Drivers Of Competitive Actions And Responses

Published Date: 23 Mar 2015 Last Modified: 21 Apr 2017

The Airlines Industry: a background

The commercial airline industry is regarded as one of the most difficult and competitive in the world. Competition in the aircraft industry has attracted attention not just because of the controversy surrounding subsidies that are often needed to cover up the huge losses that companies have been making in this sector, but because of the industry's unusual structure. The aerospace industry is replete with examples of industries where governments have use trade policy to alter the strategic interaction between competing firms in the airlines sector.

During its early days, the industry was characterised by competition among a large number of sophisticated, entrepreneurial firms. Survival risk was low because of guaranteed access to national airlines and a rapidly expanding market. Technological advances were often financed by states in deference to their defence industries. Since WWII, however, the industry has transformed into an oligopolistic production structure, extremely high survival risks, and intense competition for sales in a global market

Technological advances have extended development lead times, increased launch costs, complicated marketing, and lengthened the time between initial research and revenue earning. Probably no other industry in the world is as global as the commercial aircraft industry. The process of manufacturing an aircraft is very complicated and thousands of parts and are needed for the development and manufacturing of a plane. The high costs associated with the development, design and construction of an aircraft as well as the fierce competition between the two main players forces them to seek into finding ways to lowering their costs. In order to do, players like Airbus and Boeing try to build their competitive advantage by achieving global efficiency, multinational flexibility and worldwide learning.

Some key distinguishing characters of the airline industry can be summed up as:

The seeming departure from the efficient industry theory in case of airlines industry: The efficient industry theory suggests that if an industry looks particularly attractive, then companies will seek entry, while unattractive industries will see more companies leaving. Surprisingly, even due to heavy losses, the airlines industries have not seen many companies closing down.

The reason can be attributed to the fact that the efficient industry theory often does not take into account the role of governments in industries which they consider strategic; the huge numbers of people who would be affected in case of any problem in the US aircraft manufacturing industry makes state support a necessity, affecting the attractiveness and number of companies exiting.

In their battle for survival, the airlines have sought to optimise many of the factors to improve their profitability. To enhance revenue, several airlines have withdrawn from their most intensely competitive routes; others have sought to achieve a fare premium over the cut-price airlines through superior punctuality, convenience, comfort, and services. To improve load factors, companies have become more flexible in their pricing and in allocating different planes to different routes. Most notably, companies have sought to cut costs by increasing employee productivity, reducing overhead, sharing services with other airlines, and reducing salaries and benefits.

Company overview

Boeing:

Boeing is a leading aerospace company that manufactures both commercial as well as military aircrafts along with missiles, rocket engines, satellite launch vehicles, electronic and defence systems, and advanced information systems. It was found by William E. Boeing and George Conrad Westervelt on July 15, 1916 under the name Pacific Aero Products Company. The first plane they developed was a twin-float seaplane called the B&W, named after the developers' initials. [1] The company developed its first commercial aircraft to fly mail for the U.S. Postal Service in 1927 with the Model 40. However, the company truly saw revolution in form of the World War II after which the aircraft production surged. Boeing's first commercial jet airliner, the 707, came into service in 1958 with the 727, the 737 (for short-range travel), and the 747 jumbo jet (for long-range, high passenger or high payload flights) soon following in the decade. By 1996, Boeing's family had expanded to include the 757, the 767, and the 777, as well as updated versions of all its previous planes. [2] The full range of commercial planes of Boeing is enlisted in exhibit 1.

Boeing recorded revenues of $64.3 billion in 2010 with a net income of $3.3 billion. [3] It used to be the market leader before 2007, after which its position was captured by Airbus.

More specifically, in the last 10 years (1999-2008) Airbus received a total of 6,378 orders and delivered 3,606 aircrafts [4] , whereas Boeing received 6,140 orders and delivered 4,089 aircrafts. [5] The first mover's advantage has played a significant role in the case of Boeing; whose aircrafts still outnumber airbus's primarily because Boeing has been in the market since 1958 whereas airbus entered the market in the 70's.

Boeing operates as a global company with centralized decision making. Its business level strategy is to maintain its cost effectiveness which is the source of its core competency. It looks for the most efficient and cost effective labour worldwide and aims at developing the best manufacturing capabilities. It has presence in 145 countries with its headquarters in Chicago. [6] Boeing focuses on large scale integration and believes in maintaining long term strategic relationships with all countries that it operates in.

