Airbus - All Chapters - 002

Running Head: AIRBUS’ RESPONSE TO COMAC 1

Airbus’s Response to COMAC

Philippe P. Honoré

Palm Beach State College

Author Note

This capstone paper was prepared for the spring 2015 semester of Capstone General

Management, GEB 4935, taught by Dr. Roger Blair.

AIRBUS’ RESPONSE TO COMAC 2

Abstract

The purpose of this research paper was so Airbus, a subsidiary of Airbus Group, could grasp the

danger that might come from its new competitor The Commercial Aircraft Corporation of China

(COMAC). The specific drive was to point at Airbus’ main weakness that could lead the

company into major financial trouble, as they would not respond in a timely manner to this

threat. The means of investigation were based on Airbus internal structure, as well as a

comparison with segment diversification in the automobile industry. The solution offered relies

on the creation of a subsidiary that would compete directly with COMAC. The benefit of this

new brand would be to offer a cheaper alternative closer in price to the Chinese competitor,

while protecting Airbus’ image of innovation and as a high quality aircraft manufacturer.


Airbus’ Response to COMAC

Chapter 1: Research Proposal and Introduction

Introduction to the Organization

Airbus S.A.S. (Airbus), located in Blagnac, France is a subsidiary of Airbus Group based in

the Netherlands (Hoover’s, 2015). This global organization operates in thirty countries. They

produce single and double aisle aircrafts transporting between 100 and 800 passengers, eight

configurations of corporate jets, as well as freighter aircrafts (Airbus, 2015).

Corporate name, founding date, founding leaders. Before it became a subsidiary, Airbus

was a consortium created by politicians to become a European aircraft manufacturer (Airbus,

2015). Airbus industry was officially founded on December 18th, 1970 between Aérospaciale and

Deutsche Airbus. Some of its renowned leaders were Felix Kracht, Gunther Scherer and Bernard

Ziegler, although Roger Béteille was considered as the spiritual father of the organization

through the development of the A300.

Essential events and critical incidents. One unforgettable event happened on April 27,

2005 when four Rolls Royce engines lifted the 650-ton largest passenger airplanes ever

manufactured. The A380 has the ability to transport 800 passengers in one class configuration,

and takes off in an incredibly smooth and silent manner. In fact, Bill Saporito stated (2009) that

this mega airplane makes half of the noise at take off as a Boeing 747-400.

Unfortunately, there was also a tragic event that Airbus would like to take out of its memory.

Like Boeing and other airliners, a few Airbus airplanes disappeared from radar throughout

history. June 1st, 2009 was no exception as flight Air France 447 crashed in the Pacific Ocean on

its way to Brazil. A malfunction of three sensors - as big as a thumb - resulted in 228 casualties

(Bremner, 2009). Once again, Mother Nature challenged engineers who did not take into


consideration that, in extreme flight conditions such as those met by AF447, frost would stop the

airflow coming inside the speed sensors located outside of the plane. As a result, the autopilot

suddenly disconnected leaving both co-pilots to fight against a massive storm over the Pacific

Ocean, a battle they unfortunately lost.

Products throughout Airbus history:

A300B2: Airbus Industry’s first model made its inaugural flight on October 28, 1972, to

be delivered to Air France on May 10, 1974 (Airbus, 2015). A few years later, the A300

featured the Autoland System CatIIIA, which enabled its first flight with Autopilot on

December 11, 1980.

A300-600: Another important event occurred at the end of the eighties as the first A300-

600 was delivered to American Airlines on April 21, 1988.

A300-600ST: Almost twenty years ago, Airbus launched the A300-600 Super transporter.

The capacity of this oversized freight airliner is such that it can transport a helicopter

with its rotor. The A300-600ST brought more than 40,000 cubic feet of relief supplies to

New Orleans in response to Katrina’s catastrophic event (Fletcher, 2005).

A380: Its inaugural flight occurred on April 27, 2005. A380’s first delivery was in

October 15, 2007. The first flight of the A380 was their most mediatized event.

A350: Comes in three versions. Airbus website claims that this family of planes is 25%

more efficient than its current competitor Boeing (Airbus, 2015).

Industry competitors. Until now, while Bombardier and Embraer were selling smaller

airplanes, Boeing was considered as Airbus’ historic competitor. Chinese airliner manufacturer

COMAC, its new and most feared new entrant, should launch in the new future the C919 that

could shake the supremacy of these two airliner giants.


Statement of the Problem

According to Airbus’ mission statement, the airliner depicts itself as innovative using

advanced technologies, as well as focusing on high quality airplanes. While quality has to be the

highest priority of an airliner, this mission statement sounds like Airbus provides expensive

planes solely to airlines that can afford them.

While the two-floor passenger jet A380 was considered as a miracle of technology,

orders are not piling up. The largest airplane transporting passengers on the market today has not

met Airbus’ expectations in terms of firm orders, as well as meeting their target of manufactured

planes (Mouawad, 2014). Additionally COMAC, the once unthreatening Chinese airliner

manufacturer who just launched its first passenger jet, started the production of the C919

(Perrett, 2014) a direct competitor to Airbus A300 series. Expected to be delivered in 2018 after

some major delays (Dennis, 2014), the low-cost C919 might take new market shares occupied by

Airlines that once had to buy used planes. In this article, M. Mouawad also pointed at Airbus’

lack of imagination when it comes to predicting its product’s success. While COMAC is

aggressively engineering new models that will become Airbus’ nightmare, the European firm is

looking the other way, confident that their reputation of high quality makes them a primary

choice for premium airlines.

Airbus has the ability to respond to a Chinese offensive only if it can overcome its inertia.

