Case

11
Excerpt from Bear Stearns Analyst Report as reported in Fortune in August 1999 We are not here to buy market share. Noel Forgeard, Chairman, Airbus Industrie, in August 1999

In prior years we found customers somewhat cautious about supporting Airbus. This year it has become acceptable and, frankly, even stylish to laud Airbus and to chastise Boeing.

AirbusFrom Challenger to Leader

BSTR/046 BOEINGS NIGHTMARE
In October 2002, The Seattle Times, a local newspaper published from Seattle, USA, where Boeing is headquartered, carried a headline story, Boeing Is Slipping to No. 2. According to the newspaper report, Boeings sole competitor, Airbus Industrie (Airbus) had bagged an order from easyJet1 for 120 A-319 jets. easyJet was one of Boeings most loyal customers (Refer [to] Exhibit 1 for a profile of Boeing). Analysts felt that after easyJets shift away from Boeing, other low-cost airlines would follow suit in opting for Airbus. Airbus seemed all set to take market leadership in the low cost segment from Boeing for the first time. From the mid1990s onwards, Airbus had steadily increased its market share. By the late 1990s, Boeing and Airbus had an equal share in the market. Rival Boeing accused Airbus of resorting to heavy price cutting in order to beat off the competition. It also accused Airbus of producing aircraft for which it had not received orders and creating a glut in the market. But Airbus rejected the allegations, saying that it was in the market to make money and not to buy market share. Some analysts were of the opinion that Airbus was able to increase its marketshare because of the financial support it received from its consortium partners. However, others attributed Airbus success to its fuel-efficient jets, which were economical to run.

THE TAKEOFF
This case was written by K. Subhadra, under the direction of Sanjib Dutta, ICFAI Center for Management Research (ICMR). It is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. The case was compiled from published sources. 2003, ICFAI Center for Management Research. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means electronic or mechanical, without permission. To order copies, call 0091-40-2343-0462/63 or write to ICFAI Center for Management Research, Plot # 49, Nagarjuna Hills, Hyderabad 500 082, India or email icmr@icfai.org. Website: www.icmrindia.org.
1 Europes

biggest low-cost airliner.

The history of Airbus dates back to the late 1960s, when Britain, France and West Germany launched the Airbus Project. Airbus was a desperate attempt by the European governments to end the monopoly of American manufacturers in the aerospace industry. At that time, American manufacturers dominated the global aerospace industry and European aircraft manufacturers were unable to compete with American players. The big three of EuropeBritain, France and West Germanycame together to salvage European pride and industry. Due to differences with the other partners, Britain quit the project in July 1967, and in 1970 the Airbus Project was reorganized and named Airbus Industrie, a FrancoGerman company under French law. In 1971, Spain joined the consortium with [a] 4.2% stake through state-owned Construccciones Aeronautics S.A (CASA).

