The Investment Decision Of Airbus And Boeing - Essay Example

?Contents executive summary 4 Introduction 5 Section Variables influence the investment decision of Airbus and Boeing 6 Management attitude and perception 6 Market analysis 7 Traffic of passengers 7 Change in Idea to Point to Point 8 Market Deregulation 8 Product Portfolio 8 Cost and the return: 9 Technological ability 9 Section 2: Risk Factors faced by Airbus and Boeing: 10 Risk 10 Risks faced by boeing and airbus 10 Technological Risk 10 Market Risk 10 Economic Risk: 11 Environmental Risk 11 Financial Risks 11 PESTLE Analysis 11 Political Risks 11 Economic Risk 12 Social Risks 12 Technological Risk 12 Legal Risk 13 Environmental Risk 13 Managing Risk 13 TARA Model: 13 Predict 13 Prevent 14 Detect 14 Response 14 section: 3 - Stakeholders: 16 List of Stakeholders 16 Impact of each Stakeholder 16 Government: 16 Competitors: 16 Airlines 17 Society 17 Shareholders 17 Employees 17 STAKEHOLDER MAPPING 18 Group A 18 Group B 19 Group C 19 Group D 19 Tallman GmbH Model: 20 How has each stakeholder been affected 21 Government 21 Competitors: 21 Airlines: 21 Society 22 Shareholders 22 Employees 22 Section 4: financial impact of dreamliner on Boeing 23 Recommendations 24 Conclusion 24 Reference List 26 executive summary This report analyses two aircraft manufacturing firms; Airbus and Boeing. The report is based on a case which mainly revolves around the airline manufacturing industry. The most important players in the airline manufacturing industry are Airbus and Boeing and both are competing against each other. Both Boeing and Airbus are being supported by the government of their respective countries and the financial aid given by the government has a major role to play in making sure that these firms are able to meet the demands of the stakeholders. The case reveals how the Boeing’s 787 Dreamliner stage was set up and how things were before the Boeing introduced Dreamliner in the market. The reactions from the airline industry for previously launched planes by Airbus and Boeing have also been discussed and then the opportunities that 787 has, have been the main point of the study. This report basically has been divided into four sections. In the first part of the report, important variables that could influence the decision of Airbus and Boeing have been discussed in detail. In the second part of the report, the risks faced by both these firms have been discussed and how the risks faced by Airbus and Boeing are identified and analysed and then model has been used to know how firms should manage risk (McLaney, 2009). In the third part of the report, stakeholders of both Airbus and Boeing have been discussed and how these stakeholders could influence the firm have been described in detail. However, in the fourth section of the report, critical financial analysis about Boeing has been discussed as it introduces the Dreamliner in the market. In the end, conclusion of the report along with recommendations have been discussed. Introduction The report is about Airbus and Boeing and it is primarily based on a case when Boeing introduced its Dreamliner. The case discusses the background and how things shaped up that lead towards a fuel efficient aircraft, 787 Dreamliner. The report discusses how the management feels and what variables they considered when they were preparing the feasibility of introducing a new fuel efficient plane as well as variables that influenced their decision to not go for a jumbo sized aircraft, 747. The second section of the report discusses about the risks that the company faces and how Airbus and Boeing need to manage their risk properly in order to have consistent profits in the long run. The importance of managing and identifying risks has been described in this section. The third section of the report discusses important stakeholders of both the aircraft manufacturing firms; Boeing and Airbus and analyses how they could impact the firm’s operations. Also stakeholders have been prioritised using a theoretical framework to identify the level of their impact and their power to influence the firm’s operation. The fourth section of the report discusses the critical financial analysis of Boeing as it introduces a new fuel efficient plane and what impact the plane would make in the long run profitability of the firm. The report then gives recommendations for Airbus and Boeing and then it leads to conclusion. Section 1: Variables influence the investment decision of Airbus and Boeing There are different variables that influence the decision of two aircraft manufacturers to make investment in any kind of project. In recent years, Boeing came up with the idea of introducing a new plane that would be able to take many passengers at one time; however the research conducted by the management of Boeing did not found the idea to be profitable enough for the company to go ahead. Also the company did not receive sufficient number of orders to proceed and start the development of this jumbo sized airplane (Alexander, and Sheedy, 2005). But on the other hand, Airbus had a similar idea and they proceeded with the implementation of the idea. The management had different thinking and different variables to consider while making the investment decision as one company invested in the same idea whereas the other did not. The management of Airbus was successful in successfully implementing the idea as they introduced a 555-seater airplane with the name of A380. However, Boeing regretted after not investing in the idea. There are different variables