Boeing Co. and EADS Airbus: Oligopolistic Competition and the Effects in the Managerial Decisions.

Carlos Fermin Jahn
Pace University
Business 150 – Contemporary Business Practice

Executive Summary……………………………………………………………..............………..3

Introduction………………………………………………………………………..............……...4
Definition of Market Structures……………………………………………….….............…….5 Competition…………………………………………………………….….............……..5 Oligopoly…………………………………………………………………..............……..5 Table 1. Differences between Competition and Oligopoly…………..............…….6
The Global Market Structure for Large Civil Aircraft Manufacturers…….............……..6 Figure 1. Flow of Large Civil Aircraft (LCA) Production…………............……..7

Figure 2. Large Civil Aircraft (LCA) Markets Distribution………............………7

Competitive Criteria: Airbus vs. Boeing Co…………………………………................…….8

A) Competition by Outsourcing……………………………………...…...................8

B) Competition by the Use of Technology……………………………….…..….…...8 B.1. Uses of Composite………………………………………………....…..…8

B.2. Fly-by-Wire………………………………………………………..………9

C) Competition in the Global Market…………………………………...…..….……9 Table 2. Orders by Company (2005-2011)……………………….....…….10 Table 3. Deliveries by Company (2005-2011)……………………..……..10 Graph 1. Deliveries and Orders Overly by Company (2005-2011)..…10 D) Effects of Competition in Currency Exchange Rates..................................11

E) Competition on Production Plans..............................................................12 F) Financial Analysis of Boeing and Airbus for 2011....................................13
Conclusion...................................................................................................................14
References.....................................................................................................................15
Executive Summary In this research is going to be analyzed in-depth comparison the competition between Airbus and Boeing in the following aspects: • Outsourcing and the rapidly expanding production of both manufacturers. • Technologic Advances and state-of-the-art innovation in order to attract customers. • The competition for World Market contracts and shares • Effects of competition in currency rates. • Histogram of orders and deliveries by company • Brief analysis of both Third Quarters Reports for 2011 and shares prices. • It would be demonstrated how large companies deal with external competition • How the economic theory of competition influences the managerial decision of a company in regards to its product. • How companies need to specialize their production in order to decrease competitive barriers in certain markets. • Relevant connotations will be defined in order to introduce the reader to the framework that will be discussed.

Introduction

During the last month, the New York Times published an article regarding Boeing’s Third Quarter Reports in addition to the announcement of the first deliver of newest aircraft, Boeing 787 Dreamliner in 2013, which may compete with the upcoming Airbus A350. It’s been said by economist that healthy competition encourages efficiency, lower prices, and enhance innovation in such a great way. Indeed, from a macroeconomic perspective, healthy competition has caused commercial firms to develop new products, services and technologies, which gave consumers a greater selection and better products. For example, the two world largest aircraft companies Boeing and Airbus are pursuing to innovate the best aircraft, which fulfill its customer needs at competitive prices in order to increase revenues, thus increase profits. The competition between these two giants started in 1980 with the implementation of technology in their airplanes. Nowadays, Boeing and Airbus compete for shares in the global market for LCA, diminish production expenses, redesigning aircraft in order to fit larger quantities of passengers and so on.

Definition of Market Structures (Economics): In reference to Economics by McConnel, Brue and Flynn, competition stands for a notion in which a number of firms produce a standardize product (Identical products) in order to compete for a greater share of the market for a given product. Three levels of competition have been classified: 1) Direct Competition: Also called brand competition, where products compete against each other if they perform the same function. 2) Substitute Competition: Where products compete against close substitutes. 3) Budget Competition: Which is based on the different items available for what an individual or organization may buy. It’s also important to note that competition is often limited by government interventions such as antitrust, subsidizing different industries, or even introducing tariff in imports. Other important connotation is oligopoly, a market structure where only a few sellers produce standardize products, with the characteristic that price and product has a direct relationship with the company performance within the competitive market. Oligopolistic competition can raise different outcomes, such as: Collusions, Market Sharing, etc. Firms often collude in order to stabilize unstable markets, however in some countries there are legal restrictions for collusions.