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Exhibit 1

Profile of Boeing

The leading airplane manufacturer in the U.S., Boeing Airplane Company (Boeing), was formed in 1916 by William Boeing (W. Boeing) and George Westervelt (Westervelt). At the time, it was called the Pacific Aero Products Company. The companys name was changed to Boeing in 1917. Boeing began by manufacturing [aircraft] for the U.S. military during the First World War. In 1922, Edgar Scott became the companys president and during his tenure the navy awarded Boeing a contract to build a primary trainer (a plane for test flights). In 1927, the Model 40A mail plane won the U.S. Post Office contract to deliver mail between San Francisco and Chicago. The Boeing Air Transport (BAT) [company] was formed to run the new airmail services. BAT also trained pilots, set up airfields and provided maintenance staff for the new service. However, Boeing realized that to grow, it needed to design and go in for mass production and sell its own aircraft. After the Second World War, the company shifted its focus from the defense industry to commercial jets. In 1952, Boeing launched its first commercial jet, the Boeing 707, a short-range jet. In 1960, William M. Allen (Allen) became the companys CEO. The same year, Boeing began manufacturing its first jumbo jetthe Boeing 747. During Allens tenure, Boeing launched one of its most successful jets, the 737. In 1962, Boeing manufactured the Air Force One for the American presidents use. In late 1969, Boeing entered the spacecraft manufacturing business by contributing to the Apollo program. In the early 1970s, Boeing faced a host of problems due to the recession in the aviation industry. When Airbus Industrie was formed in 1970, Boeings market share (70% in the early 1970s) began to decline. In the mid-1970s, Boeing launched long-range planes (the 757 and the 767). By the mid-1980s, Boeing expanded its presence in the consumer electronics business through joint ventures, mergers and subcontracting. In March 1984, Boeing took over the De Havilliard Aircraft [company] of Canada to enter the commuter planes market. In the early 1990s, Boeing completed the manufacture of the 727 and the 737. By October 1994, the company launched the new 737 series, the 737-800. In the mid-1990s, Boeings revenues plunged and it had to retrench around 9,300 employees due to the economic slowdown. The company faced a 10-week strike in the fourth quarter of 1995. In late 1996, Boeing and McDonnell Douglas announced plans to merge. In 1997, Boeing had approximately 70% of the world market for passenger aircraft. By the end of 1997, Boeing was severely affected by the Asian economic crisis2 that put in doubt over one-third of the $1.1 trillion projected commercial aircraft sales for the next 20 years. The companys internal problems such as excessive bureaucracy, redundant manufacturing processes and an outdated information technology setup further aggravated the situation. Boeing lost 17% of its market value as a result of the Asian crisis. In 2002, Boeing was a $54 billion company operating in 145 countries with around 112,000 employees worldwide. The company was divided into six major units: Air Traffic Management, Boeing Capital Corporation, Commercial Airplanes, Space and Communications, Military Aircraft and Missile Systems, and Connexion by Boeing. The commercial aircraft division contributed around 60% of the total revenues. Boeings manufacturing plants were located at Renton, Everett (Washington), Wichita (Kansas) and Long Beach (California).
Source: ICFAI Center for Management Research.
2 The Asian financial crisis started in early July 1997, when international currency speculators as well as many Thai nationals started selling Thailands currency, the Baht, to buy U.S. dollars, causing a flight of capital out of the country. As a result, capital became scarce and interest rates on borrowed money rose sharply, leading to the Baht losing about 20% of its value. Then the Thailand stock and real markets collapsed, pushing the country into its worst recession, as production decreased, unemployment rose sharply and businesses went bankrupt. The crisis spread quickly to other countries in the southeast Asian region like Indonesia, South Korea and Japan, significantly damaging the regions economy.

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Initially, Airbus had its headquarters in Paris; in 1974, the headquarters were shifted to Toulouse (France). Each partner in the consortium was assigned specific production and assembly tasks, and the consortium was responsible for coordinating designing, development, financing and production activities of the partners. Airbus first product was the A-300-Ba widebody twin-jet plane with a capacity of 226 passengers. The next product was the A-300-B2, a 250-seater. By 1975, Airbus was able to garner 10% of market share, and received first time contracts from Eastern Airlines3 and Thai Airways.4 By the end of 1975, Airbus had orders for 55 aircraft. By 1978, Airbus orders had increased to 133, and it had a 26% market share by value. It also launched [the] A-310 with a 218passenger capacity in the two-class configuration. The A310 had a two-man cockpit with a six-cathode ray tube display, replacing dialsthe first of its kind in the aviation industry. In 1979, British Aerospace Systems (BAE Systems) entered the consortium with a 20% stake, and in the same year, Airbus announced that it would launch a single-aisle aircraft with a seating capacity of 130170; the aircraft was later called the A-320. In the early 1980s, Airbus experienced difficulties in financing the A-320 project, since all the Airbus partner governments had not approved the program. While the French government had approved the project, both British and German partner governments wanted more time to measure the market potential for the plane. Another problem was that the consortium had not yet made money on products already in the market. By 198586, Boeings market share had decreased to 46%, with Airbus having increased its share to 25%. With Airbus increasing market share, Boeing began to accuse Airbus of using unfair trade practices by getting heavy subsidies from its European governing partners. The U.S. government too started [pressuring] the EU to reduce subsidies to Airbus. The then President of the United States, Ronald Reagan, cited Airbus as a classic example of violation of international trade agreements. In the late 1980s, [the] U.S. government filed a complaint against Airbus at The General Agreement on Trade and Tariffs (GATT). It complained of unfair competition against two U.S. airline manufacturers, McDonnell Douglas and Boeing, by Airbus. Airbus, it said, had the financial support of four European governments, who provided cheap loans to the consortium with no repayment conditions. Airbus responded by denying that it received heavy subsidies from the governments concerned. The governments of the four European states also stated that U.S. aircraft manufacturers received indirect government subsidies through the U.S. defense department. After protracted discussions, in

