Topic Paper – Week 3

Boeing Commercial Air versus Airbus Group

Submitted by

Cita Renee’ Reid

Prepared for

Professor Greg Gotches
BUSN 6120, Managerial Economics
Spring 1, 2015
Section OE
Webster University

24 January 2015

CERTIFICATE OF AUTHORSHIP: I certify that I am the author. I have cited all sources from which I used data, ideas, or words, either quoted directly or paraphrased. I also certify that this paper was prepared by me specifically for this course.

Cita Renee Reid________________________24 January 2015
Signature Date

Introduction
For nearly four decades, Boeing Corporation and Airbus Group have battled for supreme dominancy of the large civil aircraft (LCA) market. In years past, U.S. held Boeing had dominated the commercial aircraft industry; however, between YY and 2013, European-owned Airbus, had slightly edged Boeing out as the top supplier. In 2014, the precarious balance was tipped once again, as Boeing delivered more aircraft to its customers; thereby, reestablishing itself as the number one manufacturer. This paper will explore the history of the companies, how they are alike and different (particularly their production process), how they approach the aircraft marketplace, where their rivalry will likely head and the most probable outcome of their ongoing competition. It will also give a brief history and overview of the World Trade Organization (WTO) 2012 ruling over the receipt of governmental subsidies both companies received to enhance their competitive positions.

Background and History
The Boeing Company, was founded in 1916 by William Edward Boeing and following its merger with McDonnell Douglas Corporation in 1997, became the only U.S. manufacturer of large civil aircrafts (those with 100+ seats). The Boeing Company is the world’s largest aerospace company and also the largest single U.S. exporter. The company is divided into two business units: Boeing Defense, Space and Security and Boeing Commercial Airplanes (BCA). This paper will discuss the BCA unit.
According to the Boeing website, more than 12,000 Boeing built commercial jetliners are in service worldwide (approximately 75% of the world fleet) and about 90% of the world’s cargo is carried onboard Boeing’s freight planes. The company manufactures the 737, 747, 767, 777 and 787 families of airplanes and the Boeing Business Jet. New product development efforts include the Boeing 787-10 Dreamliner, the 737 MAX, and the recently launched 777X (Boeing, 1995-2015).
Airbus was founded in 1970 as Airbus Groupement d’Interet Economique (GIE). It was a consortium formed by government initiative between France, Germany (the UK withdrew prior) where the European countries collaborated to build the A300; the world’s first twin-engine wide-body passenger jet. The governments recognized in order to compete with the US dominated aircraft industry they would have to pool their resources. In 2000, three of the four partner companies merged under the moniker European Aeronautic Defense and Space (EADS). In 2014, the firm was renamed to Airbus Group Incorporated in a bid to improve how the manufacturer was perceived by its customers. EADS stated the name change would, "enhance integration and cohesion by renaming the group and its divisions using the globally recognised Airbus brand." (BBC, 2013)
According to the Airbus website, Airbus’ modern and comprehensive product line comprises highly successful families of aircraft ranging from 100 to more than 500 seats. The company manufactures the A320 (including the A320neo, the fastest-selling aircraft in aviation history); the wide-body, long-range A330/A340; the A350 XWB, A380 family; Airbus Corporate Jets, freighter aircraft. (Airbus Group, 2014)

World Trade Order Dispute
In 2004, disputes over illegal subsidies provided by the respective governments for Boeing and Airbus came to a head. On October 6, 2004, the US unilaterally renounced a trade agreement between Boeing Corporation and Airbus and initiated the dispute resolution process through the WTO. The complaint alleged that the European Community (EC) violated international trade agreements, in particular by providing launch aid to Airbus. The same day, the EC filed a similar complaint against the US, alleging “Boeing received prohibited government subsidies in the form of tax breaks and preferential government contracts.” (Kienstra, 2012) Launch aid is a form of low-cost financing that the does not require repayment should the products fail.
In March 2011, Boeing claimed the EC gave Airbus $18billion in subsidized funding; Airbus asserted that Boeing received $19billion in illegal subsidies from the US government. (Office of the United States Trade Representative, 2011) In March 2012, the WTO Appellate Body reached the final verdict over the illegal subsidies dispute. The ruling stated Boeing received between $3-$4 billion in US subsidies and lost sales slightly over 100 aircraft. Airbus received approximately $15 billion in governmental subsidies in the form of launch aid. (Office of the US Trade Representative, 2012)

