Christian Uwagwuna How the Macroeconomic Environment of the Airline Industry Affects the Strategic Decision of Boing Vs Airbus A Case Study Document Nr. V170506 http://www. grin. com/ ISBN 978-3-640-89394-2 9 783640 893942 ‘Case Study – How the Macroeconomic Environment of the Airlines Industry Affects the Strategic Decision of Boeing Vs Airbus’ By Christian Uwagwuna Course: Strategic Management 27 January 2011 Executive Summary This paper discusses the external economic factors affecting the strategic decision of airline industry and how this decision in turn, affect the market forecast of the aircraft manufacturing industry.
Various business issues affect airlines operation either directly and indirectly, and these issues affect the strategic decision of the airline industry. The present economic crisis, instability in aviation fuel price, and environmental factors (such as the recent volcanic ashes and snow) has further shrunk business in the airline industry and thereby increasing competitive rivalry. Although the future projected growth by the airline industry look promising, factors affecting airline businesses can make it daunting.
Strategic decisions however, will help the airlines to maximize this positive forecast.
To make these decisions, it is vital for the origination to understand the macroeconomic environment affecting the airline industry. Various framework and models have been developed to help organizations study and understand the macro-economic environment affecting their business. One example is of such framework is PESTEL (Political, Economical, Social, Technological, Environmental and Legal), used by firms to study external economic factors affecting airlines and how they make strategic decisions in order to be able to withstand the influence these factors exert on their business.
Another model developed by Porter (Porter five forces model) also serve as a veritable tool that help the airlines industry to identify the different external forces such as threat of new entry, buyer’s bargaining power, supplier’s bargaining power, threat of substitute and competitive rivalry that exert immense pressure on the airline industry. The decision taken by airline industry based on analysis of the external economic factors, directly or indirectly affect the airline manufacturing industry. Presently, the airline manufacturing industry is a duopoly comprising of two players: Boeing and Airbus.
These aircraft company has been neckdeep in competition with each over who control the highest market share. PESTEL and Porter’s five forces analysis also help the aircraft manufacturer to understand the impact the airline industry plays on their survival and what strategic decisions they will make in order to stay competitive. Currently, an analysis of the external environment and the future forecast in the airline industry has made both Boeing and Airbus to make a strategic differentiation, each targeting a niche in the airline industry.
For example, While Boeing foresees a growth in the next 20 years in direct pointto-point travel between cities, Airbus foresees a growth in mass transportation of passenger between major hubs. These differences in forecast have led both companies to develop aircrafts that have different carrying capacity and range. While Boeing built the low cost B787 aircraft with great speed and to reach a farther range, Airbus built the A380 that has the capacity to carry more than double the number of passengers B787 can carry but with a lesser range.
Part A: External Economic Factors Affecting Airline Industry Introduction Few inventions have affected on a large scale how people live and experience the world as did the airline industry. The airline industry remains a big and growing industry such that today, air travel has become commonplace as it is becoming more and more affordable to various income classes of the society. Air travel has also changed the way we live and do business as it reduces travel time. It has also changed our view of distance, making it possible for us to do business at places once considered remote.
Airline industry is the major engine powering the globalization of businesses and services. Prior to 1970’s, the airline industry was mainly owned and controlled by the governments in different countries. There was no free market competition as travelers have to make do with the services and prices available to them from the few airlines. But with the deregulation of the airline industry that swept across the world after 1970, entry barriers were lowered allowing new start-up of many airline companies, thus engendering competition in the airlines industry.
This has led to competitions in various fronts, especially in prices and services provided onboard the flight. This competition has led to formulation of various business modules and the re-strategizing of the already existing and new start-up companies, in order for them to survive the new business environment. The operating environment of the airline industry continues to evolve, thereby presenting a significant challenge for the survival of the industry.
Different models and frameworks have been formulated for analyzing the operating environment of various industries. In analyzing the operating environment, it is vital to indentify the different factors that might affect the organization cost, supply and demand. PEST (Political, Economical, Social and Technological) is one of the framework used for analyzing the macro-environment affecting organizations in a particular sector. It categorizes the environment influencing a business sector into political, economical, social and technological.
Sometimes, additional factors such as environmental and legal and added to form a PESTEL (Political, Economical, Social, Technological, Environmental and Legal), but these can also be incorporated in the others. Also Porter’s five forces model has proved a veritable tool in the analysis of the operating environment of the airline industry. There are two major players Boeing and Airbus in the aircraft manufacturing industry, and they compete stiffly to control the market. The PESTEL framework and Porter’s five forces model can elp the airline manufacture to study the external environment and to take strategic decision that will help them to compete favorably. This paper will discuss in detail using PESTEL framework and Porter’s five forces model, the challenges the airline industry faces and how this challenges affects the aircraft manufacturing industry and their strategic decision. The aim of this essay is to carry out a comprehensive analysis of the operating environment of the airline industry using the PEST framework and identify what factors affects the way airlines do business.