1992 a bilateral deal was signed between the European governments on one side and the U.S. government on the other, that limited the financial help that could be given to Airbus to develop any new model, to 33% of its total development costs. The agreement also stipulated that the aid would have to be repaid with interest within 17 years. In the mid-90s, the main problem for Airbus was to raise finance for its major projects, such as the development of a new super jet. Airbus wanted to bring in more partners; however, no new partner was willing to invest money because of the uncertain financial health of the consortium. Under French law, Airbus was not obliged to publish its annual accounts or reveal cost and revenue details. With no financial data on the consortium, no new partner was forthcoming. Another negative feature of Airbus was its slow decision-making processevery partner (representing [each] different country) tried to safeguard its own interests rather than [make] decisions that would benefit [the] consortium as a whole. Airbus came under strong pressure to corporatize itself. Despite its success in attracting orders and increasing its market share, many were skeptical about its ability to compete with Boeing with its existing structure. Airbus announced its decision to restructure itself on the lines of an integrated company. However, the managing partners could not reach agreement on the nature of the restructuring. Around the same time, Boeing announced its decision to take over U.S. aircraft manufacturer McDonnell Douglas. BusinessWeek summarized the challenges that Airbus faced: With 35% of the world jet market, Airbus has so far proved a spirited challenger to Boeing. But to face up the new behemoth, Airbus must change itself from an unwieldy, fourpartner consortium into one for-profit company. It must develop planes with more than 400 seats to compete with Boeings 747 series and develop a next-generation superjumbo that can carry up to 700 passengers. And it must overhaul its inefficient manufacturing, which is geared more toward making sure each partner gets its share of jobs than it is toward making money.5 Reports said that though British Aerospace and DaimlerChrysler Aerospace AG (DASA) were in agreement over the plan for revamping Airbus organizational structure, the French partnerAerospatialewas opposed to it. The French company did not want to pool manufacturing assets, fearing that rationalization of production might lead to massive layoffs. This was politically unacceptable to France, a country with an already high unemployment rate. In early 1998, the Airbus partners re-started discussions on revamping the organizational structure of the consortium. In the same year Noel Forgeard (Forgeard)6 was appointed as CEO of Airbus. However, there were serious

was one of the largest airlines in [the] U.S., which operated on eastern coast routes. It was liquidated in 1991 due to heavy losses. 4 Thai Airways is an airline company, operating from Thailand.

3 Eastern Airlines

at Airbus, BusinessWeek, December 23, 1996. CEO of French missile and satellites maker Matra Hautes Technologies.
6 Former

5 Angst

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Table 1

Manufacturing Plants of Airbus

NOTE ON AEROSPACE INDUSTRY

The history of the aerospace industry dates back to 1917, when the U.S. government built an aeronautics research center in Langley, Virginia. In the subsequent years, there was close private and public sector collaboration in the industry. The U.S. governments investment in the aerospace industry was substantial, before and during the Second World War. After the Second World War, U.S. manufacturers had distinct technological and financial advantages over their European competitors. Prior to the Second World War, Britain had been the leader in the aerospace industry. However, it failed to retain its leadership position due to the lack of a proper corporate and regulatory climate. The industry continued to be a high priority area for governments after the Second World War. Western governments invested in the industry to an increasing extent after the war. While military aviation received federal funding in the U.S., in Europe, governments provided funds for civil aviation. The aerospace industry can be broadly divided into three categories: defense contracts, space programs, and commercial aircraft. The aerospace industry is one of the most capital-intensive industries in the world. It is characterized by high labor and research [and] development costs. R&D, apart from developing new commercial aircraft designs, provides technological inputs for the defense and space programs. Investment in the aerospace industry involves a high degree of risk. The investment risk can be gauged from Airbus investment in its A-380 aircraft; the investment required was equivalent to the companys net worth. The cost structure of the aerospace industry is also very high. It is estimated that the cost of development of a new aircraft model from designing to launching, is around $4 billion. The cost structure in developing a new aircraft can be broken up as follows:
Development Tooling Work-in-progress and overhead expenses 40% 20% 40%

Parts Manufactured Cabin Interior Fuselage (forward & aft) Fuselage (cockpit & centre) Wing Pylon, Nacelle Empennagehorizontal tail plane Empennagevertical tail plane FINAL ASSEMBLY LINES A-320 Family A-300/A-310 & A-330/A-340 A-380

Location Buxtehude, Laupheim (Germany) Hamburg, Nordenham, Bremen, Varel (Germany) Meaulte, Saint Nazaire, Nantes (France) Broughton, Filton (England) Toulouse (France) Puerto Real (France), Getafe & Illescas (Spain) Stade (Germany)

Hamburg (Germany) & Toulouse (France) Toulouse (France) Hamburg (Germany) & Toulouse (France)

Source: www.airbus.com.

