Case 10.

REVOLUTION IN THE JUMBO JET MARKET: AIRBUS BOEING IN 20011

Just as the 747 introduced a new way of flying compared to what was in existence before that, we are absolutely convinced the A380 will create that same quantum change in the way people fly...2 (Airbus)

Having proclaimed victory in one competitive arena, Airbus was now committed to the biggest pie in the industry: intercontinental jumbo jets. In June 2000, Airbus announced the launch of the super jumbo A380. The A380 would enable Airbus to enter the category of over 400-seat aircraft where Boeing's 747 had been the only plane in that arena. This was Boeing's territory, the lucrative Boeing 747 market. When it first introduced these jets in 1966, Boeing sold 747s for about $18 million each. In 2000, the price of the very same airframe (albeit with some improvement and renovations) was about $150 million apiece. One industry analyst estimated that Boeing's 2000 profit on each 747 sold was about $45 million. Boeing and Airbus had two different strategies for the over 400-seat aircraft market. Airbus was betting that what the world needed was a 555-passenger jumbo jet, and would like to offer in this double-deck aircraft various amenities (a casino, hairdresser, showers). Boeing, on the other hand, speculated that there was not market for such planes and instead intended to launch a stretch version of the 747-400. Which strategy makes sense?

AIRBUS INDUSTRY Airbus Industry was formed in 1970 as part of the GIE (Groupe d'Interet
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Student Claire A. Breviere prepared this case under the supervision of Professor Subhash C. Jain. Airbus' top salesman John Leahy, interviewed in 2000.

Economique), an entity of French origin under which separate companies pooled their interests and activities for mutual gain. All of the financial accounts associated with the Airbus programs were incorporated into the partners' own accounts, therefore the GIE did not report its financial results. A major reason for Airbus' existence was the desire of several European governments to have a viable aerospace industry. The initial two members of the consortium were France's Aerospatiale and West Germany's Deutsche Airbus. Later British Aerospace and Spain's CASA joined as well. EADS (European Aerospace and Defense Company) was created in 2000 with the fusion of French Aerospatiale Matra, German Dasa and Spanish Casa and Airbus became a subsidiary company of EADS. The EADS made Airbus as flexible as any multinational company, able to switch production to where it was most efficient, thereby enabling significant cost-savings. Before, without company status, Airbus had struggled to raise the money it needed to compete with Boeing and to rebut the attack from the American government that Airbus was heavily subsidized by European governments and thus it had an unfair advantage against Boeing. The EADS realized revenues of 24 billion euros in 2000, and 70% of its sales came from Airbus. In 1970, discussions on cooperation stemmed from perceived opportunities in the short- to medium-range market. At that time, over 60% of the world's airline traffic flew routes less than 2,500 nautical miles and the short to medium-range airliner market was virtually untapped. From the A300, delivered in 1974, was the world's first twin-engine wide-bodied aircraft, seated 240 to 345 passengers, and had a range oi' 2,000 to 4,000 nautical miles. Later, the A300 was improved when the consortium launched the A3 10 in 1983, with its smaller and longer-range wide body. Recognizing the importance of having a range of aircraft "families" available to fill various niches

for customers, Airbus followed with the A320 in1988, a small-capacity, short-range craft. The A330 and A340, first delivered in 1993, were to compete with the MD-11 and 747 on medium- to long-range routes, and were a way to access the expected increase in intercontinental (especially trans-Pacific) travel. Only one category where Airbus was not present in the year 2000 was the over 400-seater. Exhibit I shows the whole family of Airbus aircrafts. Airbus aircraft boasted technological advances over U.S. planes. Technological firsts for Airbus on the A320, A330 and A340 included, among other features, active controls, variable camber wing, fly-by-wire, digital auto-flight systems, side-stick controllers, and advanced composite materials in the aircraft's structure. Later on several of these technologies were incorporated into the new versions of Boeing and MD designs like the 777 and MD-11. Over the past decade, Airbus had steadily eaten into the home market of Boeing. Today, about 10% of the big commercial airplanes flying around the US were Airbus models. They expect to have 20% of the market share by 2005. Had either of them developed a twin-engine wide body aircraft, it would have avoided head-to-head competition with the 747, and might have prevented Airbus from getting off the ground. Instead, over the past 20 years the European consortium had encroached on Boeing's dominant market share. Boeing used to account for well over two-thirds of orders, but it was being challenged in most parts of the market by Airbus. Exhibit 2 shows that Airbus had already bitten into Boeing's dominant position, and the two now share this market almost equally. Exhibit 3 presents in a matrix the aircraft offerings of both Airbus and Boeing, and shows how Airbus offered an aircraft in every market segment, except the over 400-seater. Boeing now reigns supreme only with the largest 747s.

