CASE STUDY ANALYSIS

COMMERCIAL AIRLINE INDUSTRY

AIRBUS & BOEING

Submitted By:
Group 2 - Finance‘B’
Rajalashmi.T (09PG115)
Praveen Yadav(09PG396)
Mayuri Sood(09PG086)
Ravi Kumar(09PG279)
Ashutosh
Gupta(09PG368)

Alliance University Page 1

Table of Contents

Table of Contents..................................................................................................2

PORTER’S FIVE FORCES FOR AIRLINE INDUSTRY................................................4

Threat of New Entrants.- Low..........................................................................4

Power of Suppliers- High ................................................................................4

Power of Buyers- Low ....................................................................................4

Availability of Substitutes-Low........................................................................4

Competitive Rivalry. – High.............................................................................5

SWOT ANALYSIS OF AIRLINE INDUSTRY..............................................................5

Strengths.........................................................................................................5

Weaknesses....................................................................................................5

Opportunities..................................................................................................6

Threats............................................................................................................6

ABOUT AIRBUS......................................................................................................7

STRATEGIC LEADERS..........................................................................................8

INFANCY: BERNARD.........................................................................................8

GROWTH STAGE: JEAN ...................................................................................8

MATURITY STAGE: NOEL..................................................................................8

SWOT ANALYSIS ................................................................................................8

Strength: ........................................................................................................8

Weakness: ......................................................................................................9

Opportunity:....................................................................................................9

Threats: .........................................................................................................9

AIR BUS TO BOEING...............................................................................................9

BOEING’S HISTORY..............................................................................................11

SWOT Analysis:................................................................................................11

Alliance University Page 2

 Weakness: ....................................................................................................12

Opportunity:..................................................................................................12

Threats:.........................................................................................................13

SALIENT FEATURES OF BOEING’S MODEL INCLUDED:......................................13

Corporate Level Strategies:..............................................................................13

Business Level Strategies:................................................................................14

COMMERCIAL AIRLINE INDUSTRY

Alliance University Page 3

PORTER’S FIVE FORCES FOR AIRLINE INDUSTRY
Threat of New Entrants.- Low

• Existing loyalty to major brands

• Incentives for using a particular buyer (such as frequent shopper programs)

• High fixed costs in R & D

• Scarcity of resources (technical )

• High costs of switching companies (maintenance cost)

• Government restrictions or legislation

Power of Suppliers- High

• The airline supply business is mainly dominated by Boeing and Airbus. For
this reason, there isn't a lot of cutthroat competition among suppliers.
• Also, the likelihood of a supplier integrating vertically isn't very likely.

Power of Buyers- Low

• There are high costs involved with switching airplanes, but also take a look
at the ability to compete on service.

Availability of Substitutes-Low

• For regional airlines, the threat might be a little higher than international
carriers. When determining this you should consider time, money, personal
preference and convenience in the air travel industry.

Alliance University Page 4

Competitive Rivalry. – High

• Highly competitive industries generally earn low returns because the cost
of competition is high. This can spell disaster when times get tough in the
economy.

SWOT ANALYSIS OF AIRLINE INDUSTRY

Strengths
• A major strength of any airline is the product itself -- air travel. Despite
downturns, over time air travel continues to grow, not only due to population
growth, but also due to an increased propensity to fly.
• Another strength is the safety record, and the associated public acceptance of
air travel as both a fast and safe way to travel.
• Airline staff is highly trained and experienced, from pilots and flight
attendants to mechanics and ground staff.
• Business-wise, airlines have the ability to segment the market, even on the
same routes. This allows airlines to establish different levels of service and
make associated pricing decisions.

Weaknesses

• Airlines have a high "spoilage" rate compared to most other industries. Once a
flight leaves the gate, an empty seat is lost and non-revenue producing.
• Aircraft is expensive and requires huge capital outlays. The return on
investment can be different than planned.
• Large workforces spread over large geographic areas, including international
points, require continual communication and monitoring. This can be
exacerbated during operational irregularities, e.g. bad weather.
• While the business climate can change quickly, airlines have difficulty
making quick schedule and aircraft changes due to leases, staffing
commitments and other factors.

Alliance University Page 5

Opportunities

• Airline market growth offers continual expansion opportunities for both

leisure and business destinations. This is particularly true for international
destinations.
• Technology advances can result in cost savings, from more fuel efficient
aircraft to more automated processes on the ground.
• Technology can also result in increased revenue due to customer-friendly
service enhancements like in-flight Internet access and other value-added
products for which a customer will pay extra.
• Link-ups with other carriers can greatly increase passenger volumes.

Threats

• A global economic downturn negatively affects leisure, optional travel, as

well as business travel.
• The price of fuel is now the greatest cost for many airlines. An upward spike
can destabilize the business model.
• A plague or terrorist attack anywhere in the world can negatively affect air
travel.
• Government intervention can result in new costly rules or unexpected new

international competition.

Alliance University Page 6

ABOUT AIRBUS
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 13 October 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.

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 of Airbus, described a number of factors which
explained the dominant position of American 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."