Approach to the Commercial Aircraft Marketplace
Boeing and Airbus have rationales on how they approach the commercial aircraft marketplace, not only in their business model but also in their products. There is no clearer indication of this than the Boeing 787 Dreamliner and the Airbus A380. Both aircraft are true innovations; however, market insight is where the clear winner goes to Boeing.
The Boeing 787 Dreamliner family was designed to bring big-jet ranges to midsize airplanes. Marty Bentrott, Boeing VP of Sales stated, “Our strategy has been to design and build an airplane that will take passengers where they want to go, when they want to go, without intermediate stops; do it efficiently while providing the utmost comfort to passengers; and make it simple and cost-effective for airlines to operate.” Boeing accurately predicted that passengers would prefer to fly point-to-point, with more frequency on smaller airplanes (Babej, 2014). The 787-10, was launched in 2013, is capable of carrying 323 passengers up to 7,020 nautical miles, which is more than 90% of the world’s routes (Boeing, 2015). The 787 will deliver economy through technical innovation (newly designed twin engines, lightweight composite materials) rather than seek economies through scale (long run average cost decline as output is increased). The aircraft is designed for comfort, such as more standing headroom, larger windows and bathrooms, and higher humidity – all of which benefits all passengers. (Babej, 2014)
By comparison, the Airbus A380 is a luxury at its finest. It is capable of carrying up between 525 passengers (three class configuration: first, business, economy) or 853 passengers in single class with wider seats than its competitor (Airbus Group, 2015). It was built under the assumption that airlines would continue operating in the traditional “hub-and-spoke” model and passengers would accept changing aircraft at the smaller hub in order to ride in luxury on the longer leg of their journey. The hub-and-spoke model is designed so airlines fly smaller body planes on short routes (spokes) into a few large hubs, then fly to the next hub (or final destination) on giant airplanes (Babej, 2014).
According to Bloomberg, Airbus may consider discontinuing the A380 project as soon as 2018 because there was not a single buyer of the aircraft in 2014. The plane is popular with travelers, but most carriers (airlines) prefer the “smaller twin-jet models that are more fuel efficient and can access more airports.” (Rothman, 2014)

Economic Analysis
“Large commercial aircraft are not merely technologically complex on multiple fronts, they also present extreme complexity in manufacturing and are sold to a very conservative set of customers—passenger airlines,” (Gupta & Wang, 2010). The LCA market is dominated by Boeing and Airbus (producer-producer rivalry), thus defining the industry as an oligopoly, or more accurately as a duopoly.
According to the Airbus website, (http://www.airbus.com), the company commands more than 50% of the market share of aircraft over 100 seats. At year-end 2014, Airbus exceeded its annual target and achieved a new record high of 629 deliveries to 89 customers (including eight new customers); which consisted of 490 A320 Family aircraft, 108 A330s, 30 A380s and also the first A350 XWB. The company also set an unprecedented 1,456 in net orders from 67 customers (of which 14 are new). These orders were comprised of 1,321 single aisle aircraft and 135 wide-body aircraft. The achievements in 2014, brought Airbus Group’s total aircraft orders to 15,271; deliveries to 8,885 and the backlog (outstanding orders, not in production) to new industry record of 6,386 aircraft. The list price of the backlog alone is valued US$ 919.3 billion (Airbus Press Centre, 2015).
Although predominantly purchased in the foreign market, Airbus has penetrated the US market. Airbus US customers include American Airlines, Delta Air Lines, JetBlue Airways and Spirit Airlines. The company is also scheduled to open its first commercial assembly plant in Mobile, Alabama (2015). The plant will produce the A320 narrow-body aircraft family, with the first delivery to JetBlue in 2016 (Jacobs, 2014).
According to the Boeing website, (http://www.boeing.com) the company is the “world’s largest plane manufacturer for the third consecutive year.” At year-end 2014, Boeing set the record for delivering 723 aircraft- the most commercial airplanes delivered in a single year; which consisted of 485 - 737 program, 99 - 777 program and 114 – 787 Dreamliners. The company also boasted 1,432 net orders (1,104 from the 737 family) which carry a value of $232.7 billion at list prices. Boeing’s current backlog is 5,789 aircraft. (Boeing, 2015)