The following table describe in more details characteristics of this two types of market structures:

Table 1. Differences between Competition and Oligopoly
|Market Structure |
|Characteristics |Competition |Oligopoly |
|Number of Firms |A very Large Number |Few |
|Type of Product |Standardize |Standardize / differentiate |
|Control Over Price |None |Limited by mutual interdependence; |
| | |considerable with collusions |
|Conditions of Entry |No Obstacles |Significant Obstacles |
|Non-price Competition |None |Yes |
|Examples |Retail Stores |Aircraft Manufacturers |

The Global Market Structure for Large Civil Aircraft Manufacturers:

According to the United States International Trade Commission, the industry for aircraft manufacturers comprises 50 major firms who compete for contracts rather than efficiency. However, Boeing and Airbus dominate the industry, with headquarters in North America and Europe respectively. Since the civil aircraft structure is dominated by roughly two large firms (Boeing and Airbus), the market where these companies perform their financial transactions is characterized as bilateral oligopoly, where a few buyers face a few sellers. In this bilateral oligopoly, prices have been characterized as “indeterminant with a vengeance” since the relative small number of buyers with strong purchasing power has more leverage in contracts and negotiations for aerostructures parts. In addition, hierarchy tiers divide the industry for Civil Aircraft Manufacturers into three categories. The first tier comprises suppliers differentiated by their magnitude of sales. The second tier are conformed by assemblies for integration by the first tier suppliers. Lastly, the third tiers are conformed mainly by airlines and other companies who bought the final product. Figures 1.1 and 1.2 illustrate the hierarchy tiers that conform the industry for Large Civil Aircraft Manufacturers and production (LCA):

[pic]
Figure 1.1: Flow of Large Civil Aircraft (LCA) Production

[pic]
Figure 1.2: Large Civil Aircraft (LCA) Markets Distribution.

Competitive Criteria: Airbus vs. Boeing Co.

A) Competition by Outsourcing:

Both LCA manufacturers Boeing and Airbus are subcontracting the production of new aircraft, components or assemblies in countries of strategic importance where they can gain a competitive advantage. For example, Boing has offered contracts with Japanese suppliers such as Mitsubishi Heavy Industries and Kawasaki heavy Industries by which increase involvement in Boing jet programs, dominating the Japanese market for commercial jets. For the production of Boeing newest Jet (the 787 Dreamliner) outsourcing has been extended in such way around the world that Boeing’s involvement in the project, design, assembly and test operation is almost insignificant.[1] In the other hand, because of its foundation as a consortium of European companies, Airbus has more challenges in outsourcing its manufactures and assemble outside the European Union and its own European plants. Nevertheless, Airbus inaugurates its newest plant in Tajin, China for the production and assembles of the A320 series[2].

B) Competition by the Use of Technology
Use of Composites Airbus started to compete with the already formed company Boeing in 1970 by the introduction of the usage of advance technology. Airbus was the first manufacturer to made one of their products by using composite materials in replacement for aluminum. Composites are lightweight materials created for two or more components such as the carbon fiber reinforced plastic and glass-fiber reinforced plastic. Considering two competitive models by sequence, the Boeing Dreamliner is composed by 50% of composites. Then, Airbus is elaborating the competitive model A350 using 60% of composite materials[3]. It is notable that the composite technology is becoming an essential characteristic in the manufacture of aircrafts.
Fly-by-Wire
The automation of the aircraft engineer’s and pilot functions was first introduced by Airbus with the model A320 in 1981. Then Boeing began to incorporate such technology in its model 777 in 1990. Since 1980’s, Airbus has established a solid competition with Boeing throughout the innovation of advance technologies to achieve better performance in their aircrafts.

