Jet Aircrafts and Aerospace Defence Equipments - Essay Example

Jet Aircrafts and Aerospace Defence Equipments INTRODUCTION The market for commercial jet aircrafts and aerospace defense equipments is highly dependent on the long-term trends in the airline passenger traffic and political environment respectively which could be explained by the presence of factors such as the rate of economic growth in countries across the globe, emerging markets, political and economic harmony, as well as consolidation of the industry while factors such as non availability of proper infrastructure government restrictions, environmental regulations as well as military policies play a significant role. The market for aerospace and defense is highly influenced by other factors such as product development, product differentiation, technological innovations as well as the overall competitive environment. The market for commercial airlines and defence equipments is highly dominated by three major players – Boeing, EADS and Dassault Aviation. Boeing The Boeing Company, founded by William E Boeing in 1916, is a pioneer in the field of aerospace and defence materials. It is the world’s largest global manufacturer and supplier of commercial jetliners and military aircrafts, catering to a wide range of markets including the supply of its defence products to U.S and other allied armed forces across the world and is the second largest1 aerospace and defence contractor in the world. Boeing has five business units: 1. Commercial Airplanes: This is the largest business unit of Boeing so far and is mainly engaged in the process of unit designing and development and manufacturing of commercial jet liners. It boasts of a robust portfolio comprising of a range of products such as the 737 series, which has a seating capacity of up to 150 passengers, 747 series, which accommodates up to 566 passengers, 767 series with a capacity of 325 passengers, and 757 series up to 230 passengers. The company frequently introduces latest models in this segment and is currently working on the Dreamliner, which boasts of an impressive state of the art technology with an aim to provide ultimate ease in traveling to its customers. Boeing’s commercial aircraft sales play a major role in enhancing its brand value and popularity ultimately translating into increased profitability. 2. Integrated Defence Systems: The sale of defense products is highly dependent on external factors such as government support – in the form of subsidies, military budgets as well as the political environment. Boeing saw a substantial rise in the demands for its defense and space related services in the wake of the Iraq war. However, due to some other external factors such as the WTO disputes on the availability of subsidies have had a negative impact on its sales. US has witnessed a strong decline in its defense projects in the recent years leading to a sharp fall in the demand for its products and ultimately restricted cash inflows. Some of the major contributors to the defense revenues include Space Station work packages, F-22 fighter aircraft, V-22 Osprey tilt rotor transport and RAH-66 Comanche helicopter. The company has also bagged several high profile orders from international markets such as Korea, China and West Asia. 3. Boeing Capital Corporation The Boeing Capital Corporation is a global financing solutions provider which is involved in providing financial solutions to various business activities of the company by working closely with the integrated defense system and commercial airplanes and arranges and facilitates the delivery of Boeing commercial and military aircraft, satellites and launch vehicles. 4. Phantom Works Phantom works is the R&D unit of the Boeing Company where the latest technological aids are designed and developed by its engineers with an aim to provide world class service to its customers and retain its competitive position in the industry. 5. Shared Services Group The shared services group of the company is mainly involved in providing innovative and effective services to all the business units of the company to support the competitive design and manufacture of its aerospace and defense products. Competitive Landscape The aviation industry is highly influenced by the external environmental factors such as Government policies – (military budgets), socio – political factors, as well as over all economic climates in the country as well as across the globe, as a result, these factors have a direct influence on the demand for such products thus affecting the airline traffic as well as demand for new commercial aircrafts. Thus, in order to maintain sustainability in such a highly competitive market, it is inevitable for the firms in this industry to depend on technical expertise as well as price their long-term contracts accurately and precisely. As a result, only the major players in the industry in terms of design, manufacture and purchasing potentials enjoy economies of scale. While the smaller firms on the other hand, can establish their stronghold in the manufacture and sale of some selected parts and components for prime contractors. According to the current trends observed in the industry, recently, small players in the industry are resorting to in house development and integration of systems to counter the competition posed by the larger players who are mostly involved in outsourcing sizeable portions of their contracts. The production of aircraft and major aircraft components requires implementation of sophisticated automation systems, thus the industry is highly driven by competent and technologically efficient workforce. Industries where Boeing competes include, Aircraft manufacturing, Aerospace and Defence Maintenance Services, Aerospace and Defence parts manufacturing, Aircraft Leasing, and Weaponry and related product manufacturing. It is a world