Airbus vs. Boeing

Presented by:Group E

QUESTION 1

What are the drivers of value creation and value capture in the industry?

Value Creation

• Innovation– Had to balance innovation with homogeneity

• Customer Relations– Dedicated teams for airline accounts

• Alliances– Alliance with Japanese manufacturers– Alliance between the players for VLCT

• Technology– Driven by technology

• Fuel efficiency• Greater capacity• Direct Operating Cost

Porter’s 5 Forces Analysis

Bargaining Power of Suppliers

• Large Number of Suppliers• Large investment made by suppliers in

developing manufacturing technologies• Long term relationships with the suppliers

• LOW

Bargaining power of Buyers

• More than 450 airlines and operators• Discounts for large orders• High investment for the research & design

• MEDIUM

Threat of New Entrants

• High switching costs• High Research & Development cost• High initial investment• Govt. subsidies (Airbus)

• VERY LOW

Threat of Substitutes

• Other modes of transport• Tele-conferencing

• HIGH

Rivalry Amongst the Players

• Struggle for market• Red ocean– United Airlines

• Break-even sales requirement is high• Orders are usually bulk orders

• HIGH

QUESTION 2

As of 1992, who is doing better- Boeing or Airbus? Explain why?

BOEING AIRBUS

Existing Fleet Size 57% 16%

%age of new orders 55-65%

Fight between Airbus and McDonnell Douglas for the rest

Earnings from operations(1991) $1.95 billion $250 million

No. of aircrafts delivered 6600 900

Orders to be delivered in 1992 342 156

Number of categories of aircraft 4 3

Comparison Between Boeing & Airbus

Revenue: Boeing, McDonnell Douglas & Airbus

Supremacy of Boeing

• Mission: Aircrafts for every segment• Deliver 500 planes over the next 5 years• Innovative approach– Gang of Eight: A group of 8 US and International

Airlines invited by Boeing to contribute to design process of 777

– DBTs (Design/Build teams): A group of 10 to 30 people of various disciplines

– CATIA( Computer Aided Three dimensional Interactive Applications): All 777 designs were computer aided

Rise of Airbus

• Airbus is growing– Number of orders received by Boeing grew by

12.2% between 1999 to 1991 whereas the growth of Airbus for the same period is 73%.

– Airbus won a long time customer of Boeing.(Potential threat?)

• Superior Technology– “Fly by wire” in A320 in mid 1980’s

QUESTION 3

What will be the value of the new VLCT to both the companies?

Value of VLCT to either player

• Economies of scale to airlines would lead to increased demand and profitable contracts

• Brand name would be reinforced as a pioneer in aviation technology and would spill over favorably towards other business (smaller models)

• Would eventually be ‘the way of the future’- Howard Hughes; due to congestion at key airports

Feasibility of Co-operation

• Historically Airbus suspected that all the Americans were really interested in was to split Airbus up, and hamper its growth as a competitor

• The threat remained that one of the parties would acquire the other's crucial technical expertise

• Develop an advantage and defect• Going for outright dominance

Potential Value add through JV

• More control over suppliers• Risk mitigation• Collaboration to facilitate high level of

resources• Take advantage of currency swaps and interest

rate fluctuations between the U.S. and Europe • Combining Airbus’s fuselage and Boeing’s

wings

QUESTION 4

If you were Airbus, how would you respond to Boeing? Should Airbus collaborate with Boeing in the development of VLCT?

Developers Dilemma(to produce or not to produce)

• Each player has two options to invest in the development of a new product or not to invest If only one of the players decides to develop, he will reap superior profits from unchallenged

future market dominance If both players go ahead, the product is likely to generate losses for both players If neither goes ahead, a profitable market remains untapped

Boeing/ Airbus Develop VLCT Don’t Develop VLCT

Develop VLCT High risk / Risk(Individually -

loss/lossCooperatively -

gain/gain)

Gain/loss(Boeing Dominant

strategy)

Don’t Develop VLCT Loss/ Profit (Airbus Dominant

Strategy)

Gain/ loss

Scenario 1 : European SubsidiesBoeing/Airbus Develop

VLCTDon’t Develop VLCT

Develop VLCT (-) (+) (+) (0)

Don’t Develop VLCT

(0) (+) (0) (0)

• In spite of Boeing going for the VLCT option Airbus can afford to develop due to subsidies offered by European countries

• US government could retaliate ?

• Boeing could use better technology?

Scenario 2 : Uniform subsidies/Same technology

Boeing/Airbus DevelopVLCT

Don’t Develop VLCT

Develop VLCT (-) (-) (+) (0)

Don’t Develop VLCT

(0) (+) (0) (0)

• US and Some European nations sign accord governing subsidies

• Developers dilemma• Entry deterrence will

need to be used by either Airbus or Boeing

• Lowering of Price

Collaboration of Airbus and Boeing?

• Pros – Both could avoid prisoner’s dilemma– Shared resources so reduced development costs– More profits for both– Improved and Advanced aircraft with Airbus’s fuselage and Boeing’s

wings.– Shared core competencies

• Cons for Boeing:– Boeing might lose its market dominant position to Airbus– Collaborating with Airbus would mean sharing their core

technologies– Boeing’s current market share for mid sized planes could be affected

What should Airbus do?

• Could consider collaboration as it would increase chance for profits.

• However Boeing’s commitment to this collaboration could be questioned.

• Boeing would stand at advantage even if it did not enter the new market of large planes.

• Airbus has to develop large planes.• Its dominant strategy would be to do it alone and at

the same to ensure Boeing does not get into the market.

Airbus’s Response

• Airbus respond by announcing to develop its own large plane with latest technology.

• It could challenge Boeing with this announcement.

• If Airbus entered this segment, Boeing would be better off collaborating with Airbus

Feasibility of Co-operation

• Historically Airbus suspected that all the Americans were really interested in was to split Airbus up, and hamper its growth as a competitor

• The threat remained that one of the parties would acquire the other's crucial technical expertise

• develop an advantage and defect• going for outright dominance

HOW TO MAKE MUTUAL ASSURANCES CREDIBLE ?

Developers Dilemma(to produce or not to produce)

• Each player has two options to invest in the development of a new product or not to

invest If only one of the players decides to develop, he will reap superior

profits from unchallenged future market dominance If both players go ahead, the product is likely to generate losses for

both players If neither goes ahead, a profitable market remains untapped

• Competitive landscape reinforces game-theory modeling, where decisions by one player are dependent on the moves expected of the other player

Potential Value add through JV

• More control over suppliers• Risk mitigation• Collaboration to facilitate high level of

resources• Take advantage of currency swaps and interest

rate fluctuations between the U.S. and Europe • Combining Airbus’s fuselage and Boeing’s

wings

THANK YOU