A Report on Analysis of Case on

Boeing versus Airbus

Submitted To: Prof. (Dr.) Mayur Shah

Analysed by:
Devang Patel 33
Shashank Jaiswal 23
Mamta Patel 35
Ankeit Deshmukh 14
Himanshu Mathrani 29
Manish Jha 24
Case Summary:
Until 1980, US commercial aircraft industry enjoyed a de facto monopolistic
position in the world market, despite the European-based Airbus Industry having
come to exist in 1970. The US dominant position, with two US commercial aircraft
manufacturers, Boeing and McDonnell Douglas together, accounting for more
than two-thirds of the world market share, continued till as late as the mid-1990s.
With Boeing deciding to acquire McDonnell in 1996, it was expected that the
position will improve further. Surprisingly, this formidable position came to be
challenged by Airbus, which since 1981, contrary to its initial perception of having
been regarded as only a marginal competitor, was progressively increasing its
market share. By early 2000s, Airbus was consistently garnering a larger share of
new orders than Boeing, and in 2003, it even surpassed Boeing for the first time in
deliveries of aircrafts (305 deliveries by Airbus as against only 281 by Boeing).
The phenomenal success of Airbus was not received well by many in the US who
attributed it to the fact that it was due mainly to the huge subsidies it received
from the government. This was followed by a chain sequence of accusations and
counter-accusations. Somehow, under an agreement in 1992, the two sides
agreed to make some allowances to each other. The agreement allowed Airbus to
receive some launch aid from EU governments (Great Britain, Germany, France
and Spain), and Boeing to benefit from government R & D contracts. Under the
agreement, direct government subsidies were limited to 33 per cent of the total
costs of developing a new aircraft with the condition that such subsidies had to be
repaid with interest within 17 years. But the agreement did not last long. In 1997,
the agreement broke down when the European Union decided to challenge the
merger between Boeing and McDonnell Douglas on the ground that it limited
competition. Boeings plea was that the merger was necessary to strengthen its
presence in the defense and space side of the aerospace business areas where
McDonnell Douglas was traditionally strong. After the two sides listened to each
other, the dispute between the two appeared to have settled. But soon after, the
Airbus executives, who had initially stated that they had no objections to the
merger, gradually started opposing the merger again and became increasingly
vocal in their pronouncements. Trade tensions between them erupted yet again
in 2004. This time, the US questioned the appropriateness of Airbus receiving the
launch aid even as it had consolidated its position in the world market. To this the
Airbus responded with the accusation that Boeing was still benefiting from
subsidies. No break-through was seen in the dispute. To add fuel to the fire, the
British government decided to announce even a fresh dose of aid ($ 700 million)
to the Airbus in mid-2005. The US dissatisfied with these developments formally
filed a request with the WTO for establishment of a dispute resolution panel. The
EU, on its part, quickly reacted and filed a countersuit with the WTO claiming that
US aid to Boeing exceeded the terms set out in the 1992 agreement.

1. What are three reasons for the Europeans
creating the Airbus consortium?
Airbus Industries was formally established as a Groupement d'Intrt conomique
(Economic Interest Group or GIE) on 18 December 1970. It had been formed by a
government initiative between France, Germany and the UK that originated in
1967. Its initial shareholders were the French company Arospatiale and the
German company Deutsche Airbus, each owning a 50% share. 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.
The objective of the consortium was to build commercial aircraft with Germany,
Great Britain, and Spain taking on the job of constructing the aircraft and France
assuming responsibility for assembling it.

The logic of the arrangement was fairly straightforward. Three reasons for the
Europeans creating the Airbus consortium: -
1. Given the growth of international travel:-
Airbus started building planes. It took quite a while, but by 1990 the
consortium was not only becoming well established but had back orders for
1,100 planes and by 1997 this number had reached 2,300. In the process
Airbus captured over 30 per cent of the world market. One of the major
reasons for its success was that it focused on building fuel-efficient craft at
competitive prices. Its wide-body, medium-range models, the A300 and
A310, for example, were very reliable and the orders started flowing in
from a wide number of buyers including large US carriers such as America
Airlines and Northwest.

