Commercial Airline Industry

8/6/2019 Commercial Airline Industry

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CASE STUDY ANALYSISCOMMERCIAL AIRLINE INDUSTRY

AIRBUS & BOEING

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GROUP 9

KUNAL BHUSHAN 09PG384PRACHI JAIN 09PG157

PRAVEENA R 09PG097

SHONE THATTIL 09PG110

RITIKA SINGH 09PG165


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COMMERCIAL AIRLINE INDUSTRY

Industry Analysis:

Porters Five Forces:

Threat of New Entrants: - Low

y Existing loyalty to major brandsy Incentives for using a particular buyer (such as frequent shopper programs)y High fixed costs in R & Dy

Scarcity of resources (technical )y High costs of switching companies (maintenance cost)y Government restrictions or legislation

Power of Suppliers: - Moderate to high

y There are very few suppliers of a particular producty There are no substitutesy Switching to another (competitive) product is very costlyy The product is extremely important to buyers - can't do without it

Power of Buyers: - low

y As there are only two suppliersThreat of Substitutes: - Low

y No other way to flyCompetitive Rivalry: - High

y A mature industry with very little growth; companies can only grow by stealingcustomers away from competitors

y Only two players in the market


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Competitive Structure

Duopoly

SWOT Analysis:

Strengths:

y Few competitory Risk sharing with suppliersy Profitable after sales servicey M

any buyery Government support

Weakness:

y Huge R & D expenditurey Longer breakeven periody Few suppliersy Long lead time

Opportunity:

y Globalization has resulted in greater demand for connectivityy More and more people now traveling by airlines for businessy Governmental assistance for promotion of tourism and thus fueling air travel

Threats:

y Terrorismy Oil pricesy Tension and outbreak of wary Fear of double dip recession in west


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AIR BUS

Airbus S.A.S. is an aircraft manufacturing subsidiary of EADS, a European aerospace company.

Based in Toulouse,France, and with significant activity across Europe, the company produces

around half of the world's jet airliners.Airbus began as a consortium of aerospace manufacturers.

Consolidation of European defense and aerospace companies around the turn of the century

allowed the establishment of a simplified joint stock company in 2001, owned by EADS (80%)

and BAE Systems (20%).After a protracted sales process BAE sold its shareholding to EADS on

13October 2006.

Airbus employs around 57,000 people at sixteen sites in four European Union countries:

Germany,France, the United Kingdom, and Spain. Final assembly production is at Toulouse

(France),Hamburg (Germany),Seville (Spain) and Tianjin (China).Airbus has subsidiaries in

the United States, Japan and China.

History

Airbus began as a consortium of European aviation firms to compete with American companies

such as Boeing, McDonnell Douglas, and Lockheed. While many European aircraft were

innovative, even the most successful had small production runs.In 1991, Jean Pierson, then CEO

and Managing Director ofAirbus, described a number of factors which explained the dominant position ofAmerican aircraft manufacturers: the land mass of the United States made air

transport the favoured mode of travel; a 1942 Anglo-American agreement entrusted transport

aircraft production to the US; and World War II had left America with "a profitable, vigorous,

powerful and structured aeronautical industry."

Formation ofAirbus

Airbus was formally established as a Groupement d'Interet Economique (Economic Interest

Group orGIE) on 18 December 1970. It had been formed by a government initiative between

France,Germany and the UK that originated in 1967.The name "Airbus" was taken from a non-

proprietary term used by the airline industry in the 1960s to refer to a commercial aircraft of a

certain size and range, for this term was acceptable to the French linguistically.


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In 1972, the A300 made its maiden flight and the first production model, the A300B2 entered

service in 1974. Initially the success of the consortium was poor but by 1979 there were 81

aircraft in service.It was the launch of the A320 in 1981 that guaranteed the status ofAirbus as a

major player in the aircraft market - the aircraft had over 400 orders before it first flew,

compared to 15 for the A300 in 1972.