Table 2

Turnover of Airbus

Year 1997 1998 1999 2000 2001 2002

Source: www.airbus.com.

Turnover (in billions) $11.6 $13.3 $16.7 $17.2 20.5 24.3

differences between the consortium partners over the valuation of the assets to be pooled in the new corporate structure. The fact that accounting standards differed from country to country was also a hindrance in the valuation of assets. In 1999, the stumbling blocks to restructuring were finally cleared, when Aerospatiale was merged with Marta Hautes Technologies, and DASA (Germany) [took] over the Spanish partner CASA. Aerospatiale Marta and DASA together formed the European Aeronautic Defense and Space Company (EADS). By 2001, Airbus was incorporated into an integrated company, with EADS and BAE owning stakes of 80% and 20% respectively. In 2002, Airbus employed around 45,000 employees, with manufacturing plants spread all over Europe (Refer [to] Table 1). In 2002, it reported a turnover of 24.3 billion7 (Refer [to] Table 2).
7 On

June 6, 2003, 1 Euro = $1.18.

Product development of an aircraft begins with a paper airplanea three-dimensional model, estimating the performance and the operating costs of the aircraft. The manufacturers generally [use] these models to demonstrate new technology and most importantly to assess the response of potential buyers. Generally, before initiating production of new aircraft, companies hold discussions with key airline companies about adaptations and options that need to be incorporated into the prototype. Often, these airlines [become] launch customers, placing initial orders that [guarantee] the minimum volume, while sending signals to potential buyers that the aircraft is worth considering.

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Case 11: AirbusFrom Challenger to Leader

One of the important characteristics of the global aerospace industry was the high entry barrier of heavy capital investment required. Another characteristic was the high level of involvement of governments in the industry. Prior to the Second World War, [the] British ruled the aerospace industry. But after the war, the Americans began to dominate the global aerospace industry. Many European aircraft manufacturers became bankrupt, being unable to compete with the American aircraft companies. The main players in the aerospace industry were [the] Boeing, McDonnell, Douglas and Lockheed companies, all [from] the U.S. Over the years, there was strong consolidation in the aerospace industry through mergers and acquisitions. One of the first moves towards consolidation was made in the 1960s, when McDonnell and Douglas merged, forming a new companyMcDonnell Douglas. In the late 1960s, in order to challenge American dominance in the industry, the big three of [. . .] Europe joined together, forming the consortium Airbus Industrie. From this point, American and European companies competed for dominance in the global aerospace industry. In the early 1980s, the American company Lockheed announced that it was stopping production of commercial aircraft to concentrate on the military and space segments. The commercial aircraft market was now divided between the three dominant playersBoeing, McDonnell Douglas and Airbus Industrie. There was further consolidation in the industry when, in the late 1990s, the two American majors, Boeing and McDonnell Douglas, announced their merger. The merger resulted in a situation of duopoly in the commercial aircraft market with only two playersBoeing and Airbus Industrie (Refer [to] Table 3 for market share). In the late 1990s and early 2000s, the worldwide economic recession compounded by terrorist attacks in the USA resulted in turbulent times for the industry. The September 11, 2001 attacks on the U.S. had a devastating [effect] on [airline] companies all over the world, with a decline in the world air passenger traffic. Many airline companies went broke and filed for bankruptcy. The U.S. government stepped in and

announced a bailout package for the U.S. airline industry. The slump in airline services had a very negative impact on aircraft manufacturers, with most airline companies canceling orders for new aircraft.

FLIGHT TO SUCCESS
In 1970, when Airbus Industrie was set up, the commercial aircraft market was totally dominated by U.S. aircraft manufacturers led by Boeing. Boeing dominated the world market with its 747 jumbo jet family of aircraft. Although Airbus had great difficulty in breaking into the market initially, over the years, it managed to attract more and more customers. Though some attributed Airbus success to the subsidies it received from European governments, others felt that Airbus succeeded because of its production efficiency and innovative product development.