Airline Industry Current Business Issues and Trends in Airline Industry The global airline industry has grown significantly consisting of over 2,000 carriers worldwide, operating over 23,000 aircraft, and servicing over 3,700 airports. On the average annually, world airlines flew approximately about twenty eight million (28 million) scheduled flights carrying over 2 billion passengers (IATA, 2006). With this immense growth, numerous complex challenges presently beset the airline industry.
Competitive pressure from low-cost carriers, the transparency of pricing facilitated by the internet and consumer’s loss of confidence in the reliability of air transportation system have all impacted negatively on airlines revenues (Anon, 2009). Since 2006, the cost of fueling the aircraft has on a regular basis emerged the largest industry expense and has surpassed the cost of labor for the first time (Anon, 2008). The progress recorded post 9/11 has improved safety on the air to a certain degree as passengers and their luggage are now screened for security reasons.
This process has created a lull in air travel business as passengers are wary of the additional delay caused by the extra security measures. This has led to decrease in air travel as passengers perception of this ‘hassle factor’ and the uncertainty of the amount of delay that will result from the extra security measures has been a cause for concern. The extra security measures have resulted in increased operating cost and induced more security-related flight delay and disruptions (Anon, 2009, Ho 2009).
Due to the volatile nature of air travel and the recent happenings since 9/11, airlines are suffering from increased cost of insurance and their access to cheap fund are becoming increasing difficult due to the economic downturn, also compounded by the decrease in air traffic volumes (Ho, 2009). Airlines are struggling to survive these negative trends, with several carriers experiencing financial difficulties and some becoming bankrupt. These increase pressures have resulted in mergers, alliances, acquisitions and industrial consolidation by airlines in order to reduce operating cost and thus enhance profitability (Ho, 2009).
Understanding the External Environment The external environment consists of external influences that affect the firm’s decision making process and performance. “These external environments are key factors which are outside the direct control of the business”. These factors such as the economy, social change and government policy affect the survival of the firm significantly (Gillespie, 2007). Understanding the macro-environment raise a very vital issue: given the vast number, range and uncertainty of external influence, how can management understand, analyze and monitor environmental conditions?
The starting point is to use some kind of framework that helps in organizing information. Narayanan V and Fahey L (2001) asserted that the environmental issues influencing a firm’s performance can be classified by source or by proximity. The source can further be classified into such factors as political, economic, social and technological (PEST analysis) whereas the proximity factor is the “micro-environment” or “task environment” which are factors internal to firm and are distinguishable from the wider influences that forms the macro-environment.
Analysis of the External Environment of Airline Industry – Using PESTEL Framework The external environment of airline industry is very crucial to the survival of the various airlines as it exert enormous impact on the airline industry. The external environment of the airline industry can be described as very unstable as there are regular fluctuations in the macro-environments. Recent event happening in the macro-environment has affected the airline industry significantly. Government regulations in most cases have been unstable and restrictive. The industry is often plagued by the outbreak of diseases, war, terrorism and recession.
These risks often affect the operability and the survival of most firms in the industry (Dempsey, 2008). In order to carry out a comprehensive analysis of the airline operating environment, the PEST framework is going to be used. PEST is an acronym for Political, Economic, Social and Technological, which are environmental factors influencing a business sector. Sometimes, additional factors such as environmental and legal are added to form PESTEL. In this section, a detail analysis of these environmental factors affecting the airline industry will be carried out.
Political: Because of its importance to the economic growth of many countries, and in order for nation to be able to participate in globalization, governments, throughout history, has promoted the development of the airline industry by providing infrastructure, research and development, subsidies, protective regulation and outright ownership of airlines. For instance, prior to 1978, the US government strictly regulated commercial airlines by controlling airline’s route entry and exit, passenger’s fares, airline rate of returns, mergers and acquisition (Dempsey, 2008).
It was very difficult if not impossible for entry of new airlines as the regulation hindered competition. Deregulation and liberalization of the sector has led to the relaxation of ownership rules in US and EU and other part of the world. Deregulation leads to increase in market size of the airline and more opportunities for passengers as it leads to competition in prices offered to passengers. Competition from independent carriers has the capacity to influence the airline fares. For example the entry of low-cost airline in the US has exerted strong downward pressure on prices since deregulation.
This has accounted for an estimated 40% annual savings from lower fare offered to passengers (Morrison and Winston, 2000). To survive the pressure created by deregulation and liberalization, airlines responded by forming alliances, acquisition and merger and cooperation in ways that were hitherto impossible. For instance, the STAR alliance which include SAS airlines, Lufthansa and twenty five other airlines cooperate in such a way that they are able to reduces cost of operation and are able to reach routes which otherwise were unreachable.
Economic: The recent economic downturn and the incessant increase in aviation fuel have adversely affected airline industry. With this credit crunch affecting every sector of the economy, airlines witnessed a reduction in both regular and business travel. At the same time, the cost of labor has been increasing annually. Also inadequate infrastructure and the lack of capacity (noticed recently during the Island’s volcanic eruption) has led to airport congestion, flight delays and outright cancellation, resulting in customer’s dissatisfaction and perception of poor services by the airlines.
