Airbus and Boeing - Factors Influencing Investment Decisions in the Aircraft Manufacturing Industry - Case Study Example

Name : Professor : Course : Due Date : Table of Contents Table of Contents 2 Executive summary 3 Introduction 4 Current situation 5 Factors that influence investment decisions 6 Cost of manufacture 6 Service quality 6 Market trends and size 7 The competition 8 Speed 9 Range 10 Risk factors 11 Inadequate financial resources 11 Political interference 12 Scarcity of law materials 13 Acts of terrorism 14 Key stakeholders 15 States and regional blocks 15 The customers 15 The business partners 15 The business owners 16 Dreamliner financial appraisal 16 Conclusion 17 References 18 Executive summary This study was commissioned with the primary aim of studying the events in the aircraft manufacturing companies. The study was particularly based on the two major aircraft manufacturing companies which are the Airbus and the Boeing. The analysis has established that for many years, the airline industry and more especially the manufacturing sector has remained very sensitive. The two aircraft manufacturing companies for many years in the world of air travel have remained the most dominant companies in the industry. This analysis has also managed to establish that there various factors which influence the investment activities of these companies which include: the cost of manufacture, service quality, market trends and size, competition, speed and range. The risk factor that these companies face include: inadequate financial resources, political interference, acts of terrorism and scarcity of law materials. The key stakeholders of these companies include the states and regional blocks, the customers, the business partners and the business owners. Finally, this study has discussed and presented the future prospects of the Boeing after investing the production of the Dreamlinner. Introduction The airline industry for many years has remained the most sensitive of all industries. This is more witnessed in the airline manufacturing companies. Aircraft manufacturing companies are prone to market risks that involve generation of revenue and change in market prices which are provided in the economic indicators (Flores, 2000). When economic conditions are hard, the travelers tend to reduce their journeys and consequently affecting the business of different airline companies. Different economic indicators such as unemployment, income per capita and personal decisions always influence the production activities of the manufacturing companies (Newhouse 2007, 43). Reduced travel means decline in revenue and less demand for aircrafts by airline companies. The aircraft manufacturing companies are always affected by periodic downturns and upturns of the economy. International threats such as terrorist attacks and disease outbreaks like the H1N1 are view examples of the factors that have continued to affect the airline industry. The primary objective of this paper is to critically analyze the factors that influence the investment activities of the aircraft manufacturing companies and the key stakeholders with reference to the case of Boeing and Airbus aircraft manufacturing companies (John, 2008). Current situation The two aircraft manufacturing companies for many years in the world of air travel have remained the most dominant companies in the industry. The Boeing Company was founded and based in the United States while the Airbus was founded and based in the United Kingdom. Both companies have continued to get substantial support from their governments in terms of finances in order to increase their operations. Perhaps this is because of the major contribution the two companies make to the development of the economy of their respective countries in facilitating the travel of people from one region to the other apart from creating employment for thousands of people and generating revenues in form of taxes (Newhouse 2007, 29). Competition and rivalry is eminent among the two companies because of the desire to dominate in the industry. This has led into the development of various investment strategies such as redesigning the aircrafts in order to meet the changing demands of the market. Competition has been spotted in these two companies through continuous variations of prices in order to attract a large customer base. Apart from size, range, service quality, efficiency and speed have remained the major concern for the two companies. Based on these facts therefore, this assessment article will take a critical view on the two companies’ investment strategies, the factors that influence their investment plans, and the risks they face while executing their investment plans. The paper will also consider discussing the key stakeholders in the industry and how each and every one of them has been affected by the companies change in strategies. The assessment will finally, critically evaluate the financial appraisal of the Dreamliner on Boeing and its future financial prospects (John, 2008). Factors that influence investment decisions Cost of manufacture In reference to the two companies Boeing and the Airbus, the element of cost has been and has remained a major concern. Citing the example of the Airbus which had agreed to manufacture and aircraft that is comparable to the Jumbo of the Boeing, cost variations were evident. Launching a new aircraft that can carry 550 passengers Codenamed A380, would