THE BOEING COMPANY The Boeing Company was founded in 1916 in Seattle, Washington. In 1987 Boeing bought rival and leading military aircraft maker McDonnell Douglas Corporation for $16 billion, This merger made Boeing the world's largest aerospace company and second largest defense supplier, and combined the last two remaining commercial jet airplane manufacturers in the United States. In 1999, Boeing realized revenues of $58 billion, 60% of which came from its commercial airplane activity. Boeing was also America's largest exporter (40% of its sales were foreign sales.) The order level of aircraft was 640 aircrafts in 2000 (530 commercial aircraft), rising from 620 in 1999 (490 commercial aircraft.) Boeing also produced military aircraft and products for NASA and other aerospace organizations. Boeing developed a family of basic models for a wide variety of flight ranges and passenger capacity (see Exhibit 4). From these, derivatives could be developed to expand markets and to extend product life cycles. In 2000, Boeing's airframe families included the 727 and 737, both short-range aircraft; the 757 and 767, both larger, medium-range craft; the 777, a medium- to long-range wide body aircraft that Boeing successfully launched in 1995; and the 747, a massive wide body airplane that could carry 400 passengers and could fly farther than any other commercial airliner. With the increase of competition with Airbus, Boeing had to improve its efficiency in the 1990s. In March 1998, it introduced a new system to control the supply and stock of all of its parts in order to cut inventory costs. At the same time, Boeing made efforts to trim the number of special features it had to produce for different airlines. The several production changes Boeing initiated included halting the

manufacture of its MD11, -80, and -90 lines (from Mc Donnell Douglas), and cutting back its workforce. Boeing announced in May 2001 that it would move its headquarters out of Seattle, where it had been founded 85 years earlier. It considered Chicago, Denver or Houston and finally chose Chicago.

AIRBUS IN 2000 Within 20 years, Airbus managed to become the major competitor of Boeing with an airplane in each category except the 747 segment. The 747 had been in production for 30 years, could carry in its current version 416 passengers, and had earned the company $20 billion in profits since its first flight. Because there was no price competition, Boeing realized significant profits from this sector. Airbus suspected that Boeing was able to use its monopoly profits on the 747 to keep down its prices for smaller aircraft, thereby snatching away Airbus sales in the other categories. Airbus had been content to attack the 747 from below, with bigger versions of its long-range A340, but now it was looking to challenge the Boeing 747's monopoly over 400-seaters. When it came to new products, few businesses were more perilous than making civilian aircraft. Aeroplanes cost billions to develop and were designed to last a generation. Boeing bet the company when it launched the 747, spending $2 billion on the project, or 2 1/2 times the value of the firm. Airbus had been looking at the jumbo jet since 1993 when Boeing and the four Airbus Industry partners launched the Very Large Commercial Transport study to jointly produce a large airplane. The Boeing-Airbus collaboration lasted two years, after which the companies concluded they would not build anything together. People from Airbus felt that this joint study

