Boeing Final Analysis
Virgil Del Mundo | Rebecca Meyer | Daniela Nita | Constantin Sofronie | Gana Tarrant
The Boeing Company offers products from three major areas: Commercial Airplanes; Defense, Space & Security; Shared Services Group; Boeing Capital Corporation. This analysis will focus on the commercial airplane manufacturing business of Boeing, one of the biggest in the world. Boeing describes itself as “…the world's largest aerospace company and leading manufacturer of commercial jetliners and defense, space and security systems.”
The Boeing Company was established in 1916 by William E. Boeing in Seattle, Washington. Growing from a small airplane manufacturer to the large commercial airline jet creators today, it was not always so lonely in its market. Throughout the years, Boeing has experienced plenty of competition, in the United States specifically, of which were companies such as Douglas Aircraft Co., McDonnell Aircraft Corp., North American Aviation and Hughes Aircraft. Over time, these companies have merged together to create what Boeing is today. Boeing’s main businesses are supported by nine corporate functions: Business Development & Strategy; Communications; Engineering, Operations and Technology; Finance / Boeing Capital Corporation; Human Resources Administration / Shared Services Group; International; Law; Office of Internal Governance and Government Relations. With its corporate office in Chicago, it employs over 170,000 people across the US and 70 countries. Boeing’s largest market competitor is Airbus, a European co-op developed by France, Germany and Britain; founded to strengthen Europe’s aviation technology.
SITUATION ANALYSIS
Industry Analysis:
Currently, Boeing and Airbus dominate the commercial aircraft industry, in what is effectively a duopoly, with other smaller players – Brazil’s Embraer, Canada’s Bombardier Russia’s Suckhoi and Ukrain’s Antonov- competing marginally and in niche markets (under 130 passenger capacity and regional jets) not covered by the two.
In the near to medium term China’s ambitions to get a strong footing in this industry with its COMAC (Chinese government aircraft manufacturer – a consortium of different Chinese state owned and funded companies) manufacturer, will mean that the Status Quo will be challenged and COMAC will compete for market share in the narrow body, single aisle jets, challenging Boeing’s 737 and Airbus’ A320 family of airplanes.
The commercial airline industry has been in a lull for the last couple of years, but with emerging markets air travel expected to expand strongly in the next 2 decade, we believe there will be good growth in the aircraft demand in the long-term (based on industry’s own forecasts as well as other analysts forecasts). Furthermore, the renewed focus of the airlines industry globally on fuel efficiency (fuel is one of the biggest cost for the airlines), and an aging fleet will also spur demand for replacement aircrafts. In addition, the air passenger demand is expected to grow in the coming years.
In the near term, due to the European crisis and other economic trends, Boeing finds that its European sales and air cargo sales will not expand in the near future. In the long term, the company’s latest forecast and current market outlook 2012-2031, estimates that total demand in the next 2 decades to be 34,000 airplanes at a value of more than 4.4 trillion USD. Thus the number of airplanes in service will double from a 19,890 to 39,780 airplanes, accounting for new and replacement demand. These figures are in line with forecasts from rival Airbus as well as newcomer COMAC (the new airframe manufacturer entrant from China). One third of this demand will come from Asia Pacific with an estimated 12,030 new airplanes deliveries for this region and with the lion’s share to go to China alone, with 5,260 airplanes. About ¾ of these will be single aisle airplanes (B 737 / A320 family) and Boeing’s competition for these contracts is likely to be very stiff. Not only are the already established airplanes manufacturers like Airbus, Embraer and Bombardier in the mix, new companies in China and even Russia are also likely to enter and compete in the 70 to 190-seat airplane market over the next few years. Many will also probably get subsidies from their governments.
A special note here about the partnership that the Canadian’s Bombardier Co. has set up with COMAC since 2008. Bombardier has put intellectual property concerns aside and has agreed to give the Chinese manufacturer design authority on major supplied parts for its newest designed, narrow body, single aisle, airplane, the CS series. Bombardier will contribute expertise on China’s first long-haul jet, the C919 and the two new airplanes will share a cockpit design that will make them complementary products when they are ready for sale to airlines (1-citation from NY Times Article). This will definitely help the Chinese speed up on the learning curve and enable them to complete their proposed jets development sooner rather than later (as it has been 10 years in the development stages and has seen delays after delays so far).
The commercial airline industry is affected by many external factors including oil prices, customer buying habits affecting air cargo, passenger flight demand (both personal and business), alternate modes of transportation, and potential emerging markets.
We analyzed how Boeing uses its influence and expertise to exploit particular characteristics of their industry. We used Porter’s five force model of competition includes the threat of new entrants, power of suppliers, power of buyers, the threat of product substitutes, and the intense rivalry among all competitors.
Threat of New Entrants: The overwhelming high startup cost associated with developing, engineering, and manufacturing new airplanes is a major prohibitive factor. New entrants in the market must expect to invest in extreme costs. In the 1990’s developing the Boeing 777 were as high as US 5.5 billion dollars (Rodgers1996, cited in Hill, Jones & Galvin 2004).
Another prohibiting factor is the long lead-time until reaching a break-even point. A manufacturer must sell between 400 and 1000 aircrafts at a rate of 50 sales per year in order to regain their initial investment after developing a new airplane product. This means that companies who enter the market must be prepared to wait for at least 10 years before showing any profit from their incredibly high investments. (Dertouzos, Lester &Solow 1990, cited in Hill, Jones & Galvin 2004). The new manufactures will also face the high capital requirement and a daunting task of government regulations and permits.