have cost the business 11billion dollars while the construction of the other aircraft that will resemble the Jumbo will have cost the company 7billion dollars even though originally the Jumbo will have cost the company 2 billions dollars (Newhouse 2007, 87). These project cost variations were associated with the installation and inclusion of the new features to the aircraft. However, on the other hand, the cost of the Codenamed was going to cost the company over 12 billions because everything was going to be done from scratch since there was now any resemblance aircraft that had been developed earlier on. Cost assessment has been a major consideration since it involves the commitment of the companies’ revenues and profits towards the new project. Cost determination is carefully considered as one way of assessing the viability of the project for the company and its long-term financial impact to the business. The cost should be associated with the benefits that the project will bring into the business. Given that much of the cost was to be subsidized, the company was obliged to provide appropriate estimates for funding by the European Union (Jon, Mike & Craig, 2010). Service quality Quality is of great concern and to a greater extent directly affects the demand for the company’s aircrafts. Design and development of quality aircrafts depends on the materials that are used for constructing the bus (Flores, 2000). Let’s consider the example of the ‘fuel-efficient middle-sized jet’ by the Boeing. The aircraft is made from very light materials with a more aerodynamic design. Apart from being cost efficient in fuel consumption, the jet is said to be very comfortable since the larger part of the jet is made from the composite materials. The cabins do not need to be pressurized and this has made the seats more relaxing with no much fatigue, passenger dehydration and other pains such as headaches and backaches that are caused by low quality seats. In general terms the quality of the jets is likely to stimulate the market demand for the company jets and consequently better returns and large customer base for the business (George & David 2004). Market trends and size In many years, the size of the market has been the key factor for investment among the two companies. The world over, more and more airline companies have continued to mushroom. This has persistently continued to present brilliant market opportunities for the two companies. The world market has continued to evolve thereby placing and more advanced demands for the two companies. Each of the two companies, is interested in changing its investment plans to meet and satisfy the new customer needs (Lou Anne, 2002). Frequent review of the market investment plans plays a very crucial role in helping these companies tackle the challenges that they face at the market place. The market comprises of all kinds of customers who include business people, professionals, students, tourists and diplomats who in many occasions travel using these jets. In addition, these categories of customers travel different distances which directly influence the kind of jets that should be applicable. China is one of the countries that pose great market opportunities for the aircrafts. Even though the country has posed a great market opportunity for the two companies, they are also obligated to design and develop those jets that are long rangers in order to facilitate the connection between the country and the rest of the world (John, 2008). The competition The competition at the market place is a key factor that influences the investment decisions that are made by these two companies. Competition can be positive or negative depending on its effects to the business. This means that constructive competition should lead to development and stabilization of the industry globally. When competition comes into play, the ultimate winner is the customer. Quality and affordable jets will only be as a result of competition at the market. The primary objective for competition is to outdo the rival and if possible take control of the market. This scenario has been presented by the two companies in greater lengths. First, the production of different jets as counter measures for the rival companies’ activities. Based on the scenario of the two companies under consideration, the stiff competition has been manifested during the manufacture of the Dreamliner. This jet was developed using the most recent technology in the industry. Immediately, the Airbus Company took charge and started designing a new high-tech jet with 270 seats named as A350 (Newhouse 2007, 57). The jet was expected to be cheaper than the Dreamliner even though it was build using the most modern technique which involved the use of lightweight materials. The plane is expected to have new generation engines. According to the Airbus chief executive Noel Forgeard, the plane given its design, it will be able to favorably compete with the Dreamliner and other major planes in the market once it’s launched. In terms of performance, Forgeard adds that the plane will be better and it is expected to be bigger than the Dreamliner. This plane is expected to be launched in 2013 and it is expected that it will be more expensive as opposed to the Dreamliner. The whole essence of this actions and counter actions between the two companies is founded on the issue of dominance and taking control of the market. This