Airbus:

Till the mid 60s the commercial aviation industry was dominated by American firms such as Boeing and McDonnell Douglas. The other minor European firms that existed were incapable of exerting any significant influence on the industry. These European firms slowly understood that in order to acquire any real market power they would have to form a consortium and act cooperatively. This is how Airbus was officially created in 1970 which was a consortium between France's Aerospatiale and Germany's Deutsche Airbus.

The companies collaborated in creating the A300, the first Airbus aircraft and also the first twin-engine wide body airliner. It was designed to "fill a gap in the market and to challenge American supremacy in the aviation industry." [7] 

Slowly as new members joined in, the power of Airbus was growing. With the release of A320 in 1981, Airbus's position as a major industry competitor was secured. Over the next two decades, Airbus expanded to include the A300/310 family, the A320 family, and the A330/340 family. In 2001, partially in order to be more efficient, productive, and competitive, and partially to prepare for the development of the A380, Airbus Industrie became a single, private company.

Even though as of now it has more market share than Boeing, Airbus witnessed a period of continued losses which it managed to partially recover in 2010. Airbus manufactures and sells A300/A310, A320, A330/A340, A350 and A380 family aircrafts. The full range of commercial aircrafts that the company manufactures can be found in exhibit 2.

Airbus operates in a centralised hub, trying to get cost advantage and quality assurances. Since the assembly requires development of many parts, the manufacturing takes place in various locations worldwide and the parts are finally assembled in Germany. [8] 

Competitive Rivalry: the concept

Competitive rivalry is one of Porter's five forces. This term describes the intensity of competition between existing players (companies) in an industry.

Low barriers to entry lead to a high competitive rivalry. If it is easy for customers to move to substitute products for example from coke to water then again rivalry will be high. Not all industries are equally competitive. In general, some of the factors leading to high an low competitive rivalry can be stated as:

Factors leading to high competitive rivalry

Factors leading to low competitive rivalry

Low differentiation between products

High differentiation hence leading to brand loyalty

Competitors are of around the same size

Some firms dominate the market

Competitors have similar strategies

Varied strategies, hence independent of each other

High exit barriers

Low exit barriers

Low market growth rates

Market can accommodate competitors (high growth)

High fixed or storage costs

Low fixed costs/ resources are not specific

High "strategic stakes" tied up in capital equipment, research or marketing

The business is strategically less important

These are just some of the conditions in which competitive rivalry is more likely to be high. The result of this is a pressure on prices, margins, and hence, on profitability for every single company in the industry. The competitive rivalry in business occurs in so many ways but they mostly depend upon the type of customers, the size of the business, the strategies involved and the costs. In addition, there are many reasons why there is business competition and one of which is that it is expensive to leave the industry that they are in right now. In this case, they have no choice but to fight against one another in order to see which one stays on top. Business rivalry threats cannot be avoided but if you are well prepared and you have the right attitude towards them, you will be able to eliminate your rivals eventually. A series of competitive actions and competitive responses among firms competing within a particular industry leads to what is known as competitive dynamics. Factors affecting competitive dynamics can be represented by:

A Model of Competitive Rivalry

This model shows that for a firm to be able to attack or respond and hence demonstrate competitive rivalry, it needs to first be aware about the competitors; have the motivation to respond/attack and then also have the necessary resources to execute their plan of actions. [9] Moreover, smaller firms are more nimble and hence more responsive when compared to bigger firms.

Firms with high market commonality and highly similar resources are direct and mutually acknowledged competitors. However, direct rivals do not always intensify their competition. The drivers of competitive behavior, as well as the likelihood that a competitor will initiate competitive actions or reactions influences the intensity of rivalry, even for direct competitors.

Two important drivers of competitive actions and responses are market commonality and resource similarity. Market Commonality is concerned with the number of markets with which the firm and a competitor are jointly involved and the degree of importance of the individual markets to each. Resource Similarity is the extent to which the firm's resources are comparable to a rival's in terms of both type and amount. Firms with similar types and amounts of resources tend to have similar strengths and weaknesses and use similar strategies. Also Competitors are more likely to respond to strategic and tactical actions taken by market leaders. Hence reputation is also a key determinant of the extent of competitive rivalry.

