The Civil Aerospace Industry - Term Paper Example

Civil Aerospace Market, in the Aircraft Construction Industry Answer The civil aerospace market in the aircraft construction industry is mainly dotted by two giant manufacturers Airbus and Boeings. Though there are couple of others around the world, but those are concerned with satisfying the local needs within their own pockets of influence, while the majority stake in the international market is held by Airbus and Boeings. Out of these two as well, Boeings is the market leader in almost all types of aircrafts closely followed by the EADS Company Airbus. The 'others' category also includes a number of companies like BAE Systems Plc., Bombardier Inc., Embraer-Empresa Brasileira de Aeronutica S.A., Sextant Avionique etc. In the following discussion we'll analyze the industry structure of the civil aerospace market in general and the two main companies in particular. SWOT analysis of Boeings Industries Ltd Strengths and Weakness are the internal factors that affect Boeing in making strategic moves. Some such factors are as listed. Strengths i. World's leading aerospace company with over 75 percent of the market ii. Even after the availability of a range of new and modern aircrafts, several mature, but still popular, models that are generating high cash flow (737 & 747) iii. Highly skilled engineering culture iv. Employs more than 155,000 people in some 67 countries v. Boeing has been the premier manufacturer of commercial jetliners for more than 50 years vi. World's second-largest defense company. Boeing Integrated Defense Systems provides end-to-end services for large-scale systems that combine sophisticated communication networks with air-, land-, sea- and space-based platforms for global military, government and commercial customers Weaknesses i. Management at Boeing is a product of its military heritage, which is a hierarchical, ridged, and semi-autocratic style. While modern management principles call for much more flexibility. ii. As the final product requires high precision and skilled work, Boeing has maintained a an overly secretive and security - conscious image iii. At times poor vertical and horizontal communications within the company shop floor results in employees feeling alienated from management iv. Loss of technological leadership to Airbus - fly by wire avionics v. Highly investment intensive and labor intensive business. Opportunities i. FAA (US) Aerospace forecast for the period 2006-2017 states that, 'By 2017, U.S. commercial air carriers are projected to fly 1.6 trillion ASMs and transport 1.07 billion enplaned passengers a total of 1.256 trillion passenger miles. Passenger trip length is also forecast to increase by more than 120 miles over the forecast to 1,171.9 miles (up 10.2 miles annually). ii. New technological breakthroughs in IT, computers and electronics industries, providing opportunity to serve the customer in a better way. iii. New product development efforts are focused on the Boeing 787 Dreamliner, a super-efficient airplane that is expected to be in service in 2008. Threats i. Global slowdown (decelerating growth) in airlines business, particularly after the 9/11 incident ii. Shrinking profit margins for airlines industry, resulting in closing down of many airlines iii. Fluctuating oil prices and turbulent political scene in the middle-east region iv. New entrants in the business particularly from India, China and Japan. These countries are trying very hard to tap the market with state owned companies getting full support from respective governments v. Widespread opposition of the outsourcing moves by the unions at Boeing as well as from other unions in the country, fearing widespread retrenchments. SWOT analysis for Airbus Headquartered in France and employing about 60,000 people worldwide Airbus has made a commitment to itself that it will remain in the 40-60 percent range as far as market share is concerned1. During 2006 also Airbus was able to capture 44 percent market share with 824 new firm orders worth US$75.1 billion. Strengths: Leading position in the aircraft manufacturing business (second only to Boeing) Patronage from existing customers Strong R& D Support for upgrading the aircraft features Weaknesses Low operating margins in the business Investment and labor intensive business Not able to push back Boeings from the leading position, despite best efforts Opportunities Despite a gloomy past, the airlines business has started looking up again and projections for future too present a healthy increase in airline travelers. Intense competition amongst airlines is making them make a move towards upgrading the facilities that also includes going for newer aircrafts. Threats Increasing terrorist threats and activities Increase in fuel prices Decreasing profit margins Porters 5 forces: Buyers'/Consumers' power: The consumers of aircrafts i.e. airlines hold the key in writing a script of success for the aircraft industry. The global consumer does not have many alternatives as far as civil aircrafts are concerned, but the consumer can still wield enough power to take the advantage of the rivalry between Airbus and Boeings. In the aviation sector, strict adherence to the specifications set out by the customers makes the task quite challenging for the manufacturer. Slight deviation or some glitch in the giant aircraft, will require a thorough check up on the part of the manufacturer, which involves additional expenditure in the form of sending a team of experts to the customer site or even taking back the aircraft to the manufacturing facility. This way the customer wields enormous power. Therefore, both these companies will have to reckon with a formidable force while attracting and retaining the customers within its fold. Suppliers' power: The aircraft companies do not have to deal with suppliers on a daily basis, as its main supply chain of metals and equipment comes from reputed companies like Rolls Royce (engine supplier). As these companies deal with specialty equipment and precision items, their role becomes extremely crucial in determining the performance, reliability and durability of the aircraft. Therefore, the supplier companies do hold a good power in influencing the decisions at Boeings or Airbus. Rivalry amongst Competitors: There's indeed intense rivalry between Airbus and Boeings each trying to influence the customer/s, mainly the airlines and the governments in their own way. This rivalry often lends them in legal tangles, because sometimes during the tender process, both companies end up canvassing for themselves in many ways. Similar legal issue crop up when respective governments also get involved. For example, as is being reported in the media now a days; EU has put the blame on US government for providing illegal subsidies to Boeing, which has been stated as causing huge revenue losses to Airbus. Well, that's an indication of how intense the rivalry is. There's no doubt some competition from the domestic and smaller manufacturers like Samsung, Daewoo, Saab, Daimler etc. which often prove to be fulfilling the needs at the local