competition has also been enhanced through establishment of partnerships with governments and other major airlines in order to sponsor the investment plans’ activities. Airbus for example is trying to establish industrial partnerships particularly from Japan in order to help fund some of the projects investments costs. However, the Boeing is already established in the country after entering into business deals with two major airline companies in Japan namely the Japan airlines and the All Nippon Airways who are currently very loyal to the company (Rigas, 2006). Speed The two companies are also affected with the speed factor. This is informed by the fact that some journeys are very long and in many occasions to turn out to be a very tiresome exercise for the travelers. The travelers are expected to take very long hours before they can reach their various destinations. This is well demonstrated by the two companies. To start with the Boeing had launched the ‘Sonic Cruiser’ which even though was expected to be the fastest passenger plane on earth. It was expected that the plane would substantially reduce the travelling time by 20% more especially when compared with the Jumbo (George & David, 2004). The jet was a long ranger since it could travel from London to Sydney nonstop. The idea behind the construction of this jet was speed. However, this could not yield since it received several criticisms more especially with efficiency. Many airlines are more interested in attaining high level of efficiency as opposed to speed and range. This resulted to development of the most efficient jet known as the ‘super efficient’. This jet was a little bit smaller as opposed to the Jumbo. The jet came to be known as the Dreamliner. Apart from being efficient and faster in terms of speed, this jet was also a long ranger thus raising the prospects of the company’s business in future. This jet is expected to consume less fuel by around 20% apart from being cheaper as opposed to the other jets that are currently operating in different parts of the world. This has also been exhibited by the Airbus after threatening to launch the most efficient jet than the dreamer and at the same which can outdo the Dreamliner in terms of speed. This struggle to attain high speeds and efficiency is based on the fact that once the jet is more economical and faster, its frequency is enhanced and at the same less cost is incurred in fueling the jet. Range The distance that can be covered by the jet without landing has remained a very important factor in influencing the investment plans. It is assumed that frequent landing and taking off before a journey is completed is a waste of time and business opportunities. This is because the jet is likely to take more time on the way than it ought to have been because of the numerous stops. This is the reason as to these two companies are struggling to design and manufacture new planes which can go long journeys without landing anywhere. This factor has persistently forced the companies to invest more ensuring that jets that they develop are faster, efficient and long rangers. Ideally, many customers prefer those jets that can save them both money and time. The development of different jets and redesigning those that have already been manufactured by the two companies is aimed at creating a more convenient travel for the customers (Newhouse 2007, 35). These two companies are applying different investment strategies because they are two great rivals and that each of them is trying to reign over the other. Once the company is a leader in the industry it is very easy to dictate terms and trends in the market and more especially the product price. Price factor at a market place and it can easily be influenced by the decisions of the market leader (Guy & Mark, 2010). It is for this reason that the two companies employ different strategies as one way of ensuring that the rival is not in position to undermine him and even control him in the industry activities. The two companies are also interested in gaining the large market share as this will translate into more sales and definitely more revenues and profits for the business. In 20 years to come, the number of jets is expected to increase to 35, 000 almost double of the current number of jets in the world. This presents great opportunities for the business which the two companies are fighting for. Risk factors Risk identification and management is a very important process for any business. This is because it helps the business develop appropriate measures that can be used to manage them. The risks are the presumed threats that may prevent the business from fully optimizing the available business opportunities. The following are the possible threats that are likely to affect the performance of the business in the market in one or the other. Inadequate financial resources The project of designing and building new planes is a very a very costly undertaking. It costs billions of dollars to complete just one jet. A good example is the construction of the new jet by the Airbus Company which was going to cost the 11 billion dollars to complete. Ideally, this is a lot of money for single company to finance. The cost issue has raised a lot of concern more especially from the company stakeholders. The construction of the new jumbo was going to cost the company roughly 1 billion dollars. This cost is four times higher than that of the Jumbo that