1 Introduction– Company Background
1.1 Airbus
1.2 Boeing
2 Internal analysis
2.1 Vision and Mission Statements, Goals and Objectives
2.1.1 Airbus
2.1.2 Boeing
2.2 Management philosophy and attitudes, Culture and Leadership
2.2.1 Airbus
2.2.2 Boeing
2.3 Strategic Levels
2.3.1 Airbus
2.3.2 Boeing
2.4 Enhancements of efficiency, quality, innovation and customer responsiveness
2.4.1 Airbus
2.4.2 Boeing
2.5 Value Chain
2.6 Strategy Execution Process
2.7 Financial Analysis and Comparison of Airbus and Boeing
3 External Analysis
3.1 Key economics and business characteristics
3.2 PESTLE-Analysis
3.3 PORTER’s 5-Forces and Industry attractiveness
3.4 SWOT-Analysis
4 Conclusion
List of references
Appendices
Appendix 1 – Key economics and business characteristics
Appendix 2 – PESTLE analyses of the global Aircraft Industry with specifics in the USA and Europe
Appendix 3 – Airbus and Boeing SWOT analyses
Appendix 4 – Porter’s five forces model of competition for analysing this business
Appendix 5 – Vision and Mission statements and the goals/ objectives of Airbus and Boeing in a comparison
Appendix 6 – Strategic levels of each organisation and differentiation strategies
Appendix 7 –Efficiency, quality, innovation and customer responsiveness enhancing practices
Appendix 8 – Value chain
Appendix 9 – Management philosophy and attitudes, Culture and Leadership
Appendix 10 – Strategy Execution Processes
Appendix 11 – Financial Analysis
Appendix 12 – Target Market Selection – Product Portfolio of Airbus and Boeing
Appendix 13 – Aircraft orders for Airbus A 350 and Boeing B787
The purpose of this report is to carry out a detailed strategic analysis of the two large aircraft manufacturers Airbus and Boeing. The discussion main part of this report is separated into internal and external analyses, which are reasoned in greater detail and supported with reasonable graphs and tables in the attached Appendices. Finally, conclusions are drawn as to which is the more strategic savvy and which company has the more sustainable enterprise; and there is a recommendation given in which company a potential investor should rather invest in.
Airbus is a European joint venture between EADS and BAE Systems, headquartered in Blagnac Cedex, France. Starting in the 1970’s, Airbus has caught up becoming an aircraft manufacturer for large civil jetliners and is now fighting for the market leadership in a duopoly with Boeing. The company offers a range of single aisle and wide body aircrafts that carry between 110 and 555 passengers, a sign for strong diversification. Airbus is known as the innovation leader by using new technologies for reducing operating costs, fuel burn, noise and emissions, and simultaneously increasing range (Airbus 2004). The company has been reporting constant revenues increase since 2002 with €25.2 billion in 2006, an increase of 13.2% over 2005. Thus, Airbus is EADS’ cash cow, with 64% of EADS’ total revenue (EADS 2007a, p.III). From a strategic point of view Airbus believes devoutly in strong air traffic between major hub airports around the world and therefore regards its mega-jumbo A380 as the airline’s best solution for the future (see Appendix 6).
Boeing is one of the world’s leading aerospace companies and the largest manufacturer of satellites and military aircraft worldwide. Beside that it shares the market leadership for large commercial jets with Airbus. Boeing, formerly in Seattle, is now headquartered in Chicago (USA) and produces aircrafts that carry between 107 and 433 passengers (<www.boeing.com>). Boeing is one of the largest US exporters, with increasing revenues of $28.5 billion in 2006, a 33% growth caused by improvements in the production (Boeing 2006a, p.9). After having difficulties with efficiency in its production in the 1990’s and the long-term strategy due to the failed project around the high speed Sonic Cruiser, the company is back in track. By launching the revolutionary B787 Dreamliner, completely built with composite materials like carbon fibre (see figure 8), Boeing pursues the strategy to provide a mid-size airplane for the forecasted increasing point-to-point traffic on long haul (see Appendix 6).
Airbus’ long-term strategic purpose is expressed in its strategic company vision of ‘creating the best and safest aircraft’. This very future-orientated and enduring message is even more confirmed by the mission statement, which follows the principle ‘to meet the needs of airlines and operators by producing the most modern and comprehensive aircraft family on the market, complemented by the highest standard of product support’. To quantify this mission Airbus formulated in its goal that the company wants to deliver strong results in a sustained manner, while commanding at least half of the world commercial aircraft market over the long-term. This shall succeed by objectives like further internationalization, focusing on key geographic markets, expanding its customer services offering and restoring its competitive edge by focusing on flexibility and efficiency (see Appendix 5 and EADS
2007b, pp.14-15).