Despite all the obstacles for new entrants, Boeing now is facing the threat of a new entrance by the Chinese aircraft manufacturing company, COMAC. Through partnerships, technology transfer and its own R&D, COMAC will acquire the know-how and capabilities to eventually manufacture large passenger planes that will compete with both Boeing and Airbus. As of November 2012 their two jets in development the ARJ-21(a twin engine, single aisle, 70-105 passenger short range) and the C919 (a twin engine, single aisle, 150-190 passenger short to medium range) have been plagued by delays but will eventually attack head on sales of the B 737 and A320 family of single aisle, narrow body airplanes, which are the biggest sellers for both Airbus and Boeing. In their latest presentation at the Zhuhai Airshow (November 13-18, 2012) the Chinese company has officially unveiled the C919 with 100 firm orders and plans to have the aircrafts designed, built and rolling off the assembly line to a launch airline partner by the year 2016 or early 2017. The emergence of a strong Chinese manufacturer could loosen Boeing’s unprecedented lock on the commercial jet aircraft market. Thus the competition in the airplane industry will only intensify in the future (medium-long term).
Threat of Substitutes: The competitive threat of substitutes in commercial transportation is moderately low. There are several travel alternatives available such as cruise liners, trains, buses, privately owned cars, or choosing not to travel at all.
The failure to meet scheduled delivery times and the Asian Economy, gave birth to a new substitute, The World Aircraft Leasing Industry. Airlines Companies started to switch to Airbus claiming to have a more technologically advanced Fleet. Their older aircrafts were sold to other smaller airlines or to the leasing company. This trend threatened Boeing’s bottom line as the competitive leasing companies started to grow in the Asian marketplace. An analysis reveals that the portfolio size of leased aircraft reached $115.42 billion in 2004, and is has advanced to $143.93 billion by 2008. Surface transportation, especially by rail, also raised important substitution issues. While air transportation requires vast airports located away from the metropolitan centers, railways can provide city center arrivals and departures. Switching from airlines to the bullet train or high-speed railway could threaten Boeing’s aircraft manufacturing demand.
Bargaining Power of the Suppliers: In this industry, the bargaining power of the suppliers is low. Though the OEM suppliers are few in numbers in the industry, this leads Boeing to have a high degree of control over the suppliers. Typical are those who provide a multitude of different components for the airplane industry alone, starting from exterior to interior parts for the aircraft to whole subassembly parts of planes . However, for most of these suppliers there are no other buyers for their unique manufacturing service but Boeing. Thus their bargaining power is low. On the other hand since Boeing serves a variety of different markets, they have a diverse supply chain. Boeing has to depend solely on these suppliers. So, with expansion of Boeing’s production capacity and ramp up in production, it is likely to affect and be affected by the capacity of the suppliers’ production, financial power and investment capacity for retooling and expansion. Hence, this could be a problem for Boeing to lose its established bargaining power. The bargaining power of the aircraft buyer is considered low, on a scale of 1 to 10, it is ranked as 3.
Bargaining power of the customers: Both Boeing and Airbus’ aircrafts are designed and manufactured with the “family concept.” It then becomes convenient for airlines to maintain and retrofit their fleet of airplanes. (Cohen n.d., cited in Hill, Jones & Galvin 2004).) While both aircraft suppliers employ the family plan, each is unique and different to the other. If an airline company wishes to change from one of these major players to the other, it is difficult at best.
Of notable importance is the airplanes’ control system. These systems serve as functionally giving the pilots complete in flight and ground control of the airplane. Even though these control systems do the same thing, they are designed and manufactured in completely different ways. Each system is unique to the aircraft company’s individual design and manufacturing specifications. They are for all practical purposes, completely different. If an airline that has been using Boeing’s aircrafts has decided to switch over to Airbus, they would require each and every pilot to attend three weeks of extensive technical and hands on training. Another consideration is the pilot’s years of service with a fundamentally different airline operational control systems. This onsite training is very expensive and must be calculated into the costs and expense associated with changing aircraft manufacturing suppliers. As the change of aircraft suppliers by an airline company can be very costly, it will affect the bottom line for some time to come. This should be factored into any corporate recommendation or decision.
One practical solution for a change in aircraft suppliers is to purchase a whole new fleet of competitive aircrafts. Many off the additional training and implementation costs could be wrapped up in the purchase agreement. For these reasons, the purchase of a few new aircraft from a competitive manufacturer would not prove to be very cost effective. The bargaining power of buyer is considered moderate to low and on the scale of 1 to 10, it is ranked as 3.
Competitive Rivalry between Existing Players: Even though, Boeing and Airbus have in effect a duopoly status and define most of the big airliners market, while on the much smaller markets for regional jets (50-140 seats), and business jet airplanes they marginally compete with Brazilian company Embraer and Canadian company Bombardier, the rivalry Airbus presents is considered very high and is ranked 9 on a 1 to 10 scale. This intensive competition with Airbus in the cargo and commercial aircraft market could threaten Boeing’s bottom line and pressure its profitability. The loss of market share can cause a major impact on Boeing’s performance and its future development as the commercial aircraft production business is critical to Boeing because as it covers more than 65% of its total income.
In the late 90’s and early 2000s Airbus made a strategic decision to pursue market share (at any cost -discounted sales prices that resulted in razor thin margins or even losses) while also making a bet on a super jumbo airplane (A380 - the biggest in the world). So far Airbus’s drive for market share at the expense of profits has had a measurable impact: its sales are up, but profits are down, (with net losses for 5 out of the last 6 years) while Boeing’s airplanes sales and earnings have flat lined (2-citation Seeking alpha). On the R&D front, Airbus has been making great efforts in collecting market research and pursuing development of new products. For example, Airbus organized customer focus groups to generate customer friendly design for the super jumbo A380. They spent 5.9% of their total revenue on R&D in 1999 and have continued that direction through the current year. But so far their A380 super jumbo jet has seen anemic sales and the jury is still out on its commercial success.