and factors that could influence the decision of the firm to make investment in any kind of project. This section of the report analyses some of the most important variables that influence decision of Airbus and Boeing to make investment in any project: Management attitude and perception One of the most important variables that influences the decision of any management to make investment in any kind of project is the attitude, perception and thinking of the management (Khan, 1993). It is the attitude and perception of the management that could make an average idea look profitable, and because of the attitude the management could make a profitable idea look an average or even below average one. Therefore the role of management is important as they have to clearly and carefully analyse the opportunities and threats of the project as well as analyse the strengths and weaknesses of the company and then take decisions accordingly so that the decision taken is on the basis of what the firm can does rather than their own perception and thinking (McNeil, Frey, & Embrechts, 2005 ). Boeing might have found some other variables that would have stopped them from investing in jumbo sized planes whereas these variables either were unidentified or have minimal impact and this has been one of the reason or variables because of which Airbus invested in the idea of A380. Market analysis Analysing the market is an important factor that could assist the management to make decision. To make investment in any of the project, it is important for the management of the organisation to properly and appropriately analyse what factors could influence the market and demand of the product and then identify how much impact these variables could make to the overall demand or sales of the product (Kaplan, and Atkinson, 1998). If the management is able to carefully analyse the factors and their impact then it would become easier for the firm to come up with strategies so that the impact of all these factors are reduced and the decision can look profitable. However, if the factors identified are not controllable by the management and their impact could seriously hurt the profitability of the firm, then the management should leave the idea of investing in the project. But, if the factors identified are controllable, then one should go ahead and make the investment. Traffic of passengers One of the most important variables for Airbus and Boeing to make investment is the traffic of airline passengers. There has been an increase in the number of airlines passengers travelling and therefore it has become important for these two aircraft manufacturers to meet the increasing demand of passengers. In addition to this, because of market deregulation the competition in the airline industry has increased and as more airlines have entered the market, the demand for planes has increased. Therefore the increasing demand of airplanes is an important variable to consider. Change in Idea to Point to Point Boeing has been working hard to implement the concept of Point to point so that the time of the passengers can be reduced and they have to fly only in one flight rather than taking connecting flights particularly when they are travelling to countries far away. So, this would encourage airlines to buy more planes as well. Market Deregulation Market deregulation results in increasing the competition and therefore more airlines in the industry would be encouraged to come and start their business. Already there has been an increasing number of airline firms entering the market and it has been predicted that this trend would further increase in the years to come (Leland, 2002). In addition to this, low-cost airlines have been highly successful which has helped companies like Airbus and Boeing to make better use of technology and come up with fuel efficient jets so that the operational cost is reduced (Khan, 1993). With the introduction of more low-cost airlines, the cost of travelling has reduced which has improved the demand of the airline industry and therefore it has been very helpful for firms like Airbus and Boeing because they receive higher orders and recorded more sales. Product Portfolio It is important for companies in any industry to prepare a portfolio so that when the demand of one product reduces, the other product is able to compensate. Similarly, it is important for both Airbus and Boeing to make a portfolio of their products which would include different kinds of jets like fuel-efficient jets, mid-sized jets, large or jumbo planes like A380 or 747 etc. Diversifying the portfolio helps in offsetting the bad time of one of the products as the other products are able to compensate for that (Kraman,& Hamm, 1999). Cost and the return: For any investment decision, the cost to be incurred and the profitability that the firm would get because of the investment is an important consideration. If the profitability of the investment project does not seem to be sufficient enough for the firm to take the risk then the management would not be interested in going for the project and vice versa (Rasmussen, 1997). Similarly, if the cost of the project is too high and would require large amount of capital, then it might hesitate the management to go for such a project particularly when the future cash flows have high variations then it would discourage the investors to go ahead with the investment. For Airbus and Boeing need to identify and analyse the accurate cost of preparing different kinds of planes as well as the expected revenues that they could