Airbus and Boeing - Race to the Bottom - Research Paper Example

?Introduction The market structure of commercial passenger aircraft is oligopolistic, primarily dominated by Boeing and Airbus. Boeing has a 70 year heritage and has been a leader in the industry for a long time. However, since the advent of Airbus, a European consortium, Boeing has faced tough competition and the market has developed and grown due to the presence of now two strong companies. Firm Growth Boeing Over the years, Boeing has taken advantage of its history and early entry into the market (since 1958) to become leaders in manufacturing commercial aircrafts. In 1958, Boeing introduced 707, the United States' first commercial jet airliner. (Boeing, 2011) Boeing, then expanded by acquiring Vertol Aircraft Corporation in 1960. (The Boeing Company, 2011) In 1996, Boeing took over Rockwell’s aerospace and defense units. Then in August 1997, Boeing merged with McDonnell Douglas. This merger allowed Boeing's leadership to increase as it joined with the line of Douglas airplanes. (The Boeing Company, 2011) The tax breaks given to Boeing by the US government have also helped in the expansion of the firm. It is believed that subsidies for the defense wing of Boeing have also helped with the commercial side of aircraft manufacturing. (Irwin & Pavcnik, 2003) In 2002, Boeing’s market share was 54%, however it is now struggling to maintain it. (Taylor & tillman, 2002) Airbus Airbus is a subsidiary of EADS, European Aeronautic Defense and Space Company. (Airbus, 2011) It was a government initiative by France, Germany and UK in 1967. It started off as a consortium of aerospace manufacturers, Airbus Industry. The combination of the European defense and aerospace companies in 2000 led to a company being established in 2001. BAE Systems and EADS transferred their assets to Airbus SAS, for ownership in that company. EADS owned 80% and BAE Systems 20%. (BBC News, 2000) In October 2006, BAE sold its ownership to EADS. Airbus Industry was officially recognized in December 1970. It is believed that Airbus has only been successful due to protection used by the European countries and a large launch aid. WTO reached a decision in August 2010 and May 2011 that Airbus had indeed received unacceptable government subsidies from several European countries which resulted in lower sales of Boeing aircrafts. (New York Times, 2011) Airbus’ market share has been steadily increasing sine its share of 46% in 2002. (Taylor & tillman, 2002) Product Development Boeing Boeing has approximately 12,000 commercial aircrafts in use globally, which constitutes around 75 percent of the world fleet. Through Boeing Training & Flight Services, it trains maintenance and flight staff in the 100-seat-and-above airliner market. Boeing has over 159000 employees, working in 71 countries (The telegraph, 2011). Through this diverse workforce and extensive training, the company’s product development ability has increased. In aircraft manufacturing, focus has always been on developing low cost, high quality aircrafts. Hence, approximately half of the current commercial aircrafts will be replaced in the next 20 years due to technological obsolescence and inefficiencies. This will increase the demand for new ones. Approximately 1,362 commercial aircraft orders were placed in 2010, greater than twice the amount placed in 2009. (Bombardier Commercial Aircraft, 2011) Emphasis is also on fuel efficient and environmentally friendly productions. Boeing, together with Air New Zealand has undertaken research on sustainable alternatives to conventional fuel. (Boeing, 2011) Extensive and expensive research allows better versions of existing aircrafts to be developed and new aircrafts to be launched in this oligopolistic market. Boeing has also resorted to outsourcing its production to Japanese suppliers including Mitsubishi Heavy Industries and Kawasaki Heavy Industries. The use of advanced technology has allowed Boeing to enhance its production capabilities. (Reuters, 2011) Airbus An internal air transportation system is used to airlift pre-assembled parts of Airbus aircrafts from production sites to final assembly lines in Toulouse and Hamburg. Also, Airbus has continuously pushed itself to improve the operational performance of its aircrafts. (Airbus, 2011) Innovations such as fly-by-wire controls, state of the art navigation techniques and latest ground operations procedures impress customers. This technological enhancement has advantages for operators, who enjoy world-class performance, economy and reliability of their Airbus aircrafts. (Airbus, 2011) Airbus aircrafts are also environmentally friendly through the use of a greener, chemical-free milling process that minimizes energy and water consumption during the production process. Airbus has also focused on