Transition to Airbus SAS

The retention of production and engineering assets by the partner companies in effect made

Airbus a sales and marketing company.This arrangement led to inefficiencies due to the inherent

conflicts of interest that the four partner companies faced; they were both GIE shareholders and

subcontractors to the consortium.The companies collaborated on development of the Airbus

range, but guarded the financial details of their own production activities and sought to maximise

the transfer prices of their sub-assemblies.

Civilian Products

The Airbus product line started with the A300, the world's first twin-aisle, twin-engined aircraft.

A shorter, re-winged, re-engined variant of the A300 is known as the A310. Building on its

success,Airbus launched the A320 with its innovative fly-by-wire control system.The A320 has

been, and continues to be, a great commercial success. The A318 and A319 are shorter

derivatives with some of the latter under construction for the corporate biz-jet market (Airbus

Corporate Jet).A stretched version is known as the A321 and is proving competitive with later

models of the Boeing 737.

Manufacturing

The final assembly lines ofAirbus are in Toulouse (France) and Hamburg (Germany).A fourth

final assembly line, for the Airbus A400M, is in Seville (Spain). EADSAirbus will be opening

an assembly plant in Tianjin, China for its A320 series airliners, to be operational in 2009.

AVIC I and AVIC II will be EADS' local partners for the site, to which sub-assemblies will be

sent from plants around the world.


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SWOT Analysis:

Strength:

1. Technological Leadership2. Family of planes3. Decentralized production4. Centralized marketing

Weakness:

1. High upfront cost and longer lead time as the sector takes longer time from design toproduction

2. Not able to meet production schedules3. Too diverse location and assembling

Opportunity:

y Governmental assistance as more and more governments are providing subsidies toattract tourists.

y Demand for more frequent nonstop flights.y Growing volume of transcontinental trafficy More and more countries deregulating the aviation industry

Threats:

y Terrorist Attacks: This could impact on the number of passengers that travels around.y Jet Fuel Prices: Increase in fuel prices could also increase the cost of production.y Suppliers falling behind schedule designing for projects: This could lead to cost overruns

as it could hold the production and assembly lines.


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Corporate level strategies:

This set the direction how airbus was going to target the customers.It came into being during the infancy

period of the company.It gave the broad area of focus:

y Technological Leadership- You cannot compete with dominant player if you donot offer themsomething different. This was the crux behind which the company focused aggressively.

y Family of planes- Borrowed the idea from Boeing and took it several steps ahead.All derivativesof a given model shared maintenance, training and operation procedure, as well as replacement

parts and components the use of such derivatives enable airline carrier to cut cost.

y Decentralized production- Took sub contracting many steps ahead owned no assembly plant nordid any of the consortium members owned any plant.

y Centralized marketing- the company targeted on the core activities , and marketing was givenhighest importance.

Four Ps:

Product:

y Technologically advanced new of its kind Aircraftsy Low maintenance cost

Price

y Competitive pricingPlace:

y US markets, Japanese market and emerging economies.Promotion

y Attractive payment options (part payment & leasing)y Attractive loans for purchase


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Growth Phase 1985 to 1998:

The focus of the company shifted on: -

y Improving financial resultsy Cost cuttingy Increasing salesy Developing new planesThus the basic idea shifted from just acquiring new markets to making the company more

profitable.

Business level strategies:

Product developmentwent on keeping these things in mind: -

y Material application in order to reduce the dead weight of the aircrafty Flight control systemy Aerodynamics twist at the roots wingsy Both long distance and short distance platforms

The main objective was to squeezing the leading product Boeing 747 from above and below.

Sales:

Change of sales procedure and strategy was mad to make the buyer feel more connected with the

company.

y Replaced European sales team with native born Americany Streamlining all pricing decisionsy Selling the products at merits rather than on attractive financial deals


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CostCutting:

Due to weakening of dollar the European currencies appreciate against it, this lead to the

products of airbus becoming less competitive. To overcome this the company went on a

ambitious cost cutting program which concentrated on: -

y Deep job cutsy Stream line of production processy Speed up of deliveries

The adoption of flexible lean production and manufacturing system lead to a productivity gap of

48% in favor of airbus.

Restructuring:

The airbus industry was essentially a marketing and sales organization which coordinated aircraft

design, conducted flight test, obtaining aircraft certification.The financial and manufacturing of

aircraft were responsibility of partner companies.