leader in the sale of Aerospace and Defence equipments, followed closely by EADS and Lockheed Martin. Qualitative and Quantitative Data Boeing enjoys a significant position in the industry which could be mainly attributed to the various factors such as continuous improvements in quality of its products and processes, highly skilled, efficient and motivated work force, capable and focused management, commitment to integrity, and technical excellence. The company, since its inception, has shown a strong sense of commitment to the long-term improvements in the products and services. It has a highly skilled and motivated workforce, which is an inevitable part of the organization, which requires a high level of expertise. Thus, human resource is its most important resource and the basic strength of the company. Equipped with the right combination of skills, training, environment and leadership, which is essential for the attainment of its business goals, Boeing has all the elements that help it gain a competitive advantage over its competitors, as it has translated into increased productivity and better returns and ultimately increased profitability. The management team is efficient and focused and highly driven by commitment in attaining the desired goals of the organization. The managers work in close association with each other, facilitated by proper and efficient communication channels to enable better and uninterrupted communications across all levels in the organization, which in turn enables proper and faster decision-making. In a world, dominated by newer and better technology, Boeing boasts of state of the art technology, which is continuously refined and upgraded that helps the organization to remain competitive. The management believes in the principle of integrity, and a strict adherence to all the relevant laws and regulations, which is accorded the highest regard in all its actions and relationships with all the key stakeholders of the company, including its customers, suppliers and employees alike. It is this commitment to uncompromising values that makes Boeing an unbeatable industry giant. Quantitative Data: The company has recently achieved record revenues, which rose to 8% in the current year, grossing $66.4 billion, while the net income grew by 84% totalling $4.1 billion. It has set a record of sorts, by bagging the orders for commercial airplanes – 1000 planes totalling 1423 orders during the financial year 2007, for the third consecutive year, and 787 and 737 freighters in a single year. As a result of increased revenues, the dividends have also been raised to 14%. The balance sheet has shown a steady increase in cash and short-term investments to a total of $2.9 billion while the consolidated debt has seen a drastic reduction by $1.3 billion. Boeing has successfully captured 9 out of 11 of its major competitors by bagging key orders for Tracking and Data Relay Satellites, Joint Cargo Aircraft the Airborne Early Warning and Control aircraft for the Republic of Korea2 and two key pieces of NASA’s Ares program3; and has received a 100% award fee for Ground-based Midcourse Defence program and 100% incentive for milestone criteria on Future Combat Systems. The company has also managed to achieve significant Commercial Airplane milestones by surpassing the 800 orders figure for 787 and 7000 orders each for 767 and 777 airplanes. Some of the key financial data is represented in the tables below: 2007 Financial Highlights U.S. dollars in millions except per share data 2007 2006 2005 2004 2003 Revenue 66,387 61,530 53,621 51,400 49,311 Net Earnings 4,074 2,215 2,572 1,872 718 Earnings Per Share* 5.26 2.84 3.19 2.24 0.85 Operating Margins 8.8% 4.9% 5.2% 3.9% 0.8% Contractual Backlog 296,964 216,567 160,637 104,778 104,855 Total Backlog† 327,166 250,253 205,215 152,873 155,498 *Before cumulative effect of accounting change and net gain loss from discontinued operations. †Total backlog includes contractual and unobligated backlog. (Taken from Boeing 2007 Annual Report) Earnings from Operations The following table summarizes our earnings from operations (Dollars in millions) Years ended December 31 2007 2006 2005 Commercial Airplanes 3,584 2,733 1,431 Integrated Defence Systems 3,440 3,032 3,919 Boeing Capital Corporation 234 291 232 Other (243) (738) (363) Unallocated Expense (1,185) (1,733) (2,407) Settlement with U.S. Department of Justice, net of accruals (571) Earnings from Operations $5,830 $3,014 $2,812 (Taken from Boeing 2007 Annual Report) (Source: http://analytics.ifdk.com/materials/common/Modules/News/3128.pdf) Limitations of the financial data: The Financial data represented above is subject to certain limitations which include, the impact of economic downturns/developments in certain regions, the effect of fluctuations in foreign currency on the profitability especially in the respect of the company’s dealings in non-U.S. accounts, the continued and uninterrupted execution of its operations subject to the governmental policies which has the effect of adversely affecting the viability and growth of commercial airplane revenues or revenues from other segments such as the manufacturing and sale of its defence equipments, the ability of successfully developing and launching the relevant programs and policies coinciding with major socio-economic/political events, the impact of local and international policies related to defence, the success or failure of its negotiations related to collective bargaining and the assumed continuation of the trends in revenue yields in the aviation industry. Competitive Benchmarking Models: PEST ANALYSIS Political factor • The political factors such as regulatory and policy decisions on the part of the government can have significant impact on the demand for Boeing’s civil transport aircrafts. • The political decisions taken by some of the most influential bodies