quiet and fuel efficient aircrafts. Its aircrafts form benchmarks for fuel efficiency and low noise levels. (Business Wire, 2011) Pricing In this oligopolistic market, each company differentiates its aircraft, so Boeing and Airbus aircrafts are not in direct competition with each other. This means that the prices cannot really be compared to one another. The two firms contend on comparable products like the 737 with the A320, the 767 and 777 with the A340. By introducing these two lines however, Airbus and Boeing are at different levels of the product range. This leads to less chances of price competition through differentiation. Both manufacturers have been trying to establish their very own line of aircrafts. (Taylor & tillman, 2002) Boeing's production costs are in USD, while the production costs of Airbus are mostly in Euros. When the euro depreciates against the dollar, the cost of producing a Boeing aircraft rises compared to the cost of producing an Airbus aircraft. Airbus however, has insurance against currency fluctuations. Boeing aircrafts are priced only in dollars, while Airbus, prices its aircrafts in dollars as well as other currencies used in Asia and the Middle East. (Sea or air, 2011) Prices of aircrafts are expected to rise due to the heavy demand from emerging economies. The rise in oil prices in 2011 has resulted in many orders for fuel-efficient aircrafts. This has increased the demand for Airbus's A320neo. However, it has also increased pressure on Boeing. (Jacobs & Blamont, 2011) The prices of different aircrafts of both companies are given below. 1 2 Comparison of the Aircraft market and the Personal Computer market Market Structure The aircraft manufacturing market has an oligopolistic structure with two dominant firms, Boeing and Airbus. They each hold approximately 50% of the market, fluctuating year from year. The personal computer market has a monopolistic structure with many firms in the market. Market leaders include HP, Dell, Apple, Toshiba and Acer. The latest market structures are given below. (Eric Slivka, 2011) 3 Each firm differentiates its products slightly in terms of design, features, weight, storage capacity and other characteristics to serve a niche in the market. Since the barriers to entry, in terms of cost are low in the personal computer industry as compared to the aircraft market, many new firms have entered the market. Asian computer companies such as Lenovo are threatening to surpass the US market leaders. They already account for 28% of the personal computer market. (McKinsey Quarterly, 2011) Product Design Product design is linked with innovation and technological advancements. This industry has the ability to bring out a new variation of a product within months. The aircraft industry on the other hand requires much more extensive research, testing, and pilot projects. It takes years for a new innovation to be introduced in the market. Orders have to be placed years in advance. Delivery is made in one or two years also. With personal computers, companies like Dell offer customers the option of customizing their entire computer from scratch and have it delivered to their doorstep within hours, or a few days at most. The design and management work is done in the U.S. by U.S. firms, while the development and manufacturing of the physical product takes place in Taiwan and China. Because of technological advancements, the personal computing industry does not only include desktop, laptop PCs and servers, but also PDAs and smart phones (Jason Dedrick, 2008). Laptops that are thin enough to slide into envelopes are some of the newest inventions that have mesmerized customers. (Apple, 2011) With rapid innovation, there has also been a steady decline in the prices. A major reason is the demand from emerging economies like India and China. The globalization of production has led to PCs being 10%-30% cheaper. (Jason Dedrick, 2008) Aircrafts on the other hand continue to rise in price because of rising costs of research and development in alternative fuels to make quieter, fuel efficient aircrafts. Growth Opportunities According to Gartner, growth in the PC market will slow down to 9.3% in 2011 as compared to 2010’s 10.5%. The reason for this slowdown is that customers do not feel the need to upgrade their current PCs. (Daily Tech, 2011). In 2012 however, growth is expected to come back to its range of 10-11% (Suzanne Deffree, 2011). The aircraft industry is also expected to grow because of the rising demand from emerging economies and the need to replace old aircrafts that consume massive amounts of fuel with new quieter and more fuel efficient aircrafts. This will allow the industry to grow further as all economies move into recovery after the global financial crisis of 2009. 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