The company underwent restructuring, the companys share were held by EADS (80%) and

BA

Es owned 20%.the restructuring of

Airbus as an integrated company resulted in a leaner

,

more flexible organization where the lines of communication were shortened, functional units

were consolidated, the redundant positions were eliminated.

It also resulted in-

y Saving in material purchasey Leaner and more flexible organization

Company also entered into new market of defense aircraft manufacturing this provided:-

y A new product category and markety Provided a fixed demand and protection from fluctuating demand of the aviation

industry.


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Globalization

The company due restructuring took the advantage of the cost effective outsourcing destinations .

This outsourcing to different countries helped the company to win many political contacts.

Marketing & Sales

Empowered its sales team to make pricing decision on the spot and sign the deals without having

to seek approval from its corporate office.


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Change in Trend (Airbus to Boeing):

As Forgeard was expected to leave Airbus by 2005 and take charge of EADS, airbus was facing

two serious challenges.Firstly, the future prospect ofA380, and secondly, the introduction of

new aircraft by Boeing B-787 Dreamliner, which threatened the market ofAirbus for midsized

jets.

In 2004,Airbus predicted sales ofA380 to be 1650 over a period of 20 years whereas Boeing

predicted that the market for large aircraft would not exceed 400 units. Based on the changing

structure of airline industry Boeing expects more passengers to fly on direct routes on midsized

airplanes instead of giant sized airplanes. This analysis was done based on the number of

transatlantic flights aboard Boeing 747 declined while that of smaller wide bodied jets like A340

and B-777 tripled.

There were certain sources of concern forAirbus from their competitors Boeing. A380 was

facing stiff competition in long haul travel market from B-777 , B-787 and also from their own

airplanes that is A340 and A350 aircraft. Another potential risk faced by A380 was cost

overruns.As the dollar value lost by 30% with respect to euro, the cost of project ofA380

became more expensive in terms of dollar.There was still one more obstacle faced by Airbus

A380 that is selling the aircraft.The introduction of Boeing 787 which was designed to fly over

longer distances played a stiff competition with A380 and A330/A340 airplanes.

B-787 had several advantages overA350. B-787 was more fuel efficient, equipped with smaller

comfortable cabin and flew over longer range.Above that A350 was not expected to enter the

market until 2010 and A330 was still very popular.

By June 2005 it was seen that Airbus was losing its competitive edge in the airline industry as

sales ofA380 came to a halt and A350 did not move at all.This shows how slowly Boeing

started taking lead overAirbus in their three decades long duel.


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BOEING

Introduction

Boeing is the world's leading aerospace company and the largest manufacturer of commercial

jetliners and military aircraft combined. William Boeing established the Boeing Company in

1916 in Seattle.In the early 1950s Boeing entered into large jet aircraft were the company came

up with different models such as 707, 727, 737, and 747.Additionally, Boeing designs and

manufactures rotorcraft, electronic and defense systems, missiles, satellites, launch vehicles and

advanced information and communication systems. It was 747 jumbo jets that best defines

Boeing. By mid 1970s Boeing was past the breakeven point on all of its models .The next model

was 777 which was the first wide bodied long haul jet to have two engines.Their significant

amount of work was outsourced.

In 1997 they merged with McDonnell Douglas because which they could strengthen its presence

in the defense and space side of the aerospace. In 2000, they shifted their headquarters from

Seattle to Chicago to give a signal to the investment community that Boeing was far more than a

commercial aerospace business.

Three things dominated Boeings commercial aerospace development. First, the method of

adopting lean production systems, secondly the idea of rejecting the building of a successor to747 and thirdly, Boeing decided to develop a new wide bodied, long haul jetliner, the 787.


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SWOT Analysis:

Strengths:

yBy mid 2006 sales of super efficient wide bodied 787 along with 7

37 and 777 jets

increased because of which Boeing took back its lead from Airbus.

y Families of planes: since planes were made under a basic model it helped in sharingmaintenance, training and operations procedures, as well as replacement parts and

components.This helped in cutting down the costs.

y Managed supply process through vertical integration.y Designed new aircraft digitally and assembled virtually.y Positive Cash Flows: Since Boeing has crossed the breakeven point on all of its models

this helped in investing in new aircrafts such as 757 and 767.

y Production of new low cost and right sized aircrafts.