Boeing’s long-term strategic purpose is expressed in its strategic company vision of ‘People working together as a global enterprise for aerospace leadership’. This very future-orientated and enduring message is even more confirmed by the mission statement, which follows the principle to be the leader ‘among the premier industrial concerns in terms of quality, profitability and terms of quality, profitability and growth’. For succeeding, Boeing’s “Vision 2016” formulates core competencies. These act as objectives such as customer knowledge and focus, large-scale systems integration on a global level by outsourcing and a lean enterprise (<www.boeing.com/vision>).
‘The company's philosophy is always to listen to its customers and to maintain its vision -- the forward thinking which has placed Airbus at the forefront of the industry. Nothing is taken for granted’ (<http://www.airbus.com/en/corporate/ethics/mission
_values/index.html>). This value of innovation and excellence is tried to be connected by Airbus’ Management with a culture of partnership – as well among the employees and the managerial levels as towards suppliers and customers. The aim is a two-way flow of views, ideas and technical ideas. The leadership idea of Airbus is about sharing responsibilities and exchanging ideas among all levels and nationalities for getting the best results, but nevertheless it is seen as essential to pursue a strong leadership with clear guidelines. (<http://www.airbus.com/en/corporate/people/ growing/>).
Boeing’s management philosophy is expressed best by its vision ‘People working together as a global enterprise for aerospace leadership’. Boeing represents a so-called open and honest culture, in which all employees are required to share opinions and perceptions in order to resolve issues. In this work environment management listens to these concerns and does not retaliate against those who raise them (Boeing n.d., p.9; Boeing 2006a, p.6). Boeing’s leadership understanding is expressed in a statement which attests that Boeing aims to be a world-class leader in every aspect of the business. Hereunto team leadership skills at every level shall be developed – in the management performance; in the way of design, construction and servicing the products, and in our financial results’ (<http://www.boeing.com/ companyoffices/aboutus/ethics/integst.htm>).
As Airbus is a 100% subsidiary of EADS and dealt as a division of it, EADS corporate strategy is transferable on Airbus and all other divisions (see organigram in Appendix 6). The top management intends to underline EADS’ position as a leader in major global aerospace and defence markets (EADS 2007b, p.9). In its business strategy within the division Airbus pursues the strategy of diversification as best cost provider in every market segment for large civil commercial jetliners (see Appendix 12). Airbus functional-area strategies within the division are embossed by the strong connection with the parent company EADS (see Appendix 6). Furthermore it is expanding worldwide with a global strategy in terms of supply chain enhancing and key market presence (see Appendix 6 & 7).
Airbus’ Differentiation Strategy – ‘Hub-and-Spoke-concept’:
The Airbus A380 is Airbus’ solution to the growing traffic between major hubs and limited resources and slot capacities at these hubs. Hereby Airbus is dealing with the concept of the hub strategy that says that the passenger volume at central airports could be raised by more feeder traffic and mass transportation on long haul flights with very large airplanes.
Boeing’s companywide corporate strategy is to maintain the global market leader position in both the military and civil sector (Boeing 2006a, p.24). With such a mixed portfolio Boeing wants to keep a balance and be secured in case on business section is affected by a crisis (see Appendix 6 with organigram and more). On a business strategic level Boeing, exactly like Airbus, pursues a strategy of strong diversification with its product portfolio (see above and Appendix 6 and 12). The functional-area strategy within Boeing Commercial Airplanes is embossed by an interesting tripartition, with a special focus on the big B787 project (see Appendix 6). For further information about subdivision and functional responsibility see Appendix 6. The
strategy of Boeing’s global strategic level is described in more detail in the following chapter and Appendices 6 and 7.
Boeing’s Differentiation Strategy – ‘Direct Point-to-Point-Traffic’
The competitor Boeing pins its hope on a different strategy and does not take the hub and-spoke concept as a given. The new Boeing 787 Dreamliner will be its solution for nonstop point-to-point flights between secondary cities (airports). The aim is it to build mid-size airplanes with big ranges, put an emphasis on passenger comfort, introduce higher humidity rates in the cabin, and a composite material body made of carbon fibre (Boeing 2004).
The second part of Appendix 6 deals with the different strategic approaches both companies pursue. First the different concepts are defined, after what the advantages and potential market of the Hub-and-Spoke- and the Point-to-Point-concept are shown– and in more detail whereupon they are based on.