in the industry such as The United States Government and its Federal Aviation Administration (FAA), which are the governing bodies that regulate the largest air transport market in the world, could prove to be highly disastrous and have significant impact on Boeing’s revenues. Also, regulations by the governments of countries like United States and the European Union could cause major setbacks with regards to the orders for new aircrafts and engines in the coming years. On the other hand, factors such as the deregulation of European airlines, holds immense potentials for Boeing to expand the market prospects especially for small regional jets and ensure a better hold over it. • Other political factors that could have adverse impact on the sales of Boeing aircrafts include high level of political intervention, as it plays a significant role in influencing buyer behaviour. For example: currently China is the biggest market for Boeing and it is expected to remain so for the next 20 years. In fact, China, through its considerable purchases of Boeing planes, has managed to gain a lot of political leverage in the U.S4. Economic factors • Certain economic factors such as the grant/availability of subsidies by the government have a major impact on the manufacturers in the aviation industry. • The factors such as fluctuation in fuel prices, congestion, hike in security costs, increased expenditure in insurance as a result of terrorist activities and other economic factors such as trade policies poses serious damage to the organizations in terms of restricted cash inflows. International Air Transport Association estimated that airlines' fuel costs would rise by 31% 5 in 2005. IATA, which represents 95% of the world's airlines, also predicted that the industry would lose $1.7 billion6 • Factors such as closing down of several airlines combined with the recession in the global tourism industry has led to a subsequent and significant reduction in the pricing policies of other players in the industry, leading to reduced profitability. Social factors • Factors such as anti-US feelings, witnessed in some of the countries, especially in Western Asian countries, have had an adverse impact on Boeing’s sales revenues, and thus a loss of potentially lucrative market. Technological factors • With an increase in technological innovations and a resultant and corresponding increase in consumer awareness has led to a simultaneous demand for super sonic airline transport, which could mainly be attributed to consumer preference for such high speed super sonic jet engines that has the potential and promise to cover distances in short period of time. • Considering the changing market place and continuous technological enhancements by the competitors in the industry, the manufacturing and designing of faster and more efficient aircrafts is probably the best choice for the companies in order to sustain their position in such a highly competitive industry. Boeing has utilized this technological advancement by building a new model, the Boeing 777, by using computer technology to build a prototype7. This is tremendously cost effective because the company does not have to absorb the cost of the prototype that they normally would have to build. • Technological factors facilitate efficient utilization of resources and hence several of the major players in the industry are continually investing more and more in Research and Developmental activities. Porters 5 Forces Analysis This model facilitates a structural and comprehensive analysis of the industry as well as the companies competing with it by analyzing various elements such as existing competitors, their alliances, as well as potential threats that could have a significant impact on the firms. The Bargaining Power of Buyers With a significant reduction in the number of orders and a resultant measure leading to a rapid decline in the investments in a bid to optimize their operations places immense power in the hands of the buyers who mostly comprises of airlines and leasing companies and countries with heavy requirements for defence equipments. Moreover, factors such as Government policies play a significant role in influencing buyer behaviour as it regulates the structure of the defence industrial base and is also the single largest customer for such products, i.e. the regulating bodies play dual roles of buyers as well as policy makers. The major players, therefore continuously strive to get policies and regulations framed in their favour, which could have a strong impact on their competitive positioning in the markets. Hence the bargaining power is relatively higher than what is observed in other industrial sectors. The Bargaining Power of Suppliers The bargaining power of suppliers has increased in recent years especially the Lead Systems Integrators mainly because of their ability of integrating complex military systems. The suppliers mostly comprising of engine manufacturers and Technology providers are expected to enjoy a rise in their bargaining power in the coming years with the organizations’ increasing dependence on high technology and sophisticated defence capability equipments, owing to the growing importance of military operations across the globe. The suppliers for aerospace and defence equipments are HCL Technologies, Mitsubishi Electronic Corporation (Japan), RUAG Aerospace (Switzerland), General Electric, Pratt & Whitney (US) etc. who are the main competitors. Moreover, certain regulating bodies, like the FAA, and EPA, for instance, may be regarded as potential suppliers to the industry as they regulate and often dictate terms governing the industry. The aerospace and defence industry being highly capital intensive requires intensive sources of investment and financing thus the suppliers of these facilities too hold considerable bargaining power. New Entrants The aerospace