This study, based on the French automobile industry, investigates the possibility of

manufacturing low cost planes based on existing passenger jet platforms, which could be sold at

a cheaper price to Chinese, South American, and African Airlines. In order to keep Airbus’

image of exceptional products, we advocate the establishment of a new brand within Airbus

Group, directly under Airbus SAS’s subsidiary called LBJets. In tribute to Louis Blériot (Siegel,


2009), the first man to fly over the English Channel more than a century ago, LBJets would

reincarnate the aviator’s courage against adversity.

Research Question

Knowing the over-confidence of Airbus Group, will the company take a chance on

creating a low cost brand in direct competition with Chinese airliner COMAC?

Hypothesis

Because of its over-confidence and self-contemplation over its success, Airbus might be

victim of the Icarus Paradox if it does not see COMAC offensive in a timely manner.

Research Significance

This research paper is crucial for the longevity of Airbus so it could face new entrants

into this very competitive market such as COMAC, and would also rejuvenate the innovative

spirit of this organization in order to prepare for the new challenges of tomorrow.

Purpose

Like other global corporations, Airbus constantly thrives to keep its competitive

advantage. Until now, Boeing and Airbus shared this market segment of one hundred and more

passengers, while bombardier and Embraer were fulfilling a niche with smaller planes. Even if

previous battles between these two giants felt like transatlantic flights with major turbulence,

future flights might be bumpier than ever, with a risk of not reaching their destinations. The

purpose of this research shows how Airbus can prepare itself by coming up with a contingency

plan that would strengthen its presence in the segment of middle to massive carrier aircrafts. If

Airbus has been criticized in the past for being off in its prediction, today is the time for this

innovative corporation to show the world that it can come up with alternatives to beat

competitors on their ground. Not only could Airbus, once again, astonish the world with its


creativity, but it could also make this journey a success story that would be written in airline

history.

Data Collection/Research Methods

While our data collection will skim over our leading competitor Boeing, we will

concentrate our research on COMAC. As we will not be able to retrieve financial data from

COMAC as it is owned in part by the Chinese government, our research will be mainly

qualitative, relying on data from public sources, such as reports coming from COMAC’s

customers.

Chapter 1 Summary

Our text (Hill, Jones, Schilling, 2015) uses strategic management to provide some

guidance to Airbus so it can successfully attain its goal. One might think that the reason to

implement such strategy is to be able to respond to COMAC’s offensive, although the true

purpose is to maximize shareholders’ profit in the long run. The more Airbus is able to keep its

competitive advantage, the more its shareholders would receive high returns. Although in order

to do that, Airbus has to look outside of the box and provide cheaper products to satisfy the low-

end airline market. While we understand that Airbus’ reputation could suffer from such a

strategy, we believe that, like Renault did with Dacia (Just-auto.com, 2013), the second biggest

airliner of our time can create a reputable brand such as LBJets, making products that are more

affordable, while not compromising quality. If well directed by corporate, functional managers

of this new subsidiary should be able to provide valuable information so LBJets could create

innovative products that would compete with new entrants.


Chapter 2: Literature Search

Literature Search

In an era where the answer to success depends on globalization (Griswold, 2009),

organizations have to be open-minded enough so they can redefine themselves if needed. One of

the keys relies on their ability to adapt and reorganize so they can survive in this fierce business

world. There is one main idea in business that tends to prevent them on doing so:

overconfidence, or as Danny Miller (1992) called it the Icarus Paradox. In Greek mythology,

Icarus, the son of Daedalus, ignored his father’s warning who had built two pairs of wings out of

wax and feathers so they could both escape a labyrinth Daedalus designed himself. Flying too

close to the sun, the wax holding the feathers melted, and Icarus perished from his fall into the

sea (Humphries, 1989). Miller uses Icarus as an analogy by pointing out how success blinds

established organizations to the point that they do not see danger coming. This chapter analyzes

the effect of overconfidence on organizations.

Icarus paradox. Like two established emperors guarding their territories, Airbus and

Boeing use their duopoly situation to keep their market shares by raising the barrier of entry so

high that smaller aircraft manufacturers would not dare to challenge. Their power is such that

they both are sitting on their pile of orders, reassuring themselves to the point that they might not

see a storm coming from the East. After all, who could blame them? Like Icarus, Airbus flies in

euphoria whenever it can steal market shares from its historical rival. It happened in 2006 when

Airbus beat Boeing in number of airplanes delivered at year’s end (Company’s Watch – Airbus,

2007), and once again in 2013 by net orders (Davidson, 2013). The problem relies on the fact

that, like Icarus who was so blinded by his bliss, Airbus’ overconfidence keeps it from looking at

the real danger. If Airbus hangs onto looking over its shoulder to make sure that Boeing stays


behind, COMAC will eventually grow to the point where Airbus will not have any strength left

to fight.

The risk of overconfidence. Priscilla Cale made an interesting finding in her book Sink

or Swim (2011) where she realized that if overconfidence was a major part of the Titanic

disaster, this effect could also apply to family businesses. Although this premise is also true for

many organizations, no matter what size they are. While confidence remains as a powerful

attribute to successful leaders, too much of it takes their attention away from focusing on their

deficiencies (Schings, n.d.). What applies to individuals working in an organization, applies to

the organization as a whole. Rose Trevelyan (2008) points out the fact that overconfidence

increases biases when it comes to decision-making. In business, it happens when leaders’ overly

optimistic views affect their ability to run a business. In fact, overconfident managers have a

tendency to emphasize the returns on acquisitions while underestimating the risks (Wang, Zhang

& Yu, 2009). Airbus employees can be proud to work for such an organization as this

corporation was always highly innovative, surprising its competitors with new products such as

the massive A380, the kerosene efficient A350, or the giant transporter Beluga. Each success

strengthens a leader’s confidence as well as builds employees’ trust in their management. If we

take Vivendi as another example of overconfidence, we can see that one of its famous CEOs,

Jean-Marie Tessier (Petit & Bollaert, 2011) was so sure of the company’s success, that he

announced in multiple interviews that the firm was doing amazingly well, while it actually was

losing billions of dollars. Messier’s hubris cost him his job, even if he left with a comfortable

$20 million plus severance (James, 2003).

