Airbus: Success or Failure of the Global Strategy?

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In this case study we decided to deal with the airbus strategy, that is why we had to analyze the global demand. Starting from this point the use of the PESTEL and PORTER models were necessary to withdraw Airbus options and strategic choices to become the leader of the aircraft industry. These tools are the key framework of this report. Analysis: Company Introduction: Airbus, based in Toulouse, France, is currently the world’s leading commercial manufacturer with 54% of the market share, and has been in fierce competition with Boeing since its inception in 1970.

Airbus is a subsidiary of the European Aeronautic Defense and Space Company (EADS). In 2001, Airbus formally became a single integrated company, EADS and BAE transferred all of their assets to the newly incorporated company and became shareholders, with 80% and 20% shares. A shareholder committee that consists in seven members and acts as a supervisory council, five members from EADS and two from BAE governs airbus; they approve the budget and make up a three-year investment plan.

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Airbus has been reorganized into “centers of excellence” with each center managing its own make or buy policy, deciding to subcontract whenever they can lower cost, which is seen as the only way to build profitability Airbus has four main subsidiaries: Airbus of North America, Airbus China, Airbus Japan, and Airbus Transport International. In 2004, Airbus achieved a turnover of some 20 billion euros and provided support for more than 3,300 Airbus aircraft currently in operation with more than 250 operators.

Airbus’ mission statement is; our mission is to provide the aircraft best suited to the market’s needs and to support these aircraft with the highest quality of service. Their vision statement is based on their philosophy of listening and responding to customers’ needs Airbus Corporate Strategy: Airbus believes in the future of aircraft is in jumbo size airliners, which they in their opinion will help relieve congestion of so many airplanes operating in and out of airports by economically ferrying more passengers between major hubs.

The company is following an expansion strategy as it takes it proven expertise in civil aircraft industry and it put to use in the military sector with the A400M program To secure profitability, Airbus started to outsource major elements of their newest project, the A380 with nearly a third of the project being outsourced, on a risk-sharing basis. The company uses only mature and long tested technology and chooses long-term suppliers to guarantee quality.

An important part of Airbus’ strategy is the use of synergies between all its airplanes, which offers operators a much shorter training time for pilots and engineers, significant savings through streamlined maintenance procedures, and reduced spare parts inventory. The result is economics of time and money for Airbus operators, which translate to real competitive advantage for them EADS Stock performance (since mid July 2003) Boeing: Boeing is a major maker of commercial jets and the leading aerospace company and offers related support services.

Boeing’s 2004 sales were $52. billion from customers in 145 countries with 30% coming from international sales. Boeing has more than 159,000 employees in 48 states in the U. S. and 67 countries. Their future success is based on a three-pronged strategy of running healthy core businesses, leveraging strengths into new products and services, and opening new frontiers. Boeing has decided to take a different approach by focusing its strategy on the development of smaller, midsize aircrafts since they believe that airlines want the flexibility of using smaller airports and travel longer distances.

Their future success is depended on the 787 Dreamliner. However, Boeing considers the introduction of the A350 as a sign of lost confidence in the A380 Boeing Stock performance (since mid July 2003) The essential items to deal with the global strategy (based on the PESTEL analysis): Political: Since Airbus is a European consortium of French, German, Spanish, and U. K. companies, the EU has a huge stake in seeing Airbus remain a successful corporation. Airbus is support through tax breaks, financing, loan guarantees, and R&D support.

The assistance is given because Airbus is a huge generator of economic activities such as jobs, technology development, ancillary companies, and spin-offs. The European Association of Aerospace Industries (AECMA) reports at least 435,000 direct jobs in Europe’s aerospace sector in 2001 with over 1. 2 million total jobs supported directly or indirectly by the industry. Airbus’ compensation of huge subsides from the European Union has strain relationships between the US and EU. The US government and Boeing consider the subsidies unfair and no longer necessary since Airbus has become the leading aircraft manufacturer in the world.

