Case: Airbus vs. Boeing

Boeing and Airbus wanted to join forces to investigate the possibility of a very large commercial transport (VLCT), known as a super jumbo.

o It would hold between 550 and 800 passengers and would sell for between $150 million and $250 million.

Airbus won a 100-plane leasing deal with longtime Boeing customer United Airlines.

Amid the grueling competition, U.S. and European governments ended a six year trade dispute resulting in a cap on government subsidies in aircraft manufacturing.

The Commercial Airline Industry

Large commercial aircraft were defined as airplanes with 100 or more seats. Large aircrafts made up 90% if the fleet, while smaller airplanes accounted

for the remaining 10%. VLCT was defined as a plane over 400 seats or with capacity to haul more

than 80 tons of freight.o As of 1992 there existed one model: Boeing 747 Jumbo Jet.

Three main manufacturers of large commercial aircraft: Boeing, Airbus, and McDonnell Douglas.

o Boeing: 57% of existing fleeto McDonnell Douglas: 20%o Airbus: 16%

For major components of the airplane such as engines, wings, frames, and flight instruments, aircraft manufacturers sought to establish long term relationship with suppliers.

Boeing and McDonnell built their planes in the U.S. and Airbus in Europe. The geographic reach of suppliers spread through the world.

Airlines typically ordered from manufacturers four to five years in advance of the predicted delivery date: a minimum of one or two years was needed to manufacture the planes.

Large aircraft had a useful life between 15 and 20 years. Large commercial aircraft ranged in price from 30$ million for a 100 seat plane to 200$ million for a plane over 400 seats.

High value airplane deals usually escalated to government levels, often with the involvement of high profile ministers and heads of state.

o Between 55% and 65% of the industry’s new orders typically went to Boeing, while Airbus and McDonnell Douglas fought for the other orders.

Market share of a particular commercial aircraft segment was determined by a number of factors including price, the installed fleet size, direct operating costs borne by airlines, delivery conditions, fleet variety, commonality with other models made by the same manufacturer, historical buying patterns, and political positioning.

Aircraft size and technology were the two key elements that determined direct operating costs (DOCs).

o The larger the plane, the cheaper it was to operate on a per seat basis. Technology influenced DOCs in several ways, but the most important was fuel

costs: newer airplanes had more modern engines and a lighter structure, thus burning less fuel than older models.

While new technology was always desirable, airlines preferred to manage homogeneous fleets with a limited number of different models.

o Each new aircraft type demanded heavy investment in parts, tools, and training of skilled personnel.

The Very Large Commercial Transport (VLCT) Aircraft

All three industry players agreed on the market readiness for a super jumbo. All three manufacturers disagreed on the size of the market opportunity:

o Boeing: believed market would evolve toward more point to point flights, which would divert air traffic from current megahubs to more secondary airports. This would allow the industry to satisfy most of the demand with current planes, and only 200-300 new super jumbos would be needed over the next 20 years.

o Airbus: believed the demand for flights to and from major airports would continue to grow and the only way to prevent saturation would be a new, higher capacity airplane. More than 1000 super jumbos would be needed over the coming 20 years.

The Boeing Company

Boeing invited eight U.S. and foreign airlines (“The Gang of Eight”), to contribute to the design process.

o Among suggestions, the airlines all wanted a plane that would be wider than competitor’s offerings.

o Boeing inked a highly unusual agreement with United to develop the 777 together.

“In order to launch on time a truly great airplane, we have a responsibility to work together to design, produce, and introduce an airplane that exceeds the expectations of flight crews, cabin crews and maintenance and support teams and ultimately our passengers and suppliers”.

o To design the plane, Boeing formed over 200 design/build teams. Each team had 10 to 30 people and included all disciplines such as engineering, manufacturing, procurement, customer support, and other specialties.

Boeing wanted to use the teams to change attitudes and pull on the collective wisdom of its members as opposed to the previous method of engineering “throwing designs over the wall” to manufacturing without consultation.

Boeing dealt with thousands of different suppliers from all 50 states and several other countries throughout the world.

o The most important raw materials used in commercial aircraft production were aluminum and titanium in the form of sheets, plates, forgings, and extrusions.

o While there were several part suppliers, it was customary that sourcing and qualifying and new supplier could take a year or more.

Boeing depended on several suppliers as a sole source, and any changes in specifications, quality standards, delivery dates, and costs could adversely affect the production of the plane.

o Starting with the development of the 777, Boeing held meetings directly with airlines to involve them in the planning stages of a new aircraft model in an attempt to secure commitment for a future order.

o In order to win over customers from choosing Airbus, Boeing had implemented several plans. One common scheme was the trade in of a competitor’s aircraft. This called for Boeing to purchase Airbus planes in exchange for Boeing’s.

o In the commercial aviation sector, 62% of the revenues were generated form customers outside the U.S. As the company stated: “sales outside the United States are influenced by international relationships and U.S. government foreign policy”.

Airbus Industrie

Since the development of Airbus’s first commercial plane, the A300, the company had enjoyed a reputation for innovative design and technology.

Despite the orders, the new company was struggling and was producing “white tails”.

o New aircraft without particular buyer.o To avoid shutting down its production line. o It eventually was forced to cut back its production form two planes to

one plane per month. The advantage of the A320 over competitors was the “fly by wire”

technology, whereby pilots used a joystick instead of a traditional steering wheel.

o This technology required use of computer chips and electrical signals in place of traditional mechanical pulleys and cables allowing precise and easier steering of the plane as well as a completely clear view of the instrument panel for the first time in aviation history.

The Joint Investigation Opportunity between Boeing and Airbus

Boeing proposed that the two companies work together using Airbus’s fuselage and Boeing’s wings to build a plane.

o Airbus was suspicious that all the Americans were really interested in was splitting the Airbus organization, just as it was beginning to move into top gear in the production and marketing sectors.

Boeing and Airbus consortium members believed that a new super jumbo would be necessary in the next 10 to 15 years in order to reduce the congestion at key airports such as those in New York, Los Angeles, London, Tokyo.

Boeing approached two Airbus consortium members about collaborating in the form of a joint venture. The collaboration would involve a thorough market study of demand and the development of specific technical characteristics of a super jumbo.

Some observers felt that Airbus was taking direct aim at Boeing’s strategy of working intensely with Japanese industrial companies, which allowed Boeing certain exclusivity on the relationship.

Other Considerations

Boeing and Airbus and their respective governments had been embroiled in a public debate regarding government subsidies. U.S. officials argued that Airbus members were receiving “cheap loans” from their respective governments.

European officials pointed to Boeing’s and McDonnell Douglas’s indirect government subsidies in the form of support of Boeing’s defense initiatives with the department of Defense and NASA.

In April 1992, the U.S. government and select European governments agreed on an accord governing subsidies to aircraft manufacturers.

o The accord called for direct government subsidies to be capped at 33% of the development costs and all loans to be repaid with guidelines for interest rates and schedules.

o Also, indirect subsidies were capped at 5% of total civil aircraft revenues.

The Decision

Boeing is a victim of its own success. o What if you are the market leader? Where do you go from here?

People believe that the cap on government subsidies would hamper (estorbar) Airbus’s profitability in the future and its ability to engage in major development projects.

Would it be beneficial for both sides to come together to lay the foundation of what could become the future of commercial aviation, the VLCT?

Should Boeing go ahead alone, and if so, how?