Alliance University Page 7

STRATEGIC LEADERS
INFANCY: BERNARD
During the introduction stage Bernard was the CEO and he focus on more of technological
leadership because they know that Boeing was the market leader that time and if they wanted
attention they have to offer something different.

They even took the family concept several steps forward and thus made it the foundation for
its manufacturing and marketing strategy.

Focus on decentralized production and centralized marketing.

GROWTH STAGE: JEAN

Now as we all now during growth stage we need to focus more on distribution part so that we
can reach to our customer better than our competitors and thus able to grab more market
share. So Jean focus on

Product Development

More aggressive sales

Subsidies & Cost cutting too

MATURITY STAGE: NOEL

In maturity stage we focus more on material management try to innovate more or in other
words try to diversify. Noel too followed the same concept

Restructuring Airbus ownership

Diversification into Defence Products

Continue focus on Marketing & sales

Keep a proper check over the Financials.

SWOT ANALYSIS
Strength:
• Technological Leadership

• Family of planes

• Decentralized production

Alliance University Page 8

 • Centralized marketing

Weakness:
• High upfront cost and longer lead time as the sector takes longer time
from design to production

• Not able to meet production schedules

• Too diverse location and assembling

Opportunity:
• Governmental assistance as more and more governments are providing
subsidies to attract tourists.

• Demand for more frequent nonstop flights.

• Growing volume of transcontinental traffic

• More and more countries deregulating the aviation industry

Threats:
• Terrorist Attacks: This could impact on the number of passengers that
travels around.

• Jet Fuel Prices: Increase in fuel prices could also increase the cost of
production.

• Suppliers falling behind schedule designing for projects: This could lead
to cost overruns as it could hold the production and assembly lines.

AIR BUS 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 of A380, and secondly, the

Alliance University Page 9

introduction of new aircraft by Boeing B-787 Dreamliner, which threatened the market of
Airbus for midsized jets.

In 2004, Airbus predicted sales of A380 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 for Airbus 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 of A380
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 over A350. 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 of A380 came to a halt and A350 did not move at all. This shows how slowly Boeing
started taking lead over Airbus in their three decades long duel.

Alliance University Page 10

 BOEING’S HISTORY

Boeing had been one of the early pioneers in the Commercial Airline Industry. Established in
1916 and based out of Seattle (which it would later come to share with the formidable
Microsoft Corp ) Boeing entered the Commercial business post World War 2 with the Dash
80.

William Boeing never looked back and my mid 1970s the company was past its breakeven
point in all its 4 categories. The success of the vertically integrated production business
prompted the airline major to experiment with outsourcing and soon it was outsourcing 60 %
of its product components.

However between 1996 and 1997 the industry leader got drawn into a quagmire of troubles
with its production capacity stretched and components and labor in short supply. In fact this
bad year cost the company its market share (with Airbus eating into it ) and $1.6 Billion
against its earnings.

SWOT Analysis:
1. Strengths:

• By mid 2006 sales of super efficient wide bodied 787 along

with 737 and 777 jets increased because of which Boeing
took back its lead from Airbus.

• Families of planes: since planes were made under a basic

model it helped in sharing maintenance, training and
operations procedures, as well as replacement parts and
components. This helped in cutting down the costs.

Alliance University Page 11

 • Managed supply process through vertical integration.

• Designed new aircraft digitally and assembled virtually.

• 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.

• Production of new low cost and right sized aircrafts.

Weakness:
• High upfront costs: For a model to breakeven it would need
to capture a significant share of the projected demand.

• Assembly of aircraft is a complex process: since the

modern planes have over one million component 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.

• R&D Costs: The development and tools cost for

manufacturing an aircraft is always higher.

Opportunity:
• Demand for commercial jet aircraft is very volatile. This
depends on the financial health of airline industry as well
as the economic growth of a nation.

• Increase in competition: Competition among low cost

airlines and well established airlines that uses hub and
spoke model increases demand.

• Demand for more frequent nonstop flights.

Alliance University Page 12

 • Growing volume of transcontinental traffic.

• Productivity Initiative: This means ways for reducing the

production costs, i.e., lean production, Six Sigma, global
sourcing.

Threats:
• Terrorist Attacks: This could impact on the number of
passengers that travels around.

• Jet Fuel Prices: Increase in fuel prices could also increase

the cost of production.

• Suppliers falling behind schedule designing for projects:

This could lead to cost overruns as it could hold the
production and assembly lines.

SALIENT FEATURES OF BOEING’S MODEL INCLUDED:

• Quick turnarounds.

• Flying Point to Point

• Cross training the crew

• Limited service

• Hiring non unionized workforce

• Focus on volume markets.

Corporate Level Strategies:

Some of the corporate level strategies taken by Boeing which helped
them to regain back their position from Airbus were:

Alliance University Page 13

 1. Investments in narrow bodied 757 and wide bodied 767. These
investments were made from 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 were outsourced. 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.

4. Moved corporate headquarters from Seattle to Chicago. This was an

intended signal to the 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 profits as 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 stiff competition 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
didn’t add any value. This helped in reducing their cost of
production.

2. Introduced moving assembly lines:

Alliance University Page 14

 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.

Alliance University Page 15