Market Commonality

Boeing and Airbus compete in 6 main geographic regions in two broad product categories - narrow body and wide body aircrafts10

North America

Europe

Asia Pacific

Latin America

Middle East

Africa

Narrow body aircrafts are used for up to 6,000km and carry between 100 and 200 passengers whereas wide body aircrafts are used for up to 14,000km and carry 200 to 450 passengers [10] .

Historically Boeing had dominated the market share in each of the regions and categories. This is possibly due to the fact that it had the first mover advantage and hence a longer presence in the industry .Also the fact that commercial aircrafts have an average life span of about 30 years contributes to this dominant market share of Boeing. In the last 10 years however, the two companies had about the same share of orders and deliveries. However with regard to the net order share, in the last ten years, Airbus has overtaken Boeing in the race with 64% market share while Boeing is left with only 36% as of in the year 2009. This is in contrast to the fact that Boeing occupied 54% market share as compared to 46% by Airbus in 2000.

In fact Boeing and Airbus capture about 92% share of the world commercial aircraft market in narrow body and wide body aircrafts. [11] 

In Asia, Airbus has two subsidiaries namely Airbus Japan and Airbus China. Since the Asia market is of strategic importance the two subsidiaries there carry out marketing and sales activities and also foster greater industrial cooperation with companies in the Asia-Pacific regions. Similarly, the Airbus Russia subsidiary offers its services to Aeroflot, Russia's international airline operator [12] .

Again Boeing has been actively involved in the international market and especially in the Asia-Pacific region. In Japan, Boeing has offered longstanding relationships with Japanese suppliers including Mitsubishi Heavy Industries and Kawasaki Heavy Industries by which these companies have had increasing involvement on successive Boeing jet programs. This process has helped Boeing achieve almost total dominance of the Japanese markets for commercial aircrafts.

Again when it comes to product portfolio both the companies have similar portfolios with the products being direct competitors in different categories. In 1970 Boeing launched the world's largest passenger aircraft, the famous B747. Since then, Boeing enjoyed a monopoly in the market for large passenger aircrafts. In 2001, EADS Airbus attacked this monopoly by launching the A380, which is now the largest passenger aircraft with more than 550 seats. The launch of the A380 programme actually pushed Boeing into the position of challenger. Boeing responded by launching the B747X, an extended version of the B747. However despite a heavy marketing effort in the beginning of 2001, Boeing did not have the same success with its 747X.Given the segment's slim size, Boeing had to withdraw from the race and instead created another niche in which it started to compete. In April 2001, Boeing launched the Sonic Cruiser, which not only had a new design with canards and delta wings, but also signalled a very different strategic approach to the market.

In the 100-seat market Airbus's A318 is a direct competitor to Boeing's B717. Likewise A321 competed directly with B757 in the 240-280 passenger categories. Again in the wide-body, long-range, 200-400 seat market the Boeing 767 and 777 families, compete with the Airbus A300, A310, A330, and A340 families. All of these aircraft families are intricately intertwined in market relations and competition [13] .

Over the years the two companies have come out with fundamentally different products, based on diametrically opposite visions of the future. The A380 is built around the assumption that airlines will continue to fly smaller planes on shorter routes into a few large hubs, then onward to the next hub on giant airplanes. It assumes that passengers will put up with the hassles of changing planes in exchange for the privilege of travelling in a jet-powered cruise liner. Boeing however challenges the current hub-and-spoke model as a given and believes customers still prefer more point-to-point flights, flown more frequently, on smaller airplanes.

Resource Similarity

Strategy is concerned with matching company's resources and capabilities to the opportunities that arise in the external environment. Airbus' main goal is to meet the needs of airlines and operators by producing the most modern and comprehensive aircraft family on the market. This in turn is complemented by the highest standard of product support. Airbus produces aircraft which are unique in its design and uses high end technology installing fly-by-wire, cockpit commonality design and other innovative designs attracting orders from its customers. At the same time Airbus also manufactures products suiting to the needs of military with use of advanced technology. The capability of Airbus lies in manufacturing aircrafts which are unique in design and are advanced on the technological aspect as compared to its rivals. The capabilities of Airbus arise from its valued resources like culturally diverse employees, its customers, contractors, suppliers whom it considers as partners and develops new aircraft only in consultation with its customers. The resources and capabilities have resulted in a sustained competitive advantage over its rival in terms of technology and design. The strong organizational structure and the work culture, defined by theAirbusway [14] , of Airbus have actually helped the company in becoming the industry leader and pushing Boeing to the role of the challenger.