The entry of low-cost airlines have further increased the economic pressures on legacy airlines as passengers now prefer cheaper prices offered by theses airlines (Anon, 2009). Reduction in flight schedule as a result of different forms of alliance and cooperation between airlines has alleviated some of these pressures on infrastructure, and has resulted in fewer flight delays, and faced with massive layoff and economic uncertainty. Labor unions have become more willing to accept downward review of their earnings and to cooperate more with management in many front.
Passengers have also become more willing to lower service expectation in exchange for improved security and cheaper flight (Anon, 2009). Social: The economic downturn has resulted in behavioral shift in passengers taste and choices particularly on the part of business travelers, thereby impacting negatively the ability of airlines to generate adequate revenue to cover their operating cost. The reduction in business travel budget coupled with the reduction in airline passengers service quality has led business travelers to look for alternatives such using lost-cost airlines or resorting to video conferencing to carry out their business.
The airline industry can benefit from passengers willingness to travel for wedding occasions, vacations, getting along with family members during festive occasions, by offering cheaper family deals, better choices and lowest fares (Anon, 2009). Technological: Technological advancement has led to increased competition in the airline industry as passengers can now compare prices online and make an informed choice. Mobile phones is another area where technological advancement has proved positive to the airline industry. With the ability to access internet with mobile phones, passengers are becoming wiser in their patronage of airlines industry.
With nearly 95% of passengers, having access to mobile phones, these digitally equipped passengers can access their travel information such as purchasing ticket and checking-in online while on the move (TravelDailyNews, 2009). Some industry expert predicted that mobile boarding will save aviation industry close to 500 million US dollars due to less infrastructural requirement and overhead cost reduction (TravelDailyNews, 2009). Airlines need to take advantage of this technological advancement by developing e-commerce strategy that will enable them to stay in touch with diverse customers, hence saving cost.
Environment: The climate change debacle has put immense pressure airline industry to cut its C02 emission rate, reduce fuel burn and noise level. This is capital intensive as it requires a total system and engineering change to achieve this. Additionally, the unstable environment has affected the airline industry adversely. The recent volcanic eruption, heavy snow fall and other environment changes which occur on a regular basis cause flight disruptions on a global scale. Airlines need to been seen as socially responsible, and therefore need to key in into environmentally friendly measures that will enable them to remain competitive.
They also need to build capacity that will enable them to cope with the inevitable environmental changes that will surely always occur. Legal: Most airlines today face legal action from passengers who are dissatisfied by their operations, especially resulting from delays and cancellations due to inclement weather. Airlines are aware of the implications of such legal actions, such as monetary compensation and an increased number of passengers becoming more aware of legal procedures and requirements that govern irlines operation, leading to more legal suits. For instance, RYANAIR recently faced legal actions from customers who were abandoned by the airline to fend for themselves, as a result of cancellation by the airline. These passengers are aware of European compensation rule and are fighting to force the airline to abide by the rules (The Guardian, 2008). Porter’s Five Forces Model of Competition in Airline Industry Porter five forces model is another good tool for analyzing the environmental factors influencing the operation of an industry.
It is based mainly on the concept that organizations needs to develop corporate strategy that will meet the opportunities and threats in the organization’s environments. Porter identified the five forces influencing that organization’s environments as follows: threat of new entrants, the power of buyers, the power of suppliers, the intense rivalry among competitors, and the threat of product substitutes (Jang P et al, 2009). An analysis of these forces will be carried out in this section to find out how they contribute to the overall competitive pressures in the airline industry.
Threats of new entrants: With the deregulation of airline industry in most country it is now possible for news airlines to spring up on a regular basis. At first glance, it looks like a herculean task for new entry into the sector, because of the financial requirements. But with the possibility of accessing cheap bank loans, the possibility of new airline to enter the industry is very high. With constant entry of new airline, the market is getting saturated, and firms needs to devise strategies that will help them to survive.
Firms with strong brand are likely to outwit other and to remain liquid despite the situation in the market (Anon, 2010). The powers of suppliers: The supply front is presently dominated by both Boeing and Airbus and hence there is no cutthroat competition among suppliers (Anon 2010). Additionally, fuel price is on the high side and the cost of maintaining labor is also very high therefore, they maintain a strangle hold on the airline industry (Anon, 2010). The power of buyers: Since airlines cannot just switch airplanes, their buying power is considerably low.
On the other hand, passengers are very price sensitive and they most often patronize low-cost airline. Airlines are devising strategies such as the frequent flyer program to help them to retain customer’s loyalty (Anon, 2010). Threats of substitutes: This can depend on whether the travel is local, regional or international. For local and regional travel, passengers might decide to take bus, car or train instead of flight. Whereas for international travel threat of substitute is very low as travel by sea is very inconvenient and land travel is not feasible at all (Anon, 2010).