and defence industry is highly capital-intensive requiring huge amount of capital investments. Besides, the industry being an oligopolistic market, there are just a handful of major players in the industry, who face intensive competition in grabbing market share, the barriers to entry are numerous. Also the firms in this industry requires strategic alliances with the parties in power, such as political parties, a strong international presence, exceptionally well trained and skilled labour and a vast amount of investments in the Research and Development of technological innovations which is an inevitable part of this industry to keep abreast of the growing competition. Governmental regulations, military defence budgets, huge capital requirements, availability of extremely skilled labour, the need for sophisticated support industries, necessary proven track record and the long waiting periods to break even and achieve expected levels of profitability are some of the setbacks that act as high barriers to entry. In spite of these prospective barriers the possibility of these new entrants gaining an easy entry into the industry, finding their niche and gaining decent percentage of market share by enhancing their capabilities and rationalizing their operations by adopting and implementing smart and competitive strategies such as low cost no frills product strategy cannot be totally ruled out. However, these barriers are not insurmountable, as the factors such as availability of funds, the presence as well as willingness of venture capitalists and private equity industries to extend their services to the potential new entrants and support from major professional service firms which has strategic relationships with the defence and airline equipment manufacturers or suppliers could help these new entrants gain an easy entry into this highly competitive markets. Although these factors might guarantee an easy entry into the industry, the new entrants might face immense difficulties in acquiring prime mega contracts with strong established firms because of their proposed inexperience and other factors such as lack of brand recognition. By identifying the right market niche and venturing into potentially new markets such as West Asia where the demand for such products is on the rise, these new firms can hope to pose modest competition to the existing players and achieve decent profitability ratios. Threats of Substitute Products or Services The availability of substitute products and services seems highly unlikely in this type of industry, although it does have all the necessary and powerful elements to bring about a significant change in the type of market structure and levels of competition. For example, it is difficult to imagine the availability of a substitute product for the commercial aircraft or a super sonic fighter plane, but the possibility of substitutes for services cannot be ruled out altogether. With the development in technology and increasing reliance on Information Technology by the equipment manufacturers, for instance, the mechanized systems of operating an aircraft could be replaced by a fully automated system, thus eliminating the need for extra labour/manpower. The commercial airlines, on the other hand does have several substitutes in the form of high speed bullet trains that offer similar services and takes as much time or sometimes even less as that offered by the commercial jet liners. The TGV service8, for example, in Paris, has eliminated the need for air transport for several passengers who are finding the new mode of transport more convenient than the conventional mode of fast speed transport, with the Air Interface reportedly having faced a setback costing them a 50% reduction in its air travel business9. The possibility of implementation of such faster and cheaper and more convenient modes of transport in cities across the globe that covers short distances within even shorter periods could be a potential threat to the airline industry. The introduction of high speed motor vehicles by the automotive industry – cars and other means of road transport and availability of better infrastructure – specially equipped freeways, could also pose a threat to the airline industry. On the other hand, factors such as technological advancements in the field of telecommunications, collaborative computing and desktop video-conferencing based on broadband ISDN type services might totally eliminate the need for travel and reduce the airline traffic by a significant extent. Such factors may pose a challenge to the aviation industry that might have to struggle to maintain a stronghold in the industry. Major Competitors: EADS and Dassault Aviation European Aeronautic Defense and Space Company – EADS, is a global player in the aerospace, aviation and defense related services and a strong contender to the Boeing. It is a gigantic European leader which provides integrated systems solutions in the areas of military, aircraft, missiles, intelligence and Surveillance. Boeing competes with EADS (Airbus) in the commercial airline business. Airbus, has been dominating the commercial airline industry for several years while Boeing struggled to capture a decent percentage of market share. However this initiative was achieved by Boeing in the year 2006, when FedEx, the world’s largest express package transportation company cancelled orders for 10 of the new double decker A380s citing production delays and ordered 777 instead10. Dassault Aviation, a French aircraft manufacturer, is one of the major players in the aviation and defense industry and a strong competitor of Boeing. Boeing is continuously and rigorously expanding its global outreach. The company gained a stronghold in foreign markets through continuous technological innovations and prompt delivery of orders that enabled it to secure several significant orders; for