They considered the introduction of the A380 to be proof that Airbus can stand on its own without any government aid. However, Airbus and European governments have response that the US government does the same with its subsiding of Boeing. In addition, the EU is challenging a $3. 2 billion tax break that the state of Washington has promised Boeing and its suppliers. However, Airbus’ launch plans for A350 is adding more tension to the situation since Airbus is pledging to look for a new round of government loans equaling roughly $US 1. billion for the aircraft.

The political situation is far complicated because of the role that aircraft play in national security and economic stability of both the US and EU. Economic: The commercial aircraft industry expected to be worth US$ 2 trillion over the next twenty year, which will require an addition of 16,600 new aircraft into service. World passenger traffic is projected to grow at a 5. 3% annual rate between now and 2023. The greatest demand for these aircraft will come from airlines in the United States, China, and the United Kingdom.

The greatest demand for air travel will come from emerging and developing countries with China and India leading the way. Substantial growth is also expected for the Middle East. It is estimated that China, with its fast growing economy and emerging middle class, will alone need 2,200 aircrafts to meet their domestic and international air travel needs. In addition, there is expected growth to occur in the international freight sector with an expected increase of 253% in the next twenty years.

The EU governments and Airbus are both unwilling to give up government “launch aid” because the assistance has been instrumental in the plane maker’s rapid ascent to becoming the world’s leading supplier of commercial jets. Airbus has been able to tap into $15 billion in government loans since its inception in 1970, including $3. 2 billion for the A380. Airbus is not required to pay back the loans if the aircraft program is unsuccessful. The launch aid received by Airbus has helped it to shift risk away from the market unlike Boeing and any other commercial competitor.

The true benefit of the loans is that Airbus is able develop any program it wants and discount whatever it wants without the fear of losing it shareholders. However, Boeing, which is dependent on its shareholders and has to answer to earning reports, cannot do the same. Airbus’ plans the A350 does have some industry analysts worried because it could be the doom of the A330, which currently is the closest aircraft to the 787 in Airbus’ portfolio. There is also the problem of timing since the A350 will not enter service until 2010, a full two years after the 787.

The situation is further hinder since the A380 is currently running 2 billion over its projected budget. Any future funding for the A350 may have to come from outside the EU. Airbus would need to seek partnerships with foreign firms that can win state financial support similar to what Boeing is doing with the 787. Boeing signed contracts with Mitsubishi Heavy Industries and other Japanese firms that will construct a third of the aircraft. The Japanese government is expected to loan the suppliers at least $US 1. 5 billion, which would cover most of their development costs.

Partnerships with Japanese companies may prove to be difficult for Airbus since Boeing dominates the market. Airbus may turn its attention towards China where Airbus has recently negotiated a $US 26 billion aircraft sale to two Chinese airlines and signed a $US 100 million deal with the state-owned China Aviation Industry. However, orders for the 787 have begun to pick up after a slow start. Boeing says it has 263 orders and commitments for the plane, which could lead to Boeing regaining market leadership by year’s end and result in Airbus rethinking its long-term strategy and its need for future launch aid.

Socio-Cultural: Airbus operates on the principles of thinking ahead and listening to their customers, passengers, and employees in building constantly more comfortable and efficient aircrafts. These principles are seen as fundamental to the company’s future success. The three main points of Airbus’ corporate culture are innovation, creativity, and freethinking with the focus of internationalization and globalization. Diversity of culture and languages is considered a competitive advantage for the company.

Through the creation of effective teams with different nationalities, backgrounds and skills, Airbus’ growth, and development can be secured. English is the working language, unifying about 80 different nationalities speaking over 20 languages. Although different cultures and nationalities in may cause problems of communication and understanding, it also makes it possible to reach customers all over the world in knowing their culture and speaking their language. Until recently, air travel demand has been driven mainly by convenience. However, the trend is now changing with consumers basing their travel decision primarily on price.

