrop Grumman and Airbus which led to protests and angry discussions in the US Congress. When Boeing's protest was reviewed, the Government Accountability Office favored Boeing and ordered the USAF to re assign the contract. Therefore the entire plan for the aircraft had been rescheduled, then canceled, and lead to making a new decision in March 2010. On 24th February 2011 due to a lower price, Boeing won the contest. People felt in the media that the prices Boeing was offering were so low that it would ultimately lead to a loss in the deal. They also came up with assumptions that the company can break even their cost with the help of maintenance and spare part contracts. As expected it was disclosed in July 2011 that the project cost rose significantly by $1.4bn and also exceeded the $4.9bn contract by $300m. Most of the airlines in the world are usually semi private or state owned, aircraft procurement decisions are mostly taken into account by considering political and commercial areas of interest. Boeing and Airbus wished to exploit this by giving the making of aircraft machinery or the assembly to the producers where the countries are to be at an advantage. Boeing has maintained good relationships with Japanese suppliers like Mitsubishi Heavy Industries and Kawasaki Heavy Industries. These companies help out and are continuously involved in the development and enhancement of the jet planes. As a result, Boeing has dominated the Japanese markets with their commercial jet. They offered to outsource 787 and as a result Boeing own involvement was drastically reduced to just merely managing the project, designing, assembling and carrying out test operations. It led to out sourcing most of the real actual work of manufacturing the planes all over the world. Boeing did accept that it has "outsourced too much" and that they wish to reduce the external dependency for plane production in the future and would use their own staff for engineering and production purposes. Airbus compared to Boeing has very little opportunities to outsource partly because its origins are based in Europe. Most of its plants are centralized and concentrated in Europe only. In 2009 Airbus got an opportunity to open a plant for assembling in China to produce its A320 series airliners. Airbus and Boeings competition could not be put to an end. Airbus wished to compete with Boeing that was already very well established by bringing in the use of technology that was way more advanced as compared to what Boeing was using. It has automated the flight engineers functions, a task which was never done before. It became the first commercial jet that permitted a two-man flight crew. Airbus eventually became the first one to bring the digital Fly-by wire controls into the airliners in the 1980's. Now that competition became open, both companies started to compete for better airplanes. They used advanced technology to super cede each other's products. An example of this is the Boeing 787 Dream liner. This made both companies go to extreme end to be victorious in their competitions. Engines of course play a very significant role in the production and quality of the planes. The engines of the planes were a great competitive strength to both the companies. Companies usually prefer to have engines from two of the three companies which are General Electric, Rolls-Royce and Pratt & Whitney. These companies are the major manufacturers and therefore the quality of engines they produce is much more appreciated than anything else making the aircraft of a different level all together. Engine manufactures prefer to work with a one company and have such a deal that helps them achieve their goals and aims only by having a single client. You cannot really compare the production costs of Boeing and Airbus as Boeings costs are mostly in United State dollars where as Airbus' production costs are most of the time in Euros. When there is an appreciation of the dollar against the euro, the cost of production is likely to rise and compared to that of the Airbus as it is in euros. Similarly, if the dollar depreciates, it is beneficial to the Boeing. There are many risks and benefits involved in the way the planes are manufactured and sold due to the difference in the currency. Although both companies typically price the sale of their aircrafts in dollar as it the most common and flexible pricing system to sell air craft's in Asia and the Middle East since they have various currencies. The dollar provides uniformity. The currency trade plays immense significance as based on the exchange rate between the two different countries, airlines can make profits or losses on the deal assuming that Airbus has not bought any insurance policy against such currency fluctuations to secure themselves for unprecedented losses. Current situation The outsourcing was extended in such a way that Boeings own involvement was lessened to nothing more than mere management, design, assembly and test operation, and to outsource most of the actual manufacturing around the globe. Boeing then stated that it has outsourced way too much and from now on the all the airplane projects will depend on Boeing's own engineering and design. Due to the Boeing's origins being a group of European companies, Airbus had fewer chances to outsource some of the important parts of the production to companies other than Europe. Nonetheless in 2009 the Airbus made a plant in Tianjin, China for production of its A320 series airliners. In 1970's Airbus planned to compete with Boeing which was well established at that time by introducing advanced technology. For example; The A300 made the broadest use of merged materials yet seen in the aircraft around 1970's. By automating the flight engineer's functions, A300 was the first large jet that had two-man flight crew. Digital Fly-by-wire controls into an airliner were first introduced by Airbus in 1980's. Since then airbus has proved to be a great competitor of Boeing, both companies, to seek performances in their products have used advance technology day to day. For example the way Boeing 787 dream liner is built using materials for major part of its production will be the primary large airliner