Theory of immortality. Walking down a busy street of any megalopolis in the United

States emphasizes the impression that certain organizations appear to be immortal (Krakovski,


2013). It seems impossible to think that one of these famous chains would be gone in a decade or

two. Although if we go back in time, who would have thought that sole proprietorships would

melt like ice under the sun to the profit of chains located in malls (Kall, 2013). The little ones

had two choices, either closing down, or franchising. The truth is that the curve cannot show a

constant growth forever. Like mom and pop companies, giants of today might become the

unknown of tomorrow. Organizations, no matter their size, are as mortal as we are. While

entrepreneurs should not see this as a fatality, they should consider that in order to survive, an

organization has to reinvent itself, or to rebirth through acquisitions or mergers (Nunes &

Breene, 2011) . In 1999, the giant Starbucks acquired sixty Pasqua Coffee stores that were very

familiar to San Francisco coffee fans (Emert & Rubenstein, 1998), and three years later, HP

bought Compaq with a $25 billion check (Lashinsky, 2002). No matter how successful an

organization is, its life expectancy should not be overvalued. Those who carry today their

Skinny-Venti-Vanilla-Latte-Triple-Shot-No-Foam made by the famous green mermaid might

have to run on Dunkin tomorrow. In order to stay afloat, organizations’ leaders should be aware

of any type of competitor that could threaten their well being, especially if they are part of a cozy

duopoly.

Comparative Company Analysis

Fortunately, there is no giant aircraft manufacturer that went bankrupt. The closest

example was Fokker that developed the F100, which was supposed to be in direct competition

with the duopoly. This Dutch aircraft manufacturer - saved many times by its own government

and bought by Daimler later on - did not survive its competitors (The Economist, 1996). Since it

closed its three core units in 1996, Fokker delivers maintenance on its sold aircraft, but further

more is considered as a specialist supplier for the aviation industry, Airbus being one of its


customers (Fokker, 2015). Like Airbus, on a different scale, Fokker thought that everything

would be fine as long as the Dutch government kept on chipping in.

Generation Y saw how overconfidence affected one of their favorite organizations. Who

would have thought that customers would rent or buy movies and TV shows from the comfort of

their home? Certainly not Blockbuster’s CEO Huizenga who spent his time acquiring other firms

while he was already flying too close to the sun (Malmendier & Tate, 2007). AMC, MCI,

Compaq, RCA, the list of once worldwide known organizations that have closed down is

endless. Even potential Airbus clients have vanished from the sky. One of them, Pan Am (Pan

American World Airways), has sadly seen its intellectual property revived in fashion, such as by

Marc Jacobs in his limited vintage product line (Pan Am, 2015).

It is doubtful that COMAC would ever go through the same situation, as the Chinese

government puts so much pride in industries it subsidizes, it would be surprising to see this

Chinese company running out of funds. COMAC was created in 2008 and has already

manufactured, tested, and obtained certifications on an airplane in December 2014 (Aerotime,

2014). This means that COMAC has sufficient engineering knowledge, production capacities, as

well as funds to disrupt the well-established duopoly. Although, according to a study about

overconfidence in Asian culture (Seok, 2007), it appears that the Chinese have double the level

of overconfidence as Americans.

Chapter 2 Summary

While Icarus was a myth, its paradox is a reality. Whenever organizations are

concentrating their attention on one or two particular competitors, they tend to forget about the

big picture. Our duopoly might even go beyond and search into any macroeconomic environment

that could impact their business, social forces that could change customers’ habits, demographics


that could affect who their customers are, or new technologies that could make them save

money, but it is rare that a giant would look at a future threat. Overconfidence is what prevents a

huge corporation to be threatened by smaller organizations, but as in Charles Perrault’s fairytale

The Dwarf and the Giant (Goldberg, 2003), these small organizations might be more powerful

than one ogre can imagine.

Chapter 3: Organizational Operations and Strategies

Current Company Operations

In this first part of chapter 3, we go over a detailed financial analysis of Airbus SAS with

the help of Airbus Group’s 2014 financial statement. Airbus governance model, human

resources, and labor issues are also touched on, before we move on to various technologies used

by the company. Finally, we address one main threat that could endanger the stability of Airbus,

as well as Airbus Group. The second part of this chapter goes deeply into the organization by

analyzing its corporate and business strategies

Financial Aspects of Airbus. As Airbus is a subsidiary of Airbus Group - also known as

EADS N.V. - the financial aspect of the group will be used in the financial analysis (Airbus,

2015). Airbus Group, who restructured its ownership in December 2012, has almost 73% of its

stocks held by the public, while the rest is still held by three European States. This has a major

impact on the group’s decision capability, as two of the States (France and Germany) involved

before the restructuring, had the majority of votes, as well as shares in EADS. The participation

and control of European countries over EADS was historically due to EADS involvement in its

defense program through its subsidiary Airbus Defence and Space (Michaels, 2013). Figure 1.1

below shows the percentage of shares controlled by various governments as of December 2013.


According to the report of the board of directors as of February 2015 (Airbus, 2015) the

year 2014 was remarkable for Airbus division. Despite the fact that the A380 did not meet

expectations, there were 629 other aircrafts delivered in 2014, as well as a net order of 1,456.

Shareholdings. 26.16% of share capital were issued in 2014, which represents a total

of €784,780,585. 1,871,419 stock options were granted to Airbus Group employees.

