Boeing

Case Study 1 - Boeing Commercial Aircraft: Comeback?

Jeffrey Cunningham

MBA 689 Summer 2011 Central Michigan University

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Competitive Nature of the Airline Industry The airline industry like the technology, automotive, and many other industries face an extremely competitive market. Albeit, the airline industry, depending on the corporation and certain European countries involvement have a competition that is unrivaled. The commercial jet aircraft market involves competitors who are intent on increasing their market share, such as Airbus, Embraer & Bombardier, and other entrants from Russia, China, and Japan. (Boeing 2011) During the 2000s, the market for large commercial jet aircraft was dominated by just two companies, Boeing and Airbus.

History of Airbus and Boeing Airbus began as a consortium of aerospace manufacturers in 1969, Airbus Industrie. Consolidation of European defence and aerospace companies in 1999 and 2000 allowed the establishment of a simplified joint-stock company in 2001, owned by EADS (80%) and BAE Systems (20%). After a protracted sales process BAE sold its shareholding to EADS on 13 October 2006. (Airbus 2011) Airbus employs around 52,000 people at sixteen sites in four European Union countries: Germany, France, the United Kingdom and Spain. Final assembly production is at Toulouse (France), Hamburg (Germany), Seville (Spain) and, since 2009, Tianjin (People's Republic of China). Airbus has subsidiaries in the United States, Japan, China and India. (Airbus 2011) While Airbus enjoyed industry and government support, Boeing was founded in 1916 by William E. Boeing of Seattle Washington. Over the years, Boeing has expanded, merging with its rival at the time, McDonnell Douglas in 1997. The Boeing corporate headquarters has been in Chicago, Illinois since 2001. (Hill & Jones 2009) Boeing and thousands of its employees around the world, is made up of multiple business units, which are Boeing Commercial Airplanes (BCA); Boeing Defense, Space & Security (BDS); Engineering, Operations & Technology; Boeing Capital; and Boeing Shared Services Group. Boeing is among the largest global aircraft manufacturers by revenue, orders and deliveries, and the third largest aerospace and defense contractor in the world based on defense-related revenue.

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Boeing is the largest exporter by value in the United States. Its stock is a component of the Dow Jones Industrial Average. (Boeing 2011)

Working Together Airbus and Boeing? Based on the makeup of both corporations, it is highly unlikely that these two aircraft industry giants will work hand in hand as cooperative partners. Much of the material discussed about Boeing and Airbus focuses on their intentions with regards to their product line, government subsidizes, and their belief of the future of air transport. Airbus believes in the development of large hubs that will require very large aircraft such as the A-380 to accommodate traffic growth at airport with limited capacity. (Merluzeau 2004) Boeing, on the other hand, does not believe in this approach by Airbus and feels that providing direct connections between airports is where the airline industry should focus. And as a consumer who flies on business, I prefer the direct route and not a flight that takes off from Ft. Lauderdale to Los Angeles, but has to make a stop in Atlanta first.

5 Forces Analysis of the Airline Industry The true task of any manager is to analyze competitive forces in the industry environment to identify opportunity and threats. (Hill & Jones 2009) Some people call this analysis a SWOT analysis, where you identify your Strengths, Weaknesses, Opportunity, and Threats. Michael E. Porter created a framework called Porters Five Forces Model. In his model, he identified the five competitive forces that have the ability to mold every industry and market to help managers analyze their particular industry.

Risk of Entry by Potential Competitors Based on the information regarding Boeing and the airline industry as a whole, one would believe that breaking into this industry it practically impossible due to the enormous cost associated with it and the pressures to be number one. But if one has access to bank loans with low repayment options, new airlines will begin to enter the market. Take a look at the success of Jet Blue Airlines. They entered the market at the right time with strong

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customer based incentives such as direct TV and many other amenities that other airlines are now deploying.

Bargaining Power of Suppliers The airline supply business is mainly dominated by Boeing and Airbus. For this reason, there isnt a lot of cutthroat competition among suppliers. (Investopedia 2011)

Bargaining Power of Buyers The bargaining power of buyers in the airline industry is quite low. Obviously, there are high costs involved with switching airplanes, but also take a look at the ability to compete on service. Is the seat in one airline more comfortable than another? (Investopedia 2011)

Threat of Substitutes What is the likelihood that someone will drive or take a train to his or her destination? For regional airlines, the threat might be a little higher than international carriers. (Investopedia 2011) For example: If you lived in New York City and had to be in Newark New Jersey, one would almost never fly when a cheaper alternative is available such as Amtrak.

Intensity of Rivalry among Established Firms Highly competitive industries generally earn low returns because the cost of competition is high. This can spell disaster when times get tough in the economy. (Investopedia 2011) The rivalry between the airlines as a whole has been incredible. Over the past few years, we have seen former competitors joining forces to compete in this global market. Delta and Northwest, Continental and United, and just recently, Southwest airlines purchased Airtran.

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References Airbus. (n.d.). In Wikipedia. Retrieved July 16, 2011, from http://en.wikipedia.org/wiki/Airbus Boeing. (n.d.). In Wikipedia. Retrieved July 16, 2011, from http://en.wikipedia.org/wiki/Boeing Hill, C.W., Jones, G.R. (2009). Essentials of Strategic Management. (Second Edition).

Manson, OH: Cengage Learning. Merluzeau, M. (2004, November 18). Boeing vs. Airbus: The Market will Tell, Not the Press Offices. In Frost and Sullivan. Retrieved July 16, 2011, from http://www.frost.com/prod/servlet/market-insight-top.pag?docid=27886120

The Boeing Company 2010 Annual Report. (n.d.). Retrieved July 16, 2011, from http://www.envisionreports.com/ba/2011/20707FE11E/d2e2b5ec9432426e825952329f6 4083a/Boeing_AR_3-23-11_SECURED.pdf

The Industry Handbook: The Airline Industry. (n.d.). In Investopedia. Retrieved July 16, 2011, from http://www.investopedia.com/features/industryhandbook/airline.asp#axzz1SPh7zZUn