Collision Course in Commercial Aircraft: Boeing-Airbus-McDonnell Douglas

Group 8 November 8th, 2011 Colin Kelliher, Tyler Schenk, Toney Meyer, Mike Love, Shea Clark, and Mike Sodic

Commercial Aircraft Industry: Porters Five Forces

Threat of New Entrants (Low)
Launch Costs High R&D costs, capital investment needed before production begins and revenues earned (12-14 years after decision to launch) Three major manufacturers: Boeing, Airbus Industrie, McDonnell Douglas Relationship Business Airlines worked closely with manufacturers during development phase and large initial investments and standardization of airlines fleets for maintenance and spare parts purposes caused long relationships and low substitution While there are other modes of transportation, Air travel is the fastest mode Concentrated aircraft market with high competition Three major manufacturers implemented competitive financing plans to edge out the competition in the price category

Substitutes (Few Number)

Competitive Rivalry

Bargaining Power of Suppliers (Low)

Concentrated market and government support gave the three manufacturers negotiation power
Three Major manufacturers in the market Pricing Competition: Financial plans such as Deferred Seat Plan Walk Away Lease and Trade In Airlines had large initial investment and usually purchased entire fleet from one manufacturer Usually continued purchasing from manufacturer to maintain standardization over fleet and for maintenance and spare part purposes.

Bargaining Power of Buyers (Moderate)

European Competition
Airbus Industrie
Entity of French origin under which separate companies pooled their interests and activities for mutual gain Desire for several European governments to develop and have a viable aerospace industry
Focused on opportunities in the short to medium range market Focused discussion around the development of the A-300worlds first twinengine wide bodied aircraft

Airbus aircraft claimed technological advances over U.S. planes 70-90 % of R&D costs for technological development were financed by money from the participant nation governments Government assistance helped to offset currency difficulties faced by subsidiaries Relied on non EC suppliers such as CFM and GE for substantial aircraft parts Used financial packages to undercut U.S. aircraft prices to gain greater market share
Deferred seat plan

U.S. Competition
Boeing
Americas largest exporter and was worlds largest private commercial aircraft manufacturer By 1990 manufacturing capacity was 70% of worldwide demand Military aircraft and space programs helped promote development of new technology and products Federal military grants afforded Boeing lower capital expenditures and helped them move down learning curve on commercial planes Developed family of basic models for wide variety of flight ranges and passenger capacities Cancellation of 7J7 around 1990 helped strengthen cash position allowing marketing team to aggressively sell on a global scale Boeing now had the financial means to compete on the basis of price: Targeted carriers such as United Airlines and British Airways who refused to relinquish as customers at any price. Reputation for rapid, worldwide service and parts replacement for customers Contracted with three Japanese heavy manufacturers to build 20% of the airframe of 777 wide body Largest defense contractor: majority of revenues came from U.S government orders in 1991 Financial trouble: Both government and commercial sectors faced high competition and low demand MD used basic frame from DC-9 and DC-10 to develop the MD-11, which was filled with technical and manufacturing difficulties, and was also incapable of reaching its advertised maximum range MD approached Airbus about potential joint venture, which would have given them a larger market share than Boeing, however negotiations broke down over disputed production processes

McDonnell Douglas Corporation

Trade Conflicts and Government Intervention

International Agreements
GATT Agreement on Trade in Civil Aircraft set forth an international legal framework governing and concerning areas such as elimination of duties, technical barriers for civil aircraft and a ban on government interference on sales or purchases Large Aircraft Sector Understanding in July of 1985 sought to remove government financial assistance by using interest rates to equilibrate customer financing opportunities

Embassy assistance
Assistance provided to foreign manufacturers in exchange for contracts Example: French government activities in India to secure Airbus contracts

Government Subsidies
U.S. governments provided indirect subsidies to manufacturers through development and production contracts for military products with commercial applications Since its inception over 13 billion had been given to Airbus in government subsidies for development and production expenses

Trade Conflict Recommendations

European viewpoint
The EC should continue to defend European interests only to the point that is does not affect other areas of trade and commerce with the U.S. Airbus should continue to appease to their participating governments to back their operation and maintain the subsidies level at 45% Airbus should continue to use subsidies and implement more financial packages to fund R&D and expand market share If Airbus expands to include more countries in their organization, they can increase their market share, disperse some risk, and increase funding for R&D

American viewpoint
In response to Airbuss relentless drive for market share, Boeing and MD should continue to lobby the U.S government to force European negotiators to disclose the true amount of subsidization and show violations of the GATT Boeing and MD should also lobby the U.S. government to lower the subsidies level to 25% so as to offset Airbuss increasing market share Boeing and MD should also concentrate funds to develop technologically advanced planes that are more efficient and cheaper than Airbuss. If the U.S. manufacturers utilize creative selling and legal government subsidies they can retake market share.