A Report on Analysis of Case on Boeing versus Airbus

Submitted To: Prof. (Dr.) Mayur Shah

Analysed by: Devang Patel 33Shashank Jaiswal 23Mamta Patel 35Ankeit Deshmukh 14Himanshu Mathrani 29Manish Jha 24Case Summary:Until 1980, US commercial aircraft industry enjoyed a de facto monopolistic position in the world market, despite the European-based Airbus Industry having come to exist in 1970. The US dominant position, with two US commercial aircraft manufacturers, Boeing and McDonnell Douglas together, accounting for more than two-thirds of the world market share, continued till as late as the mid-1990s. With Boeing deciding to acquire McDonnell in 1996, it was expected that the position will improve further. Surprisingly, this formidable position came to be challenged by Airbus, which since 1981, contrary to its initial perception of having been regarded as only a marginal competitor, was progressively increasing its market share. By early 2000s, Airbus was consistently garnering a larger share of new orders than Boeing, and in 2003, it even surpassed Boeing for the first time in deliveries of aircrafts (305 deliveries by Airbus as against only 281 by Boeing).The phenomenal success of Airbus was not received well by many in the US who attributed it to the fact that it was due mainly to the huge subsidies it received from the government. This was followed by a chain sequence of accusations and counter-accusations. Somehow, under an agreement in 1992, the two sides agreed to make some allowances to each other. The agreement allowed Airbus to receive some launch aid from EU governments (Great Britain, Germany, France and Spain), and Boeing to benefit from government R & D contracts. Under the agreement, direct government subsidies were limited to 33 per cent of the total costs of developing a new aircraft with the condition that such subsidies had to be repaid with interest within 17 years. But the agreement did not last long. In 1997, the agreement broke down when the European Union decided to challenge the merger between Boeing and McDonnell Douglas on the ground that it limited competition. Boeings plea was that the merger was necessary to strengthen its presence in the defense and space side of the aerospace business areas where McDonnell Douglas was traditionally strong. After the two sides listened to each other, the dispute between the two appeared to have settled. But soon after, the Airbus executives, who had initially stated that they had no objections to the merger, gradually started opposing the merger again and became increasingly vocal in their pronouncements. Trade tensions between them erupted yet again in 2004. This time, the US questioned the appropriateness of Airbus receiving the launch aid even as it had consolidated its position in the world market. To this the Airbus responded with the accusation that Boeing was still benefiting from subsidies. No break-through was seen in the dispute. To add fuel to the fire, the British government decided to announce even a fresh dose of aid ($ 700 million) to the Airbus in mid-2005. The US dissatisfied with these developments formally filed a request with the WTO for establishment of a dispute resolution panel. The EU, on its part, quickly reacted and filed a countersuit with the WTO claiming that US aid to Boeing exceeded the terms set out in the 1992 agreement.

1. What are three reasons for the Europeans creating the Airbus consortium?Airbus Industries was formally established as a Groupement d'Intrt conomique (Economic Interest Group or GIE) on 18 December 1970. It had been formed by a government initiative between France, Germany and the UK that originated in 1967. Its initial shareholders were the French company Arospatiale and the German company Deutsche Airbus, each owning a 50% share. The name "Airbus" was taken from a non-proprietary term used by the airline industry in the 1960s to refer to a commercial aircraft of a certain size and range, for this term was acceptable to the French linguistically.The objective of the consortium was to build commercial aircraft with Germany, Great Britain, and Spain taking on the job of constructing the aircraft and France assuming responsibility for assembling it.

The logic of the arrangement was fairly straightforward. Three reasons for the Europeans creating the Airbus consortium: - 1. Given the growth of international travel:- Airbus started building planes. It took quite a while, but by 1990 the consortium was not only becoming well established but had back orders for 1,100 planes and by 1997 this number had reached 2,300. In the process Airbus captured over 30 per cent of the world market. One of the major reasons for its success was that it focused on building fuel-efficient craft at competitive prices. Its wide-body, medium-range models, the A300 and A310, for example, were very reliable and the orders started flowing in from a wide number of buyers including large US carriers such as America Airlines and Northwest.

