The Airbus Business - Report Example

1.0 Introduction 1.1 Company overview Airbus Industrie is an aircraft manufacturing company based in Toulouse, France. It was established in the 1970s as a consortium of European aerospace manufacturers to challenge their American counterpart and “fill a gap in the market” (Airbus S.A.S. 2009). Airbus Industrie GIE (Groupe d’Intérêt Economique), as it was known, was initially comprised of Deutsche Airbus and France’s Aerospatiale before Construcciones Aeronáuticas, S.A. (CASA) of Spain and British Aerospace came to join them later (Airbus S.A.S. 2009). Each of these partner company, referred as Airbus Deutschland, Airbus France, Airbus España and Airbus UK, had its own tasks in manufacturing the aircraft, although GIE gave the consortium a unified face in marketing, sales and customer service efforts. “In 2001, Airbus became a single fully integrated company” (Airbus S.A.S. 2009) with European Aeronautic Defence and Space Company (EADS) - a consolidation of German, French and Spanish stakes - owning 80 percent of the company while British Aerospace successor, BAE Systems, took 20 percent. The company has grown from almost nothing to become a market leader in the aviation industry, challenging the United States dominance (Norris & Wagner 1999, p. 6). In Early 1970s when it was established Airbus started on a low note, especially the period “between 1974 and 1976” it acquired merely “18 new orders” for its A300B aircraft. Nonetheless, change in strategy saw the company grow remarkably to serve the aviation industry as a force to reckon. 1.2 Statement of the problem After Airbus was formed, it did not attract customers and failed to get orders for over a period of two and a half years (Norris & Wagner 1999, p. 6). Nonetheless, by early 2000, it had become a market leader in the aviation industry beating its main rival. This report examines the business history of Airbus in relation to that of Boeing to provide answers to three main questions. First, it offers a discussion of the initial problems faced by Airbus and an analysis of the strategies adopted by the company to overcome these problems, citing that it failed to attract customers and did not get any orders for over two and a half years. Second, noting that Airbus had acquired market leadership in the aerospace industry, it provides a discussion of the nature of the competition between Airbus and Boeing, explores the differentiating strategies that Airbus adopted in order to survive and succeed over the past few decades, and makes a justification of the extent to which the author thinks the advantages are sustainable in the long run. Finally, it provides an analysis of the changes in the structure of the aerospace industry over the years to summer 2009, and an evaluation of its effects on competition in the industry. 1.3 Purpose of the report The purpose of this report is to provide a comprehensive analysis and discussion on problems, and strategies of Airbus business as well as the competition with its main rival, Boeing, through a perspective of a management consultant. In particular, it’s a look at the problems faced by Airbus and strategies adopted by the company, the nature of the competition between Airbus and Boeing, the differentiating strategies that Airbus adopted in order to survive and succeed over the past few decades, how far the advantages are sustainable in the long run and provides a justification, and explores the changes in the structure of the aerospace industry over the years to summer 2009 as well as its effect on competition in the industry. The aim of the report is to provide critical reviews on theories relating to these scenarios, while indicating their application, and making concluding remarks. 2.0 challenges and strategies 2.1 Initial problems faced by Airbus Airbus Industrie faced a lot of problems after it was formed. It did not attract customers and went without getting any order for a significant period (Norris & Wagner 1999, p. 6; Groucutt, Leadley & Forsyth 2004, p. 243). This is attributable to a number of factors that were mainly political (Hayward 1987). Since Airbus was established as a consortium, and largely through the efforts of various governments (Norris & Wagner 1999), its business and strategies were often thwarted by government interference. The most notable on this regard were the French and British governments (Celway Group 2002). In the two years after the initial agreement the governments of British and French expressed their reservations on the success of the venture. The British contention was mainly fuelled by the company’s decision to use an American Engine to power the initial aircraft as opposed to that manufactured in United Kingdom (Norris & Wagner 1999, p. 16). In effect, and given that the agreements for partnership was informal, the British government withdrew from the partnership on 10 April 1969. On the other hand, the government of France threatened to pull out, although it did not due to cost implications for manufacturing Airbus aircrafts including the Airbus