Innovative Product Development

In the 1970s, the aerospace industry was in a transition. The regulatory set-up in the American market restricted price wars among existing carriers and the entry of new carriers. However, existing airlines were allowed to fly any number of flights on [a] route, resulting in an increasing number of flights on the popular routes. Airlines found that the use of Boeing aircraft (Boeing 727s) was expensive for frequent flying. There was a demand for wide-body aircraft with twin engines and twin aisles, and with passenger capacities of 250 passengers. However, Boeing was not interested in manufacturing such aircraft. Though both McDonnell Douglas and Lockheed came out with the wide-body planes, their aircrafts had three engines and a range of 3,500 miles. Airbus was able to identify the niche left by the U.S. aircraft manufacturers, and decided to launch a wide-body aircraft with twin engines and with a range of 2,100 miles. Thus Airbus launched its first product[the] A-300in 1974, a wide-body aircraft with twin engines and twin aisles, which reduced flying costs for the airliners. However, the A-300 model was not as popular as expected and for around 18 months there were no orders for [it]. The first breakthrough for Airbus came in 1978, with Eastern Airlines8 placing an order for 23 A-300s, and soon Airbus started receiving more orders for the A-300. In the same year, Airbus decided to develop a new model[the] A-310an extension of the A-300, with a budget of $1 billion. Till the late 1980s, Airbus had only two aircraft models on the market[the] A-300 and [the] A-310. Soon it realized that it needed to increase its product range in order to compete with
was one of the largest airlines in [the] U.S., which operated on eastern coast routes. It was liquidated in 1991 due to heavy losses.
8 Eastern Airlines

Table 3

Global Aerospace IndustryMarket Shares (in %) Year 1995 1996 1997 1998 1999 2000 2001 2002 Boeing 69.7 64 60 50 45 45 47 43 Airbus 13 32 35 50 55 55 53 57

Source: Compiled from various articles.

Case 11: AirbusFrom Challenger to Leader

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Boeing in all product categories. During the 1990s, Airbus focused on introducing new aircraft. It launched 4 product families with nine airplane models during the 1990s; in the same period Boeing launched only two product families 7179 and 777and revamped its old models in other product lines. Commenting on the Airbus products, Ned Laird, managing director of Air Cargo Management Group, said, Airbus airplanes are newer in design, and in most cases they are cheaper to own than Boeing alternatives.10 In 1989, Airbus launched the A-321 with increased seating capacity (185 passengers), and in 1992, [the] A-319a 124-seaterwas launched. In 1993, Airbus launched the A-319 with a seating capacity of 124 passengers (Refer [to] Exhibit 2 for [the] Airbus product range). Airbus was able to emerge as a serious threat to Boeing chiefly because of the success of the A-320 family of aircraft, which included [the] A-318, A-319, A-320 and A-321. Instead of imitating Boeings products, Airbus came out with product innovations to differentiate itself from Boeing. For instance, Airbus offered similar cockpits across every model, unlike Boeing, which designed the cockpit differently for every plane. The identical cockpit design was an instant hit with airline companies. Similar cockpits meant that airline companies could use the same crew across Airbus aircraft, right from the 107-seat A-318 to the 380-seat A-340. Said Tim Bennett and Alex Hunter, analysts at Morgan Stanley, Airbus has taken the technological lead by offering a common cockpit configuration. We believe this is helping to consolidate Airbus position with airlines operating a mixture of short-haul and long-haul aircraft.11 Airbus also differentiated itself from Boeing in its aircraft design. For instance, the A-320 was designed with [a] 71/2-[inch] wider fuselage than Boeings 737 (designed during the 1960s), giving the airlines extra space to add more seats in a six-across configuration. Richard Aboulafia, director [of] aviation [at] Teal Group, said, That inch makes a difference, because North American rear ends arent getting any smaller.12 The wider choice of aircrafts encouraged airlines to switch to Airbus in order to spread their maintenance costs. Commenting on the economies of using Airbus aircraft, Frederic Brace, vice president [of] finance [at] United Airlines, said, Once you get an Airbus in your fleet, you tend to want more of them. They make a good plane that is very economical to operate.13

Exhibit 2

Product Range of Airbus & Boeing

Category Single Aisle Family Model

Airbus A-319 A-320 A-321 A-318 A-300600R A-330200 A-340200 A-330300 A-340200 A-340300 A-340500 A-340600 A-380

Boeing 757 757200 767 757300 717 767200ER 767300ER 767400ER

Wide Bodied Aircraft Model

Super Jet Jumbo

747400

Source: www.airbus.com & www.Boeing.com.

Over the years Airbus has come out with aircraft in line with the market demand, and [has incorporated] technological innovations, unlike Boeings aircraft, which were extensions of its 747 technology. Boeing had failed to introduce new technology in its commercial jets after its Super Jumbo 747. Airbus A-320, launched in 1984, had new technology, resulting in better operating efficiencies and performance. The A-320 was the first commercial jet with fly-by-wire14 controls and side sticks, and was designed to meet the requirements of short-distance routes. In 1986, Airbus launched the medium capacity A-330/-340 for long-distance routes. While Airbus was coming out with new models, Boeing was offering its existing 747 and 737 product lines only. Unlike Airbus, Boeing did not use computers for designing its aircraft. Its designing activities were done manually, consuming a huge number of engineering hours, while Airbus used computer software to design its aircraft. The use of computer-aided design reduced the number of engineering hours spent on designing, and also helped Airbus bring out better designs.