Attempting to restore its competitive edge, Airbus aims at enhancing its efficiency, quality, innovation and customer responsiveness. The Power 8 program was launched to restructure the organization and productions processes and to create a network of global business partners and integrating Airbus in a new industrial organisation with transnational centres of quality (EADS 2007b, p.15). To strengthen the collaboration with key suppliers all around the world, EADS founded a procurement and supplier network. Information flows together in the so-called EADS Global Innovation Networks, in order to enhance cooperation, improving efficiency of the supply chain and sharing practises (EADS 2006a, p.53). Another important field Airbus emphasizes on is the development of products in response to customer needs (EADS
2007b, p.15).
In order to be forearmed for the future competition, Boeing developed initiatives which cover enhancing in efficiency, quality, innovation and customer responsiveness. The Internal services productivity initiative aims to raise productivity. The Development Process Excellence initiative deals with improving the speed of the R&D and major development programs such as the 787 Dreamliner. Boeing’s initiative of global sourcing and outsourcing parts of its core competencies aims at achieving greater economies of scale, to optimize the worldwide supply chain and to find the most innovative solutions for such revolutionary products like the B787 (see Appendix 6 & 7 for details of Boeing’s global activities).
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To fully understand the aircraft manufacturing industry, the whole backward and forward channel has to be taken into consideration. The industry value chain above shows the process from the suppliers of the raw material to the end user who demands the service of transportation (more detailed analysis in Appendix 8).
From the aircraft manufacturer point of view, airports and the end user play a rather secondary role because they influence only indirectly by providing the infrastructure or demanding air travelling due to the price and the way to travel. Suppliers for some common raw materials and general electrical aircraft components could be rather neglect as well because of the number of suppliers worldwide. First-tier suppliers on the other side are as important and valuable as a bulk buyer like aircraft leasing companies or big global airlines. Hereby its is necessary to create a long-term relationship and strategic alliance like for engines (Rolls-Royce & General Electric), respectively to intensify the collaboration in terms of customization and development of a new aircraft or servicing the product.
Airbus and Boeing both are following basic managerial guidelines (see Appendix 10) to stay on the right track of success and execute their strategy properly within the companies. Both aircraft manufacturers have introduced huge programs, in order to tighten their organization in terms of company structure, production and supply chain.
Airbus launched a so-called “Transformation” process which consists of four “I’s”:
To improve the INTEGRATION and to enhance INNOVATION within the entire EADS, Airbus was fully subdivided and important functions like R&D were integrated (EADS 2007a, pp. 5-7; p.16). The IMPROVEMENT of the industrial model includes the Power 8 program to improve cost and production efficiency (EADS 2007a, p.17). INTERNATIONALIZATION shall allow worldwide market presence and access to technology and know-how.
Boeing’s “Vision 2016” regards ‘people working together’ as its core competency and competitive advantage. To support that by doings Boeing has founded several benefit programs for employees worldwide, improves interaction between all levels by open letters, started a Diversity Policy to attract best qualified people globally regardless of their race, religion, gender and disability (<http://www.boeing.com/ employment/culture/diversity.html>). Boeing’s Code of Conduct rounds off the picture of a fair and ethical business (see Appendix 10; Boeing 2004).
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(Source: Own compilation according to the Annual Reports 2006)
The long-term solvency ratios leave the mark that Airbus is in weaker financial position than Boeing. The profitability ratios show that Boeing had an average year in
2006 with a moderate and good profitability. The return of assets of over 6 % shows an overall strong earning power of Boeing’s total assets. Indeed, Airbus on the other side is not in the red, but it is remarkable that the company had a bad year caused by the production and delivery problems with the A380, connecting with the delay compensations. The trend and the fluctuations over the past two years reflect this impression as well. More about the financial ratios and its evaluation, a share price chart comparison and the companies’ shareholder’s structure could be found in Appendix 12.
The aircraft manufacturing industry is constantly growing, a global market and had a size of US$ 63 billion revenues in 2006 (EADS 2007a, p.III; Boeing 2006a, p.9). It is characterized by high entry barriers and investment in R&D and by a duopoly with Airbus and Boeing having a market share of 86% for aircrafts over 100 seats (see Appendix 1).
This chapter represents a summary of the deeper analysis performed in Appendix 2. These key points emphasize which external factors influence the aircraft industry.
The worldwide liberalization of the aviation is progressing, but trade and production are influenced enormously by subsidies and government procurement practices (International Labour Organization 2000, Chapter 4). The World Trade Organization (WTO) is discussing the transatlantic dispute concerning these subsidies since 2004. Both Boeing and Airbus has initiated WTO procedures against the other party (Heymann 2007, p.1). Because of the high degree of cyclicity between air traffic and economic growth the demand for aircrafts is higher in a booming world economy (see figure 5). High fuel costs and increasing environmental awareness adherent with legal regulations[1] stimulate the demand for new airplanes with a better fuel economy as a replacement for older airlines fleets (IATA 2007, p.1). New lighter composite materials and better engines improve fuel economy and operating costs by up to 20%,
see ‘Technological Advancements’ in Appendix 2 (Airbus 2006b, p.11).