The French State sold 8,000,000 of its shares in a bilateral agreement with the

German State that should increase its share in proportion. As far as dividends, Airbus

Group was able to distribute a payout ratio of 40%. Due to a few order cancellations

by Singapore Airlines as well as the poor sales performances of the A380, Airbus

Group share (AIR.PA) lost roughly 35% closing at €41.35 on December 31, 2014. As

of the issue of this paper on March 15, 2015, the share finishes at €63.86 (Yahoo

Finance, 2015).


Income statement (See Appendix 1). Airbus Group’s consolidated income statement

shows a drastic improvement in gross margin from 2013 to 2014 with an increase of

12.36% reaching a high €8,937 millions. The net income jumped by 58.5% attaining

€2,350 millions by December 31, 2014. Airbus itself saw its revenue increased by

seven percent, thanks to thirty A380 sold that year. The earnings before interest and

taxes (EBIT) of the commercial aircraft division of Airbus Group gained 68%

between 2013 and 2014 while Airbus Defence and Space lost 38% of EBIT.

Balance Sheet (See Appendix 2). Airbus current assets saw an increase of €1,804

million due to the new A350 XWB program which accounts for 79% of the total

increase of current assets. Most non-current liabilities increased in 2014 partially due

to - now resolved - technical issues on the A380. Current liabilities of Airbus group

went up €1,146 millions mainly from trade liabilities from which a part can be

attributed to pension provisions, and once again to the A250 XWB program and a

reclassification of a contract loss provision.


Financial Profile of Airbus and Boeing. As we can see in the following table, the

gross margins of both companies are fairly close. However, Boeing’s ROE are much

higher than the European group which means more profitability for the American

firm. Same as for income per employees, where Boeing makes twice as much profit

as Airbus.

Organization Hierarchy, Structure, and Leadership Style

Airbus - being located in Blagnac, France - must reinforce the French code of

governance. Although the CEO of Airbus is appointed by the board of directors, which is located

in The Netherlands, Airbus Group established in The Netherlands has to follow the general

Dutch corporate law. The CEO elected by the board of directors must be a resident as well as a

citizen of a country belonging to the European community. Concerning the executive nomination

and composition, the first thing that one would observe on Airbus management overview is the

overwhelmingly male presence. As of January 2015, there are ten executive committee members,

none of them female. Airbus President and CEO Fabrice Bregier graduated from Ecole


Polytechnique and spent seven years working for the French State. This led him to work for semi

private companies such as Matra Defense and EADS later on. A member of Airbus Group

committee, he presented a list of nine other members to be approved by the board of directors as

well as three presidents and one chairman of Airbus subsidiaries in Japan, China, the Middle

East, and the Americas. Allan McArtor (McMillin, 2014), Chairman of Airbus Americas Inc. as

well as Chairman and CEO of Airbus Group, Inc. gives us an idea of his leadership style

described in an interview with The Wichita Eagle. Graduated from the U.S. Airforce Academy

that he left after the death of his eight year old daughter, McArtor also served his government at

the Federal Aviation Administration under Ronald Reagan. According to McArtor, his leadership

style promotes communication as well as team leading.

HR and Labor Issues. Airbus headquarter being located in France, employees working

in the French territory have a multitude of benefits. The most remarkable one, voted in fifteen

years ago, decreases working time from 39 to 35 hours per week (Matthew, 2014). Because most

organizations could not close on Friday at noon, the French government gave then the ability to

credit four hours a week per working week. This means that on top of their five weeks paid

vacation, most full-time employees benefit from an additional two to four week vacation per

year. Unfortunately executives and management employees are exempt employees meaning that

they have as much vacation as employees, but work many more hours per week than the average

worker. Airbus provides also flexible working time whenever possible. Although times are

changing as Airbus and Airbus Defence and Space met with unions around the bargaining table

in order to increase working hours among its managers and engineers which would impact

23,000 employees in France alone (AFP, 2015).


Technology and information systems. As expected, Airbus provides turnkey solutions

for the maintenance and engineering of its aircrafts (Airbus, 2015). E-Solutions and AiRTHM,

are two main systems that Airbus has perfected. In order to improve the reliability of its planes,

as well as reduce the cost of maintenance, Airbus offers six E-Solutions to its clients. Among

them, AirN@v that allows maintenance engineer to easily navigate through the endless manual

of each airplane, AirPl@n that creates work packages to reduce maintenance costs, as well as

reduce grounding time, and finally AIRMAN-web that gives airlines the opportunity to perform

unscheduled maintenance.

The advance service of AiRTHM (Airbus Real Time Health Monitoring) provides real time

information to operators flying the giant A380 aircraft, or the new efficient A350 XWB. This

system operates during the pre-departure check, as well as during flight. In addition, trend

monitoring anticipates potential problems by collecting, analyzing, and using data algorithms to

prevent any failures.

Threats to the Organization’s Future Competitive Success. As stated in previous

chapters, COMAC could threat the organization’s future competitive success by introducing the

C919 that would compete directly with the A320 series. Ryanair has already committed to more

than 200 orders of C919 (Frost & Rothwell, 2011) and even if it has not been announced yet, we

can assume that the price tags of the Chinese company will be substantially lower than our

duopoly. According to Airbus press release on January 1st of last year (2014), a new A318’s

average price at $71.9 million. As far as the average price of a C919, Aircraft Value News

(2011) pointed out an airplane of this type being sold at 30% less than an Airbus would

definitely be a competitive advantage for COMAC.


Corporate & Business Strategies

Company’s Mission and Goals. “Airbus' mission is to meet the needs of airlines and

operators by producing the most modern and comprehensive aircraft family on the market,

complemented by the highest standard of product support.” As described in earlier chapters,

Airbus has two main goals: excellence and innovation. This is where Airbus might have the most

difficulty when it comes to fighting against new entrants such as COMAC. Its overconfidence in

its products does not allow Airbus to be threatened by anyone, even Boeing (Govindasamy &

Yan, 2013).