Innovation has been a primary driver in Airbus' decades of success and has guided many aspects of the company's business activities and playing a crucial role in the development of new-generation products, processes and techniques. Airbus has over 3,000 individuals working directly or indirectly on more than 400 research and technology projects. The A300 made the most extensive use of composite materials and by automating the flight engineer's functions it became the first large commercial jet to have a two-man flight crew. Again in the 1980s Airbus was the first to introduce digital fly-by-wire controls into an airliner - the A320.

Like Airbus, Boeing too emphasizes marketplace insight as the core of product development. Technological innovation pursued at the Boeing Technology Services goes into the making of most of newly designed, fuel-efficient twin engines and lightweight composite materials. According to Boeing, the 787 is the result of over a decade of focus groups and scientific studies to gain a better understanding of passenger comfort and how the design of airplane interiors can make flying a more pleasant experience. Approximately 1.5% of Boeing employees are in the Technical Fellowship [15] program, a program through which the top engineers and scientists set technical direction for the company. Boeing believes that having diverse employees, business partners and community relationships is vital to creating advanced aerospace products and services. However, Boeing's lost market share has often been attributed to its poor corporate strategy and decision-making and the vulnerability of a notoriously long-term business to rampant shareholder value.

Thus on the basis of market commonality and resource similarity one can conclude that Airbus and Boeing have both high market commonality as well as high resource similarity. As a result the two firms are direct and mutually acknowledged competitors and use their similar resource portfolio to compete against each other in markets that are important to them.

Drivers of Competitive Actions and Responses

Awareness

As the market commonality and resource similarity is high, Airbus and Boeing recognize the fact the degree of mutual interdependence is high for both the firms. Both the firms are acutely aware of each other's competitive actions and responses. And the rivalry is intense. The Asia-Pacific market is considered to be the most profitable market in the near future and it will be very significant as to which of the companies captures the majority of world market share in the future. As both companies have equal market share in the last few years, any potential move by Airbus will be countered by Boeing. Similar is the case in North America which is the largest market of commercial markets. It is significant for both companies, but more for Boeing which considers the market to be its home market.

The European market is the third largest market and it is highly profitable and significant for both companies. Airbus enjoys an advantage because of its cultural heritage but Boeing is a strong competitor in this market as well.

Motivation

Motivation is essentially the incentive for a firm to take action or respond to a competitor's attack. This in turn depends on the perceived gains and losses. Now Airbus enjoys an advantage in marketing and sales activities for the Asian region because of its local subsidiaries in China and Japan [16] . However, Boeing has tighter and better relations with governments. As the Asia-Pacific market involves high strategic stakes both the firms will be motivated to protect their positions through competitive actions and responses.

On the other hand as the North American region is more critical to Boeing's revenues it will have higher motivation to launch strategic moves to defend its position here. Similar is the case for Airbus in Europe where it enjoys a slightly better position. Airbus will have higher motivation to consolidate its position in Europe through competitive actions and responses.

Ability

The ability of a firm to respond to a competitor's actions or attack a competitor is related to a firm's resources. As both the firms have very similar resources any competitive action is taken only after a careful study of the possible response of the competitor is done. However as pointed out earlier, Airbus enjoys a slight better position in Europe whereas North America is the home market for Boeing. Hence in these two regions the two firms enjoy slight advantage over each other in terms of resources.

History of the Rivalry

This rivalry started in the early 1970s with AIRBUS positioned as a viable alternative to BOEING with the help of substantial financial help from the European governments. Soon, AIRBUS was engaged in a fierce competition with BOEING in several markets across the globe. As is natural in such cases, this struggle was characterized by legal disputes, agreements, alleged violations and ever increasing complexity in the relationship that these two behemoths have come to share.

The intensity of the involvement of the Governments on both sides has added a further dimension to this rivalry.