generate so that the aircraft manufacturers are able to take decision which might be helpful in the long run to improve its profitability. Technological ability Research and development has been an important aspect for both Airbus and Boeing and it is the achievements of research and development team that they are able to come up with better and improved models of aircrafts to meet the increasing demand of its stakeholders. However, as there has been an increasing demand of stakeholders Airbus and Boeing have to analyse whether they have the technological capability to meet the increasing demands of the stakeholders. Firms should also consider evaluating and making improvements in their technological ability so that they are able to gain competitive advantage over others. Technological ability does not only refer to advancements in technology but it could also be about training human resources to make better use of technology so that the productivity of the organisation is improved. Section 2: Risk Factors faced by Airbus and Boeing: Risk Risk is defined as the uncertainty in the future earnings of the company and every business faces risk though the kind of risk and the impact of risk faced by the firm varies from one organisation to another. Therefore risk can be said as the threats faced by the organisation that could have an impact on the future profitability of the organisation. Management calculates how much risk is faced by the company by taking the product of the likelihood of that particular risk with the impact the risk would cause to the organisation. Mathematically it can be presented as: Risk = Likelihood X Impact Risk Identifying the probability of any event to happen is a complicated job and therefore it is important for the management of the company to properly analyse the situation and the likely impact of the risk. The impact of risk should be taken in quantitative terms in order to calculate how much the risk could damage the firm. Risks faced by boeing and airbus There are different types of risk faced by both Boeing and Airbus however some of the risks are ready-made as firms face them because of their existence. Readymade risks would include some of the following risks: Technological Risk Risks faced by both Airbus and Boeing because of advancements in technology would be considered as the technological risk. Market Risk There are several risks faced by the firm because of the market condition that could influence the firms operations and profitability, such risks would be termed as the market risk. Economic Risk: Risks that might emerge from changes in the economic condition could influence Boeing and Airbus and such risks would be considered as the economic risk. Environmental Risk Airbus and Boeing also face risk because of environmental conditions and such risks could also influence the future cash flows of the company. Financial Risks Financial risk could influence the working capacity of the firm and therefore it is significant for the management to continuously evaluate the financial strategies adopted by the firm so that such risks could be minimised. PESTLE Analysis PESTLE analysis has been used by different organizations to analyse the external environment and to analyse what kinds of risk the firm faces from the external environment. PESTLE analysis of Airbus and Boeing has been discussed below: Political Risks Airbus and Boeing are two firms that receive substantial amount of funds as subsidies from the government therefore these firms face considerable amount of political pressure. Besides the subsidies given to these two companies, Airbus and Boeing are given tax breaks so that their overall cost is reduced and their profitability could be enhanced. Airbus has been facing criticism because of receiving aid from the government in order to come up with a competing product of Boeing’s 787 Dreamliner. Considering the opportunities that Dreamliner has in the market and how Boeing has been managing this fuel- efficient plane, Airbus has been given financial aid of $23 billion to produce a competitor having similar features to 787. However, Boeing has made several efforts to prove that Airbus would not be able to come up with such plan. Economic Risk With different low-cost airline coming up and the demand of low-cost airline increasing, different airlines have been more concerned to save their costs. Therefore economic environment has put pressure on Airbus and Boeing to come up with planes that are able to save their costs and this has also been one of the reasons that Boeing had to start working on a fuel-efficient plane to meet the demands of the market. According to Boeing, the Dreamliner 787 would reduce the fuel cost by approximately 20%. Social Risks Increase in terrorism throughout the world has raised concerns for people travelling from one place to another particularly through airlines and events like 9/11 have made an impact on the airline industry. Technological Risk Different kinds of technological risks are faced by Boeing and Airbus which have impact on the future cash flows of these companies. Advancement in technology like video conferencing, online meeting, video chat etc have reduced the distance and people from one country are able to meet and interact more easily with other person in other parts of the world. However, as it has made life easier for the society and general public, such advancements have made it harder for everyone related to airline industry as people prefer to use such applications to interact online and meet more frequently rather than