Line of Business and Acquisitions. Airbus SAS, a subsidiary of Airbus Group also

known as EADS, follows one simple strategy: to keep competitors from entering its market. Like

Boeing, Airbus sells twice as many planes as it can produce (Sparaco, 2014). This strategy can

only be effective because of this duopoly between these two airliner manufacturers. In the

meantime, because these orders are firm, other companies such as COMAC cannot sells their

own planes even if the orders have not already been fulfilled.

Company’s Strategy. When an organization wants to grow its market share, increasing

its marketing and sales budget might not be its only solution. In fact, Airbus found a clever way

to gain market share through its acquisition of Metron Aviation (2015). Specialized in Air

Traffic Flow Management (ATFM), Metron Aviation is moving the old Air Traffic Management

(ATM) into Next Generation (NestGen) that optimizes traffic flow management. This means that

Metron Aviation has been working with the same clients as Airbus such as airlines like

American Airlines, Delta Airlines, Air Canada, and also FedEx.

Broad Differentiation. Airbus uses a broad differentiation competitive strategy as it

offers a wide number of aircrafts that are specific to customers’ needs. First there is the Beluga


Super Transporter considered the largest cargo carrier in the world that is specifically designed to

transport airplane fuselage sections, as well as spacecraft and satellites (Hoovers, 2015). There

are also the A320 Neo family specifically engineered to improve fuel efficiency by 20% over

similar aircrafts of its competitor, as well as the A350 XWB that saved an extra 5% over the

A320 Neo. Finally, the A380 remains the largest commercial aircraft ever built that lift up to 800

passengers in incredible silence.

Main Functional Strategy: Innovations. As stated earlier, Airbus uses its numerous

innovations as a competitive advantage against Boeing its main competitor. The Beluga Super

Transporter, the fuel efficient A320 Neo and A350 XWB, and its giant A380, Airbus keeps on

innovating in order to give Boeing a hard time as its, for now, only competitor. Airbus has also

just opened Airbus BizLab in Toulouse (Airbus, 2015), France that allows young engineers,

entrepreneurs, as well as Airbus employees to gather in a research center to create the

technologies of tomorrow. A second BizLab will be opened in Germany by the end of the year.

Airbus was also the one introducing the first flight-by-wire on a passenger aircraft 35 years ago

which revolutionized the industry. Other innovations took place inside the cabin with mood

lighting that ease the stress of long haul flights, as well as noise-absorbent materials for quieter

flights. As far as silence, the media acclaimed the A380 as the quietest aircraft ever build.

In the continuum of innovation, Airbus created “Smarter Skies” (Airbus, 2015). These

are five innovation concepts that will improve our flight experience by 2050. Eco-Climb uses the

navy assisted take off technology to propel aircraft into the sky. Express Skyways uses birds’

flight patterns in order to save fuel consumption, by creating a V formation of aircrafts. The third

innovation Airbus is working on is a Free-Glide approach and landing that reduces emissions and

noise pollution. Fourth would be to improve the ground operations by using electromagnetic


ground vehicles that would bring an aircraft faster and safer to its gate. Finally, Airbus is

working on reducing its footprint by researching alternative technologies that could be more

sustainable in the near future.

Chapter 3 Summary

This chapter reviewed the financial structure of Airbus Group, which clearly

demonstrated that Airbus SAS plays a major part in the group’s financial health. As far as shares,

even if the market was not thrilled about the low performance of A380 sales, the level of shares

is higher than in 2013. The liabilities moderately increased without endangering the group. As

far as governance, we understand that the company must play by the laws and standards of

countries they operate in, we might add that women are nonexistent among Airbus upper

management. We also made a ratio comparison between Airbus Group and Boeing, and realized

that Airbus has a long way to go before it can outcompete Boeing. In the second part or this

chapter, we went over corporate and business strategy. Airbus statement says it all, emphasizing

high quality, excellence, and innovation. We realized that innovation is predominant in Airbus

Group culture and therefore affects positively all subsidiaries of the group. In the next chapter,

we will perform a SWOT analysis in order to clearly define how Airbus might use its internal

strengths and external opportunities to be prepare for the eventuality of COMAC becoming a real

threat.

Chapter 4: SWOT Analysis

Strengths and Weaknesses

Airbus has acquired respect from its customers based mainly on the high quality of its

aircrafts, as well as a multitude of innovations that were offered to them (Luff, 2007). Among

those are Singapore Airlines Suites with real queen size bed configuration, or Etihad $20,000


Residence Suites that comes with a dedicated “Flying Butler” for its most exquisite customers

(Yousef, 2014). Airbus has always provided a standard that only private jets were able to offer.

While this company offers a wide range of luxurious configurations, as well as advanced

technologies that increase fuel efficiency, there are other profitable segments that Airbus cannot

reach because of its high priced items. On the end of the spectrum where airlines are reduced to

buy used aircraft, Airbus is unable to meet these low budget customers, who therefore might turn

to a new competitor coming from the East.

Leading. There are two individuals who are making a difference in Airbus among ten

executive committee members of this firm. One is the President and Chief Executive Officer, and

the other is the Chief Operating Officer for Customers. While Bergier, the CEO, is at the top of

the hierarchical pyramid, Leahy could be considered as the capstone of this edifice, as obtaining

new contracts depends on the efficiency of his department.