2. There would be a continual need for new commercial aircraft:-
When major air carriers such as American Airlines, Japan Airlines, and
Lufthansa needed to replace aging airplanes or increase the size of their
fleet, they turned to Boeing or McDonnell Douglas, the two giant American
aircraft manufacturers. Cargo carriers such as FedEx and DHL also bought
planes from them, and, as international air shipments continued to grow
rapidly, the annual demand proved to be a boon for Boeing and McDonnell.
In such a situation Airbus has to take the initiative plus big moves should be
played to get the market share.

3. Airbus wanted to be a major player in this industry:-
The initial challenge for Airbus was to capture some market share and thus
establish a toehold in the industry. This, fortunately, was not a problem.
The consortium had divided up the responsibility for building the aircraft
among its members. In this way, each country was guaranteed some of the
work and, in turn, could count on its respective government to provide
financial assistance and contracts.
In particular, the consortium would have to spend large amounts of money
for research and development in order to build competitive, state-of-the-
art craft, but by getting support from their respective governments a great
deal of the initial risk would be eliminated.





2. How will Airbus help the EU compete in the
United States?
The related big change in the marketplacedating from the 1990sis that
subsidies are often channeled to component suppliers by governments outside
the European Union or the United States, particularly by the Japanese and
Chinese governments. Japan has long sought to parlay expertise acquired in the
manufacture of aircraft components into a stronger military capability. China
harbors similar goals and has publicly declared its intention to become a maker of
civil aircraft alongside Boeing and Airbus. Facilitating these ambitions, Boeing has
outsourced a big percentage of its new 787, including high-technology work, to
Japan and Italy. Airbus has likewise outsourced on a grand scale, some $10 billion
of orders to US component suppliers and nascent assembly operations in China.
With these changes, the United States and Europe are becoming by standers as
well as participants in the global competition for the civil aviation industry. To
their credit, the United States and Europe have never required that domestic
carriers purchase new aircraft from domestic firms. Similar for bearance by China
and Japan cannot be taken for granted. Important segments of the aircraft
industry are already migrating to Asia, lured by the promise of subsidies and
preferential purchase arrangements for the finished aircraft. In fact, Boeing CEO
Jim McNerney recently predicted that China would become the third airplane
maker to rival his firm and Airbus in the coming decades. If nothing else, this
trend should prompt cooperation between US and EU authorities.










3. How will Airbus help the EU compete in Japan?

Airbus presence in Japan dates back to 1979 when Japan Air System (JAS) placed
its first order for six A300B2s. JAS subsequently placed repeat orders for the
A300, bringing the total number of aircraft ordered to 32. But before Airbus when
major air carriers such as American Airlines, Japan Airlines, and Lufthansa needed
to replace aging airplanes or increase the size of their fleet, they turned to Boeing
or McDonnell Douglas, the two giant American aircraft manufacturers. Cargo
carriers such as FedEx and DHL also bought planes from them, and, as
international air shipments continued to grow rapidly, the annual demand proved
to be a boon for Boeing and McDonnell. So, When Airbus was introduced it gave
European union a fair chance to capture highly potential market which is evident
by recent deal where Japan Airlines signed a milestone purchase agreement for
31 A350 XWB aircraft in 2013, the historic first direct Airbus order for the nations
flag carrier, which also becomes the initial customer for this next-generation
widebody in Japan. ANA Holdings ordered 30 A320neo Family aircraft (seven
A320neo and 23 A321neo) in July 2014, while Skymark Airlines is to introduce 10
A330 Family aircraft.


4. In what way did the Airbus consortium use a
keiretsu approach to building the aircraft? Why
do you think it opted for this approach?

A keiretsu is a set of companies with interlocking business relationships and
shareholdings. It is a type of informal business group. The keiretsu maintained
dominance over the Japanese economy for the last half of the 20th century. The
member companies own small portions of the shares in each other's companies,
centered on a core bank; this system helps insulate each company from stock
market fluctuations and takeover attempts, thus enabling long-term planning in
innovative projects. It is a key element of the automotive industry in Japan.


Airbus Industries was formed in 1970 as a consortium of aerospace
manufacturers. The retention of production and engineering assets by the partner
companies in effect made Airbus Industries 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 shareholders of, 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 maximize the transfer prices of their sub-assemblies.
In 2001, EADS (created by the merger of French, German and Spanish Airbus
partner companies) and BAE Systems (the British partner company) transferred
their Airbus production assets to a new company, Airbus SAS. In return, they got
80% and 20% shares respectively. BAE would later sell its share to EADS.