Production Efficiency
analysts pointed out that Boeing inherited [the] 717 aircraft family from McDonnell Douglas, which was acquired by it 1997, so they pointed out that effectively, Boeing came out with only one new product[the] 777during the 1990s. 10 Upstart Airbus Threatens to Leave Giant Boeing in Its Jet Stream, The Seattle Times, May 13, 2002. 11 Upstart Airbus Threatens to Leave Giant Boeing in Its Jet Stream, The Seattle Times, May 13, 2002. 12 Blue Skies for Airbus, Fortune, August 2, 1999. 13 Blue Skies for Airbus, Fortune, August 2, 1999.
9 Some

In 1995, Boeing started offering huge discounts of about 25% on its aircraft in a bid to draw customers back from Airbus. However, though it succeeded in getting more orders than
Fly-by-wire is a means of aircraft control that uses electronic circuits to send inputs from the pilot to the motors that move the various flight controls on the aircraft. There are no direct hydraulic or mechanical linkages between the pilot and the flight controls. Digital fly-by-wire uses an electronic flight control system coupled with a digital computer to replace conventional mechanical flight controls.
14

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Case 11: AirbusFrom Challenger to Leader

Airbus that year, it was unable to stick to its delivery schedule. Two of its production plants were shut down due to shortage[s] of parts and [workers]. As a result of the delays, many clients cancelled their orders with Boeing and returned to Airbus, raising Airbus market share over that of Boeing. The main problem for Boeing, as many analysts saw it, was that its production processes dated back to [the] Second World War period, after which the company had never comprehensively revamped its production processes. It followed traditional aircraft manufacturing methods. In Boeing factories, planes were docked in stalls on either side of the factory floor. Each plane was surrounded by ramps and workers found the parts and installed them, and during the night, partly-finished planes were moved into the stall using cranes, for the next stage of assembly. Compared to Boeings cumbersome production practices that were decades old, Airbus had very sophisticated production practices. Airbus adopted the line-manufacturing method, which made the process of assembling aircraft easier. Boeing employed 216 workers per aircraft, while Airbus employed only 143 workers. This amounted to a 51% productivity difference between the two companies. Boeings 119,000 workers manufactured 550 jets, while Airbus manufactured 230 jets with [the] help of 33,000 employees per year. Airbus also benefited from the transnational element of its organizational structure. It could exploit the expertise of its four partners to the full, resulting in low designing and manufacturing costs. This enabled Airbus to price its aircraft lower than Boeing. The company had manufacturing units (all over Europe) which made cockpits, fuselages and wings. Airbus also had much fewer HR problems than Boeing. During the mid-1990s, when its orders were up, Boeing hired 38,000 people and trained them. However due to production problems, it was forced to reduce its workforce and lay off around 26,000 employees in late 1998. By the late 1990s, workforce salaries and overhead expenses [at] Boeing were around 30% of total overhead costsvery high for any company. In addition, Boeing had difficulties with its employee unions. Boeing unions went on strike over 4 times between 1998 and 2002, resulting in serious production problems for the company. Airbus, on the other hand, managed its workforce well. Although Airbus was regularly criticized on the grounds that it was set up to provide jobs for Europeans, Airbus had a lean workforce. Due to Europes strict lay-off rules, Airbus had, right from the start, relied on contract workers. It could increase or decrease the workers hired on contract on the basis of its order-book position. Further, its sophisticated manufacturing practices enabled it to work with fewer people.

