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Discussion surrounding global alliances operating in the airline industry
Growth of the aviation industry
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Boeing/Airbus Case Analysis
Competition in the Commercial Aircraft Business
With only a few large companies across the globe (Boeing, MD, and Airbus), the commercial aircraft industry essentially exhibits the qualities of an oligopolistic competition with intense rivalry. Here is an analysis of competition in the commercial aircraft business using Porter’s Five Forces.
Figure 1: Porter’s Five Forces Applied to Aircraft Industry
Barrier to entry: - High barriers to entry, to a certain extent help understand the risks involved in operating in the aircraft industry.
1. Initial Capital Requirements: - Huge initial development period and very high investment costs, tooling costs, and WIP are necessary even before the company starts producing and selling aircrafts. It takes over 5 years of development and production costs before company starts earning revenues. Commitment to buy and investments from launch customers are crucial.
2. Economies of Scale: - Company had to have a substantial amount of orders in order to earn economies of scale. Otherwise the cost of production would usually be more than the selling price of the aircraft.
3. Government Role: - Government is an important stakeholder for the aircraft business. Government subsidies and protection play a huge role in the aircraft business. (Discussed later in the write up)
4. Learning Curve: - The learning curve is very steep. Companies learn from year by year’s development and by internalizing the lessons learned. Boeing was formed in 1916 and Airbus in 1970. Both these companies have progressed step by step learning from each product and technology they have built and also from their failures.
Buyers: - It’s essential for aircraft manufactures to have a global...
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... to be more expensive than profitable.
3. Alliance with Airbus: - May never be possible given their histories. Certainly isn’t good for the air travel industry.
4. Technology Innovation: - Boeing should carefully analyze the market to evaluate the trends in the airline industry and aggressively invest in a new product line (top dog strategy) that could counter Airbus’s A380.
5. Government Support: - Boeing might seek government intervention in preventing Airbus from being able to sell to American airline companies thereby reducing the market availability for Airbus. But this could prove counter productive for Boeing as EC governments may retaliate in a similar manner
Of the four mentioned strategies, I think the most feasible one would be either the price leadership or the technology innovation strategy. Maybe Boeing could engage in both these strategies simult
Executive Summary A key factor in determining a project's viability is its cost of capital [WACC]. The estimation of Boeing's WACC must be consistent with the overall valuation approach and the definition of cash flows to be discounted. Note that this process is a forward-looking focus and is laden with uncertainty. It is how the assumptions are modeled that many costly mistakes can be made.
Right now these are just small threats to Boeing. But as things advance, there is no telling what the new market trends will be and what new directions a company like Boeing must take. It is important to continually perform SWOT analysis and stay nimble. Overall, the Boeing Company has stayed strong in the aircraft field and with record profits for the past two years it looks like they are achieving their goals. Boeing has had to change their business direction over the past 100 years in order to stay on top of the aircraft industry.
The Boeing Corporation is one of the largest manufacturers in the world. Rivaled only by European giant Airbus in the aerospace industry, Boeing is a leader in research, design and manufacture of commercial jet airliners, for commercial, industrial and military customers. Despite enjoying immense success in its market and dominating an industry that solely recognizes engineering excellence, it is crucial for Boeing to ensure continued growth through consistent strategy formulation and execution to avoid falling behind in market share to close and coming rivals.
...leader. Certainly, it has to take into account the implications of completion from both the direct and the indirect competitors. That is why EasyJet centers on the cost management strategy and the differentiation strategy (Hanlon, 2007). Through an analysis of EasyJet Airplane company strategies and performance, it is clear that they are ambitious and strive for the best. They not only survive in an industry that is intensely competitive, as shown through the analysis by Porter's Five Forces, but also succeed in terms of offering their customers the best that they have to offer in terms of value for money. The advantage this airline gains over its oligopolistic competitors stems from flexible ticketing and complete access to all primary routes. However, in keeping airline industry, there is room for improvement and growth as the analysis using Ansoff Matrix reveals.
The Five forces in the airline industry can be easily broken down, firstly the threat of new entrants. Over the last 10 years there has been a huge influx of new low cost companies in Europe such as “Easyjet”, or “Ryan Air” as the low cost niche slowly becomes more full we are seeing less and less entrants since the market has become saturated. The better an airlines brand image, such as British Airways being a recognised name and the use of frequent flier or airmiles schemes the less likely a new entrant with lower prices will be able to break into the market. Next we have Supplier and buyer power in the industry. In terms of the suppliers of aircraft the main two are Airbus and Boeing and so it may seem that this few suppliers would have a lot of power over the airlines, but intact it tends to just increase the competition between the suppliers as they fight for major contracts with the big airlines. The bargaining power of customers in the
Describe the competitive position of each of the major firms in the aircraft manufacturing industry. Which segments are they pursuing? What is their business-level strategy?