CEO. According to Isabelle Pacorel (2013) who had the chance to briefly interview

Fabrice Bergier in his office, Airbus Group CEO has a reputation for being firm and

demanding. Native of the region of Dijon, France, Bergier loves the terroir1 especially

a good Cote Rotie, which is an excellent red wine from the North Rhone Valley. If

Bregier might have the reputation to be tough, he knows how to silence his phone on

weekends. A graduate of Ecole Polytechnique, a prestigious university of engineering

also known as L’X, Bregier was taught to lead “military style” (L’X, 2015). While

this type of leadership might not be suitable to mid-size organizations, Bregier has

proven through his experience in various Airbus Group subsidiaries, as well as

1 Terroir: a French word that describes the environmental conditions, such as soil and climate, in which food and wines are grown and produced that gives them a distinctive flavor and taste.


through his experience as a government official, that he can effectively run a group of

more than 140,000 employees (Airbus, 2015).

COO – Customers. John Leahy plays an important role as Chief Operating Officer-

Customers. Leahy is also called “the 10,000 airplanes salesman” (Flightglobal, 2015).

In an organization led mostly by European natives, Leahy has successfully brought

Airbus shares from 18% in 2005 to beyond 50% today. Unlike Begier, Leahy and his

team are sales representatives who carry billion dollars contract in their suitcases.

While he was able to sell 100 airplanes to Northwest Airlines, Southwest Airlines

seems to be his oldest challenge as the low cost company has given its loyalty to

Boeing for decades. Leahy’s experience in sales is an enormous strength to Airbus

Group.

Controlling. Control is not only about performance standards, but also about how

employees use information (Hill, Jones & Schilling, 2015). Control helps an organization like

Airbus follows its plan, by making processes as effective and efficient as possible. At Airbus,

everything is about the environmental impact that its product has on our planet (Airbus, 2005). In

order to make sure that every employee follows these principles, Airbus created the ACADEMY,

which is an acronym of Airbus Corporate Answer to Disseminate Environmental Management

System. Among these guidelines are:

EMS: This Environmental Management System gives Airbus the opportunity to focus

on environmental concerns from R&D to production through retirement of their

aircrafts (Airbus, 2015). In order to succeed in this approach, an organization has not

only to focus on recycling aircrafts components, but also to make them environmental

friendly. The main goal is to reduce as much as possible Airbus’s footprint.


ISO 14001: Airbus was the first aircraft manufacture to meet these international

standards in 2007, which have been renewed in 2010 and 2013. The company has

succeeded by following the guidelines of REACH, a European regulation that

protects human lives, as well as its environment by reducing to the minimum the use

of harmful chemicals (ECHA, 2015).

Blue5: In order to further reduce Airbus environmental footprint, the company

developed a program that has a goal to drastically reduce its waste production, water

consumption, and water discharge by 2020 (Airbus, 2015). Its brand new facilities

built for the A350XWB project produces more than half of its own energy needs with

the help of more than twenty thousand meter square of solar panels.

Planning. This is where lies the main problem of the company. While Airbus might be

good at innovating, planning is not its strength. So focused on innovation and quality, Airbus has

the tendency to forget about deadlines. In fact, airlines ordering the A380 have to wait two years

before delivery (Lunsford & Michaels, 2007). The good news is that after ten years from its first

flight, the superjumbo should finally break even in 2015 (DGAP-adhoc, 2015), even if some

orders were cancelled due to these extensive delays (West, 2014). The company had the same

issue in 2007 with delays in the delivery of the A350.

This internal weakness would not resist an attack from the outside, as the company would

need to respond as soon as possible. In an environment so oriented toward creativity and high

quality, there is no room for fast decision-making. On February 21, 2014, Airbus announced

through a press release (Airbus, 2015) that the company had signed a Memorandum of

Understanding with COMAC so they could better manage sustainability in air transport. So one

would think that Airbus is trying to build some type of relationship with the Chinese company in


order to keep an eye on the competition. After all, the closer they are to their enemies, the better

they can fight back. Although while COMAC has gathered 430 orders of its single-aisle-168-

seats plane (Tan, 2014), Airbus has not reacted to this loss in market shares. While we can admit

that some of those orders were obtained by airlines that could not afford brand new aircrafts,

they probably lost opportunities for orders.

Today, Airbus has the ability to produce 42 A320 per month while Boeing produced only

38 of its 737 last year, but should be able to bring its production to Airbus’s level by the end of

2015 (Hamilton, 2013). So what about COMAC production abilities? Numbers should not

initiate a panic among our duopoly, as only four C919 should come out of COMAC factory per

month (Bechai, 2014). Although the determination of the Chinese government, as well as its

financial means should be taken very seriously by Airbus especially since COMAC was able to

receive firm orders from Airlines.

Organizing. Airbus went through a major restructure in 2007 when the group announced

elimination of 10,000 employees, mainly those working for Airbus aircraft manufacturing (The

Economist, 2007). Unlike Boeing, Airbus did not want to build its aircrafts in developing

countries. Therefore manufacturing costs were higher than their competitors, which led the group

to make drastic decisions. This efficiency improvement was named Power8 (Haines, 2007).

Launched in 2006 by previous CEO Louis Gallois (Daly, 2006), this plan was to secure the

company’s future while Airbus was facing a drop in orders due to a weak U.S. dollar (Airbus,

2007). In the meantime, the company wanted to rethink its processes in all functions of the

company. This new organization helped Airbus go through the unpredicted 2008 turmoil due to

Power8’s three main targets that were to drive growth, reduce costs, and improve EBIT while


restoring cash (Airbus, 2009). The ability to reorganize such a group has been a tremendous

strength for this European group.

External Opportunities and Threats

The organizations’ external forces represent an unpredictable and threatening

environment (Colao, 2012). While they bet their outcomes on a global economy, they also have

to deal with forces that may jeopardize their success. In order to understand what Airbus has to

take into consideration in its decision-making, this section analyzes Porter’s five forces model, as

well as macro-environmental forces.