to do so. In airliners market, the competitive strength can be highly influenced by the choices of engines available. Usually, airlines tend to rather think that they have a choice of engines from the renowned sources such General Electric, Rolls-Royce and Pratt &Whitney in any case. However, when it comes to the manufactures they usually like to be the single source to supply engines, they often succeed in making commercial deals with Boeing and Airbus to attain their goal. These are the aircrafts that have only single engine offering. The Boeing 737-300series onwards (CFM56), the Airbus A340-500 & 600(Rolls-Royce Trent 500), the Airbus A350 (Rolls-Royce Trent XWB- so far) the Boeing 747-8(GEnx-2B67), and the Boeing777-300ER/200LR/F (General Electric GE90) The currency in which Boeing's production costs are in is usually USD; whereas Airbus' costs are in Euros. When the dollar appreciates against euro, building a Boeing aircraft becomes more costly than building an Airbus aircraft and vice versa, Airbus cost of producing an aircraft rises when the euro appreciates against dollar. Currencies can play their part in being both good as well as bad for the business. Boeing uses only dollars to price its aircraft, where as Airbus uses Dollars as well, it has been stated that Airbus is more fixable and has charged the sales of some aircraft in Asia as well as Middle East currencies. Depending on the fluctuations between the currencies that sale was priced in and the dollar it can either be profitable or end in as an extra expense - that is if the Airbus has not purchased insurance for these types of fluctuations. The A320 has been ordered by 222 operators, there are also number of operators, having an edge against the previous established 737 in this sector; it also has been selected for replacements by other full-service airlines for 727s and aging 737s, such as United Airlines and Lufthansa; and after 40 years the A380 has now challenged the Boeing 747s governance of the quite large aircraft market. The Boeing 747-8 is basically an updated version of 747-400 which will not only offer greater capacity, but also fuel efficiency and longer range. Due to the delays in Air bus' A380 program several people thought of cancelling their orders in the favor to747-8, although not many did this, and many placed a reorder for A380. However, all A380F orders have been disregarded. To date, Boeing has attained 78 orders for 747-8F and 28 orders for 747-8I with their delivery originally planned for 2010 and 2011 respectively. And, after official recognition the delivery of 747-8F, had been re scheduled to 2011 and 2012 as the 747-8I was being test-flown. On the other hand, Airbus had 234 orders for A380s, the first of which was delivered in 2007 and until now, a total of 53 have been handed over to the respective owners. Many Boeing projects were started but at later stage they were canceled, like the Sonic Cruiser, which was launched in 2001. Boeing has now focused its attention to the as the platform of whole fleet transformation, Boeing 787 Dream liner uses technology from the Sonic Cruiser concept. Regardless of being delayed for more than three years, Boeing 787 is still the fastest selling wide-body airliner in history.  Concept of producing a re-engine 737 was to put it in direct competition with the A320. However, neo launch in 2016 was dropped by Boeing, saying that Boeing does believe that different airlines will pay it 10% more because of some percentage gained in fuel efficiency; instead the airlines must be looking forward to the next design which tends to save 30% fuel. However, Boeing is being pressurized by airlines to let out a direct re-engine competitor from southwest who use 737 for their entire fleet saying that they could not possibly wait for 20 years or more for a newer version of 737 and threatened to convert to Airbus. Some sources in the industry believe that making the re-engined 736 will cost Boeing more than it did to Airbus A320 because of the design of their planes. There are 5,417 Airbus aircraft in service. Airbus has managed to win 50% of the whole aircraft orders in latest years; However, Airbus' production is outnumbered by Boeings' Safety records have been great as far as recently manufactured aircrafts are concerned. It is logical that both the companies try to evade safety comparisons when they sell their aircrafts to different airlines. The aircrafts which dominate in the airline industry have excellent safety records as well, such as The Boeing 737-NGandAirbus A320families (as well as both companies' wide-body offerings). As the Boeing 727, the original Boeing 737sand 747s, Airbus A300 and AirbusA310 which were first tested in the 60s, 70s and 80s respectively are much more accident prone as stats would suggest. Both companies have been at it with each other, Boeing protests the launch aid in the form of credits which were given to Airbus while Airbus maintains that Boeing obtains illegal financial supports through different military contracts and taxation. In July of 2004, Harry Stone cipher (then-Boeing CEO) accused Airbus of breaching EU-US contract which highlighted discipline procedures for civil aircraft support from the state. Airbus was given, according to him, a huge amount of money called RLI from European governments ("launch aid" as termed by US government). They money is to be paid back including interest, and if the aircraft is a success it would result in royalties and profits. Personal opinion: Airbus claims that this strategy is fully accommodating with the 1992 contract and WTO rules. The contract permits up to 33 percent of the programme finances are to be met by government lending’s, which are also to be returned back to the government fully in 17 years. The loan is given on a very low interest equal to the cost of government plus 0.25%, which of course wouldn't have been possible without the government's backing. Airbus made a statement that after the agreement between US and EU in 1992, the European government has been repaid around US $6.7 billion, which is more than 40% of the money it received. The considerable amount of government support from US in technology improvements