with Boeing was a ploy to prolong the 747's dominance. Airbus decided to make its entry in the over 400-seater segment and announced the launch of the A380 in June 2000. The A380 had a proposed sticker price of between $213 million and $225 million. There would be dual rows of windows running the full length of the fuselage. Airbus believed that a 1200 passenger megaliner and 300 freighters could be sold, while Boeing said that the market was only 500 planes deep. Fifty orders were needed to launch the project. Airbus got 66 firm orders from several airlines like Air France, Dubaibased Emirates, Singapore Airlines, Australia's Qantas Airlines, and International Lease Finance Corporation of the US. But airlines that rushed to become launch customers got fantastic discounts from manufacturers. Therefore, Airbus would need to sell 229 aircraft before it could earn a profit, and must sell at least 780 before it could recover the investment made not just by Airbus, but by its suppliers and governments. In effect, EADS was betting the company on this aircraft, because civilian aircraft accounted for about 70% of the company's turnover. The first version of the A380 would be a 555-passenger jetliner. Its final configuration would be finalized at the end of 2001, its first flight in mid-2004 and entry into service in October 2005, with delivery of the first freighter version two years later. Configured all in economy seats, a stretched A380 could carry 800 people. Launch-aid subsidies by Airbus member governments would account for around $4 billion of the $12 billion that it would cost to develop the aircraft. Launch aid would be paid back to the governments, as a royalty on sales. Thus governments could end up making money if the aircraft sold well, but taxpayers did bear some of the risk.

THE AIRBUS A380

Airbus wanted to differentiate itself from Boeing by inventing a new way to fly. The A380 would allow airlines a really competitive advantage in passenger comfort. The main deck of the A380 would be the widest in the world. Its floor area would be 49% more floor space and 35% more seats than the 747-400. So airlines could make their seats wider and provide each seat with its own separate armrest, which was a frequent passenger demand. It would also be looking to add a grand staircase (as opposed to the spiral staircase in the 747) for passengers assigned to the upper deck. The A380 would also have a lower deck on which lavatories, sleeper cabins, crew rest area, business center, a health spa or a casino could be located. Airbus had been considering various interior design proposals for the interior of the aircraft, such as a stylish lounge with a cocktail bar and very modern seating, eating, and sleeping pods. The intention has been to have as much space for passenger amenities as for seats, to make the aircraft more comfortable and attractive to passengers in economy, club or first class. The competition was also an exercise in probing the limits of gigantism. The A380 would use advanced materials like carbon composite. It would fly at about Mach 0.85 cruise speed, and would have a 555 passenger-capacity across two decks. The basic version would list for $216 million. The A380 would allow savings in operating cost. Airbus claimed the A380 would have 17% lower operating costs than the 747-400 and, on certain Asian routes, Airbus even claimed that the modern A380 design would save airlines up to 45% on operating costs compared with the 747. Exhibit 5 gives the technical characteristics of the A380, airliner and freighter version, Demand for very large aircraft was a function of several factors- air travel

growth, and also basic airport infrastructure. If the air travel market grew but airport capacity (particularly the availability of slots) did not, the extra passenger base would have to be accommodated by flying larger aircraft. Air traffic was expected to grow by 5% per year. The inexorable growth in the global number of passengers over the next 20 years would require a larger plane on popular routes. Airbus was predicting a 127% increase in passenger numbers over the next 20 years. Exhibit 6 shows forecasted aircraft deliveries by 2018 for the various segments. Asia would be the place where growth would be the highest. The populations of most Asian countries were much more concentrated than those of European or North American nations. The Asian region is more congested than any other, making it more difficult to boost airport capacity than in other regions of the world. So there was a need for larger capacity airplanes. It was a good sign for the future of Airbus that Singapore Airlines ordered A380 planes, because it was one of the most respected airlines in Asia, which would encourage other Asian companies to buy the A380. According to Noel Forgeard, president of Airbus, only about 20 airlines, half of them in Asia, were seen as potential customers and only 10% of the total number of planes would be super-jumbos. But they would be worth 25% of the market, or $300 billion. The Impact of curfews also favored larger airplanes. Airlines couldnt simply space out their flights through the day. Market demand and the early-morning and latenight curfews at many European and Asia/Pacific airports made this not very realistic. Only 10 new airports were planned to open within the next 15 years while only 18 airports had approved plans for growth, according to Airbus. But there was still an uncertainty about airport developments. If the market growth was as rapid as