Competitive Rivalry: The airline industry is highly competitive as there are many carriers targeting limited passengers. Also, there is little product differentiation among the airline as virtually all airlines used the same seat arrangement (leg room) and compete for the available landing space in the airport thereby contributing to the high competitive pressure in the industry (Anon, 2010). PART B: Boeing VS Airbus Introduction The aircraft manufacturing industry consists mainly of a duopoly, Boeing and airbus and they compete on all fronts in other to outwit each other.
In other to compete successfully, they have developed a kind of parallel strategy, each focusing on a specific niche market with a pair flagship product which are not in direct competition with each other. This type of differentiation between the two manufacturing company will help to stave off competition in prices in the short term, which is desirable when focusing on the increase in purchasing power gained by low cost airline. In this section, the differentiation strategies of both Boeing and Airbus will be analyzed in details with respect to the global market forecast of the two aircraft manufacturing industry (Jang P et al, 2009).
Current Market Position Boeing: Boeing is one of the major market leaders in the commercial aircraft manufacturing business and presently controls about 54% share of the market (Jang P et al, 2009, Taylor and Tillmanns, 2002). Boeing success came when they started manufacturing aircraft that carried more than 100 passengers in 1966 with the introduction of 747 Jumbo Jet. This revolutionizes the concept of air travel and ushered in mass air travel (Aboulafia, 2002, Taylor and Tillmanns, 2002). Boeing recorded a tremendous growth in 2006 with revenue of about 33. %, this is after a slow down due to the difficulties they had in the 1999 as a result of efficiency problem and the failed launch of project speed Sonic Cruiser which affected their long term strategy. But with the launch of the revolutionary B787 Dreamliner Boeing, which is built on composite material such as carbon, Boeing is back on track as it helps them to refocus on their strategy of mid-sized airplane that is able to compete on the forecasted increasing point-to-point travel on the long haul (Boeing 2006, p. ). Airbus: Airbus was established in 1970, as a consortium under the French law as a “Groupe d’Interet Economique” (Marketing Consortium) and managed the European aerospace and its aim is to acts as the major competitor to Boeing which merged with McDonell Douglas a former competitor and became the only existing commercial airplane manufacturers. The parent companies and their shareholding are Aerospatiale Matra (37. 9%), Daimler Aerospace (37. 9%), British Aerospace (20%) and Construcciones Aeronauticas (4. %) – performed dual roles as owners and industrial contractors. Prior to 2001, airbus functioned as a marketing consortium and major decisions required a unanimous approval by the shareholders. Airbus was under obligation politically as well as economically, to distribute its production work among its shareholders. Then in 2001 the company was re-organized into a single fully integrated limited company, which aimed to streamline its operation among national boundaries, improve speed of production and reduce cost. The market increased remendously from 31% in 1996 to 57% in 1999 but due to inability to meets the backlogs of demand, its market position dipped sharply in 2000 to 47%. With the reorganization in 2001, Airbus recovered it market share and maintained its market position around 50% on a yearly basis (Ivan, 2006). Current Aircraft Market as it Affects Boeing and Airbus The current aircraft market looks grim to airline manufacturers as it has been hit by a global downturn. The International Air Transport Association (IATA) announced a net loss of about 17 billion dollars in 2001, this is more than the industry has made in its entire life.
In order to stay afloat, Boeing in 2002 made a dramatic cut in production by half and Airbus followed similarly by making a cut of one fourth (Taylor and Tillmanns, 2002). And more recent after the fuel volatility and the economic crisis that rocked the airline industry, revenue dipped significantly in the airline industry to just about 11% for the top 150 airlines in the world resulting in revenue of about 500 million dollars the lowest in over a decade (Dunn, 2010). The economic crisis saw to a dwindling demand for new aircraft by the airline industry and this affected both Boeing and Airbus significantly.
But happily, things are beginning to look up for the airline industry as the economy gradually recovers and these has resulted in Boeing and Airbus beginning to see a soaring orders for airline from the airline industry. For instance, in 2009, Boeing received a full-year total order of 530 for aircraft while Airbus received a full-year total order of 513 (The Peninsular, 2011). Future Airline Industry Outlook Globalization and international trade has led to wealth creation and distribution which has led to increase in demand for air travel.
Both Boeing and Airbus foresee an airline industry that is ready to witness a dramatic growth in the next 20 years with a firms forecast of average revenue-perpassenger growth of 4. 8 and 5. 3 percent respectively (Cannegieter). This revenue is projected to come from lost-cost airlines offering lower prices for airfare. Additionally, both firms agree that Asia will lead the forecasted growth as a result of the present economic growth in that region with an average Asian purchasing power on the rise. However, they disagree on how this growth will occur and on what part to follow.
While Boeing places emphasis on growth in low-cost point-topoint carriers, with the believe that while higher capacity is desirable, that the airline industry will continue to augment large fleets with smaller aircraft which enable more quicker and frequent flights. On the other hand, Airbus lay emphasis on flights between very large cities and predicts that as airports (hubs) reached it capacity, it will necessitate the need for airplanes to have the capacity to fly more passengers at a go, thereby reducing the traffic in and out of the airport.