via NASA also shows considerable support to Boeing, and also the tax cuts that are given to Boeing, which some believe that is against the contract of 1992 and the WTO rules. In its current inventions such as the 787, Boeing has been given good amount of support from governments at all levels. However, Airbus' parent, EADS, works for military itself, and is given money to extend and work on projects like the Airbus A400Mtransport and various other military aircraft. In the start of 2005, the EU and US trade-body members, Peter Mandelson and Robert Zoellick (since replaced by Rob Portman, and then Susan Schwab, and the present office holder, RonKirk) correspondingly, approved of keeping talks intended to resolve the mounting tensions. However, this round of talks was not of much help with the disagreement becoming bitterer rather than going towards an agreement. In September 2009, the New York Times and Wall Street Journal reported that the WTO would likely give a decision in favor of Boeing, against Airbus on most of Boeing's complaints; the practical result of this decision is most likely to be blunted by a large number of partners worldwide, occupied by both plane makers and the anticipated wait of number of years of requests. For instance, almost one third of the Boeing 787 Dream liner is being made in Japan. Hence, some experts are hoping that there will be negotiations before the final decision is taken. In addition to that, government subsidies given to the automobile companies in the United States of huge amounts have also helped in changing the course of the political atmosphere in the country; the grant given to Chrysler and General Motors dwarf the sum involved in the Airbus-Boeing disagreement. On 31 May 2005 the United States filed a case against the European Union for giving subsidies to Airbus against the law. Only a day after that, European Union also filed a case against the United States for showing support for Boeing. Things started to get a little messy because of the support for the Airbus A380 that erupted into a potential trade war by the upcoming launch of the Airbus A350. Airbus desires the launching of A350 program by the assistance of government loans that will cover around one third of its development expenses though it states to launch without these loans if required. Hence A350 will battle Boeing's undefeated project, the 787 Dream liners. The EU trade officials are asking questions about the type of loans given by NASA, the Department of Defense, and to be precise, the contracts of R&D that will do well to Boeing. Moreover the money provided by the states of United States such as the State of Washington, Kansas, and Illinois, to help the launch of Boeing aircraft, particularly the 787. In September 2009, an interim report of the WTO investigation was made in result to the claims made by both sides. In March 2010, the WTO administers European governments to unfairly finance the Airbus. In September 2010, preliminary reports of the WTO discover Boeing's unfair payments violating WTO rules and should be bailed out. In May 2011 WTO discovered that the US defense finances and NASA research funds cannot be used to give subsidies to the civilian aerospace industry, hence Boeing has to repay $5.3 billion of subsidies that it received unlawfully. Secondly, the WTO Appellate Body partly reversed a ruling that European administration launched aid, approving of the point that the aid was not directed at increasing exports and some form of private-public joint venture could go on. The low interest loans worth $18billion had to be repaid in chunks sooner or later; yet, there was no urgent need for it to be settled and the accurate amount of repayment will be set in future. Therefore, both parties claimed victory in the world's largest trade dispute. The corporate aircraft is enormously produced by the Airbus Executive and Private Aviation which comprises of Airbus S.A.S, an EADS company, and had a model range similar to the commercial aircraft offered by the company, varying from the A318Elite to the double/triple-decked Airbus A380 Prestige. In 1997, the Airbus came into the market with A319 Corporate Jet, following the entry of the 737 based Boeing Business Jet. The term `Airbus Corporate jet' was initially adopted for the A319CJ, but it is now often used for all various models, including the VIP wide bodies. As of December 2008, 121 corporate and private jets are in operation, 164 aircraft are in order; including an A380 Prestige and A320 family commercial Jet. The ACJ unit is standing on the boomingA320 family of aircraft and which was previously supported by the A319CJ. Currently, all the versions of A320 are available as corporate jet with 180 minute ETOPS rating. Alterations on the passenger versions include a raise in service ceiling to 41,000 feet (12,000m) and the use of a different number of detachable supplementary fuel tanks. The aircraft has a capacity of around 19 - 50 people but can be set into any pattern by the clients. Reliance Industries and UB Group are among one of its users. The A319CJ competitors are Boeing BBJ1, Gulfstream G550, and Bombardier Global Express. Its wider fuselage diameter provides larger interior than any other company. It has the similar engine types as the A320, consisting of either CFM International CFM56-5 or theV2527. The A320 Prestige offers alternative services for passenger are who are looking for more internal space than A319 offers. References John Newhouse, 2008. Boeing Versus Airbus: The Inside Story of the Greatest International Competition in Business. Vintage Publishers. Matthew Lynn, 1998. Birds of Prey: Boeing Vs. Airbus: A Battle for the Skies. Lightning Source Inc. Johan Hough, Daniel Johannes Venter, Ernst Neuland, Ronel Erwee, Riaan De Lange, 2009. Global business: environments and strategies: managing for global competitive advantage. Oxford University Press Southern Africa Douglas Lamont, 1997. Winning worldwide: strategies for dominating global markets. Capstone Inc. Douglas A. Irwin, Nina Pavcnik, 2003 .Airbus versus Boeing revisited: international competition in the aircraft market. 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