Boeing Versus Airbus
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BOEING VERSUS AIRBUS: AN ECONOMIC ANALYSIS A Thesis submitted to the Miami University Honors Program in partial fulfillment of the requirements for University Honors with Distinction By Alan John Cook May 2008 Oxford, Ohio 2 ABSTRACT Boeing Versus Airbus: An Economic Analysis By: Alan J. Cook In business there have been few rivalries as spectacular as that between Boeing and Airbus. Not only are bottom lines and stakeholder returns at stake, but also national pride and supremacy of the skies. These two immense corporations have been battling it out for over four decades. But what makes this competition between two very different foes so epic? What is it that drives these two firms to compete so vigorously? Why are they competing at all? With only two firms controlling the entire market, the industry fits the classic definition of an oligopoly – and yet we observe neither firm has undertaken collusion or moved to limit output. This paper will present an analysis of the competitive relationship between the rival firms within the large commercial aircraft manufacturing industry1 (or more simply the commercial aircraft industry). This paper will be divided into four main parts, each attempting to answer a pivotal question to our understanding of the nature of the competition: What does standard economic theory tell us about oligopolies? What is actually observed in the commercial aircraft industry? What factors drive the competition? What implications do these findings have? 1 There are many firms that manufacture aircraft, including Bombardier of Canada and Embraer of Brazil, however Airbus and Boeing are the only manufacturers of Large Commercial Aircraft (LCA), and as such the focus of this thesis will be on the LCA segment of the Commercial Aircraft Manufacturing industry. 3 4 Boeing Versus Airbus: An Economic Analysis By: Alan J. Cook Approved by: , Advisor Dr. James Brock , Reader Dr. Barnali Gupta , Reader Dr. Deborah Fletcher Accepted by: , Director University Honors Program 5 6 TABLE OF CONTENTS Abstract ......................................................................................................................................................... 3 I. History of Jet Travel ................................................................................................................................... 9 II. Standard Oligopoly Theory .................................................................................................................... 13 Cooperative & Non‐Cooperative Oligopoly Models ............................................................................. 16 III. Commercial Aircraft Manufacturing Industry Observations ................................................................. 18 Number of Firms ................................................................................................................................... 18 Market Concentration and Market Share ............................................................................................ 19 Firm Structures ..................................................................................................................................... 22 Barriers to Entry ................................................................................................................................... 24 Interdependence .................................................................................................................................. 26 Price Competition ................................................................................................................................. 27 Non Price Competition ......................................................................................................................... 30 Innovations ........................................................................................................................................... 33 IV. What Factors Drive the Competition? .................................................................................................. 38 Instrument of National Policy ............................................................................................................... 39 Order Size ............................................................................................................................................. 40 Differentiated Products ........................................................................................................................ 41 Fixed Output ......................................................................................................................................... 42 Expanding Market ................................................................................................................................ 43 Conclusion ............................................................................................................................................ 43 V. What Implications Does This Have? ....................................................................................................... 45 References .................................................................................................................................................. 46 Appendix ..................................................................................................................................................... 48 7 8 I. HISTORY OF JET TRAVEL In order to truly appreciate this analysis, it is important to cast it in the appropriate light and context. We therefore begin with a brief history of the commercial aircraft industry. The Beginning of Flight. The Wright Brothers flew their first plane in 1903 at Kitty Hawk. This was the first instance of heavier‐than‐air powered flight that carried a human being. Airplane development progressed slowly until World War I, at which time flight was recognized for the military advantages it provided. Several small firms cropped up to supply military aircraft. In the interwar period, plane development took aircraft from being constructed mostly of wood and canvas to aluminum. The onset of World War II saw tremendous improvements in airplane design and the level of production. Germany built the first practical rocket and jet engine powered aircraft towards the end of the war. Up to this point aircraft were used almost exclusively for military purposes, but after the end of WWII, commercial aviation began to increase in popularity. Firms that had previously produced military airframes for the war switched over production to civilian aircraft. Companies such as Lockheed Aircraft, Douglas Aircraft, and many smaller companies produced propeller‐driven aircraft that eventually launched the age of civilian commercial jet travel.2 The Jet Age. While civilian travel was firmly in the realm of propeller‐driven airplanes, the military – specifically the newly formed United States Air Force – took interest in the potential use of jet engines to power fighters and bombers. Boeing became a leader in jet engine technology, both due to luck and better engineers. Boeing then decided to take their expertise into the civilian market by producing a commercial jetliner. At the time, other manufacturers and airline executives believed that the cost and revenue structures could not be married to produce a profitable jetliner. This all changed 2 Heppenheimer, T. A. A Brief History of Flight. New York: John Wiley & Sons, 2001. 9 with Britain’s De Havilland Comet which was popular because it could fly faster, quieter, and above the weather, providing a smoother trip. 3 Boeing’s first jetliner – the 707 – was introduced in 1958, had four engines, and went on to be commercially successful. Lockheed and Douglas then proceeded to develop their own advancements: Douglas building the DC‐8 in 1958 and Lockheed building the turbo‐powered Electra (propellers powered by a jet turbine engine instead of pistons, a derivative of the jet engine used). Because of Boeing’s early lead and because of strategic business decisions, the 707 went on to become the industry leader, propelling Boeing to the forefront of large commercial aircraft manufacturing.4 The 707 was followed by the 727 in 1963, the 737 in 1967, the 747 in 1968, the 757 in 1983, the 767 in 1982, the 777 in 1994, and the 787 which is currently in development.5 The Birth of Airbus. In the 1960’s the commercial aircraft industry was dominated by American firms: Boeing, McDonnell‐Douglas, and Lockheed. European producers such as Hawker Siddeley of the United Kingdom, Aérospatiale of France, and Deutche Aerospace of Germany realized that independently they did not have the resources necessary to build a large commercial airplane (LCA) that was capable of competing against the American jetliners. They formed what initially was called the “A300 Project” which was collaboration between the three firms to product a medium‐range wide‐body jet. The A300 Project then went on to become a formal consortium: Airbus Industrie was established under French law and officially headquartered in Toulouse, France in 1970. The member firms of the consortium would take responsibility for the design and production of specific components, and the French partner would assemble the final aircraft – Airbus Industrie was responsible for sales, marketing, 3 McIntyre, Ian. Dogfight. Westport, Connecticut: Praeger, 1992. 4 Heppenheimer, T. A. A Brief History of Flight. New York: John Wiley & Sons, 2001. 5 Boeing Commercial Airplanes.