These differing strategic views, resulted in Boeing foreseeing growth in demand for single and twin aisle aircraft, that have the capacity to service point-to-point and connecting routes, whereas Airbus foresees a growth in demand for very large aircraft to service major routes (Aboulafia, 2002, Taylor and Tillmanns, 2002). PESTEL Analysis of Boeing and Airbus Strategic Direction In this section a detail analysis of Boeing and Airbus strategic choices using PESTEL framework will be carried out.
Political: Airbus, being a consortium of European countries, EU has a high stake in making sure that the corporation remain successful and can compete favorably with Boeing. Airbus in the first place was established with a “launch aid”, which is a form of government subsidies given to aid companies to survive and compete in an industry that already have giants with well established distribution network and economies of scale (Hit, Ireland and Hoskessin, 2009). EU has continued to support the company through tax breaks, loan guarantees, financing and research and developments.
The EU views the assistance as necessary due to the pivotal role the company plays in the European economy. Airbus generates huge economic activities such as jobs, technology development, and ancillary companies which the company activities create. This huge subsidies paid to Airbus from the European Union has strained relationship between EU and US. The US government and Boeing contend that the subsidy is no longer necessary and very unfair as it stifles competition.
They view Airbus as the leading manufacturer of aircraft and the recent launch of the A380 that Airbus can stand on their own and no longer need government aids. The European Union and Airbus responded that the US governments also offer similar subsidies to Boeing, why challenging a tax break of $3. 2 billion from the state of Washington. This political imbroglio has led to both Boeing and Airbus instituting a case at World Trade Organization since 2004 (Heymann, 2007). Economical: The aircraft industry is projecting a two trillion dollar growth in the nearest future, hich will requirement equivalent of 16,600 new aircraft in the system. As the economy of emerging and developed countries grows, with more and more middle class earners emerging, air traffic is expected to attain a growth of about 5. 3% between now and 2023. In additions, the cargo sector is also expected to grow in bounds. With these forecast and future prospect, the EU continues to subsidies Airbus operation without letup, as the assistance has been a major instrument that has nabled Airbus to become a global leader in the aircraft supply industry. Airbus has been able to access government loans since inception in 1970 which the company is not required to pay back if the aircraft program is unsuccessful. This subsidies, has help Airbus to shift risk away from the market to the government unlike Boeing. This has resulted in great benefit as it can develop any program it wanted and gives discount to whomever it want without fear of shareholding opting out.
Boeing on the other hand rely heavily on shareholders cannot do the same thing as airbus; rather Boeing has resorted to outsourcing the assembly of parts in order to reduce cost of production. Boeing has entered into what it called an “Offset agreement” with countries such as India and China by outsourcing its assemblage of part to companies in these countries where labor is much cheaper, in return they have obtained aircraft sales from these countries, which is one of the fastest growing market for airplane in the world. This has resulted in more flexibility, better cash flow and control for Boeing.
These two different strategies and sources of income for both Boeing and Airbus has enabled them stay afloat despite the gloomy economy around them (Jang et al, 2009). Social: Airbus prides itself as a company that thinks and plans ahead while at the same time listening to their passengers, customers and employees while designing and building more efficient and comfortable aircrafts. Airbus corporate culture thrives on innovation, free thinking and creativity at the same time pursuing internationalization and globalization.
The diversity of culture and language has given the airline a competitive advantage as various nationalities and background work together, why harnessing skills from ethnic mix can aid development and the ability to penetrate market that are hitherto impregnable (financial Times Business, 2004). Whereas Boeing corporate strategy focuses on “working together as one global enterprise for aerospace leadership”, has led Boeing in emphasizing team work and recognizes that it competitive advantage and strengths will comes from collaboration from its human resources.
Boeing also encouraged the sharing of ideas and has collaborated with many partners in the design of the 787 with the hope to reducing cost (Jang et al, 2009). As a tradition, Boeing changed the name of its 7E7 to 787 and it is assumed that the change could have been as a result of Chinese associating 8 with luck and more so, the sound of 8 is similar to the Japanese sound for money. This has resulted in both Chinese and Japanese airline industry ordering a large chunk of the 787. The trends in the air travel industry are now driven by price consideration, which negate the original driving factor of convenience.
This has led to the surfacing of many low-cost airlines; this has resulted in passenger lowering their test and demand for service. Even business travel is on the decline due to the global economic crises which has shaken the existence of various institutions to their foundation (Matlack and Holmes 2004). Technological: Both Boeing and Airbus spend substantial amount of money in research and development. The EU launch aid of 15 billion dollars has aided Airbus in carrying out substantial research. EU government also invest in European R&D sector to air various industries more especially aircraft industry.
US government also has similar investment in R&D using agency such as NASA, FAA and Department of Defense (DoD) to carried out research that greatly help Boeing development. For instance, Airbus estimated to have spend about $billion dollars in the design and development of A380 while Boeing estimated spending equivalent of $9 billion dollars in the design of 787 dreamliner (Donnelly, 2005). Airbus developed a system it called fly-by-wire which an electronically controlled flight system that made it easier to handle aircraft thereby enhancing safety.