This chapter represents a conclusion of the deeper analysis performed in Appendix 4. Strength of competitive pressure as an overview:
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Source: Own evaluation
The relative strong competitive pressure surrounding this industry and the fact that there are high market entry and exit barriers, gives an immediate impression of being not worth entering. But with a market volume of estimated $2.1 trillion until 2024, then even a little share of these revenues would be interesting to many companies (Datamonitor 2006b, p.25). The industry life cycle status can be ranged in the stage of growth (see figure 16), due to the expected air traffic growth on a long-term basis of 5% each year (IATA 2007b, p.1). Furthermore, the willingness of state-run companies (from Russia or China) to enter this industry is extremely embossed by political and prestigious interests to become a world’s economic superpower.
The SWOT shown here is a result of the analysis and reasoning presented in Appendix 3:
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It is a neck-and-neck race in the aircraft industry (see figure 9) and a duel between Airbus and Boeing about the market leadership – with Airbus in front the last years and Boeing back on top since 2006. Both experience a strong support by the parent companies, whereas Boeing’s outstanding and tightened military division strongly keeps the commercial airplane division on the ground. In terms of product strategy the strength of the one is the weakness of the other: Boeing found no real answer on the A380 as mega-jumbo, but is highly successful with its B787 in the mid-size, long- range segment, where Airbus is lagging behind with its try to catch up through the A350. The market opportunities for both companies and strategies exist with increasing air traffic, especially in Asia with its upcoming markets China and India. On the other side increasing prices for raw materials or indirectly oil price fluctuations, and the risk of a new external shocks are threatening the performance.
In summary, it has been shown that Airbus and Boeing, playing in a duopoly about the market leadership in the large aircraft industry, take turns in being top dog and underdog in the market.
Both companies pursue the strategy of diversification as best cost provider in every market segment for large civil commercial jetliners with more than 110 seats. Only large firms like Airbus or Boeing have the financial capability to develop a full range of products for serving all customer segments and needs simultaneously. But having a closer look showed that both companies rather focus on different long-term strategies because of limited financial and production resources or in order to retain credibility with the customer. Whereas Airbus predicts a big future for mass transportation between major hubs with very large airplanes like its A380, Boeing pins its hope on a different strategy and does not take the hub-and-spoke concept as a given. Boeing forecasts that the demand for nonstop point-to-point traffic between cities with fast and middle-size long range airplanes will increase tremendously.
The historical trend drawn in the following graph confirms this expectation.
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Boeing’s record order books for 514 B787 Dreamliner by the end of 2006 affirm their strategy (Appendix 13). At the same time Airbus backpedals and launched the A350 to compete in the mid-size, long-range segment. However, it will not be available before 2010 according to current plans, whereas Boeing plans to deliver the first B787 in 2008.
The next 12 months will show whether Airbus can really keep a full product portfolio or whether it will diminish to a niche competitor for the next decade, with a family of 100-200-seat planes, a ‘second’-class 250-300-seat planes, and one very expensive 550-seat plane. This A380 R&D program is estimated to cost over $15 billion when entering the market and consequently ties up the money, Airbus would need to replace its A320 Family in the near future.
The success stands and falls with the financial resource and situation (see Appendix11), and from that point of view one has to doubt that Airbus can be present everywhere. Boeing’s retraction from developing an own new mega-jumbo may was the right the decision. Moreover considering Boeing’s stronger military arm, in my opinion Boeing is the more sustainable enterprise for the foreseeable future and at the moment it seems that their strategy is savvier – “quod erat demonstrandum”.
Asking for giving recommendations as to which company an investor should rather invest into, you need to take into consideration, how willing the investor is to take a risk and whether he is investing long-term or short-term. Due to the conclusion drawn above I recommend to invest in Boeing, if less willing to take a risk and invest long- term, because of its stronger financial situation and resources – the company is more stable. But on a short-term view and if rather willing to take a risk I recommend to invest into Airbus, since if the A380 finally enters the market will be demanded much
more[2] and the stock prices will boom.
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[...]
[1] The European Commission counteracts by integrating the airlines flying in or to Europe into the existing EU- Emission Trading System from 2008 on.
[2] ‘…none of the program’s 13 passenger airline customers cancelled their order proves “the plane worth the wait”. In fact, last year the program’s first three customers all committed to additional passenger aircraft, with Quantas ordering another 8, Singapure Airlines ordering 9 more, and Emirates converting an order for two freighters to the passenger variant…furthermore British Airways enquires…’ (Sobie, B in Airline Business 2007, p.50).