Airbus forecast, even taking into account very ambitious expansion plans, slot constraints would be severe. Airbus had to examine different technical challenges like to fulfill international certification requirements to insure safety. Airplanes must permit evacuation of all passengers within 90 seconds. Airbus was working on the appropriate slides for evacuation of the people of the upper deck. Airbus had to face also the challenge of lack of airport capacity. Airbus met with 60 major international airport executives to make sure that the new jet would fit airport size specifications. Airbus said that the A380 would be compatible with existing airport infrastructure. The A380 would be only 72 to 73 meters in length. It was only when aircraft was beyond 80 meters in length that it became difficult for most airports to handle it. The runways, taxiways and aprons that had been designed to be large enough for the 747 should then be alright for A380. Airbus would also have to face the challenge of maintaining the same level of convenience for the passenger. A large airplane might lead to increased congestion in departure lounges and swarms of individuals collecting their luggage and longer boarding line-ups. Airbus claimed that the A380 would operate to the same ground schedule as a 747-400, which was 90 minutes. To address for example the issue of boarding line up, the A380 would allow simultaneously loading on both the upper and lower decks, by having doublewide doors and double-wide stairs.

BOEINGS RESPONSE After the announcement of the launch of the A380, Boeing proposed the 747X stretch program. The airplane would be based on the design of the 747 (which was designed in the 1960s), and would seat 522 (compared with the 416 seats on the largest of

today's 747's). Boeing didn't want to launch a totally new model because it estimated that there was not enough demand for large airplanes. Boeing estimated that only 330 aircraft larger than 500 seats would be in service by 2019. Indeed, Boeing estimated that the market for more than 400-seater aircraft (including all 747 passenger variants) would not be that much larger than Airbus' estimates for the above 500-seat market alone, amounting to only 1,905 aircraft in 2019. Since Boeing didn't receive any order from the airlines for the 747X stretch, it decided in March 2001 to drop the project and launch the Supersonic 20XX instead (see Exhibit 7). But Boeing announced that it was still working on a larger version of the 747, even if it would not be as big as the 747X stretch. The new aircraft would only add eight more seats to the existing 747-400, which seats 416 people in a typical configuration, and would have a range of about 8,400 miles. But it would enable the plane to fly an additional 775 miles without affecting its speed or cargo capacity. Which strategy will work on the over 400-seater segment? Airbus' strategy to launch the A380 or will Boeing prevail in the over 400-seat segment with their extension of the 747-400? Only time will tell who is right.

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Exhibit 1

The Airbus Family of Aircraft

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Exhibit 2

Aircraft orders by passenger seats, 1998

Exhibit 3 Matrix of aircraft by range (000 nautical miles) and number of seats + A 380

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Exhibit 4

Boeing Family Commercial Aircraft (Source: Boeing Annual Report 2000)

Source: HBS 9-391-106

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Exhibit 5 A380 Airliner characteristics

Exhibit 6 Total aircraft deliveries to 2018 by seat capacity (in $bn)

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Exhibit 7 The Sonic Cruiser 20XX Boeing sees the market for super jumbo jets more fragmented than Airbus. A fragmented market is a market that does not rely so heavily on major hubs to distribute regional or domestic traffic, but more on non-stop direct flights between cities large and small. This trend is encouraged by the ongoing liberalization of the Asian/US market. The Sonic Cruiser 20XX will fly at 95% of the speed of sound, or about 20 percent faster than today's jets. The plane, which will seat 175 to 250 passengers, will fly at higher altitudes than conventional jets and save about one hour for every 3,000 miles it travels. This will be equivalent to an hour off for transcontinental flights in the United States, three hours on flights from California to Europe. Analysts have estimated that the cost of developing the 20XX will be between $9 billion to $10 billion (the cost of developing the stretched version of the 30-year-old 747 was $4 billion). It will have twin-engine jet and a double delta-shaped wing with a horizontal stabilizer near the nose. Many of its design features must still be worked out. The Sonic Cruiser should be built with conventional materials and be powered by the same engines now used on Boeing's wide body 777. The 20XX should not enter service until the end of the 2010. But there are some limits to the 20XX. Boeing pretends that even though the 20XX will fly faster, it will still have about the same operating costs as today's jets. But most experts agree that a new supersonic jet built today would still be too expensive for most airlines to operate. It also could not fly at top speed over land because of the noisy sonic boom and would fly so high that it would damage the ozone layer.

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