Impact of Recent Economic Recession on the US Aerospace Manufacturing Industry - Research Paper Example

?How the recent economic recession has impacted U.S. aerospace manufacturing industry Table of Contents Table of Contents 2 Review of aerospace Economical History 3 Economical Crises facing the aerospace Industry 4 Managerial Economic Analysis of Boeing and Airbus 6 Conclusion 11 Reference 13 Bibliography 17 Review of aerospace Economical History The aerospace industry is among the top manufacturing industries in the world in terms of number of employees and output value. By virtue of this aerospace has emerged as the most powerful industry in the world. a. Economic Review of the Industry as a Whole The aerospace industry caters to five main markets- missiles, military aircraft, commercial airliners, space and general aviation. This industry is mainly concerned with the manufacturing and planning of new and improved spacecraft to explore the universe, designing aircraft for the transport of the civilians and military services as well as missiles with the aim of national defense. The industry employs nearly 1703000 people retaining the global diverse talents. Owing to the heavy investment in the research related functions a significant percentage of the people employed with the aerospace are scientists, engineers and technicians (Cook, n.d.). b. Short history of Boeing and Airbus Boeing is the leader in the manufacturing of space, defense and security systems and commercial jetliners. A top ranked exporter in US the company serves customers across 90 countries. The products and services of the company include military & commercial aircraft, weapons, electronics, satellites and defense systems, launch systems, advanced communication & information systems. The airline has long history of aerospace innovation and leadership. The company has continually expanded its product lines and services to satisfy the growing needs of the customers (Boeing. 2011). Aircraft ranks among the leading manufacturer of aircraft that has propelled the company to the forefront by virtue of customer focus, technological leadership, commercial know-how, and manufacturing efficiency. The company provides a variety of customer services that are tailored to meet the requirements of the operators across the globe. The airline has its headquarters in Toulouse. Owned by EADS, the airline is a global enterprise with nearly 52500 employees. The company has fully owned subsidiaries in China, Japan, US, and Middle East (Airbus, 2011). Economical Crises facing the aerospace Industry The aerospace industry is grappling with a number of challenges because of the capital-intensive nature of the industry and the situation has worsened with the major governments and companies of the world facing one of the worst crises in recent decades. The economy across the globe is anticipated to pass through tremendous economic upheaval in the forthcoming period. a. Re-Building Confidence of the Consumer The airlines across the globe reported grim earnings over the last couple of years due to a fall in the ticket sales. The commercial aviation being an essential part of the global economy the airlines across the globe are devising new ways to restore the confidence in air transport. One such way adopted by these companies is through an extensive advertisement campaign. There was a sharp fall in the airline traffic during the recent financial crisis due to the cut-back in business travel. One of the biggest problems faced by the airlines industry is the drastic fall in the demand for air transport. Despite the bailout packages almost all the air carriers have grounded air planes to limit capacity whereas some of the big airless have even retrenched workforce to prune the massive losses (The Federalist Society, 2003). To improve the demand for the air travel the companies can announce some waivers that will lower the cost of air travel thereby making this mode of travel more attractive as well as affordable. b. Security There has been a revamp of all the security standards in the aftermath of the September 11 terrorist attack. The necessary security measures have been compulsory outlined by the European Civil Aviation Sector (ECAC). These latest provisions allow for rigorous passenger, staff & luggage screening, unannounced inspections and calls upon the members of the European Union (EU) to establish common standards and security programs for equipment. The regulation calls for strict use of “airport access controls” and checks of passengers, baggage including the airline staff and crew. These are permitted in the restricted areas after a thorough screening (Europa, 2008). c. Overhead Costs The airlines industry has been doubly affected by the erosion of consumer confidence and a sustained rise in the price of fuel. The fuel bill of the airlines was moving up faster than other consumer due to a steep rise in the profit margin (Millward, 2008). Cost efficiency is crucial for the survival of an airline. The European as well as US airlines have achieved a significant progress in the reduction of unit costs especially non-fuel costs from 2001. The network airlines operating in South America and Asia have been able to bring down their cost or at least bring stability. The trimming of the overhead and