tial investment of $10 billion. If it took off, Airbuss A-3XX (later called A-380) would end the monopoly of Boeings 747 in the over-400-seats category. According to company sources, the A-380 would be a double-decker plane with a seating capacity of 555 passengers (137 more than the Boeing 747). The super jumbo would be priced at $213 million and was expected to fly by 2004 (later the launch date was postponed to 2006). The main challenge for Airbus was to raise the funds required to manufacture [the] A-380. Finally, Airbus was able to split the total costs of development of the project as follows: around 40% would be funded by its suppliers such as Saab (Sweden), 30% would be in the form of government loans [brought] in by partners, and the remaining 30% would be the consortiums own funds. Boeing questioned Airbus wisdom in putting funds into the development of a super jumbo. While both Airbus and Boeing were [in agreement about] the expectation that air traffic would increase 5% annually over the next 20 years, they differed in their expectation regarding the type of aircraft the market would absorb. Airbus felt that airlines would opt to buy larger aircraft to accommodate growing consumer demand, whereas Boeing felt that airlines would be buying smaller aircraft such as [the] 777, as there would be increased demand for point-to-point services rather than long-haul flights requiring bigger planes. Said Allan Mullay, head [of the] commercial airplane division [at] Boeing, We think the lineup we have is what airlines want, and there is no economic justification for a bigger airplane.15 Airbus disagreed, saying that with increasing restrictions in airports regarding noise and pollution, airlines would opt for big planes, as they would require few takeoffs and landings. Said Philippe Jarry, head [of] Airbus market development, Boeing acts as if there are no constraints on airports, runways, or the environment. Im really surprised that the leading American manufacturer is so concerned about the bottom line that it says, Flying is more fun in our smaller planes. You should buy more of them. 16 The Airbus super jet project received further encouragement when airline companies also showed interest in the aircraft. Companies such as Federal Express were reportedly interested in the super jumbo as freight shipments were predicted to grow fastin fact, faster than passenger volumes. Commenting on their interest in [the] A-380, Don Barber, senior vice president of FedEx air operations, said, The A-3XX may be an option to increase our capacity per trip.17 Airbus consulted more than 60 airports worldwide to ascertain whether or not its super jumbo jet would take off and land easily. To reduce the weight of the aircraft, a crucial element in take-off and landing, Airbus developed a new material called Glare.18 During the design of the aircraft, the
15 Blue 16 Blue

THE GAMBLE
In order to increase its market share, Airbus decided to enter the super jet category (400 seater). In 1998 it announced that it would be developing a super jumbo jet with a planned ini-

Skies for Airbus, Fortune, August 2, 1999. Skies for Airbus, Fortune, August 2, 1999. 17 Blue Skies for Airbus, Fortune, August 2, 1999. 18 Glare was made of aluminum alloy and glass-fiber tape, which reduced the weight of the aircraft.

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Airbus staff had to give careful consideration to seating arrangements and arrangements for evacuating 555 people from the aircraft in case of an emergency. Initially, passenger seating [was] on a single deck or in side-by-side fuselages; however, later on designers hit upon double-deck seating arrangements as it would be easier to get passengers off the plane quickly. Another advantage was that double-deck planes would not require more space on runways. In order to avoid the problem of claustrophobia among passengers, Airbus announced that it would create an ambience of leisure on the plane. [The] A-380 would have a staircase connecting both decks, and also exercise rooms, and sleeping rooms with bunk beds. It enlisted 1,200 frequent fliers from eight cities across the world to assess and provide suggestions for its mock cabins. In response to fears that operational costs of the super jet would be high, Airbus sources said that the use of new technology meant that the A-380 would be 15% cheaper to operate than the Boeing 747. Airbus also said that the 656seater A-380 would [. . .] reduce operating costs by around 25%. Boeing officials, however, calculated that cost savings through the super jet would amount to half the level claimed by Airbus. As Airbus went ahead with its super jet plan, Boeing too started considering the manufacture of similar large planes. Although reports came out on Boeings plans to design a 550-seat aircraft with a wide single deck and three aisles, company officials denied any firm designs. Later the project was dropped due to lack of orders. Meanwhile, the response to Airbus super jumbo jet was good. In 2000, the super jet project received a boost with Britains Virgin Atlantic airline (owned by Richard Branson), and QantasAustralias major airlinerplacing orders for the A-380 aircraft. Geoff Dixon, CEO [at] Qantas, said, The aircraft will also enable us to further enhance our onboard customer product consistent with our recognized tradition as a pioneer in the development of long-haul air travel.19 A major concern that arose for Airbus was Boeings decision to extend its 747 family. In March 2001, Boeing announced that it would be extending the family of 747s with its 747-X planes that would be on par with Airbus A-380s20 and would carry around 522 passengers. It was also reported that Boeings costs for [the] 747-X would be around a quarter of the A-380s budget. However, by the end of 2001, Boeing abandoned its plans to go for [the] 747-X due to weak market projections for the large super jet. It announced that it would launch a Sonic Cruiser that would travel at 98% of the speed of sound. However, this project too failed to arouse any interest among airline companies due the turbulent conditions in the industry. After the September 11th (2001) attacks, the airline industry was down and out because of the sharp [fall] in air travel. The worldwide economic slowdown also affected the
19 Airbus Steals Boeing Ground, www.news.bbc.co.uk, November 30, 2002. 20 [The] A3XX