A300, A300B, Dassault Mercure and Concorde. (Flight International 1997). These actions by the two governments worsened Airbus position as a competing aerospace manufacturer (Norris & Wagner 1999) because these concerns were relayed to potential clients, the pooling of funds was necessary to support these large projects, and the goodwill by local consumers was dependent on the political will of all the four governments. Furthermore, the commitment by the partner company was not enthusiastic to propel the company into success. After the British government withdrew, both Germany and France and were reluctant to assume the production responsibilities played by the British firm. These governments were also sometimes reluctant in approving proposals and releasing funds meant to support production initiatives. This is despite the need to develop large capacity aircrafts, which necessitated pooling together of resources to counter their individual financial incapability to support such projects (Flight International 1997). The lack of commitment by some governments to fully support the project resulted to compromise on use of suitable technology as well as implementation of full projects. At some point, the company abandoned its initial project to produce an 250 to 300-seater commercial aircraft after some partner government refused to support the project (Mark 2001). The company then proposed an alternative design that was less costly to ion out the cost contention. However, the need to use a superior engine was in direct conflict with the interests of some partners (Norris & Wagner 1999). This resulted to withdrawal from the project by Britain, compelling the company to undergo some reorganizations. The company’s structure was also an obstacle the operations and success of it business. The structure of Airbus presented other weaknesses that were unhealthy for its business. Airbus Industrie remained as a sales and marketing firm because, even after agreeing to work together, each partner company retained ownership and control of both engineering and production assets. As a result, this arrangement allowed inefficiencies owing to the intrinsic conflicts of interests that each partner experienced; that is, each of the four partner company was both a subcontractor to, and GIE shareholder of the consortium. Consequently, although these partner companies teamed up on developing Airbus range of products, some shielded the financial information of their production activities with the aim of maximising the compensation for their sub-productions. 2.1 Strategies adopted by Airbus to overcome its problems The company, however, adopted various strategies to overcome these problems. It employed a “frontal attack” strategies to penetrate the aviation industry and compete with the dominant players (Groucutt, Leadley & Forsyth 2004, p.243). It emphasized on innovation and use of technology to serve the needs of a market that had been ignored by the dominant US-based companies. Airbus range of products included the world’s first A300, the world's first wide-body aircraft powered by twin engines proposed to counter US dominance on short-range to medium-range courses. The 220 passenger aircraft utilized innovative technologies that allowed “lower noise profile, significant fuel efficiency and thus lower operating costs” when compared to its main rivals (Groucutt, Leadley & Forsyth 2004). The productions of various designs were also characterized by the need to serve a particular market that had not been exploited, or as a counter to a move taken by the then dominant players in the aviation industry. The company paid attention to the needs of their customer and based their new designs on customer sentiments. The company strengthened its collaborations efforts, streamlined its structure and operations, emphasized on niche production for markets not served by its rival. The collaboration was characterized by redrafting and formalizing of the agreement between partnering companies to increase their commitment (Mark 2001). Collaboration plays a significant role in strengthening industries, especially where there is the risk of “financial overextension” and “upward pressure on costs”(Hayward 1987). Sharp and Shearman (1987 p. 102) also identifies collaboration as the “second best option” for companies that wish to limit governments participation. The multi-government arrangement allowed the company to acquire financial support making it possible to use “easy credits terms and penetration pricing” to break in the twin-aisle aircraft market. In addition, it leveraged orders of its Aircrafts through its partner companies and their corresponding governments. The company also embarked on a reorganization process that ultimately resulted to its establishment as a typical company. This was marked by the merger of DaimlerChrysler Aerospace who had taken the position of Deutsche Airbus, Aérospatiale-Matra who succeeded Sud-Aviation, and CASA into European Aeronautic Defence and Space Company (EADS), and the subsequent transfer of production assets by EAD and BAe Systems to Airbus for equity share later on. The new company was renamed Airbus SAS, with EAD having a 80 percent stake while BAe owned 20 percent. Moreover, the streamlined division of labour among the four assembling plants initially devised as a means of sharing tasks among Airbus partner companies, became an efficient approach to manufacturing aircraft due to reduce costs and increased flexibility rather than manufacturing everything in one place (Sharp and Shearman 1987; Flight International 1997). The challenges that Airbus encountered prepared it to curve strategies that made it possible to penetrate the aviation market to become a major player and significant rival to the previously dominating US companies. 