C) Competition in the Global Market

Table 2.1 and table 2.2 summarize orders and delivers obtained from Boeing and Airbus respective reports for a period elapsed between 2005 and 2011:

Table 2: Orders
2005200520072008200920102011TotalAirbus1055790134177727157412316039Boeing1002104414136621425305165309
Table 3: Deliveries
2005200520072008200920102011TotalAirbus3784344534834985104183174Boeing2903984413754814623872834
Graph 1: Orders and Demand Overlay
[pic]
The previous charts give us an approach in how close is the competition for deliveries for both manufacturers. Is important to note the rough shift in demand during 2007. This large shift in demand can be attributed to several factors such as the recent surge in fuel prices because of loss in refining capacity in the Middle East[4], the aging fleets where airplanes are required to be replaced on a regular basis of 15-20 years and the demand for airplanes from new emerging airlines in industries such as China, India and Malaysia because of intensive growth.

D) Effects of Competition in Currency Exchange Rates

Boeing’s production expenses are mostly paid in United States dollars, while Airbus’ expenses are mostly in Euros. When the dollar appreciates in relation to the Euro, the cost of producing a Boeing aircraft increases relative to the cost of producing an Airbus, and conversely. In addition, there is also a possible currency risk-reward situation that operational managers must take into consideration in the way that the airplanes are sold. According to the price table of Boeing Co, this company prices its aircrafts only in US dollars, which may be more convenient for the company. However, in reference to Airbus price table, Airbus prices its aircrafts in multiple currencies for more convenience. Despite the fact of convenience and depending on currency fluctuations between the time of the acceptance and delivery of the order, prices of the aircrafts may increase or decrease in the time elapsed for the transaction generating an extra profit or an extra expense relatively[5].

E) Competition on Production Plans:

The Airbus A320 was bought by 222 airlines during December 2008[6], taking out of the market the well-established Boing 737. Many other airlines have replaced old Boeings 727 and 737 with the Airbus A320. Moreover, after 40 years of the Boeing 747 dominance in long-flight jets, the relative new Airbus A380 now challenges the Boeing 747 dominance. Several Boeing Projects were started and the cancelled. The company is now focusing on its new airliner, Boing 787 Dreamliner. Despite the three years of delay, the 787 Dreamliner is the fastest selling airplane in history. The rapid sales and innovation, led Airbus to revise and redesign its competing Airbus A350.

According to Boeing’s Annual Report and Overview, it’s stated that they would stop innovating their airplanes in fuel efficiency and rather focus in major redesigns of the exterior and interior of an airplane. However, pressure for Companies already started to heat Boeing’s plans for redesign. For instance, Southwest Airlines uses 680 737 in their fleet and they said that they would not wait 20 years to change its fleet, threatening to convert to Airbus[7]. On the other hand, there are 5,417 Airbus in service, challenging the efficiency, design and orders of Boeing. Also, the company is striving to win over 50% of aircraft orders for 2011 as stated in EADS Airbus Global Market Overview 2011-2030.

Financial Analysis of Boeing and Airbus for 2011:

Since November 2010, Boeing stock raised from $63.77 to $65.79 a share and a market capitalization of 743.2 million of outstanding shares; in addition, according to Boeings Financial Report for the 3rd quarter of 2011, Net Income has increase 31% as from 2010 ($837.000 Millions to $1.71 Billions). On the other hand, the stock share for airbus rose from $17.00 to $21.00 and have a current market capitalization of 816, 876, 719 outstanding shares. According to the EADS Financial Statement for 2011 third quarter, Net income increased from 203 Millions of Euros to 423 Millions of Euros. Considering all this criteria, Airbus has performed better than Boeing in terms of competitiveness, innovation and effectiveness. However, Boeing has greater Net Income than Airbus.

Conclusion
It is relevant to emphasize the greatness and power that both companies have achieved in the industry and global market for large civil aircraft manufacturers and producers by competitive theory. After analyzing the competition between Boeing and Airbus in different criteria’s, we noted how the two companies strive for introduce new aircraft and renew current aircraft in the market. For example, when Boeing issues their 727 and 737 model Airbus reinforce their A320 model, resulting in thousand of orders for this new model and the vanishing of the 727 and almost all the 737 in airlines. Later, Airbus launches its new double-decked A380 in order to compete with the passenger’s allocation dominance that previously had the Boeing 747. This example illustrate how board of directors and Research and Development have to work together in taking important decisions that may shift the profitability of a company in large scale. Moreover, the outsourcing of Boeing illustrates how a company must allocate its resources of production around the globe in order to achieve comparative advantage. In addition, both companies achieved economic of scale by buying and merging other smaller companies in order to reduce cost of production and increase output rates. Finally, the pursuing of both companies to conquer emerging markets illustrate how essential is a good marketing division in the internal structure of a large-scale company. Any margin of error from the divisions mentioned before could cost a company thousand of millions worth in losing value customers.