Another interesting feature about this phenomenon was the background in which it has been played out. The relatively unique market structure of the Aircraft Industry, where the huge Economies of Scale vis-à-vis the market demand make it a highly complex environment to operate in, suggesting an overwhelming reliance on Long Term Strategy for achieving any kind of sustainable success.

The continued subsidies available to AIRBUS from the Governments of Europe have been one of the major points of contention and the basis of recurring trade disputes between the two strategic competitors. In short, strategic trade policies have been a frequently used tool on both sides of the Atlantic.

Boeing - Boeing ventured into the commercial aviation sector first in 1958 with the 707, its first commercial jet airliner. The following decade saw a spate of new models from its stables including the 727, the 737 for short hauls, and the 747 jumbo jet for long-range, high capacity flights.

During this period, the competition consisted of several small European firms, which were finding it increasingly difficult to thrive in such an environment. They realized the need to unite against the common threat and hence formed a consortium in 1970 that came to be known as the Airbus Industrie. Initially, Airbus tried to "fill a gap in the market" by introducing the A300, its first aircraft. However, it gained little traction in the market, with the high entry barriers proving tough to overcome.

However, with an increasing number of national firms from Europe joining Airbus, and the additional resources that it enjoyed in terms of strong financial backing from the various governments, Airbus's market power began to grow, its order book swelling at an ever increasing pace. The turning point however came in 1981, with the launch of the Airbus A320, which finally established Airbus as a major competitor in the industry.

In the next two decades till 2000, both the competitors focussed on expanding their product portfolios. Boeing had added the 757, the 767, and the 777 to its line-up while at the same time upgrading all its existing models as well. Airbus had similarly introduced the A300/310 family, the A320 family, and the A330/340 family. In 2003, Airbus delivered more aircraft than Boeing for the first time ever.

A Classic Case of Game Theory

In the 1990s, Boeing and Airbus attempted to collaborate on creating a superjumbo jet capable of carrying 500-1000 passengers.

They were brought together by their common views on the need of such an aircraft to tackle congestion.

The other, stronger factor was the realization that there was room in the market for only one player. The strategic interdependence in this case was deep. If both players developed their own VLA (Very Large Aircraft),both would incur huge losses, besides Boeing's 747 coming under pressure as well.

However, by 1995, the collaboration had ended, with many alleging that it was all just part of a strategy on part of Boeing to stall the market and delay Airbus from developing anything itself.

Airbus decided to continue pursuing the VLA project, holding on to the path of developing the superjumbo jet, subsequently to be christened the A380. By 1999, it had firmed up plans to build a family of VLA, with capacity ranging from 555 to 990 passengers.

Boeing, after breaking off, indicated that it would develop updated and "stretched" versions of its 747 jumbo jet. But it cancelled the development effort in 1997. However, in 1999, it changed tack again, saying it would build a stretch jumbo that would be available ahead of Airbus's A380.

By 2000, with a number of advance orders in the pipeline, Airbus officially launched the new plane. This led to Boeing stopping its development of its stretch jumbo in 2001, and a simultaneous beginning of the development of a new aircraft known as the Sonic Cruiser, which would be faster, quieter and fly higher than existing aircraft, while being significantly smaller than the stretch jumbo. This too was abandoned in 2002 in favour of the slower, but even more fuel efficient 787 "Dreamliner", which has, of late, tilted the balance back in Boeing's favour.

Competitive Actions and Responses

Boeing and Airbus have engaged in a long drawn competitive rivalry on various fronts and using different strategies.

FIRST MOVER/ SECOND MOVER -

In this particular rivalry, Boeing, for long, held the First Mover's advantage. Founded in 1916, it has forayed into Defence, Space Security as also into Commercial Airplanes in 1958. By the time Airbus entered in the 1970s, Boeing enjoyed a monopoly in the Commercial Aircraft industry. It has repeatedly bolstered its competitive advantage by relying heavily on the First Mover's Advantage. Instances of this include the development and launch of the 707 (1957-58), USA's first commercial jet, the 747 (1969), which became the first wide-body commercial plane and remained the only significant jumbo jet for decades, and lately, the 787 "Dreamliner", the first jet to make use of revolutionary technologies like light weight composites and the integrated fuselage design.