Increasing cost and competitive generated by a new generation of “low-cost” carriers is having an effect on the major airlines. Business travel, once a stable of revenue, is now being conduct by corporate travel guidelines. As a result, airlines are consolidating their networks to exploit economics of scale, minimize environmental impact, and provide smaller markets with new or improve services. As side note, Boeing changed the classification of the 7E7 to the 787 to stay within tradition. However, the change could have made because of Chinese associating the number 8 with luck.

In addition, the sound of number 8 is very similar to the sound for the word for money in Japanese. This has work to their advantage since 140 787s have been sold to China and Japan in past few months. Technological: In the aerospace industry, there are huge costs associated with research and development for new aircraft. European government investments support European technology R&D sector, just as US government R&D schemes have sought to do, through NASA, FAA, Department of Defense (DOD), and export tax relief programs. However, the EU government support is three times as less compare to the US.

Furthermore, Airbus receives repayable launch investment, not grants. Boeing has estimated that launch cost of the 787 will be in the order of $US 9 billion while the cost of Airbus’s A380 will be even higher at $US 12 billion. Fly-by-wire is an electronically managed flight control system, which make aircraft easier to handle while further enhancing safety , is now the industry standard. Fly-by-wire technology has made it possible for Airbus to develop a true family of aircraft, from the 107-seat A318 to the 555-seat A380, with near identical cockpit designs and handling characteristics.

This makes crew training and conversion shorter, simpler, and highly cost-effective for airlines and allows pilots to remain current on more than one type simultaneously. According to Airbus CEO, Noel Forgeard, their biggest challenges is not the lost of market share or subsidies, but rather productivity. Airbus being a younger company with a newer product line and more modern production facilities has long enjoyed an efficiency edge over Boeing. Airbus is pushing to slash final assembly time on the 737’s competitor, the A320, by 30%.

However, Boeing has started to adopt lean manufacturing process for future aircraft production and is promising even more dramatic efficiency improvements with the 787. Environment (Physical): The key environmental issues of air transportation are:

  • Consumption of raw material and natural resources (water and energy)
  • VOC emissions from cleaning and painting process
  • Greenhouse emissions from consumption of natural gas and fuel
  • Indirect Greenhouse emissions from electricity consumption;
  • Nox and Sox emissions from combustion facilities
  • Production of hazardous and non-hazardous waste.

Four segments of Airbus’ manufacturing process affect the environment, which are metal and composite working, surface finishing and treatments, components and parts assembly, final aircraft assembly. Airbus is in their second year of their company-wide Environmental Management System (EMS), which is based the ISO 14001 Standard. The purpose of the EMS is to ensure the continuous improvement of Airbus’s environmental performance in all sectors of activities and covering the entire life cycle of Airbus’ products.

Aircraft effect the environment through noise and gas emissions. Carbon dioxide emissions, which contribute to global warming, are proportionate to fuel consumption rates. Legislation concerning noise pollution will affect future aircraft design. Legal: The US government and Boeing have complained that Airbus has long ignored one of the 1992 bilateral deal’s key agreements: that launch aid would be available to Airbus until the European company reached relative parity with Boeing, which is no longer the case since Airbus has a 54% share of the market.

All government loans for Airbus have been made within the boundaries set by the 1992 US-EU Agreement on Trade in Large Civil Aircraft since its entry into force. The debate over the subsidies (program launch aid) was elevated to new levels when the US government took the largest trade complaint to the World Trade Organization (WTO) for the purpose of litigation. The complaint considered the so-called “launch aid” given to Airbus for new aircrafts to be illegal under WTO rules. The EU and US have fail to reach the April 11 deadline to work out agreement surrounding the complaint, which rising the possible of the WTO having to get involve.