2. There would be a continual need for new commercial aircraft:- When major air carriers such as American Airlines, Japan Airlines, and Lufthansa needed to replace aging airplanes or increase the size of their fleet, they turned to Boeing or McDonnell Douglas, the two giant American aircraft manufacturers. Cargo carriers such as FedEx and DHL also bought planes from them, and, as international air shipments continued to grow rapidly, the annual demand proved to be a boon for Boeing and McDonnell.In such a situation Airbus has to take the initiative plus big moves should be played to get the market share.

3. Airbus wanted to be a major player in this industry:- The initial challenge for Airbus was to capture some market share and thus establish a toehold in the industry. This, fortunately, was not a problem. The consortium had divided up the responsibility for building the aircraft among its members. In this way, each country was guaranteed some of the work and, in turn, could count on its respective government to provide financial assistance and contracts.In particular, the consortium would have to spend large amounts of money for research and development in order to build competitive, state-of-the-art craft, but by getting support from their respective governments a great deal of the initial risk would be eliminated.

2. How will Airbus help the EU compete in the United States?The related big change in the marketplacedating from the 1990sis that subsidies are often channeled to component suppliers by governments outside the European Union or the United States, particularly by the Japanese and Chinese governments. Japan has long sought to parlay expertise acquired in the manufacture of aircraft components into a stronger military capability. China harbors similar goals and has publicly declared its intention to become a maker of civil aircraft alongside Boeing and Airbus. Facilitating these ambitions, Boeing has outsourced a big percentage of its new 787, including high-technology work, to Japan and Italy. Airbus has likewise outsourced on a grand scale, some $10 billion of orders to US component suppliers and nascent assembly operations in China. With these changes, the United States and Europe are becoming by standers as well as participants in the global competition for the civil aviation industry. To their credit, the United States and Europe have never required that domestic carriers purchase new aircraft from domestic firms. Similar for bearance by China and Japan cannot be taken for granted. Important segments of the aircraft industry are already migrating to Asia, lured by the promise of subsidies and preferential purchase arrangements for the finished aircraft. In fact, Boeing CEO Jim McNerney recently predicted that China would become the third airplane maker to rival his firm and Airbus in the coming decades. If nothing else, this trend should prompt cooperation between US and EU authorities.

3. How will Airbus help the EU compete in Japan?

Airbus presence in Japan dates back to 1979 when Japan Air System (JAS) placed its first order for six A300B2s. JAS subsequently placed repeat orders for the A300, bringing the total number of aircraft ordered to 32. But before Airbus when major air carriers such as American Airlines, Japan Airlines, and Lufthansa needed to replace aging airplanes or increase the size of their fleet, they turned to Boeing or McDonnell Douglas, the two giant American aircraft manufacturers. Cargo carriers such as FedEx and DHL also bought planes from them, and, as international air shipments continued to grow rapidly, the annual demand proved to be a boon for Boeing and McDonnell. So, When Airbus was introduced it gave European union a fair chance to capture highly potential market which is evident by recent deal where Japan Airlines signed a milestone purchase agreement for 31 A350 XWB aircraft in 2013, the historic first direct Airbus order for the nations flag carrier, which also becomes the initial customer for this next-generation widebody in Japan. ANA Holdings ordered 30 A320neo Family aircraft (seven A320neo and 23 A321neo) in July 2014, while Skymark Airlines is to introduce 10 A330 Family aircraft.

4. In what way did the Airbus consortium use a keiretsu approach to building the aircraft? Why do you think it opted for this approach?

A keiretsu is a set of companies with interlocking business relationships and shareholdings. It is a type of informal business group. The keiretsu maintained dominance over the Japanese economy for the last half of the 20th century. The member companies own small portions of the shares in each other's companies, centered on a core bank; this system helps insulate each company from stock market fluctuations and takeover attempts, thus enabling long-term planning in innovative projects. It is a key element of the automotive industry in Japan.

Airbus Industries was formed in 1970 as a consortium of aerospace manufacturers. The retention of production and engineering assets by the partner companies in effect made Airbus Industries a sales and marketing company. This arrangement led to inefficiencies due to the inherent conflicts of interest that the four partner companies faced; they were both shareholders of, and subcontractors to, the consortium. The companies collaborated on development of the Airbus range, but guarded the financial details of their own production activities and sought to maximize the transfer prices of their sub-assemblies.In 2001, EADS (created by the merger of French, German and Spanish Airbus partner companies) and BAE Systems (the British partner company) transferred their Airbus production assets to a new company, Airbus SAS. In return, they got 80% and 20% shares respectively. BAE would later sell its share to EADS.