Weakness:

y High upfront costs: For a model to breakeven it would need to capture a significant shareof the projected demand.

y Assembly of aircraft is a complex process: since the modern planes have over one millioncomponent parts that has to be designed to fit and then produced and brought together at

the right time to assemble.This is a complex process such that even a small delay in the

supply of a critical component could hold up the production.

y R&D Costs: The development and tools cost for manufacturing an aircraft is alwayshigher.


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Opportunity:

y Demand for commercial jet aircraft is very volatile.This depends on the financial healthof airline industry as well as the economic growth of a nation.

y Increase in competition: Competition among low cost airlines and well establishedairlines that uses hub and spoke model increases demand.

y Demand for more frequent nonstop flights.y Growing volume of transcontinental traffic.y Productivity Initiative: This means ways for reducing the production costs, i.e., lean

production,Six Sigma, global sourcing.

Threats:

y Terrorist Attacks: This could impact on the number of passengers that travels around.y Jet Fuel Prices: Increase in fuel prices could also increase the cost of production.y Suppliers falling behind schedule designing for projects: This could lead to cost overruns

as it could hold the production and assembly lines.

Corporate Level Strategies:

Some of the corporate level strategies taken by Boeing which helped them to regain back their

position from Airbus were:

1. Investments in narrow bodied 757 and wide bodied 767.These investments were madefrom the positive cash flows they attained from breakeven of their earlier models.

2. Subcontracting significant amount of work: In case of 777 60% of the work wereoutsourced.This helped in reducing their development costs.

3. Merger between Boeing and McDonnell Douglas: This Boeing to strengthen their presence in the defense and space side of aerospace. Because of which broad based

aerospace business within which commercial aerospace accounted for 60% of total

revenue.


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4. Moved corporate headquarters from Seattle to Chicago.This was an intended signal tothe investment community that Boeing was far more than commercial business.

5. To produce new low cost, right sized aircrafts which could be used to increase the profitsas there was a demand for nonstop point to point flights.

6. The launch of 787 aircraft for long haul, point to point flights which gave a stiffcompetition to Airbus A350 and A380 aircrafts.

Business Level Strategies:

1. Lean Production and Six Sigma quality improvement process:This helped Boeing to manage their warehouses in terms of inventory, space and time as

well as capital that were held up that didnt add any value.This helped in reducing their

cost of production.

2. Introduced moving assembly lines:This setup helped in eliminating wandering for tools and parts , as well as expensive tug

pulls or crane lifts. Here tools were being delivered to the workstations rather than

workers having to go and fetch because of which they could save 20 45 minutes on

every shift.

3. Moonshine Teams:These teams were formed to focus on redesigning equipments to produce parts and

designing their own equipments - small scale machines. Because of which it eliminated

the need for inventory.This also made an entire process to be completed within minutes

which could have taken hours or days just by configuring the machines.

4. Benefits from government subsidies:Boeing got subsidies from NASA to develop technology which had helped them in

developing their commercial jet aircraft.


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Recommendations:

1. Research & Development:Both the companies need to find ways to reduce the cost of spending in R&D which

would also help in reducing the cost of production.This would also help in achieving

breakeven at a much faster rate.

2. Outsourcing:They could reduce the costs in manufacturing the component parts by outsourcing.This

could be done by giving contracts to companies where there is lower labour cost and

production cost.This would help in reducing the overall cost of producing an aircraft.

3. Production of extremely short distance aircrafts:Manufacturing of aircrafts those are fuel efficient, economical and with passenger seats

less than 50 could help in short distance travel, i.e., for point to point travel.

4. Corporate Jets:Manufacturing of customized jets for big corporate would be a market that has been not

yet tapped.As the business is moving to new areas the demand for faster connectivity

also increases the demand for corporate jets.

Commercial Airline Industry

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