distribution costs is one of the key factors though there have been significant cost efficiencies in the other categories as well. Despite the improvement in the efficiencies there still exist cost gaps in the low cost carriers of all the four regions. These gaps are present across various costs ranging from labor to overhead with the extent of this gap varying across the regions (IATA, n.d.). d. Personnel The recent financial crisis has had a severe impact on the aerospace industry and its personnel across the world. The crisis resulted in a series of job cuts. Between the period May 2008 and May 2009 there was a series of job reductions in the major airlines operating in US (Harvey & Turnbull, n.d.). e. Equipment Replacement The aerospace manufacturers such as Boeing and Airbus rely heavily on the overseas market for sales. Nearly 70 percent of the sale of commercial airplanes of Boeing is made to the overseas customers. The exports of this industry in US increased for straight five years. However, this growth deteriorated in 2008 (Platzer, 2009). Managerial Economic Analysis of Boeing and Airbus a. Market Structure The worldwide aerospace industry is a high-tech industry with twin output pillars comprising of military and civil aircraft. In the year 2003 the European aerospace industry employed 415000 people reporting an annual turnover of higher than €74 billion. The worldwide market share of US dropped to 44% in the year 2003 with a corresponding rise in the share of EU market. The dominant position of US in this industry was facilitated by its high share in the domestic market. This position has been challenged by EU which has succeeded in integrating its industry under Airbus. The worldwide aerospace industry is marked by structures in the industry that dominate the industry in terms of economies of scale. In the case of civil aircraft the worldwide market is essentially a duopoly structure comprising of EU (Airbus) and US (Boeing). In the last few years the Boeing has lost a significant market share in the market of civil aviation to Airbus. In the five out of six years till the close of 2005, Airbus has outsold Boeing in respect of new orders. In the year 2003 Airbus beat Boeing in terms of delivery of commercial aircrafts something that was unprecedented before. In the year 2004 Airbus accounted for 53 percent of the commercial aircraft delivery as compared to 32 percent in the year 1999. Towards the beginning of 2005 there was an order backlog for Airbus to the tune of 1500 aircrafts as compared to Boeing’s order of 1097 (Johnson & Turner, 2007, p.129). All this show Airbus has succeeded in establishing itself as a player in the aerospace industry rather it can be said that aircraft manufacturer has managed to make an inroad in the aerospace industry against Boeing. Though the former has surpassed the latter in terms of number of deliveries it cannot be considered to be a fool-proof measure as the total value of the deliveries made by Boeing surpassed that of Airbus. However the sustained efforts of Airbus and EADS can pose a great danger to the market positioning of Boeing. Boeing is now faced with the need of tapping the capital markets as the aircraft manufacturer is wary of spending on the development of any new product specifically in the times of market downturn (Aboulafia, 2002). The manufacturing of commercial jet aircraft is duopoly of Airbus and Boeing. In the last few years various aerospace firms from the non-traditional nations involved in aircraft manufacturing have made an attempt to make a foray in the sector of commercial aircraft. While the European and Japanese aerospace firms have long competed against US firms, recently, China and Russia have posed a strong competition in the worldwide market. Both the countries are working with the objective of dominating the national aircraft industry and perhaps even the worldwide market (Platzer, 2009). The control of 46 percent of the market share is in the hands of Airbus. It has mainly been designed to put a check to the large manufacturers in US. Boeing exercises a control over the remaining 54 percent of the market. The company has a strong market position. b. Consumer Information Analysis In 2002 Boeing company launched ‘Horizons’ a worldwide advertising campaign. This is regarded as a step in the company’s long term advertising strategy which has been designed with the aim of conveying the information about its broad scope. This has been designed with the aim of bridging the gap between the general perceptions about Boeing and the actual reality of its worldwide presence. The brand Boeing is a significant intangible asset of the company. Through continuous brand investments the company aims to strengthen its position in the long term (Boeing-b, 2011). In the last few years Airbus and Boeing have adopted a different approach of reaching out to their target audience. While Boeing has remained focused on marketing of its products to its direct customers including airlines and leasing companies whereas, Airbus has focused its marketing efforts to frequent public travelers especially the business traveler. Airbus is engaged in the strategy of “communicating with the customers’ of its customers”. The advertising strategy draws a similarity with the derived demand strategy used by the