Airbus, on the other hand, relied less on the First Mover's Advantage and more on filling the gaps left behind by Boeing initially, and later on launching products that, on some level, were based on addressing the perceived weaknesses of Boeing's products. The A300 is an example of the former strategy, whereas the A380, though innovative in many ways, and not strictly an imitation, was targeted at doing what the 747 did, only better. Airbus, as compared to Boeing, could be classified as the second mover.

Now, since the market itself was a slow cycle market, with each advance and change in technology taking a long time to fructify, Boeing was not wildly successful with its First Mover's Advantage. The last two decades of the 20th century saw Airbus make deep inroads into Boeing's territory, finally overtaking it in 2003. Its own gamble with the A380 has however jeopardized its position again. It was entering into uncharted waters for the first time, and faced numerous glitches. It was Airbus's first effort at bringing out something revolutionary (by its standards), and it seemed to have not met the expectations of the manufacturer. Thus, the industry does not seem to have favoured the First Mover as much as some other Fast Cycle Markets would have. The 787 seems to be an exception, but that has yet to be tested against upcoming competitors like the A350.

Size

Size has always been a huge factor in this rivalry. This industry is highly capital intensive, with massive costs of development and production. Also, size has had its advantage in terms of creating and exploiting additional synergies in terms of sharing resources like expertise and technology sharing. The economies of scale relative to market demand are so high that small players cannot exist in such an environment. Airbus spent $12 billion before its first flight in 2005. Similarly, the 787 is estimated to have cost Boeing over $10 billion in pure development costs alone. It generally takes a decade before a firm can hope to recover such costs through sales, and that only if the model is successful. Several smaller player with lesser resources have either ceased to exist or been taken over.

Recognizing this very fact, the various constituent members of Airbus came together to form the consortium and take the fight to Boeing, which always had the advantage of a strong resource base.

Boeing further increased its size by acquiring Rockwell International's aerospace businesses, McDonnell-Douglas and Hughes Space and Communication towards the end of the 20th century. This was also an instance of Related Diversification which helped Boeing tap the synergies between the various organizations.

In response to this action from Boeing, three Airbus partners- Aerospatiale Matra, Daimler Chrysler Aerospace and Constructions Aerospatiale- merged to become the European Aeronautics Defence and Space Company (EADS). Airbus formally became a division owned by EADS and Britain's BAE Systems.

Technology

In this industry, there is a continuous battle on the technology front. Though on the surface, it is a Slow Cycle Market, the pace of technology development and change behind the scenes is frenetic and ever increasing. Every Strategic Action by the competitor is duly noted and efforts to fashion an appropriate Strategic Response get underway before the original Strategic Action's results see the light of day.

Throughout the 1990s, Airbus relentlessly pursued Boeing, expanding its line-up to match that of its competitor's. In 2001, having taken the lead, Airbus began to develop a ground-breaking alternative to the 747 in the VLA segment.

Boeing made several responses, both pre-emptive and otherwise, but all of them were hampered by severe faults. Its supersonic aircraft plan went nowhere. Its collaboration with Airbus in the VLA segment failed to preclude the Airbus from going ahead by itself. Its efforts to upgrade the 747 to fight the A380 also proved unsuccessful.

However, in a totally unrelated development, Boeing stumbled upon the lightweight plastic composites, with which it built the 787's airframe, making it highly fuel efficient and quieter than existing rivals. This was a game changing response, especially with increasing fuel prices, which put Boeing back in the driver's seat.

Market/ Political Dependence -

Political Muscle, rather than market dependence, seems to have played a greater role in shaping the success/failures of both the firms. Airbus, especially its initial existence, was funded by generous financial support from the French, British, German and Spanish governments. Airbus came to represent the Strategic Trade Policy of the European leadership. Its subsidies were justified as essential support to an "infant industry" in a high-risk environment. However, the continuation of this form of financial help to a now-well-established-firm has a different justification. Boeing's lucrative defence contracts are highlighted as another form of subsidy and are said to necessitate the continued help that Airbus receives.

The 1992 agreement between EU and USA limited the launch aid to 33% of the development costs for Airbus, and the US defence contracts to 4% of civil aircraft Boeing's turnover. However, it was terminated in 2004, after Airbus used the Launch Aid clause to fund its A380 and A350, the latter enabling to instantly challenge Boeing's 787.