Both parties say that they are willing to continue with negotiations, but EU says they will not sacrifice Airbus’s launch aid without a balanced cut in Boeing’s various lines of support. Should the WTO were to rule against either company or either the US or the European governments for improperly subsidizes the manufacturers, the results could be billions in retaliatory fines, which could hurt the huge aerospace industry and their hundred of thousands of employees on either side of the Atlantic.

Regulating bodies, such as the FAA, EPA, and similar agencies have some impact to the industry as they determine a number of constraints that manufacturers, suppliers, and operators have to work with. The impact of these institutions is considerable as they can create major obstacles for the final approval of the planes. Conclusion of the PESTEL analysis: Working with the date from PESTEL analysis leads us to the conclusion that the biggest challenges and opportunities for Airbus might face come from the economic, legal, and environmental sector.

Possible failure of either the A380 or the A350, the risks associated with developing markets, or events such as terrorist attacks or the SAR epidemic would be disastrous for the company. However, with airlines looking to implement cost-savings strategies, replace aging aircraft, and the exploration of new markets especially in China and India, there is also great potential for revenue for Airbus . The expected growth in air travel would create an even greater demand for new aircraft. There are legal issues that may become obstacles for Airbus.

The dispute between Airbus and Boeing needs be too settled outside of the courts since Airbus does not want to face the possibility of billions in retaliatory fines from the WTO. Possible new environmental legislation will have a major bearing on future aircraft designs, airport plans, and plant locations for Airbus and its suppliers. Airbus will likely need to enter either a strategy of more strategic alliances in order cover raising R&D and production costs in order remain competitive. Porter’s five force analysis: Bargaining Power of Suppliers

Substitute Products Bargaining Power of Buyers Threats of new entrants AIRBUS/BOEING Airlines Leasing companies Governmental institutions FAA, IATA, EPA Other regulating bodies Advance in small haul turboprop technology Advances in automotives industry and infrastructures High speed train Advances in telecommunications: video conferences etc… Engine manufacturer Electronic, Semiconductor etc… Others manufacturers such as metal, composite materials Government institution Capital sources investors and banks FAA, IATA, EPA Other regulating bodies Tupolev?

Mitsubishi? Others emerging power Others small aircraft manufacturers Military companies: Dassault, Lockheed, ATR. Rivalry among the industry: The analysis of the large commercial aircraft industry shows that there intense competition between Airbus and Boeing. Scattered around the world are scores of other small passenger 63aircraft manufacturers such as ATR in Toulouse, France and Gulfstream in Georgia, US. Like the high flyers, small aircraft manufacturers are involved in a global business. The industry is extremely concentrated. Threats of New Entrants:

Any new entrant in this market faces a steep, uphill battle in entering the market. Regulations, huge capital investment , extremely skilled labour needs, sophisticated support industries, a proven track record and the patience to wait for future profits are just but a few of the barriers to entry. However, one cannot completely exclude this possibility. Japan, Russia, or China may decide that this industry is strategically vital for their long term well being and encourage a highly subsidized entry in the market by their national companies.

In the case of Japan, subsidies may not even be necessary as the sophisticated industrial infrastructure and naturally protective trade policies may very well encourage Mitsubishi Heavy Industries or another firm to enter in the market. Russia represents a significant growth potential for Airbus and Boeing, but has its own national aircraft industry. It is also possible that the Russian Tupolev could enhance its capabilities, rationalize its operations and succeed in entering the market with a low cost, no frills product strategy, especially in emerging countries.

Finally, although highly unlikely, existing defence’s aerospace companies may be tempted by a late entry or re-entry strategy, such as Lockheed, as they see their traditional military market dwindling. Bargaining Power of Buyers: The buyers, which included major airlines, “low-cost” companies, and leasing companies, retain considerable power, which is increasing since there is a decline in orders. As airlines began to optimize their operations and cut their investments, the competition among the two major manufacturers becomes tedious.