This technology has enabled Airbus to develop a generic family of aircraft with similar cockpits designs and handling characteristics. This has resulted in a simpler, shorter and highly cost effective method of training crew members and enabled pilots to be able to fly more than one type of airplane such A318 to A380 simultaneously (Donnelly, 2005). Boeing on the other hand, moved to replacing the use of metal fuselage with carbon fiber fuselage which is lightweight and four times stronger than steel.
A metal fuselage aircraft consist of rectangular panel fasten together by tens of thousands rivets, whereas the entire tubular carbon fuselage can be baked in one piece hence reducing the number of section that can be fixed with fasteners. Boeing 787 is the first of its kind that was built with over 70% carbon composites (Batey, 2010). Carbon fiber being lightweight is very fuel efficient and cost less to produce compared to an all metal aircraft. By using carbon composites in building 787 Dreanliner Boeing intend to implement a price leadership strategy in order to compete favorably with Airbus A380 super jumbo (Jang et al, 2009).
Boeing has also invested on a product it called connexions which provide internet access to airline passengers (Taylor and Tillmanns 2002). Environmental: Environmental change has become a burning issue as it affects every fiber of our social and economic life. Many industries have been brought to focal point as their perception is shaped by their posture towards the environment. Both Airbus and Boeing faces similar environmental issues. Environmental issues facing the aircraft industry are: such greenhouse emission from gas and fuel, hazardous and non-hazardous waste, consumption of raw materials etc.
The aircraft industry has been under pressure from government to take measures that are aimed at reducing emission and other environmental issues such as noise level. For example the EU has established the EU-Emission Trading system to charges aviation industry a certain amount for environment degradation caused by their action (European Commission, 2006). The US government through its Federal Aviation Administration (FAA) has also established noise abatement regulation that regulates noise level allowed by the aviation industry (International Labor Organization, 2000).
To meet these challenges, Boeing is developing fuel efficient system that consume less fuel and produce little carbon footprint. Boeing is also in the process of developing biofuels from algae and feedstocks that reduces emission. Boeing has also developed a process of recycling and recovery of airlines that have reached the end of their useful life into other useful products, thereby reducing waste of materials (Boeing, 2010). Airbus on the hand has established and Environmental Management System (EMS) that proposes a continuous environmental improvement and performance throughout the entire life cycle of their products (Airbus, 2006).
Legal: Since 2004 EU and Airbus and US government and Boeing have been locked in a trade disagreement at the World Trade Center (WTO) over government funding which each side is claiming to harm competition. This is the biggest ever trade dispute brought before WTO and could harm the industry in ways not imagined (Heyman, 2007b). Boeing and US government claimed the EU and Airbus have broken the bilateral agreement reached in 1992 for the EU to discontinue the “launch aid” offered Airbus when the company has reached a relative parity with it major rival Boeing.
The EU on the other hand refused to yield to the US unless US is willing to cut various forms of aids such as tax reliefs offered to Boeing (WTO, 2010). This litigation could lead to fine from WTO thereby affecting the operations and profitability of the aircraft industry. Porter’s Five Forces Model Analysis of Boeing and Airbus Strategy Direction Threats of Entrant: The airline manufacturing industry is not easy for new company to enter as it requires huge capitals, extreme skilled labor, acquisition of needed facilities, sophisticated support industry, government regulations and the fact that profit does not accrue immediately.
For instance the design of 787 aircraft required about 800, 000 hours in processing time on a Cray supercomputer (Batey, 2010). Another inhibiting factor is the time needed to reach break-even point. It is estimated that it takes approximately about ten years for manufacturers to earn a real profit from the sale of aircraft as it need to sell about 400 to 500 aircraft at a rate of 50 per year to break-even. (Hill, Jones and Galvin, 2004). With these difficulties it is nearly impossible for new entry into the commercial aircraft manufacturing industry; hence threat of entrance to both Boeing and Airbus is low.
However, the Chinese government has approved the launch of Chinese Commercial Aircraft (CCA) with initial take-off capital. The target is to have aircraft designed and manufactured in China rolling out by 2020 as it is forecasted that the Asian airline industry is to record an increase in demand for commercial aircraft of about 10, 000 by 2025 with China alone demanding over 2, 000. The emergence of a new Chinese player in the industry pose a great threat to both Boeing and Airbus as the Chinese has acquired needed skills from cooperation with both Boeing and Airbus and it is set to harm their dominance in that sector.
Analyst has estimated that it will take at least 15 years for China to build its first plane and it could take another 20 years for Chinese plane to pose a real danger to the already existing industry leaders. Therefore Boeing and Airbus still face a very low threat of new entrant in the meantime which might change in the future (Jang et al, 2009). Threat of Substitute: The threat of substitute is generally very low as alternative means of travel are more or less constrained by distance. For instance speed train can travelled only within a geographical location.