levels. Threat of new entrants: Since the Aircraft business is capital intensive with requirements of huge investments before one can even think of profits, so there doesn't appear to be an imminent threat of the new entrants, at the scale of Boeing and Airbus, on the horizon. Threat of substitute products: Well, substitute products of aircrafts are of course, the fast moving trains. Many experiments are going on around the world with supersonic trains, bullet trains etc. Some intercontinental trains are already serving the customers in many countries, and if the trend continues with higher speeds, it could be assumed that there'll be lesser air travelers and hence lesser aircraft sales. But this scenario appears too far fetched. So there's not much threat of substitutes. Porters Five Forces - PEST analysis A number of factors influence any company, a sector or the overall business environment. For example the HR policies, the technology being used by the company, the industrial disputes law etc all determine the business environment. To analyze the macro-environment the industry has been making use of PEST analysis. PEST includes Political forces, Economic forces, Socio-cultural forces, and Technological forces affecting the business environment. For the civil aerospace market and the aircraft construction industry in general, PEST factors include; Political: Today the world is indeed divided into many political arenas on the basis of issues like fundamentalism, terrorism, oil exploration, nuclear power etc. The aircraft industry is the kind of industry where governments of respective nations are in any case involved with the deal/ negotiations etc. Therefore, the political equations definitely affect the sale of aircrafts. For example, EU nations will prefer Airbus for their airlines while U.S. and its allies will prefer to go for Boeing. Economic: The economic policies being pursued by the government also determines the aerospace sector. For example, if the country has a on open economic policy, pursuing the globalisation and liberalization policies, that indicates more and frequent business air travels, which in turn bodes well for the aerospace market. This implies an increased paying capacity of the business traveler in lieu of a comfortable journey. This will in turn encourage the airline companies to go for more advanced aircrafts with newer features. Socio-cultural: The society in general has a big influence on any business and the airlines industry is not an exception. For example, the airline companies operating in the gulf and Middle East region operate to full capacity during the Hajj pilgrimage season. Similarly, if the per capita income of the citizens happens to be good enough, that implies more paying capacity of the people, which in turn encourages the airline companies to go for advanced aircrafts. This affects the aircraft industry in a positive manner. Technological: Impact of technology can be seen in almost all walks of life today. 21st century in particular is dominated by the technology. Aircraft industry and the companies in this field being in a technology intensive business are very much affected by the advancements in technology. Answer-2 Airlines industry is the kind of industry which requires huge investments yet the level of competition is such that airlines often keep investing for years together and keep waiting for break even. The industry is investment intensive from the beginning, and requires continuous replenishment throughout the operational activities as well. Fuel costs, addressing the security concerns, maintaining well-paid pleasing personalities on the rolls for various types of services, preparing attractive promotional campaigns, inviting newer customers with loads of discounts, having a decent office and staff etc. some of the recurring costs that an airlines industry requires to survive. The airlines industry is a complex one. It is a high risk industry as is known after the incidents of 9/11, yet it is a highly lucrative industry with potential of high profits. Huge investments, high risks, squeezing profit margins, growing competition are some of the major barriers to entry in this industry. The global economic downturn has also severely affected the expansion of the airlines industry worldwide. As a result of decreasing profit margins and to consolidate their position, a major trend within the global airlines industry has been for companies to seek strategic alliances with other airlines and benefit from synergies in operations. The success of low cost airlines and the increasing airline alliances has in general resulted in contributing towards improvement in the airline industry (Datamonitor, 2005). With the opening of economies and market driven forces taking over the business prospects, the customer has become the real king in the airline industry. Now companies do everything possible to invite the customer towards them by offering them good bargains, club memberships, loyalty programmes, sumptuous meal and goodies on board. With the emergence of low cost airlines on the horizon, the aerospace scene has picked up lot of momentum. These low cost airlines too are on a buying spree, which makes the life more comfortable for the aircraft manufacturers. It is quite apparent that the aviation sector, is extremely capital intensive and requires lots of regular inputs for running the show. The charm of this sector lies in huge profits, if there is plenty of demand, but it may translate into losses, if there are not enough customers and the competition keeps the players on their toes. The threat perception of terrorism also puts the industry on their toes. And there are no short-cuts to success, except deep initial cuts into pockets. Therefore, this sector is not a very attractive sector for the new entrants, as there are already well established competitors on the horizon. The main factors leading to success in the aircraft construction industry are; The amount of investment a company can make. The larger the investments better will be the prospects. The urge for technological edge. The aircrafts require to be upgraded regularly for adding newer features for comfort and security. The ability of company management to deal with governments and the contacts that the company is able to develop amongst the main stakeholders in the aviation sector. The legal framework and the support provided by the government of the home country. References: 1. Airbus, available online at http://www.airbus.com/en/airbusfor/analysts/ (October 22, 2007) 2. Boeing (2007). Available online at http://www.boeing.com/companyoffices/aboutus/ (October 19, 2007) 3. Boeing's Global Strategy Takes Off' (January 30, 2006). Retrieved from Business-week online edition at: http://www.businessweek.com/magazine/content/06_05/b3969417.htm (October 19, 2007) 4. Datamonitor (2005), Global Airlines: Industry Profile, October 2005 5. M. Theodore Farris II, C. Michael Wittmann and Ron Hasty (2005), Aftermarket support and the supply chain, International Journal of Physical Distribution & Logistics Management Vol. 35 No. 1. Read More