They have a low switching cost since one manufacturer is more willing to sell the aircraft at lower price and/or offer better service in order to take business from the other. “Low-cost” carriers’ power comes from the fact their customers are not expecting much because of the low cost of the tickets. Bargaining Power of Suppliers: The major suppliers can be split in two different groups, based on their relative bargaining power. Engine manufacturers represent the single most significant group of suppliers and it can be assumed that their bargaining power is going to significantly increase as they undergo consolidation.

However, this power is somewhat negated since airlines can enter into separate negotiations with the engine suppliers to determine the choice of the engine for their airplanes. The planes are usually designed for more than one engine type. On the other hand, the required fuel efficiencies, increased reliability needs (especially for twin engine transatlantic wide bodies), and greater power output for the new large body aircraft require aircraft manufacturers to enter in joint development programs.

Similar to what defense contractors are facing, avionics and material suppliers are also dealing with a shrinking military market and trying to find commercial application for their products. Therefore, the bargaining powers of these companies can be considered low as they compete for market share in the commercial sector. Substitute Products: There few substitute travel methods to air travel. Bullet trains travelling between cities less than 400 miles apart offer a very attractive solution to air travel.

As their speeds approach and even exceed 200 mph, these trains can travel below two hours from downtown to downtown; a performance that any airline may find difficult to match. After the start of TGV (high speed train) service between Paris and Lyons, Air Inter saw a 50% reduction in air travel. If bullet train route were implemented in more major cities, airlines could lose significant traffic and revenue and thereby, reduce their fleets as a consequence.

Advances in the auto industry, such as cars capable high speeds, under electronic control on specially equipped freeways could also have some impact. Finally, advances in internet-based telecommunications may reduce business travel requirements and impact the airlines’ investment in new planes and routes. This loss could be off-set by forecasts of growth in the leisure travel segment. Conclusion of the Porter analysis: Regarding Porters’ five forces model, the biggest possible threat for Airbus is the high bargaining power of buyers: major airlines, leasing companies, and LCCs.

This is due because they can play Airbus and Boeing against each other. So Airbus has to take care that they fulfills their vision of listening to the customers needs, because Boeing is just waiting to take customers away from them. Suppliers, especially in the defense sector, have relative weak power since they are fighting for a share of the commercial market. Past trends show that the intense rivalry between the companies will continue even if the matter of subsides is settle.

Substitute modes of travel may play regarding short travel distance but air transportation is still considered the number one option for travel. The threat of entry should be considered to high because of the numerous obstacles to overcome. However, the revenue potential maybe enough some other state sponsored firm to enter the market. Conclusion: We believe that strategy chosen by Airbus may be proven right if two conditions were to occur. First, major airlines do agree with concept of shuttling large number of passengers between hub airports.

Second, if Airbus is still able to received government aid in some form. Based on where the greatest demand for air travel will be located, aircraft like the A380 will be successful because of its need. Countries like China and India have a large portion of their population centered near major urban areas, which fits perfectly with Airbus’ strategy. However, this is not necessary the case in Europe and North America. Besides the major population areas, there are small to mid-size population centers scattered across these regions.

In addition, there are only a few airports capable of handling an aircraft of that size. Early testing has shown that no other aircraft can take-off or landing for a period of five minutes after an A380 has landed or taken-off due to the large amount of turbulence is causes. This can limit the number of flights that an airport can handle and further add on to the high levels of congestion all ready seen in major airport around the world. Furthermore, Airbus plans for A350 may have some airlines rethinking that the A380 is not worth the investment.

There is a social aspect we need to investigate concerning if passengers are willing to fly aboard such an aircraft. Loss of government aid would hurt both companies but Boeing would be better position as compared to Airbus, which would no longer have the luxury of doing what ever it wanted and selling its aircraft at a discount price in order to make the deal. An unfavorable ruling by The WTO could force Airbus to drop its plans to launch the A350, which give that part market completely to Boeing.

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