Future Competition
Although a sizable market exists in large commercial aircraft industry, the extremely high entry barriers are prohibitive. In fact, over the last 40 years, the only new entrant into the market was Airbus; however, this all is destined to change. Looming over the horizon, the Boeing/Airbus duopoly is being threatened by the Commercial Aircraft Corporation of China (COMAC). Approved by the Chinese State Council in February 2007, the state-owned limited liability manufacturer’s mission is to produce Chinese engineered and manufactured jumbo jets and become the third major player in the large commercial aircraft industry by 2020 (Gupta & Wang, 2010). According to the company website, “COMAC functions as the main vehicle in implementing large passenger aircraft programs in China and is mandated with the overall planning of developing trunk liner and regional jet programs and realizing the industrialization of civil aircraft in China. COMAC is engaged in the research, manufacture and flight tests of civil aircraft and related products, as well as marketing, servicing, leasing and operations of civil aircraft.” (COMAC, 2014)
Although COMAC only has two aircraft models in its product line, the company is posed to start competing with Boeing and Airbus. The manufacturer’s first aircraft, the C919, 168 seat single-aisle plane marvels the likes of both the Airbus A320 and Boeing B737. As of November 2014, COMAC has collected 430 orders, from 17 different customers, for C919 aircraft. The aircraft is expected to make it maiden flight by the end of 2015 (Tan, 2014). Deliveries for the C919 are expected in 2018, delayed from 2016 (Tan, 2014). The manufacturer has indicated it expects to produce about 100 C919s annually; this will assist China end its reliance on imported aircrafts. (Gupta & Wang, 2010).
COMAC’s Advanced Regional Jet for the 21st Century (ARJ21) is a short/medium range 78 seat (dual class) or 90 seat (full economy) jet. Its flight range is mainly for meeting the “operation requirements of hub-spoke routes, ie. from central cities to neighboring medium and small cities” (COMAC, 2014). There are currently 278 commitments for the ARJ21 and the first order comes from Africa. The aircraft received type certification from the Civil Aviation Administration of China (CAAC), on 30 December 2014; more than 12 years after the program was launched (Toh, 2014).
COMAC is posed to overtake the aerospace manufacturing global market. The company already has all the key elements it needs for success – “a dedicated government, large funds, opportunities for economies of scale in development and in manufacturing, and, through its long liaison with Western companies, the capability to design, build and market globally competitive aircraft.” (Braddon, 2014)
Limited competition exists from regional jet manufacturers Embraer (Brazilian) and Bombardier because, until recently, they were focused on producing smaller regional airplanes. Now however, both companies are developing larger commercial airplanes. Forbes report, Embraer’s second generation of E-jets, designed to seat 110+ passengers, will enter service in 2018; and Bombardier’s new CSeries (110-140 passengers) is scheduled for its first delivery in sometime this year. These airplanes will compete directly with the smaller models in Boeing’s 737 series, which seat 120-220 passengers (Team, 2014). If these manufacturer’s can keep cost below Boeing’s, then they may be able to weigh on Boeing’s market share.

Conclusion
Boeing and Airbus will always compete for supremacy in the continuously growing global aerospace market. In fact, forecasts predict the market could see demand for “27,000 new commercial airliners by 2031, with an additional 24,000 regional business jets and 40,000 of smaller, rotary-wing aircraft.” (Braddon, 2014). China’s COMAC is poised to become a huge game changer and is set to topple the duopoly as we know it.

References
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Airbus Group. (2015). A380. Retrieved January 20, 2015, from Airbus Corporate Website: http://www.airbus.com/aircraftfamilies/passengeraircraft/a380family/
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