travelling to other country. Also businesses operating in more than one country, used to call up important people at one place to have a meeting, but they are now able to interact from different parts of the world easily by using such video conferencing applications. Legal Risk Boeing has tried to reduce the financial aid given to Airbus. Boeing has also declared that the profitability of Airbus is reducing and making investment or giving financial aid to Airbus would be a loss. At the moment, these two firms; Boeing and Airbus are having a dispute and the case is with World Trade Organisation. Environmental Risk Boeing and Airbus manufacture airplanes that operate in the environment and therefore some of their planes have been faced criticism for polluting the environment. Managing Risk Managing risk is an important part for any business to prosper and achieve success. In order to manage risk, different firms use different techniques however one of the most used frameworks is TARA model. TARA Model: TARA model has been used by different firms to identify, assess, and manage the risk faced by the firm. There are different steps followed by the firms using TARA model that have been described below: Predict The first step is to predict the kinds of risk faced by the firm and in this step, the management of the firm identifies and anticipates the kind of risk faced. It is the most important step because at this stage, the management identifies the risks that faced by the firm and actions could only be taken by the firm if they identify the actions (Rosenquist, 2009). Prevent The second step of TARA model is to prevent the risks faced by the firm so that the impact of risks is reduced. The cost at this stage is higher than the predict stage. Detect The third step in the TARA model is the Detect and in this step, the management detects the risk faced by the firms. Different techniques like monitoring and detecting the risks faced by the firm and then take actions to minimise the impact of these risks. The cost of the risk faced at this stage is higher than the previous stage. Response The fourth stage of the TARA model is the Response and at this point of time, the risk has made an impact on the firm and its profitability has already been hurt. So, at this stage the management tries to restore the firm at the normal condition. There are certain actions or responses that are to be taken by the firm once the risk has been detected and these actions are: Transfer: the firm once the risk has been identified; it could transfer it to another party. Avoid: Firms could avoid the risk but it could only be done if the risk would not have a significant impact on the firm’s profitability. Reduce: the other action that the firm could take is to reduce the impact of such risks because if the firm avoids such risks then it would not be beneficial in the long run. Accept: if the actions taken by the firm might not be successful in transferring or reducing the risk, then the firm might have to accept the risk and operate with that risk. The market risk faced by the firm needs to be accepted, as firms could not do much with such kinds of risk and therefore they have to accept such risks but still operate. section: 3 - Stakeholders: The word ‘Stakeholders’ is defined as any party either individual, company or any institution that might be affected by the company actions or they could affect the company because of their actions. Every organisation has its stakeholders; the stakeholders vary from one organisation to another. Stakeholders are an important part of every organisation and organisations need to know how they can be influenced by the stakeholders so that they are able to manage their operations in a smooth way. List of Stakeholders Stakeholders of Boeing and Airbus are as follows: a. Government b. Competitors c. Airlines d. Society e. Shareholders f. Employees Impact of each Stakeholder Government: Government has a major role to play because it helps and supports both Airbus and Boeing. Government not only gives the financial aid to these two firms, but also helps in giving them tax advantages and tax breaks which is helpful in improving the profitability of the company and paying less amount of taxes. Competitors: The other important stakeholder is the competitors. Airbus and Boeing are competitors of each other and for Airbus, Boeing is the main competitor whereas for Boeing, Airbus is the most important competitor. It is important for the firm to analyse what the competitor is doing so that the strategies and policies of the firm can be adjusted accordingly. Airlines Airlines are basically the customers of Airbus and Boeing as they buy the aircrafts from these two firms. Therefore it is important for these two firms to know what they are doing and what their plans are, because the revenues are being earned by the companies from airlines. Society Society has a major role for any organisation because no company operates in isolation. The aircrafts manufactured by these two firms emit radiations that influence the environment and the society therefore it is imperative for Airbus and Boeing to know what people in the society are looking for so that they could meet their needs. Shareholders Shareholders of the firm are the investors as they purchase the shares of the company. Company generates capital by floating shares in the market and these shareholders have a say in how the company would operate. So, it is important for both these companies to know what the shareholders are demanding and what their plans are