pharmaceutical industry (Spreen, 2007, p.135). The media relation of Boeing is managed by Anne Eisele. She is in charge of the external communications of the aerospace manufacturer. Her work includes maintaining contact with the broadcast and print journalists, acting as a spokesperson for the company on corporate related issues and handling the media relations of the various business units of the company (Boeing-c, 2011). Airbus has chosen “The Jeffrey Group” a reputed integrated communications company for targeting the Latin population (The Jeffrey Group, n.d.). The leaders at Boeing are entrusted with the task of identifying new opportunities for improving efficiency thereby raising the profit margins. The company management aims at acquiring a leadership position by ensuring the safety and reliability of the shuttle (Hislop, 2002). The improvement and change program of Airbus consists of a facility known as “AIRTAC (AIRcraft Technical Aircraft on ground Centre)” that offers real time flight support round the clock. By way of this facility the aircraft components are monitored with an identification of the items outside the level of tolerance for the purpose of repair. This mitigates immediate issues besides building confidence and customer relationships in the product. By way of this the aerospace can establish its position in the future (Clay, 2010). b. Decisions for the Future Government regulations- The aerospace sector being a global industry the rules and regulations for the industry is framed at the international level. This industry is also impacted by the EU regulations and other policy measures like the rules relating to usage of chemicals (European Commission, 2010). The agencies and executive departments of the “Federal government” issue regulations that are incompliance with the executive orders and federal laws and which regulate their processes and functions (RAND Corporation, 2001). Game theory decisions- The aerospace industry comprises of two main players- Airbus and Boeing. The industry has to operate under a number of government regulations in US as well as outside. The intense competition between the two rivals implies that the two aerospace manufacturers would employ advanced and sophisticated methods of public relations to acquire a share in the market. This scenario is a variation of Prisoner’s Dilemma. Here each player in the industry can select between two options. It can invest in the developing a new product or it may not. If one player decides to develop a product in that case it may result in higher profit flows from the untapped and markets. Again if both the players opt for the development of the new product then this may result in losses. If neither of the players moves ahead then a significant market may remain unexplored. This seems to describe the strategic situation for Boeing and Airbus. The alliance between the two players in the past has been marred by the fear of one party gaining advantage over the other thereby threatening its market position. Boeing believes in the preserving of its monopolistic position. As per the terms of game theory Boeing earned a positive payoff by not exploring the new market. The interest of Boeing was to delay the jet development in the 400 plus category while the interest of Airbus lied in the ending the monopoly of Boeing (Kretschmer, 1998). c. Effect of Price Wars The global giants are engaged in intense fights with respect to the market share. In a air show held in Paris Boeing unveiled its plans to purchase the 17 of Airbus’s jets from the another airlines in a bid to sell its own carriers to the airline. The management of Airbus was not impressed by this move of Boeing and accused the latter initiating a price war. All this gave rise to speculation among the market participants of fierce price cuts. This had also happened in the middle of 1990s and eventually proved to be a huge loss for both the aerospace manufacturers (ZUCKERMAN, 1999). Conclusion a. Future of the aerospace Industry as a whole Various participants outside the industry are of the view that the aerospace industry is laden with introspection and an unwillingness to accept change. It is touted that the airplane manufacturers have to make good returns to their investors. There have been apprehensions about the bottom-line of the company. The emergence of market players from countries like Russia, China, India and Brazil pose competitive threats to the European as well as US aircraft manufacturers. However this does not imply that the US and European giants like Boeing and Airbus would cease to be the principal innovators in the industry. The sector being subject to protectionism the governments across the world across the world should resolve the conflict relating to open market. There is a need for a higher understanding among the various governments and between the industry players and the government on matters like interoperability and technological transfer. There is little doubt about the growing popularity of the air travel in the future. There is every possibility of an annual growth of 5 percent in the number of air passengers. The practice of leasing the aircraft in the aerospace industry presents an unclear picture about the financial responsibility. In the absence of pricing power the airlines are