3.0 Competition between Airbus and Boeing By the early 2000s, Airbus had acquired market leadership in the aviation industry. This was characterized by a tough competition with Boeing that had earlier dominated the marked. The company adopted varying strategies allowing it to survive and succeed in the last few decades. The sustainability of these advantages, however, is questionable. 3.1 The nature of the competition between Airbus and Boeing. The competition between airbus and Boeing has been intense with both company applying various efforts and strategies to win more orders. Both companies developed a wide range of aircrafts in different segments including single-aisle and twin-aisle (wide-body) aircrafts. However, each new development by Airbus does not match exactly with its rivals. Instead the response models are either a bit larger or a bit smaller than that of their rival in order to grub the untapped opportunities and thus gain a better competitive edge. For instance, the A380 of Airbus is bigger than the Boeing 747 although they are in the same category of very big aircrafts. The A320 version of Airbus is larger than the Boeing 737-700 aircraft although it is smaller than the Boeing 737-800 design. The Airbus’s A321 design is bigger than Boeing 737 - 900 but much smaller than the previously introduced Boeing 757 - 200. The latest Airbus design, A350 XWB is meant to counter the high end of Boeing 787 as well as the low end of Boeing 777. As much as this trend is meant to counter the rival’s designs and capture certain markets, airlines have benefitted because they are able to select from a wide range of aircrafts with varying seat capacity as opposed if these manufacturers produced similar designs. The competition is also characterized by use of advanced technology and specific engines. The two companies have tried to outdo each other in terms of technology for a particular aircraft as well using reputable engines that gives the impressive power output. Therefore, the companies have chosen to predominantly use engines manufactured by Pratt & Whitney, Rolls Royce and General Electric (Done 2001; Hayward 1987). The variation of design by Airbus in relation to those of Boeing won it a significant share of the aviation market. The company acquired more orders for its aircraft in 2003 through 2008 than Boeing did. However, its delays in development of some aircrafts has cost the company some business (Robertson 2006). Although Airbus has gained over half of aircraft orders in the recent years, it is still behind Boeing in terms of the numbers of aircraft in service largely due to it late entry into the aviation industry. The competition has also been characterized by Boeing winning in terms of value of orders in some years. In fact, in 2006, Boeing led in both the total number of orders and the total value of these order (Airbus 2009). 3.2 The differentiating strategies adopted by Airbus in order to survive and succeed over the past few decades Airbus has adopted different strategies from those of Boeing in order to survive and succeed in the industry. While Airbus resulted from a consortium that involved various companies and a multi-governments support strategy, Boeing merged with other aerospace manufacturers, notably McDonnell Douglas, to expand its resource base. The Airbus arrangement to manufacture aircraft parts in different plants also allowed efficient operations and focus on producing quality products (Norris & Wagner 1999). Airbus also countered the productions of its rival with aircraft designs that were either slightly smaller or slightly bigger so as to capture the market that Boeing designs had missed to fulfil its needs. Airbus strategies have also been characterized by use of advanced technology. The A300, for instance, used composite materials more extensively than any aircraft of that period. Its flight engineer functionalities were also automated. Airbus pioneered the fly-by-wire control technology. Airbus also emphasized on using credible and powerful engines than its counterpart in the US (Norris & Wagner 2009). Airbus has also benefitted from government support in form of subsidies commonly known as reimbursable launch investment (Mark 2001). These have helped Airbus to meet its huge financial requirements. This has, however, attracted much controversy with the claim that Boeing obtains illegal subsidies through research and military contracts awarded to it, and the tax breaks given by the US government (Flight International 1997; Kundnani 2006). On the other hand, both Airbus and Boeing have exploited both the commercial and political criteria used in awarding procurement contracts. They have both done this through outsourcing the production or assemblies of its aircraft components to manufacturers in nations strategically significant in terms of orders so as to secure competitive advantage over their rivals. However, Airbus has focused its subcontracting largely in Europe whereas Boeing has had a long existing relationship with Japanese manufacturers. 