instance, it bagged the $4.4 billion Korean jet liner contract, beating Dassault Aviation11. The loss of such a huge contract could spell trouble to the French giant in terms of losing ground on foreign shores, which is crucial for any organization in this highly competitive industry to defray its production costs and increase its profitability. The Key Competitive Strategies adopted by the three players: A comprehensive product portfolio: The commercial airlines of all the three major players in the industry under consideration namely Boeing, EADS and Dassault Aviation include a range of passenger seating facilities ranging from 100 to 500 passengers as well as Defence Aircraft & Support and Space Technology. All the three major players are involved in providing a comprehensive range of services to its passengers by making available, jet liners from medium to large sizes. Whilst in the Defence and Space market, involvement is in battle & support aircraft, defence equipment and space communications respectively. Technological Assistance: They are also indulging in extensive research and development activities and seeking technological assistance for reducing the number of personnel required to man the airplanes by depending on automated systems. This move is especially fruitful in facilitating significant reduction in labour costs. Leasing and financing activities: As a result of factors leading to sharp reduction in the passenger airline traffic as well as adverse military budget policies causing substantial losses to the firms in this industry, the major players are increasingly resorting to lending activities to sustain their profitability ratios. All the three players, discussed in this case, are indulging in providing financial services. For example, Boeing generated revenues amounting to $3,177 million in the year 1993 which proved quite helpful as during that year its sales had declined sharply. The Boeing Capital Corporation, a wholly owned subsidiary of the Boeing Company, for instance, is a global financing solutions provider whose main aim involves arranging, structuring and / or providing financing to assist the sale and delivery of Boeing products and services. 12 Alliances & joint ventures: All the major players in this industry are increasingly entering into alliances/joint ventures with international companies in a bid to increase their cash inflows as well as gain political leverage with the concerned market. Boeing is actively pursuing a strategy for globalization and global value creation through new partnerships, joint ventures, mergers and acquisitions, supplier relationships and a greatly expanded international presence. This could further help in strengthening strategic ties with those countries ultimately translating into better products, implementation of improved technology and excessive lobbying in international forums. Boeing for instance, has strategic alliances in 6 APEC economies covering 45 business for providing 70 different parts and assemblies. According to Paulina Bendana, Director of Strategy for International Relations, “We are looking at where we can help harmonize global processes and enable all of Boeing to leverage and develop resources around the world on a common basis”.13 Key Performance Indicators KPIs can be defined as “the vital few metrics that indicate progress towards strategic objectives – where metrics include the numerical measurement, measuring process and frequency”14. In the older Boeing 747, for instance, if all the instrumentation of the aircrafts were to be taken out of the cockpit and laid end to end it would stretch to several feet in length. The pilots, however, are not concerned with such details, instead they choose to concentrate on a select few indicators to gauge any discrepancy in the working of those instruments and in case something appeared out of order, they checked the other corresponding instruments related to that particular instrument. Source: Canadian Aerospace Sector Similarly, in KPIs it is the vital few that matters rather than the intricate details, as explained in the case of Boeing 747. With an increase in global competition, firms in the aerospace and defence sector need continuous appraisal of their logistics and supply chain methods in order to better satisfy the demands of its customers in a competitive manner. Thus such factors help the firms in the aerospace and defence industries to increase/improve their level of mass customization and facilitate significant reduction in the delivery times at the same time, maintaining high levels of quality. SCM and JIT are the most widely used KPIs in this industry. BALANCED SCORECARD  BIBILOGRAPHY The Seattle Times, Business and Technology, Saturday, June 25, 2005 Available from: Business: Herald Tribune, May 31, 2005 Available from: IATA, Industry Times, 8th edition, 2006 Available from: Boeing News, July 5, 2008. Available from: Los Angeles Times, June 11, 2007 Available from: The Telegraph, May 12, 2007. Available from: The Seattle Times, November 8,2006. Available from: The Herald Tribune, April 20, 2002. Available from: Chris Arlen, 2007: Key Performance Indicators Available from: Canadian Aerospace Sector, July 5, 2008. Available from: < http://www.ic.gc.ca/epic/site/dsib-logi.nsf/en/pj00252e.html> EADS : Facing Challenges, Delivering Results, Annual Review, 2007 EADS Financial Statements and Corporate Governance, Book II, 2007 EADS Business, Legal and Corporate Responsibility, Book III, 2007 Dassault Aviation, Annual Financial Report, 2007 The Boeing Company, 2007 Annual Report J. Gruszecki, Z. Zajdel, P. Rzucidło (2007): Informatics tools using estimation during pilot training Aviation. Vilnius: Technika, Vol. 11, No. 4, p. 29-35. B. Katherine, Going Global, Boeing Frontiers, June 2002, Vol.1, Issue 02. Available from: < F:\128\Boeing Frontiers Online.htm> Read More