The market structure for the aerospace sector is oligopolistic i.e. there are few enough firms to enable barriers to entry to new firms because of various reasons such as huge capital investments and high technology. Hence, Boeing and Airbus, which are the two giants in the aerospace industry, have virtually split the market. When Airbus was first set up, it faced a lot of competition from Boeing. This civilian aircraft pact allowed the European government to take protectionist measures by providing various government subsidies to its developing high –technology industry (i.e. Airbus) so that it could compete with Boeing in the international market.
As aviation matured, airlines, aircraft manufacturers and airport operators merged into giant corporations. When cries of "monopoly" arose, the conglomerates dismantled.
The aviation industry is very difficult to enter, and the threat of new entrants is low. The first and major threat to entry is the initial capital requirements. The development period is over 5 years, with very large initial investment costs, parts costs, and wages are necessary even before the company earn revenues and sell aircrafts. The economies of scale, when the airline company has a substantial order, there are reduction in cost because of discounts on large orders. The new entrant suffers a significant cost, which is a disadvantage compared to established companies. Another risk for the new entrant, the extra supply of products for the substantial order, will decrease prices. The result, the new entrant will
Over the last 50 years The Boeing Company has shown itself to be an industry leader in the fields of technology and putting their vast physical assets to use. Boeing has been on the forefront in innovation in both commercial aviation, and airplanes used for defense purposes. Whether it was the introduction of the first modern airplane with dual engines when the Boeing 247 was unveiled or introducing new standards of efficiency into their business model Boeing seems to have always been one step above the competitors. So while Boeing was hurting their competitors on one end they decided to go and become more efficient on the other end. So not only were they the leader in technological innovation they improved the productivity of their largest business unit all while decreasing the amount of space they used. When a company is hitting on all cylinders like Boeing seems to be it becomes hard to compete, and their competitors are likely finding that out first hand.
Maintenance cost- Maintaining the old aircrafts is the biggest weakness for the airlines as they have to spend a huge amount on their maintenance by which their additional overhead cost raises.
The airline industry is a costly business to partake in especially due to the cost of fuel and technology needed to operate the airplane. With EasyJet internationalizing into Africa, it had the notion of facing new competitors, however, with the finances (see appendix) it possesses and the famous identity of its brand, made the threat of being a new entry within the Nigerian market low. However, a big threat would be if local Nigerian airlines were to reduce its prices then EasyJet might be at risk because the local airlines have the necessary equipment and knowledge to operate in its region.
Any change in the GDP is often reflected in airline usage and the fuel also costs almost 50% more in just 5 years. According to Antonio Vázquez, the chairman of IAG and Iberia, `competitiveness is one of the most important problems being faced by the airline industry in Europe. Vazquez mentions that this makes alliances vital for the growth and development of airlines – whether with high-speed rail links or with other airlines. He states Iberia’s merger with BA as an example where both airlines have managed to gain immense benefits from the merger despite the fact that they haven’t integrated
The 777 would be manufactured differently than previous Boeing aircraft. Various efforts would be undertaken to increase demand and reduce manufacturing costs of the 777 in an attempt to create positive cash flows sooner. To increase demand, the 777 would be the first fly-by-wire Boeing aircraft, a feature Boeing’s competitors already added to their aircraft. Boeing also made an effort to get their large customers involved in the design process from the beginning in an effort to increase its competitive advantage and long-term demand for the 777. As a cost saving measure, the design and manufacturing teams would work together to create a detailed simulation of the manufacturing process that would reduce the cost of “improvements” that were often made during manufacturing thereby reducing the overall manufacturing cost. Furthermore, Boeing would invest in more training for its engineers on the new CAD system. This new manufacturing process would lead to large capital outflows in the short-run. The challenge for Mr. Shrontz is determining whether these capital investments will lead to an increased return on equity for Boeing.
International airlines are greatly affected by trade relations that their country has with others. Unless governments of the two countries trade with each other, there could be restrictions of flying into particular area leading to a loss of potential air traffic (e.g. Pakistan & India)