3.3 Sustainability of the advantages in the long run. The Airbus advantages, which include winning more orders, may not be sustainable in the long run. The success of Airbus has been contributed mainly by the collaboration efforts, financial support, technology and engine innovations, and adopting a “frontal approach” to challenge Boeing (Groucutt, Leadley & Forsyth 2004, p.243). However, technology is dynamic (...), and its main rival, Boeing, has been improving its technological innovations (). In addition, Boeing has discovered the benefits of collaborations and embarked on collaboration efforts such as the one with the Japanese manufacturers, and in its various mergers. The financial support that Airbus enjoys from governments has attracted controversy and may lead to negative consequences. Additionally, Boeing may use the same frontal strategies to encounter Airbus success since it was overtaken as the market leader. The continuation of Airbus successes is, however, dependent on its dynamism, aggressive marketing, and correct projection of potential markets. Note that the aviation industry is dynamic and its success will also depend on Airbus innovations. 4.0 The changes in the structure of the aerospace industry over the years to summer 2009 The Aerospace industry is very diverse, compromising a horde of military, industrial and commercial applications. The industry is mainly characterized by cooperation between private and public industries. The space programs, for instance, in several countries are under governments control. These include United States’ NASA, Europe’s ESA, and Canadian Space Agency, among others. Aerospace manufacturers have also been involved in production of technical components and tools such as satellites and spaceships, as well as aircraft construction. The industry that had initially been dominated by the United States, Europe and the now defunct USSR has experienced dramatic changes. The changes have been characterized by Europe’s emerging as dominant force in the manufacture of large commercial aircrafts, while Russia has remained in the background. This has created an almost duopoly situation for Airbus and Boeing in the market for large commercial aircraft. In general, however, that industry has been characterized by entry of Asia in manufacturing of aircraft components or assembly of the same. These include Japan and China. Furthermore, the dominant players have had to engage in collaboration effort with companies in potential market countries to gain competitive edge. The industry has also experiences changes in production of aerospace in all sectors including civil aircrafts. Consumers are seeking to partner so as to reduce costs and maximize working capital with the uncertainty in the market. The industry has also been experiencing decline in purchase due to decline in defence budgets, global recession, and rising international competition. The industry is experiencing development in technological innovation at the support and manufacturing levels as well as at the product level. The manufacturing process are switching to computer controlled systems, as well as networked communication globally. 4.1 The effects of changes on competition in the industry. These changes have opened doors for increased competitions. Increasing players means there will be more for productions for the same markets. This is bound to enhance more collaboration between manufacturers and countries so as secure markets. 5.0 References Airbus, 2009, Corporate information: orders & deliveries, 14 August 2009, . Celway Group 2002, When Airbus made its maiden fligh, 13th August 2009, . Done, K 2001, "Survey - Europe reinvented: Airbus has come of age". Financial Times. Flight International 1997, Airbus history, Flight International, Reed Business Publishing. Ghauri, P. & Cateora, G. (2005): International Marketing, 2nd edn., The McGraw-Hill Companies, United Kingdom. Global Markets Direct 2009, Global Aerospace Industry Outlook to 2010: Buyer Spend and Procurement Strategies and the Impact of Recession and Recovery, Global Markets Direct , Groucutt, J, Leadley, P & Forsyth P 2004 , Marketing: essential principles, new realities, Kogan Page Publishers. Hayward, K 1987, Airbus: Twenty Years of European Collaboration, International Affairs, vol. 64, no. 1, Blackwell Publishing, pp 11-26. 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