It can only serves as alternative to air flight within that locality, but when regional travel is involved airplanes has no desirable substitute as the cruise ship travelled at a speed not convenient for business travelers and even holiday makers. Telecommunication is another factor that has affected travelers especially business travelers whole prefer to use Internet based telephony to conduct their business meeting instead of physical contact. These alternatives can reduce the frequency of travel and can lead to reduction in demand for aircraft by airlines industries thereby harming manufacturing industry (Jang et al, 2009).
Buyers Bargaining Power: The bargaining power of buyer can either be high or low depending on the circumstance prevailing at a particular point in time. During the coming crisis, the bargaining power of aircraft is high is the there was dwindling orders from airline industry. This led airlines to try to streamline their operations and reduces their investment, hence increasing the competitive pressure on the manufacturer as one try to outwit the other by offering low cost aircraft or better services to their clients hence reducing the switching cost.
Alternatively, the bargaining power of the airline industry is very low, because the switching cost from one manufacturer to the other is very high as both Boeing and Airbus aircraft has different control mechanism and for an airline industry that is used to operating with Boeing to switch to Airbus require involves a lot money in training the pilots and the air crews to learn the new system. Furthermore, Boeing and Airbus designed their aircraft with families at heart and therefore offers nearly the same onboard services such legroom, entertainments and other facilities.
Therefore there is no real reason for changing from one manufacturer to the other (Hill, Jones and Galvin, 2004). Suppliers Bargaining Power: The bargaining power of suppliers is relatively low as there are only two buyers in the industry: Boeing and Airbus which can exert very strong influence on the few available suppliers. But as the industry grow and with government regulation, suppliers can become very strong. Suppliers defaulting on the agreed supply time have on many occasions affected launching of new aircraft as in the case of 787 Dreamliner which was delayed beyond the ime it supposed to be launched due to suppliers not meeting their deadline. Airbus experienced similar situation with A320 which was delayed to the extent that some airline industry withdrew their orders and this serves as a cost to the manufacturer. Boeing chief executive Scot Carlson captures the reason for delay very much he said “unplanned rework for sections delivered to us. Parts availability from remaining structural pieces to fasteners to other small parts has affected the sequencing of the work in the factory, compounding these delays. (Jang et al, 2009). Competitive Rivalry between Boeing and Airbus: There is a very strong rivalry between Boeing and Airbus the two major players in the commercial aircraft manufacturing industry. Boeing has maintained a dominant grip in the sector prior to 1990, but that has changed with Airbus has consistently increased their market share in the last decade to the point of even taker market leadership from Boeing. In 1990, Boeing got 45 percent order of the industry total, Airbus got 34 percent and McDonnell Douglas got 21 percent.
But after the merger of McDonald Douglas with Boeing in 1996, Airbus obtained almost 50 percent of the total industry order. Years later between 2001 and 2004, Airbus had 55 percent total industry orders (Hill, Jones and Galvin, 2004). Proposed Aircraft by Boeing and Airbus In line with their strategic direction of hub and spoke and point-to-point, both Airbus and Boeing have designed aircraft of different capacity and range to meet their strategic focus. The proposed aircraft are discussed in this section.
Airbus A380 Super Jumbo The A380 was originally slated for launch into operation 2006 but was delayed until October 2007. The A380 is super jumbo in size and has the capacity to carry over 550 passengers onboard and a range of 8, 000 km and offer operating cost lower than 747 by between 15 to 20 percent. The facilities provided include “lounge spaces…gyms, bars, and games arcades; children’s play areas; duty free shops, and food outlets…conference rooms and private cabins,” (Morrocco, 2001). This aircraft target a niche of carrying over 500 passengers.
Airbus sees this aircraft as a necessity, slot restriction due to available space in the airports the number of aircraft that can take off and land at a certain time is limited, and increase in passengers leading to overcrowding of the airport. Operating a few aircraft will reduce operating cost for the airline industry. The downside is that many existing airport runway and packing space are not able to support the landing and taking of such a huge aircraft, therefore there is need to redesign the runway and packing space for the aircraft.
Another downside is the delay in its takeoff time due to waiting for arrivals of connecting flights and the time it will take passengers to switch flight. Also it can lead to security risk because the enormous task involved in handling so many passengers at a specific time can be daunting. On the positive sides is that the large number of seat decreases the cost per passengers and the less number of crew members also decreases the cost operation for airlines leading to more profit (Bowermaster, 2002).
Boeing B787 Dreamliner B787 Dreamliner is designed with passengers who prefer speed, frequency and direct point-to-point connection in mind. The B787 is built with lightweight carbon composites and it very fuel efficient, swift and can reach a cruising speed of Mach 0. 85 which equivalent to 289. 2465 m / s. because of its small size, B787 can access small regional airport with a range that can extend to 16, 000km with a carrying capacity of about 280 passengers. The B787 is pressurized for low altitude and with a high cabin humidity, passengers are assured of arriving their destination unruffled (Verghese, 2010).