Further, Boeing is the undisputed leader in US and Japan, while Airbus dominates the European markets, indicating the political overtones that mark this rivalry. However, the worldwide success of the 787, on the strength of its technology, and the emergence of markets that are not as affected by the political angle, show that slowly, the actual market dependence is acquiring an increasingly important role in this rivalry.

OUTCOMES

The competitive rivalry between Boeing and Airbus is one of great significance purely because of the way in which the companies have been able to counter attack the other strategically, with new products etc. This war has been waging for a long time and it is very difficult to point towards one as a clear winner. As mentioned earlier, the rivalry kicked off sometime in 1980s when Airbus came out with their A300 models.

Due to the subsidy that Airbus enjoyed, they were able to provide their jets at a lower rate as compared to Boeing. The first impacts of the rivalry could be traced back to the agreement on subsidy in 1992 when the US government and the European Union decided to limit the subsidies for these manufacturers to a maximum of 33%. Similarly the recent launch of the Airbus A380, the largest passenger aircraft was a result of the Boeing 747.

The launch of the A380 has prompted Boeing now to go for a modification of the 747 to compete with the A380 in all aspects. Thus we see that the rivalry has been tough and hard fought. We will look at the outcomes with regards to market position and financial performance.

MARKET POSITION

The graph below shows a brief description about the manner in which market share has been shifting around the two airline manufacturers.

We find that from the large gap that was prevalent in 1996, Airbus was able to catch up with Boeing and even managed to remain the market leader from 2001 to 2005.

The present position is a little more in favour of Boeing which enjoys a 55% share.

A B C D [17] 

A

Through steady increase in market share, Airbus beats Boeing for the first time with 57% share

B

Market share of Airbus goes down mainly attributed by the organizational issues

C

Airbus goes in for a re-organization into a fully integrated limited company

D

Boeing launches the new Boeing 787 Dreamliner

A very important aspect that has to be considered while analyzing the market position is the production capacity more than the marketing aspects. The table below shows a comparison of the orders received and delivered for the two companies.

18

The delivery percentage has gone down to alomost 30% in some years and has been as high as 300% in others to account for the back orders. On an average we find that Boeing has been able to maintain an average 120% delivery of orders compared to 90% of Airbus (till 2010). Thus a major difference in the market share could be attributed to the fact that the production capacity of Airbus is lagging a touch behind. But this said, it can clearly be seen that both these companies have been able to counter any attack from the other in an effective manner. This is reflected in the market position ove the years where they have been going neck to neck.

FINANCIAL PERFORMANCE

Financial performance is something that can be directly related to the sales that is made by each of these firms. As such when a new product is developed, there will be a break even sales figure identified. This is dependent on the product. For eg: the break eve sales for the Boeing 787 were estimated at 50. We will find a wide range of variation in the profits of the companies when taken on a timeline from 1996 to the present. It is not possible to directly compare the financials of the two firms across a common time period or for that matter of the same firm across two time periods. This is primarily because of the variation in the cash flows that occur. The period when one company is reaching the height of sales of one of its product could be the time when the other is investing a huge chunk of its capital into a new project. Unlike the other industries, the development costs incurred are incomparable.

On a whole, it can be concluded that financially, both the firms are on the better side of things as even today they are able to invest handsomely into new ventures. One main reason for this is the dynamistic of the industry and importance of technology. The fact that these are the only players in the market makes it more favourable.

ADAPTATION IN STRATEGY

The strategies of the two firms in order to place itself over the other have been a roller coaster ride. Many of the strategies have worked for them and a lot of it has backfired. There were instances when Boeing came out with a product and Airbus came out with a reply product that was better than the initial product and vice versa. A common trend that has been seen is that every time a new strategy is adopted, the firms tried to make sure that the flaws in the earlier decisions were taken care of. This enabled them to not start from scratch each time they came out with something.

The industry that the two fields are competing in is also very different compared to other industries where such a scale of competitive rivalry is seen. Here the environment is much more dynamic. The product is not something that can be made in a few days' time in order to meet the customer's demand. Any time delay in the delivery of the order could result in losing the order to the competitor. Thus accurate forecasting of the demand for a period of time becomes very important. This will enable the firm in planning in advance as to how to go about the market requirements.