so that they could meet the needs accordingly and help them satisfy. Employees The role of employees cannot be neglected in any company. Employees have a significant role to play for any organisation and employees help the company to grow and achieve success. In the success of Airbus and Boeing, the role of employees cannot be denied and to prosper it is important for these firms to know how to satisfy them and ensure that their motivation level is high. STAKEHOLDER MAPPING Stakeholder mapping is a framework used by organisations from around the world to identify and analyse how important a stakeholder is for the organisation. By analysing how important the competitor is for the organisation, the management takes steps according so that their needs are satisfied. The following diagram reflects the stakeholder mapping and how different stakeholders can be placed in these four groups. On the x-axis is the level of interest of the stakeholders whereas on the y-axis is the power of the stakeholder to influence the company’s activities. (Source: Stakeholder Mapping) Group A The first group has low power to influence the activities of the firm and this kind of stakeholder also has low level of interest in the activities of the firm. Group B The second group has higher level of interest in the firm’s activities however their power is low. Airlines and suppliers of Airbus and Boeing could be considered as one group of stakeholder included in this group. Group C The third group has low level of interest but has high power to influence the firm’s operations. Such stakeholders for Airbus and Boeing would include employees and society. Group D The fourth group is the most important group of stakeholders because their power to influence the firm’s operations is high and they have high level of interest in what the firm is doing. Stakeholders included in this group are government, shareholders and competitors. The following table shows different stakeholders based on their groups for both Airbus and Boeing. These stakeholders have been placed according to their level of interest in the firm’s operations and on the basis of their power to influence the firm. LEVEL OF INTEREST Low High Low A B Suppliers Airlines POWER High C Employees Society D Government Shareholders Competitors Tallman GmbH Model: Map A: The Likely Situation A B Suppliers (-) Airlines (+) C Employees (+) Society (-) D Government (+) Shareholders (-) Competitors (-) Map A reflects the likely situation of Boeing and Airbus that there are few stakeholders that might not be satisfied with the firm and therefore it is important for Boeing and Airbus to keep them satisfied. The stakeholders that both these companies have to satisfy are; society, suppliers and shareholders. As Airbus and Boeing have been coming up with different variations in the models and therefore it is making difficult for the suppliers to meet the increasing demand and therefore it is important for Airbus and Boeing to keep them informed and satisfied by explaining them that it is beneficial for all the stakeholders of the company. The other stakeholder that needs to be dealt with is the society and the society would be worried about the emissions from the planes and for that Airbus and Boeing need to work to come up with better planes that emit fewer emissions. Because the two firms have been making investment in different research projects and if the research does not come up in the right way, then it would be a loss therefore these firms need to explain the shareholders that it is beneficial to do research regularly for everyone in the long run. Map B: The Preferred Situation A B Suppliers (+) Airlines (+) C Employees (+) Society (+) D Government (+) Shareholders (+) Competitors (-) How has each stakeholder been affected Government Government is one of the most important stakeholders for both Airbus and Boeing. It is the government that provides the financial support to these companies which has been helpful in doing research and development as well as in making sure that the operations of these companies are run smoothly. Competitors: Competitors can be affected by the firm’s operations. As Boeing planned to introduce Boeing 787 Dreamliner, Airbus also analysed the idea to launch a similar kind of plane to meet the needs and make the most of the opportunities that Boeing’s 787 has. Therefore competitors could change their strategies according to the other competitors in order to maintain their market share and even improve it. Airlines: Airlines are the customers of the aircraft manufacturers and it is important for the aircraft manufacturers to meet the needs of the airlines. With the passage of time, airlines have been more concerned to go for fuel-efficient airplanes and therefore it is important for the aircraft manufacturers to know what they are looking for and then come up with the project that could meet the needs. Society Because Airbus and Boeing do not operate in isolation and the planes manufactured by these two firms emit radiations to the environment which disturbs the society. Therefore it is important for these firms to know what could impact the society so that they can take steps to minimise such causes (Ross, Westerfield, and Jordan, 2009). Shareholders Shareholders have an important part to play because the funds are generated by floating shares in the market. Shareholders could influence the decision making of the firm and therefore it is important for the management to make sure and keep the shareholders satisfied. Employees Employees are the most important