is already owned by the Boeing Company. High costs to manufacture and produce these planes have prompted these companies to seek for business partnerships to source for more funds to subsidize the projects. However, the risk is founded on the sustainability of this partnerships and their financing especially a time like this when the world is experiencing the economic crises. The Euro Zone Crises is another cause for reducing the government subsidies to these companies and thus affecting the continuity of the businesses in producing these planes. Therefore, the process requires that the business requires that apart from partnering with other businesses and governments for funding the projects, there is need to come up with other new ways that are more sustainable. This is because all these business are prone to the risk of economic crises and consequently their business performance is expected to go down. The most and important thing for these great companies to do is to strategize and come up with ways in which more can be generated from diversified business activities. The process will play a major role in averting the risk associated with the cost. Political interference It is very evident from the information provided about these two companies that political interference has continued to exist among them. The political powers and influence has played a major role in the performance of these to companies more especially with regard to competition. This was first demonstrated when the Boeing launched the Dreamliner and as counter measure the Airbus decided to launch bigger and more comfortable bus which was going to be more costly to manufacture than the Dreamliner. The new project by the Airbus came as a threat to the Boeing’s Dreamliner. This caused a lot of concern the American government which questioned the motive behind that project and who was the financier given that the Airbus Company alone cannot manage the project. These activities had led to a very serious conflict between the United States and the European Union. This is because the government of the United States had backed the Boeing in constructing the Boeing while the European Union and more especially Britain, France, German and Spain was on the verge to provide their financial aid to the Airbus towards the construction of the new plane (Newhouse 2007, 35). Political interference can constructive or destructive depending on how it is applied. The appropriate management of this risk is to settle down and understand who the key stakeholders to the companies are and the level are posing. This will help the directors limit their interactions to the level that is acceptable by the business so as not to create room for vested interests to come into play. Scarcity of law materials Jets are made from high quality and very costly materials. The materials used to manufacture the jets are supposed to be light but strong in order to facilitate easy movement in the air. The challenge that is there and that is likely to continue facing these companies in completing their projects is the scarcity of these resources. Many of the jets manufactured by these two companies are made from lightweight materials are aerodynamic and those that are energy efficient (Mohan, 2010). Composite materials are largely used in the manufacturing of these aircrafts as opposed to any other material. As opposed to the conventional aluminum, the composite materials do not require much pressure and therefore less fatigue, dehydration and acute pains like headaches and backaches for the passengers. Sustainability strategies have not been modeled by the two companies thus posing a very serious threat when the materials will be extinct. The best way to manage this risk is to embark in more research and innovation programmes in order to come up with ways in which materials that can be recycled can be developed and used for constructing these planes. Acts of terrorism Terrorism has been one of the most recent threats to the aviation industry. A good example is the September 11th 1998 blast in the United States. Immediately after the terrorism attack, many airlines were affected. The customer number substantially reduced based on the fear that air travel was under major threat by the terrorists. This led to the decline in the number of customers placing orders for planes manufactured by the Boeing (Newhouse 2007, 49). Continuous attacks and threats have been on the increase since then thus posing a very serious question about the safety of air travel. However, this risk in the future can be managed by the two companies if new planes’ structural designed are applied to be used as detectors of any threat that is within and around the planes before they land and take off. This will reduce the incidences of attack by the terrorists and thereby regain the lost confidence on the security and safety of the new jets. Key stakeholders States and regional blocks Different government and regional blocks are directly associated with these companies and they have a major stake in the activities that are performed by the two companies. The Boeing company is supported the United States government whereby the government is the major stakeholder (Robert, 2010). On the other hand, the European Union more especially Britain, France, Germany and Spain have been behind the sponsor of the Airbus Company. These governments are expected to fund the company projects and