more susceptible as compared to the manufacturers. It is important for the sector to resolve the above issues. One more concern is the ‘environment’. The changes in climate would require the aerospace industry to contribute in the reduction of carbon emission. The industry is expected to take a note of the probable impact of the changes in environmental policy (The Ditchley Foundation, 2006). b. Future of Boeing and Airbus Airbus and Boeing foresee a dramatic growth for the industry in the coming twenty years. The firms forecast an annual growth rate in “revenue-passenger-Kilometers” to be 4.2 and 4.9% respectively. Both the firms are of the view that the market in Asia will emerge as a region of highest traffic increase. Airbus places a higher emphasis on the market existing between big hub cities. It forecasts that with the reach of traffic capacity of airports the airlines will have to fly maximum passengers in just one flight. Boeing on the other hand anticipates a significant growth for the low cost carriers. It predicts that the airlines are expected to supplement large sized fleets with small sized aircrafts that facilitate quicker and more frequent flights. Therefore, the forecasted demand by Airbus is large sized aircrafts and the same by Boeing is twin and single aisle aircrafts (Taylor, 2002). Reference Aboulafia, R. 2002. Airbus and Boeing race to the bottom. Retrieved on May 7, 2011 from http://www.aiaa.org/aerospace/Article.cfm?issuetocid=262&ArchiveIssueID=31 Airbus. 2011. WELCOME TO THE WORLD OF AIRBUS. Company. Retrieved on May 7, 2011 from http://www.airbus.com/company/ Boeing-a. 2011. Boeing in Brief. About Us. Retrieved on May 7, 2011 from http://www.boeing.com/companyoffices/aboutus/brief.html Boeing-b. 2011. Boeing Launches "Horizons" Global Advertising Campaign. Retrieved on May 7, 2011 from http://www.boeing.com/news/releases/2002/q1/nr_020128a.html Boeing-c. 2011. Anne Eisele Appointed Boeing Director of Media Relations. Media. Retrieved on May 7, 2011 from http://www.boeing.com/news/releases/2002/q3/nr_020808a.html Clay, L. 2010. A380 Airbus in service. Community. Retrieved on May 7, 2011 from http://www.apm.org.uk/news/a380-airbus-service Cook, L.C. No date. The Aerospace Industry: Its History and How it Affects the U.S. Economy. Retrieved on May 7, 2011 from http://teachers.yale.edu/curriculum/search/viewer.php?id=new_haven_90.07.06_u#b Europa. 2008. SUMMARY. Aviation security: common rules in the field of civil aviation security. Retrieved on May 7, 2011 from http://europa.eu/legislation_summaries/other/l24253_en.htm European Commission. 2010. Aerospace industries Regulatory environment. Retrieved on May 7, 2011 from http://ec.europa.eu/enterprise/sectors/aerospace/regulatory-environment/index_en.htm Harvey, G. Turnbull, P. No date. Sectoral coverage of the global economic crisis. INTERNATIONAL LABOUR ORGANIZATION. Retrieved on May 7, 2011 from http://www.ilo.org/public/english/dialogue/sector/themes/crisis/aviation.pdf Hislop, M. 2002. Logging its best financial year ever in 2001, Space and Communications aims to become a main driver of Boeing growth. Retrieved on May 7, 2011 from http://www.boeing.com/news/frontiers/archive/2002/may/ts_sc.html IATA. No date. Airline Cost Performance. Retrieved on May 7, 2011 from http://www.iata.org/SiteCollectionDocuments/890200_Airline_Cost_PerformanceSummary_Report.pdf Johnson, D. Turner, C. 2007. European business. Taylor & Francis. Kretschmer, M. 1998. Game Theory: The Developer's Dilemma, Boeing vs. Airbus. Retrieved on May 7, 2011 from http://www.strategy-business.com/article/15872?gko=be9cb Millward, D. 2008. Airline industry in worse state than after 9/11. Transport. Retrieved on May 7, 2011 from http://www.telegraph.co.uk/finance/newsbysector/transport/2790980/Airline-industry-in-worse-state-than-after-911.html Platzer, D.M. 2009. U.S. Aerospace Manufacturing: Industry Overview and Prospects. Retrieved on May 7, 2011 from http://www.fas.org/sgp/crs/misc/R40967.pdf RAND Corporation. 2001. AIR FORCE GUIDANCE: A STATUTORY AND REGULATORY FRAMEWORK. Retrieved on May 7, 2011 from http://www.rand.org/content/dam/rand/pubs/monograph_reports/MR1537/MR1537.appa.pdf Spreen, E.W. 2007. Marketing in the international aerospace industry. Ashgate Publishing, Ltd. Taylor, S. 2002. Airbus vs. Boeing. Retrieved on May 7, 2011 from http://www.mcafee.cc/Classes/BEM106/Papers/UTexas/351/Boeing.pdf The Ditchley Foundation. 2006. The Future of the Aerospace Industry. Retrieved on May 7, 2011 from http://www.ditchley.co.uk/page/93/future-of-aerospace.htm The Federalist Society. 2003. Rethinking the Airline Bailout. Retrieved on May 7, 2011 from http://www.fed-soc.org/publications/detail/rethinking-the-airline-bailout The Jeffrey Group. No date. AIRBUS SELECTS THE JEFFREY GROUP FOR PUBLIC RELATIONS THROUGHOUT LATIN AMERICA. Retrieved on May 7, 2011 from http://www.jeffreygroup.com/news/airbus.pdf ZUCKERMAN, L. 1999. Boeing and Airbus Battle Over Singapore Airline Sales. Retrieved on May 7, 2011 from http://www.nytimes.com/1999/07/01/business/boeing-and-airbus-battle-over-singapore-airline-sales.html Bibliography FEDERAL RESERVE BANK OF SAN FRANCISCO. 2002. Competition and Regulation in the Airline Industry. Retrieved from http://www.u.arizona.edu/~gowrisan/pdf_papers/airline_competition.pdf Read More