For the last five years both Boeing and Airbus have been in a head-to-head battle to market their new airplanes; the midsize, efficient 787 “Dreamliner” and the super large and comfortable Airbus A380. Despite their differences both planes can be seen as substitutes as not many airlines will buy both models.
2004 was a tense year for Seattle. Once again, the company’s leaders’ forecasts — 200 B787 Dreamliners to be sold by the end of the year— failed to come true. As the company scrambled to restore its reputation from a defense procurement scandal, CEO Harry Stonecipher started a trade war with Europe — and was then forced out in disgrace over sexual indiscretions. Toby Bright became the latest of a line of Boeing commercial directors to be cast out . The strategies of Boeing, the long standing industry leader and that of its European rival Airbus are quite different. While they share a view of market size, there is one big difference in the two companies’ market forecasts. Airbus sees a very large 20-year market for widebody aircraft, accounting for 10 percent of deliveries and 22 per cent of revenues: 1,250 passenger aircraft and almost 400 freighters. Boeing latest market forecasts suggest that airlines will need barely more than 300 passenger aircraft larger than the B747, and around 400 aircraft in the B747 bracket. In fact, Boeing expects that the average size of commercial aircraft will decline as airlines turn to intermediate and large twin engine aircraft for long-haul routes, bypassing hubs. That view has in turn driven the companies’ major investments. Airbus has pumped more than $12bn into the A380 program, including overruns. Boeing never reveals development costs (much less overruns), but the company has spent a large budget on the development of the new Boeing 787 as can be derived from the new factories and production tools that were developed to support production of the new airplane.
The 787 is a modest successor to the iconic 747-400 and the 767. It’s smaller and more fuel efficient. The Airbus bets on the trend that airlines will carry more passengers in fewer flights. The Airbus A330 on the other hand is a very large super jumbo that can carry 555 seats in a three class and 853 in a single class configuration. This is 35% more than the Boeing 747. Singapore Airlines, the first that received an A380 even has super first class “cabins” on board that have their own beds.
Boeings outsourcing strategy versus Airbus in-house production.
For Boeing one of the major challenges to overcome was the unprecedented outsourcing of production. To keep cost down, third party contractors were used to design and build a large amount of the tens of thousands of parts, a majority of which would be made out of carbon fiber instead of the more traditional aluminum alloys. Direct fixed costs would be larger than those of Airbus because of the specialized new machinery needed to work with carbon fiber but variable and labor cost were expected to be much lower because of the outsourcing and off shoring of production. Boeing set up an internet based “world community” to design the then unnamed 7E7 that later would be renamed 787. Top level design however was done in Everett as Boeing holds closely to it’s store secrets. In this Boeing is moving from an airplane manufacturer to a designer and system integrator like Apple Inc. Applying a lean manufacturing process could help expand margins like it did for Toyota which uses a similar process for its cars.
The wings are manufactured by Japanese companies in Nagoya, e.g. Mitsubishi Heavy Industries; the horizontal stabilizers are manufactured by Alenia Aeronautica in Italy; and the fuselage sections by Vought in Charleston, South Carolina, (USA), Alenia in Italy, Kawasaki Heavy Industries in Japan and Spirit AeroSystems, in Wichita, Kansas, (USA).Final assembly employs just 800 to 1,200 people to join completed subassemblies and integrate systems. Despite cost savings the long supply line proved vulnerable, causing delays in production. The 787-8, which previously was listed at $148-$157.5 million was re-priced tot $157-$167 million after re-evaluation of cost and materials. The production delays not only cause penalties to be paid to the airlines but devaluation makes payment in dollars less attractive for the Seattle Company. In economic terms: every dollar not in the Boeing account makes production more expensive. Production abroad is becoming more expensive as well because local wages and fees have to be paid in higher value local currency.
Airbus took a different approach by keeping development largely in house. By keeping supply lines relatively short and designers closer together it was able to develop faster. Major structural sections of the A380 are built in France, Germany, Spain, and the United Kingdom. Due to their size, they are brought to the assembly hall in Toulouse in France by surface transportation. Since all EU countries except the UK settle accounts in Euro’s there was much less currency risk. Airbus is still acting like a traditional manufacturer that keeps everything in house. Even so, the multinational roots of the company make it difficult to work as a team. The French and German engineers often misunderstood each other. The delays in manufacturing were more caused by extra demands from the airlines and hold ups in the design process then from the production process itself. A big difference with the Boeing approach is that by manufacturing in house, labor cost is more a fixed part of the total cost then a variable part. Boeing can pick and choose whom to hire for its production, Airbus doesn’t have that luxury. Meanwhile, the two competitors continue to sell head-to-head in every market segment. In single-aisle aircraft, Airbus has no plans for any major changes to the A320 family.
The aircraft market is in fact a duopoly with very high barriers to entry. So far, Boeing’s success with the B787 has not changed the fact that the two rivals’ market shares are close to 50:50; and both, recently, have stated that profits matter more than market share. Both companies, also, share an optimistic overview of the market — projecting well over 800 new aircraft deliveries a year for the next 20 years, a market that Airbus values at $1.9 trillion.
As an American company, Boeing has a big competitive advantage; the military. There is no threat that the US government will negotiate away Boeing’s access to Washington state tax breaks or to any of the foreign markets that are depended on US military aid. Airbus simply can’t compete to replace the USAF’s tanker planes. Airbus has to compete in each European country separately if it wants to sell its aircraft for military purposes.
Conclusion
Offloading part production is a sound method for producing complicated products like aircraft. Boeings outsourcing has become more flexible because production can be switched to other factories or countries if bottlenecks occur. Asia is a large target market for Boeing and as such the availability of production and maintenance facilities close to the customer are a good sales argument. There are drawbacks however. Airbus can invest in improving processes — for example, using lasers rather than physical gauges to inspect composite skins — test it on one product (the A320, for instance) and then apply it immediately to the rest of the line and thereby amortize its costs. Boeing can’t do that because their sub-contractors are more or less independent, outside the company. Boeing’s aircraft have no parts in common while Airbus strives at inter-operability of parts.
Airbus decision to develop an airplane in an entirely different segment of the market was both risky and necessary. Boeing sought to take advantage of a truly globalized world while Airbus wanted shorter production lines and more control. Off course nationalistic factors should also be taken into account. As a crown jewel of the American industry, the US government is bound to support Boeing as much as possible. Japan has been a close ally of the US since WO2 and could be used as a safe outsourcing destination. Airbus on the other hand has EU politics to contend with. Its decision to spread out production between EU member states is as much a political as a strategic decision. At the launch of the A380, French president Chirac, Prime Minister Blair from the UK, The German Chancellor Schroeder, and Prime Minister Zapatero from Spain were all present, underlining the political commitment to make Airbus a successful business. This was much to the dismay of the US officials who (officially) oppose any kind of government intervention in the marketplace.
For Boeing to be proved correct the A380 must not attract substantial new business and existing customers must cease buying the aircraft beyond their initial orders. This does not seem likely. The duopoly will continue until a third player enters the field. This player might well be of Chinese origin .
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