receive part of the revenues that are realized by the two companies in form of tax. The customers The customers refer to those airlines that buy their airbuses from this companies which include the British Airways and Air France. The customers are actually major stakeholders to the businesses (Alessandro, 2009). Through their purchase transactions, the companies form larger part of the customer base that is owned by individual manufacturing company. It is through these companies that the two companies are able to generate their revenues to support the business operations. The business partners The key partners to the companies include the Japanese Airline and the Nippon airways of Japan. The establishment of business partnerships is aimed at increasing the business sponsors especially on big projects that are costly for a single company to undertake (Mohan, 2010). The construction of new jets has been costing billions of dollars for the two companies and now they are using the partners to mobilize enough funds for developing new planes. The business owners The business owners refer to those people who have invested in the companies through the purchase of their share in the stock exchange. They are major contributors to the capital of the companies. This means that the shareholders have got big interests in the performance of the business and more especially in revenue generation (Newhouse 2007, 87). The shareholders may include individual governments, individual persons and companies. The primary objective of investing in the business is to get better returns worthy of the investment. From this ground it can be argued that for many years, the shareholders have been receiving reduced dividends given that much of the companies’ revenues have been going into investment projects. Dreamliner financial appraisal The financial analysis and interpretation of a project is a very important step of ensuring that the viability of the project is determined. The cost of manufacturing the Dreamliner is estimated to be 4.5 billion. The Boeing is approximating that the market size for the Dreamliner to grow up to 3,500 in the next 20 years thus posing good market opportunities for the aircraft (Mohan, 2010). The U.S government fund for the construction of the Dreamliner is 23 billion dollars. The Boeing is estimating that the total market for the aircrafts is estimated to reach 35,000 airplanes in the next 20 years. The Boeing Company is also expecting that the Airbus’ market share for bigger jets is likely to shrink by 2% from 6% because of the decline in the demand these jets and consequently the market share for the fuel efficient 787 Dreamliner will increase by 2% to 20% from 18% (Newhouse 2007, 57). Currently, the Boeing has received over 876 orders for the Dreamliner which costs 150 dollars each. The number of customers currently stands at 53. Based on this data, it is right say that the future of the Dreamliner is very bright and does the Boeing. This is because the cost of production is relatively cheaper and the demand is rising since it is easy to manage the logistics associated with small jets. Conclusion The aircraft manufacturing industry world over has remained very sensitive to the economic trends. Based on the two companies the Boeing and the Airbus, it is evident that there are various challenges that face the industry (‘Airbus bets the Company’, 2000). The investment activities have even complicated the situation. This is because the cost of investment more especially in producing new airplanes is very high and a majority of them cannot afford. This has led into forming partnerships in order to source for more financial support a part from the government support. The industry investment activities are also influenced by different factors such as speed, range, efficiency and quality of service for the customer. The key stakeholders such as the states, business partners, customers, owners and the government have role to play in determining the investment activities of the two companies. In general terms, investment in the industry not only requires expertise and enough financial resources but also proper marketing analysis in order to establish those factors that are likely to prevent the company from fully optimizing available opportunities. References ‘Airbus bets the Company’, The Economist, 3/18/2000, p. 67. Alessandro, C 2009, The Airline Industry: Challenges in the 21st Century, Springer. Flores, M 2000, ‘Airbus Set to Launch its Monster Jet,’ The Seattle Times, 12/19/2000, p. D1. George, S & David, C 2004, Global and transnational business: strategy and management, London, John Wiley & Sons. Guy, N & Mark, W 2010, Airbus A380: Superjumbo of the 21st Century, Massachusetts, Zenith Imprint. John, N 2008, Boeing Versus Airbus: The inside Story of the Greatest International Competition in Business, London, Vintage. Jon, P., Mike, M & Craig, K 2010, From props to jets: commercial aviation’s transition to the jet age 1952-1962, Chicago, Speciality Press. Lou Anne, A 2002, Foreign Direct Investment in Emerging Economies: Corporate Strategy and Investment Behavior in the Caribbean, Routledge studies. Mohan, R 2010, How Boeing Defied the Airbus Challenge, New York, Createspace Ltd. Newhouse, John. Boeing versus Airbus, USA: Vintage Books, 2007. Rigas, D 2006, The airline Business, London, Routledge. Robert, C 2010, International Economics, London, Cengage Learning. Read More