Porter’s five forces model

Bargaining power of suppliers. In an industry run by a duopoly, suppliers take the

risk of losing their main income if they do not comply with their customers’ demands

(Wilkinson, 2013). Therefore, the power of suppliers is fairly low in the aircraft

industry. Suppliers do not have the ability to choose their customers, so the duopoly

squeezes their profit by threatening them to go to the competition.

Risk of entry by potential competitors. Until recently, the risk of entry by potential

competitors was low. Only Bombardier and Embraer were offering single aisle

aircraft and were not trying to compete with the two giants of this historical duopoly.

Today, COMAC is about to enter the market and even though as we saw earlier,

COMAC is not able to produce a lot of planes per month compared to our duopoly,

things might change quite rapidly (Haria, 2012).

Bargaining power of buyers. Knowing that buyers face a duopoly, one would think

that these buyers would have weak power. Nonetheless, they have the freedom to

choose one aircraft manufacturer over another, and they know that their final decision


could have a dramatic impact on the company that loses their contract. Therefore,

price war between the two major actors of this industry is fierce, which makes airlines

powerful in their bargaining abilities (PWC, 2013).

Threat of substitutes. One should not put airlines and aircraft manufactures in the

same category. While airlines, especially in Europe, have seen their market shares

taken away by high-speed trains, aircraft manufacturers have no substitutes

whatsoever. Do they? In order not to invest in new airplanes, Air France signed a

contract in 1994 with the French railroad company SNCF (Société Nationale des

Chemins de Fer Francais) so it could transport its clients via high-speed-rail (HSR)

instead of air. This certainly impacted Airbus from gaining firm orders of single aisle

planes, as twelve other companies signed the same agreement (Cholez, 2014).

Although because this is considered as an indirect threat, HSR cannot be considered

as a threatening substitute. The day has not come when an airline will order blimps

instead of aircrafts. Therefore, today the threat of substitute is fairly low.

Intensity of rivalry among competitive firms. The rivalry between these two

competitors has never been as high since Airbus sold 3,257 A320Neo versus 2,219

Boeing 737 Max by the end of last year (Endres, 2014). Once Airbus has

outcompeted Boeing in the number of planes ordered, Boeing announced that it was

the leader in wide-body sales that count for more than 60% of its orders (Ausick,

2015). Basically, both companies are always the best at something, depending on how

we look at the numbers. If we could only imagine what type of rivalry would exist if

Coca-Cola and Pepsi were the only ones in the market of carbonated drinks, we

would have a better picture of what this battle for air supremacy looks like.


Macro-environment forces

Global forces. Developed countries tend to focus on sustainable energies, as well as

gravitating toward a more green way of living (United Nations, 2010). Airbus has

definitely taken this into consideration by offering fuel-efficient aircrafts, such as the

A320 Neo and the A350 XWB (Airbus, 2015). Airlines, as well as their customers,

see Airbus has led company efficiency improvement (Mick, 2014), which makes it a

great opportunity for growth.

However, the real cash cows are not located in developed countries. In fact, if

COMAC’s worldwide market shares represent only six percent of total sales (Bechai,

2014), the Chinese manufacturer takes a third position, tight with Boeing, with 22%

of orders in South-East Asia. Still far away from Airbus and its 54% of orders for

narrow body aircraft, COMAC has already taken almost half of Airbus orders. Like

European airlines favor a European aircraft manufacturer (Newhouse, 2007) and

American airlines would favor Boeing, we can easily predict that Asian markets

would favor COMAC.

Demographic forces. In comparison to baby boomers, generation X and millennial

have the possibility to travel more than ever before (Mohn, 2014). This means that

they are becoming more aware of what a particular airplane can offer compared to

another. Those who flew on an A380 have noticed a drastic effort in noise reduction

(Saporito, 2009), as well as increased legroom. These types of features offered on the

A380 makes families travelling with children, as well as the elderly realize that it is

not only the airlines that make the journey comfortable, but the aircraft itself as well


(Han, 2010). Airbus understood the importance of differentiation that gives it an

opportunity to gain a competitive advantage toward Boeing.

Political & legal forces. As discussed earlier, environment does count when it comes

to decision making. While airlines would voluntarily use fuel efficiency aircrafts to

differentiate themselves from competitors, the expenses linked to R&D in order to

reach airlines’ desires are dangerously high (Hepher, 2014). The greener Airbus

wants to be, the more expenses would be allocated to R&D. As our future looks

greener, Airbus can take this opportunity to differentiate itself from Boeing and its

new competitor by pursuing its research toward fuel cells, and other fuel alternatives

(Airbus, 2015). Environmental requirements could be perceived as an opportunity if

Airbus prioritizes its green energy development.

Another benefit that protects our duopoly comes from the Federal Aviation

Agency that takes years to give a new aircraft its certification to fly (Larson, 2014).

This means that we are not about to see a COMAC C919 takeoff on U.S. runways

anytime soon. Although, in this global market, many countries do not require a FAA

certificate to fly, which is the case in the majority of Asian countries.

Technological forces and changes. This is a well-known area that Airbus has been

advancing for decades. On top of the game, Airbus knows that the only way to make

a difference with Boeing is by innovating technologies that could offer a real

difference to Airlines. Airbus has acquired the necessary knowledge as well as put

enough resources into its R&D to create these great opportunities (Hepher, 2014).

Social forces. Airbus SAS assembles its planes in France. This country has a strong

history of powerful unionized manufactures (Blanpain, 2005) that could make the


company lose millions of Euros. One of its clients, Air France, encountered one of the

worst strikes of its time in October 2014 that cost the airline more than $400 million

(Clark, 2014). Not that there is no bargaining in France, but strikes usually start

before negotiations, and are supposed to help speed the process of coming to an

agreement. These social forces can negatively affect Airbus.