References
"New York Times." Boeing Announces Its Third Quarter Reports - NYTimes.com. 31 Oct. 2011. Web. Accessed on 29 Nov. 2011. .
Gates, Dominic (March 1, 2010). "Albaugh: Boeing's 'first preference' is to build planes in Puget Sound region". The Seattle Times. Retrieved 2011-11-28.
[8] "Airbus China gamble". Flight International Magazine. October 28, 2008. Retrieved 2011-11-28.
"Boeing: Commercial Airplanes - 767 Home." The Boeing Company. Web. 28 Nov. 2011. .

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Reed. D. (2005, October 2). Sky-high price of jet fuel forces canceled flights. USA Today. Retrieved November 28, 2011 from http://www.usatoday.com/money/biztravel/2005-10-02-jet-fuel-usat_x.htm

Strong Euro Weighs on Airbus, Suppliers, Wall Street Journal, October 30, 2009, p.B3 http://airbus.com/company/market/orders-deliveries/ Associated, The (2011-01-20). "Southwest waiting to hear Boeing's plan for 737". BusinessWeek. Retrieved 2011-11-28.

"Market Overview - Orders and Deliveries." Airbus, a Leading Aircraft Manufacturer | A320, A330, A340, A350 XWB & A380 Families of Passenger and Freighter Aircraft. 22 Nov. 2011. Web. 28 Nov. 2011. .

"Civil Aircraft Manufacturing in the US - Market Research Reports - Research and Markets." Research and Markets - Market Research Reports - Welcome. Web. 28 Nov. 2011. .

"Competitive Assessment of the U.S. Large Civil Aircraft Aerostructures Industry." USITC - United States International Trade Commission. Web. 28 Nov. 2011. .

"Boeing Annual Report for 2010." Boeing Co. Web. 28 Nov. 2011. .

"Boeing Third Quarter Report of 2011." Boeing Co. Web. 29 Nov. 2011. .

"EADS Global Website - Financial Statements & Presentations 2011." EADS Global Website - EADS Global Website. Web. 28 Nov. 2011. .

"The Boeing Company." Active.boeing.com - The DYNAMIC Boeing Webserver. Web. 28 Nov. 2011. .
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[1] Gates, Dominic (March 1, 2010). "Albaugh: Boeing's 'first preference' is to build planes in Puget Sound region". The Seattle Times. Retrieved 2010-06-16.
[2] "Airbus China gamble". Flight International. October 28, 2008. Retrieved 2008-11-15.
[3] Boeing: Commercial Airplanes - 767 Home." The Boeing Company. Web. 28 Nov. 2011. .
Technology | Airbus, a Leading Aircraft Manufacturer." Airbus, a Leading Aircraft Manufacturer | A320, A330, A340, A350 XWB & A380 Families of Passenger and Freighter Aircraft. 22 Nov. 2011. Web. 28 Nov. 2011. .

[4] Reed. D. (2005, October 2). Sky-high price of jet fuel forces canceled flights. USA Today. Retrieved October 25, 2005 from http://www.usatoday.com/money/biztravel/2005-10-02-jet-fuel-usat_x.htm

[5] Strong Euro Weighs on Airbus, Suppliers, Wall Street Journal, October 30, 2009, p.B3
[6] "Market Overview - Orders and Deliveries." Airbus, a Leading Aircraft Manufacturer | A320, A330, A340, A350 XWB & A380 Families of Passenger and Freighter Aircraft. 22 Nov. 2011. Web. 28 Nov. 2011. .
[7] Associated, The (2011-01-20). "Southwest waiting to hear Boeing's plan for 737". BusinessWeek. Retrieved 2011-05-21.