Gaining competitive advantage over the other is the order of the day for these two firms. On time delivery is a very important aspect in this. But technology is what will really differentiate them. The need for better aircrafts have always driven them to go for innovations, increasing the capacity providing better performance engines, fuel efficiencies etc. Airline manufacturing is a purely technology driven industry and all other attributes come only behind this. Each new product signifies a path breaking technology. On most occasions, we can find products from both the business houses competing with each other in technical fronts. In India the main selling product is the 200 capacity medium size aircrafts - Airbus A320 and Boeing 737. Both these products match on almost all fronts except for marginal variations. Customers are mainly airline carriers as such. Each airline carrier usually goes for a fleet of either Airbus or Boeing and not a mix of both, primarily due to maintenance issues rather than technical aspects. The cost and delivery time also influences the decision when it is a first time buyer.

What is important here is firms always try to provide more than what the customers demand for. In this context, there could be mismatches that happen between what is delivered and what is demanded. A classic example of this is the Boeing 747. This is a state of the art aircraft but it was launched at a time when there was no requirement for aircrafts of that size and capacity. This reaction from the market enabled Airbus to come out with a more appealing product - the A380. Now it is up to Boeing to counter the A380 with a modified version of the 747. Thus changing the strategy according to the situation is essential for the survival of these firms. Being rigid in their decisions and not changing according to times will lead to their own peril.

THE FUTURE

Airbus has come up with this report that they call the "Airbus Global Market Forecast 2010-2029". It includes data regarding the growth in the sector, changes that have happened so far, improvements in the field etc. The most promising finding from this is that air traffic is expected to double in the next 15 years. As far as carriers are concerned, the major drivers for growth will be :

Replacement of aircraft in service in mature markets

Dynamic growth in emerging markets

Continued growth of low cost carriers, especially in Asia

Greater and continued market liberalization

Traffic growth on the existing route network where it is more

Efficient to add capacity than frequency [19] 

The growth expectation in Asia-Pacific is on a much bigger scale than in the Americas and Europe. This is promising as this will involve a lot of purchasing of new aircrafts. Along with the passenger segment, the freight segment is also bound to expand. With more players coming into this segment, the sales of freight carriers are expected to increase many fold.

Focus of the manufacturers will have to be one improvement along with innovation and expansion. There is an obvious requirement to expand the production facilities for these firms so that they are able to meet the expanded demanded that is expected to come in the near future. Along with expansion, they will also need to work on the technology front to come up with products that are faster, more fuel efficient, spacious and easy to maintain. Improving the delivery characteristics is another major challenge for both these firms. As delay is as good as losing the order, on time delivery is going to be the order of the day. In order to enable the firms to have control on the market forces, it is necessary for them to have a reliable estimate of what is in store for the future. They will have to forecast to a fair degree of accuracies as to what the market wants, not just the quantity, but also the quality aspect. We find that technical aspects are not given much importance when the customer choses a product and is more like a hygiene factor that the customer expects. Both Boeing and Airbus are going to be in this industry for quite some time into the future as well. They will have to use their strengths and opportunities to overcome their weaknesses that ultimately turn out to be their threats in the form of competition. Understanding the market, utilizing the resources available and innovating to come out with newer better products seems to be the way ahead for these firms.

Conclusion

According to an economic analysis by Hayward the formation of Airbus has been beneficial for international competition20. Research suggests that aircraft prices would have been 40% higher without Airbus's entry in the late 1970s and would have increased over time. The commercial aircraft manufacturing industry is characterized by relatively fixed output coupled with the infrequent aircraft orders, and the long run uncertainty because of extended product life cycle and a steep learning curve associated with developing new products. Thus there is a significant advantage for the firm that is a first mover in this industry. This is evident from the fact that Boeing had a near monopoly in this industry as it had entered the industry in 1970s. However Airbus could challenge Boeing and ultimately become the market leader by focussing on innovation and technology to create a niche market for itself. Boeing lacked in resources particularly technology when Airbus initiated competitive actions against it. Over the years, the two firms have developed similar capabilities and a fierce competition for leadership has resulted in a duopoly market.

20Trade disputes in the commercial aircraft industry: A background note. The Aeronautical Journal, 109, 157-166.