SWOT Analysis Evaluation

Looking over this SWOT analysis, we understand that Airbus internal strengths rely on

leadership, control, as well as its organization. Although because of poor planning, often the

company does not deliver its aircrafts as promised, which could cause the company to lose firm

orders in the long run. After all, how many airlines would be willing to deal with a supplier that

does not deliver as expected? This poor planning also reflects Airbus’ strong confidence as it

does not take into consideration its customers’ satisfaction, thinking its planes are so terrific that

no one would cancel an order.

Concerning external forces, we analyzed Porter’s five forces and their influences on the

company. Until recently, Airbus had to worry about only one major factor, which was to

outcompete its only competitor. Like Boeing, Airbus has to battle with the high bargaining

power of buyers that could always threaten to go with the competitor. Today, a third force

COMAC found a breach in the barrier of entry, making Airbus’ potential future customers

consider the Chinese aircraft manufacturer as a cheaper alternative. Once again, Airbus over-

confidence did not take COMAC into consideration when looking at external threats.

As far as macro-environment forces, Airbus maintains a strong leading position when it

comes to innovation, which allows the company to use technological forces as a powerful asset.

While COMAC might struggle in developed countries to obtain the proper certifications, our


duopoly has time to strengthen firm orders with well-established airlines. Although Airbus

should be cautious about global forces coming from new markets that have already ordered many

aircrafts from COMAC. Finally, European social forces that favor unions might cost the

company millions of Euros, which could have a better use in the battle for air supremacy.

Chapter 5: Summary, Recommendations, and Conclusion

Summary

Throughout this research paper, we discovered the strengths and weaknesses of Airbus,

as well as its threats and opportunities that could have an impact on the company’s future

profitability. This research demonstrated that COMAC might become a threat to the duopoly,

especially to Airbus and its A320, much sooner than we think. We also pointed out the lack of

planning, as well as the ability of Airbus to completely ignore a potential future strong

competitor, solely based on its actual manufacturing capabilities. This type of attitude comes

from years of achievements by the young European firm who, like teenagers thinking that

nothing can stop them, tends to feel unthreatened by new entrants. This research proved that

Airbus is not safe from the Icarus Paradox. Its overconfidence could bring the company to a

sudden and abrupt fall, as it would not be able to fight against COMAC if it keeps on looking at

its astonishing records, and does not concentrate on its competitors’ strategies.

China has shown the world its ability to learn from other countries, and has succeeded in

becoming one of the world’s leaders in many industries. As frightening examples, in 2012 China

became the leader in the steel industry by almost eight times our production, and even in high-

tech where China was exporting 2.5 times more than the United States (Stockdale, 2012).

There is no doubt that Airbus leads the aircraft manufacturing industry in term of

innovation, as well as high quality products, and its financial health strengthens its position


against Boeing and COMAC. However, Airbus might lose its competitive advantage in terms of

global firm orders if it does not react to COMAC’s ability to sell single aisle aircrafts.

Recommendations

After spending months analyzing this multi-billion dollar industry, and going deeper

within EADS’s subsidiary Airbus, I would have a few recommendations. Before I recommend

any actions, I would like to call three important business principles. One is that no matter how

innovative and profitable an organization is considered, supremacy does not last forever

(Rezazad, 2012). Second, in order to keep its competitive advantage, a subsidiary like Airbus

should not feel protected by its current status. My third and last point states that danger does not

only come where we expect it to be; therefore it is wise to look in all directions when searching

for potential threats.

The first recommendation for Airbus would be to concentrate on its internal weaknesses

instead of contemplating its strengths. This would allow the company to build a moat of

protection to keep its competitors away. Secondly, Airbus should allocate some of its R&D

toward making more affordable aircrafts that could be sold to Airlines attracted by COMAC. In

order for Airbus not to damage its reputation of high quality, the company should create a

subsidiary called LBJets that would be dedicated to making more affordable single aisle aircrafts.

This would give LBJets the knowledge and expertise of Airbus, and if it succeeds, could become

the Airbus cash cow. LBJets image would be based on Louis Bleriot aviator’s success as an

innovative and courageous man (Crouch, 2013). LBJets could have another powerful positive

effect on Airbus weaknesses. By Airbus giving more freedom to its subsidiary in term of the

company’s structure, plan, organization, leadership, and control, it would make LBJets a sort of


business guinea pig. This new dynamic subsidiary could give new ideas to Airbus that would

counter act its self-contemplation.

When an organization perceives external threats, there are a few strategic decisions that

can be made. Among them, Airbus could use a related diversification such as LBJets, which

would enable the group to target a new segment of customers, and not tarnish the image of

exception of the brand. This would keep Airbus’s existing customers while attracting new LBJet

customers that could neutralize the presence and financial power of COMAC.

Conclusions

Sometimes the answer to a problem does not come from the industry itself. Alan Mulally

discovered this when he became the CEO of Boeing after spending years at Ford. He realized

that the Automobile industry was selling different products with the same name to different

countries (Miller-Caldicott, 2014). Applying this to the aircraft manufacturing industry would

not make any sense. I based my entire research on the opening case I read in our textbook (Hill,

Jones & Schilling, 2015, pp. 246-247). The French car manufacturer Renault created its own

cash cow called Dacia almost from scratch, which enabled the brand today to not only compete

in a segment that was unknown to the brand, but also bring enormous amounts of cash that give

Renault a competitive advantage against its most truculent competitors Peugeot-Citroen Group

(Hetzner, 2014). I am convinced that LBJets could use Renault’s example to create a brand that

would become Airbus business lab, as well as its future cash cow. This would create a massive

competitive advantage against Boeing that would be left with its agreement signed with COMAC

as its only backup to a potential fatal attack by Airbus in this unexplored market segment.


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Appendix 1

Income Statement Airbus Group 2013 – 2014


Appendix 2

Balance Sheet Airbus Group 2013 – 2014

Documents

Airbus - All Chapters - 002