Analysis of Boeing and Airbus Strategic Direction The design of the A380 and B787 are targeted at a niche market and not intended to replace any of the existing ones. The A380 is designed with the aim to capture size market from Boeing who currently controls the size market with its largest aircraft B747. Boeing on the other hand foresee that in the next 20 years the forecasted demand of about 977 large aircraft, only about 343 will be aircraft with capacity of 500 or more seat.
Airbus on the other hand does not foresee a significant need for point-to-point long distance aircraft and therefore has not invested on the design of such aircraft. The B747 because of its speed and low fuel cost will take some market share from A340 (Taylor, 2002). Because these two aircraft are targeting niche market, there is no incentive for direct competition on these products. Hence both aircraft manufacturer are going on a differentiation strategic direction, although presently, they compete directly on similar products, such as the A340 with the 767 and 777, and the A320 with the 737 and so on.
These products differentiation strategy eliminate to some extent competition based on price between Boeing and Airbus which is an importation factor considering the rise in low-cost carrier and passengers demanding for cheaper flight (Taylor, 2002). With shrinking economy, travel market is likely to favor B787 because it’s fast turnaround time and a very manageable size which will not fly empty as a result of chief executives and business travel resorting teleconferencing and leisure travelers preferring Television instead.
In July 2009, at the Farnborough as B787 was about making its first international appearance, Boeing announced the receipt of 860 orders already which can be regarded as a commercial coup and unprecedented in the history of commercial aircraft manufacturing. Airbus on the order hand has fared badly as it has received cancellation of orders from many airlines that had placed order for A380. Qantas airline received it first order in 2008 two years behind expected delivery and therefore delay orders for A380.
Virgin, Ups and FedEx followed similarly either cancelling or delaying their order, yet Airbus is not giving up and in July 2008 at Farnborough air show, it received 55 orders of aircraft from Etihad airline (Verghese, 2010). Conclusion Understanding the external business environment plays a vital role to organization’s survival in this modern business environment that is enmeshed in stiff competition. Understanding the environment can be a very daunting task to management. Happily, various framework and models have been developed to assist managers on how they view the business environment they operate in.
The airline business as well as the aircraft manufacturing business is affected by macroenvironmental factors such as political, economical, social, technological, environmental and legal (PESTEL) factors. Also Porter’s five forces model (threats of new entrants, bargaining power of buyers, bargaining power of suppliers, threats of substitution and competitive rivalry) can be used to analyze the external economic factor and to arrive at strategic decision by organization competing against different external forces.
It is pertinent to note that understanding the external economic factors will help place firm in a strong market leadership position. Use of PESTEL and Porter’s five forces analysis of the airline industry, have help both Boeing and Airbus to arrive at a strategic decision that help them to focus on a niche market and avoid direct competition based on price. References Anon (2004) The Orange County register: “WTO dispute between Boeing and Airbus” Anon (2007), Fact Sheet: World Industry Statistics, International Air Transport Association (IATA), [Online] available on www. ata. org, accessed 21 January 2011 Anon (2008), Form 41 Airline Traffic and Financial Reports, US Department of Transportation Bureau of Transportation Statistics, Anon (2009), Airline Industry Overview, Global Airline Industry Program, [Online] available on http://web. mit. edu/airlines/analysis/analysis_airline_industry. html accessed 18 January 2011 Anon (2010), The Industry Handbook: The Airline Industry, Investopedia ULC, [Online] available on http://www. investopedia. om/features/industryhandbook/airline. asp accessed 22 January 2011 Aboulafia R (2002), “Airbus and Boeing Race to the Bottom,” Aerospace America Industry, pp. 20-22. Airbus (2006) Environmental Policy Towards Eco- Efficiency, [Online] available on http://www. airbus. com/presscentre/pressreleases/press-release-detail/detail/airbus-produces-itsfirst-environment-social-and-economic-report/news-browse/11/news-period/1292654533/newscategory/press_release/ accessed 15 January 2011 Batey, A. 2010) Boeing’s billion dollar gamble: Inside the world’s biggest building, where the new 787 Dreamliner plane is built, Daily Mail [online], 7th Sept. Boeing (2006), The Boeing Company Annual Report 2006 – Charting the Course, Chicago Boeing (2010) Reducing Our Environmental Footprint, Environmental Management, 2010 Enviromental Report, [Online] available on http://www. boeing. com/aboutus/environment/environment_report_10/boeing-2010-environmentreport. df accessed 22 January 2011 Bowermaster D, (2002), “Boeing Reconsiders Viability of 747 Jumbo Jet,” Seattle Times, May 26, 2002. Cannegieter R, Long Range vs. Ultra High Capacity: “Ranging Capabilities…” FLEET PLANNING, Aerlines Magazine e-zine edition, Issue 31 1 Dempsey P (2008), The Airline Business, Institute of air and space law McGill University Donnelly S (2005) “Cliff Hanger”, Time; January 24, 2005, 166(4) 36-37 Dunn, G. (2010) 2009 World Airline Rankings: Lessons learned, Airline Business [online] 22nd July.
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