asset of any organisation and it is the role of employees that help the firm to achieve success and prosper. Satisfying employees and keeping them motivated is important for the firm. It is the role of employees that help the organisation to grow and with continuous efforts from the employees of both Airbus and Boeing have been crucial in making these two aircraft manufacturers to achieve such high success. Therefore it is important for the management of these two firms to keep the motivation level of these employees high so that they are able to continue their efforts and help these organisations to achieve a lot more. Section 4: financial impact of dreamliner on Boeing Airline industry has grown a lot in the past few years and more research has been conducted in the last few years and because of these reasons, the aircraft manufacturers have been able to come up with better aircrafts. Also the aircraft manufacturers are now able to meet the needs of the passengers and airlines in a much better way than previous years. There has been development in the airplanes and much more effective and efficient airplanes have been designed and developed. With the passage of time, aircraft manufacturers have been able to meet the needs of the airlines. First, Boeing came up with the idea of introducing a big plane with the name of 747 having seat of 550 passengers. However the management did not feel that the plane would work and as they did not get sufficient orders from different airlines they rejected the idea of developing such a plane. On the other hand, Airbus had other ideas and they identified different opportunities in the market and therefore continue to come up with a new plane having capacity of 555 passengers. The name of this large plane of Airbus was A380 and the plane became successful as it was introduced in the market. Boeing monitored the successful of Airbus A380 closely and then came up with another idea of Sonic Cruiser that had the ability to travel from one place to another at 20% less time than the other planes. However the airlines did not like the idea of making investment in new planes with lower travelling time, but they wanted to have planes that is more fuel efficient rather than time saving. So, considering the needs of these airlines, Boeing came up with another plane, Dreamliner codenamed 787 that would consume lower amount of fuels in comparison to others. According to Boeig, Dreamliner had the ability to consume 20% less fuel in comparison to other planes and this encouraged different airline to go for such planes so that their operational cost could be reduced. With the growing demand of low-cost airlines as well as traditional airlines are looking to compete with different low-cost airlines as well, therefore today it has been imperative for every airline operating in the airline industry to reduce their overall costs so that they could offer tickets at a lower rate to the passengers in comparison to other airlines and in this way they would be able to attract more passengers. Considering such a situation, the airlines would be highly interested in buying Boeing’s 787 so that they are able to reduce their overall costs and attract more customers by lowering the prices. The cost of Boeing’s new plane, 787 is approximately $4.5 billion but despite of the cost, the airlines would be ready to pay as this would be an investment for them to reduce their operational cost. So, Boeing’s 787 introduction in the market would help the aircraft manufacturer to improve its revenues as well as improve its profitability. At the moment, Airbus has been able to increase its market share, but with the introduction of Boeing’s 787, Boeing would be able to achieve more sales and improve its market share than Airbus.. Recommendations One of the recommendations that need to be given to Airbus and Boeing is that they need to ensure that the planes manufactured by the planes have the ability to make the most of the opportunities identified. In addition to this, it is important for the management particularly the management of Boeing to properly analyse the demand of any product. The other recommendation that Boeing needs to implement is to have more proper marketing strategies to the final consumers as well and encouraging them to use the products of the company. Also it has been suggested that the firms need to diversify their portfolio rather than manufacturing planes without any demand. Conclusion The report covers important aspects of Boeing particularly Boeing’s 787 and with the passage of time,. There are other parties involved in the operations and activities of the firm which are named as stakeholders. Stakeholders have a major role to play in the development and progress of the country. Stakeholders could directly or indirectly affect the organization. In addition to this, this report analysis the kind of risk faced by the firm and the first stage of risk management process in which the management identifies and analyses, the kind of risk they are facing from the external environment. Also it has been found that the introduction of Boeing’s 787 would be helpful for the country in the long run as it would be helpful in generating profit and improving the revenues received by the country. Reference List Alexander, C, and Sheedy, E 2005, The Professional Risk Managers' Handbook: A Comprehensive Guide to Current Theory and Best Practices. PRMIA Publications: California. Arnold, R 2008, Economics, South-Western Cengage Learning, Mason, OH. 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