industry very badly. Both Airbus and Boeing announced declines in their revenues due to recession. However, in October 2002, Airbus had 276 orders, while Boeing had just 186 orders. Analysts felt the lower operational costs of Airbus aircraft might have brought about this situation. However, as far as the A-380 project was concerned, Airbus would need around 100 orders to break even, but it actually had only 50 orders by the end of 2002. While Airbus was gearing up to consolidate its position through its A-380, Boeing also started re-focusing on operational efficiencies in order to regain market leadership. In June 2003, Boeing announced the launch of a new plane[the] 7E7, with a seating capacity of 200250 passengers. Boeing sources said that with the help of new technology and operational processes it would be able to assemble the plane in only 3 days. With Boeing seemingly set to face up to the challenge from Airbus, it remains to be seen how long Airbus will be able to sustain its leadership position.

Questions for Discussion

1. When Airbus was set up, it failed to attract customers and did not get any orders over a period of 18 months. Discuss the problems faced by Airbus initially, and analyze the strategies adopted by the company to overcome them. 2. By the early 2000s, Airbus had acquired market leadership in the aerospace industry. Discuss the nature of the competition between Airbus and Boeing. What differentiating strategies did Airbus adopt in order to survive and succeed over the past few decades? How far do you think the advantages are sustainable in the long run? Justify. 3. Analyze the changes in the structure of the aerospace industry over the years and evaluate [their] effect on competition in the industry.

Additional Readings & References

1. Healy, Tim, Competition: Battle for Asia, www.asiaweek.com, March 29, 1996. 2. Can Airbus Partners Unite? BusinessWeek, July 22, 1996. 3. Edmondson, Gail & Browder, Seanna, Angst at Airbus, BusinessWeek, December 23, 1996. 4. Edmondson, Gail & Browder, Seanna, A Wake Up Call for Airbus, BusinessWeek, December 30, 1996. 5. Peace in Our Time, The Economist, July 24, 1997. 6. Guyon, Janet, The Sole Competitor, Fortune, January 12, 1998. 7. Henkoff, Ronald, Boeings Big Problem, Fortune, January 12, 1998. 8. Edmondson, Gail, Up, Up, and Away at Last for Airbus? BusinessWeek, February 9, 1998. 9. Airbus Highflier Grounded, BusinessWeek, February 2, 1998. 10. Hubris at Airbus, Boeing Rebuilds, The Economist, November 26, 1998. 11. Boeing Admits It Let Clients Down, www.news.bbc.co.uk, September 8, 1998. 12. Fearful Boeing, The Economist, February 25, 1999.

was renamed [the] A380 in early 2001.

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13. Taylor, III Alex, Blue Skies for Airbus, Fortune, August 2, 1999. 14. Edmondson, Gail, Overhauling Airbus, BusinessWeek, August 2, 1999. 15. Burgner, Norbert, The Airbus Story, www.flugrevue.com, February 2000. 16. Airbus Gets a Boost, The Economist, April 6, 2000. 17. Rivals in the Air, www.news.bbc.co.uk, June 23, 2000. 18. Airbus Steals Boeing Ground, www.news.bbc.co.uk, November 30, 2000. 19. Useem, Jerry, Boeing vs Boeing, Fortune, October 2, 2000. 20. Airbus Draws First Blood, www.news.bbc.co.uk, June 18, 2001. 21. Matlack, Carol & Holmes, Stanley, Trouble Ahead for Airbus? BusinessWeek, October 1, 2001. 22. Bettering Boeing, The Economist, July 18, 2002. 23. Holmes, Stanley, Showdown at 30,000 Feet, BusinessWeek, July 22, 2002.

24. Airbus Just May Win This Dogfight, BusinessWeek, August 5, 2002. 25. Bashing Boeing, The Economist, October 17, 2002. 26. Matlack, Carol & Holmes, Stanley, Look Out, Boeing, BusinessWeek, October 28, 2002. 27. Boeing vs Airbus, The Economist, April 17, 2003. 28. Boeing Can Assemble 7E7 in 72 Hours, The Economic Times, June 6, 2003. 29. www.flugrevue.com. 30. www.airwise.com. 31. www.aviationnow.com. 32. www.seattletimes.com. 33. www.news.bbc.co.uk. 34. www.airbus.com. 35. www.speednews.com. 36. www.boeing.com.