Download - SM2 FinA1 Grp6 Boeing
Abhishek Shrivastava 09FN-002
Akash Kartikey 09FN-004
Amit Pathak 09FN-009
Amit Singh 09FN-010
Imran Khan 09FN-042
BOEING: REDEFINING STRATEGIES TO MANAGE THE COMPETITIVE MARKETCASE:WRITEUP
10/22/2010
BOEING: REDEFINING STRATEGIES TO MANAGE THE COMPETITIVE MARKET
INTRODUCTION
This case basically presents the various facts of the competition between Airbus and Boeing. The
market is basically a duopoly one but it is intensively competitive. Both Boeing and Airbus have
stood the test of time and are the two major names in the aircraft industry. However, both the
companies follow different strategies to compete in the airline industry. Both the companies have
their unique strategies. The case basically discusses the prospect of a Jumbo aircraft in the airline
industry. Boeing had the 787 vis a vis the Airbus A-380. Both are very large aircrafts which can
connect the hubs of the airport network. The case then discusses the formation of Boeing and it
tells how the strategy of Boeing has changed over the years. At the start Boeing was basically
supplying bomber aircrafts till the World War 2. After the WW2 was over Boeing saw a decline
in its sales and it underwent diversification. The diversification was not successful. From the
case we can see one interesting thing that Boeing has been constantly launching new aircrafts
and all of them had been success for Boeing. However, there are certain reasons for the
skepticism associated with the Boeing 787. They are:
Will the Hub Spoke system create enough demand for such big liners?
Will customers prefer faster or more economical flights?
Will Boeing will be able to conquer on the delays of A-380?
Are the emerging economies of India and China are groomed enough for the bigger
aircraft?
Then the case moves further with discussing airbus and telling how it has differed from Boeing
as a whole. How are the strategies different for Boeing and Airbus?
Also the importance of the supply chain has been highlighted which tells about the
various blunders committed by Boeing in the outsourcing decision. These are part of the faulty
strategy of Boeing which we will be discussing at length later in the write up. Also the role of
government has always been an issue of debate. Government basically provides huge subsidies
to both the companies in the name research and development which is perceived unfair by the
competitor. There is a lot of blame game because of this issue but in the end both the companies
end up getting subsidies from their respective governments.
So the key issues we need to discuss are:
Group 6-FinA1-SM2 Page 2
BOEING: REDEFINING STRATEGIES TO MANAGE THE COMPETITIVE MARKET
1) Will A-380 be a sensation?
2) Will Airbus will be able to recoup its costs by 2010?
3) Will 787 be a strategic success for Boeing?
4) The strategy of Boeing vis a vis Airbus
5) The strategic mistakes of Boeing
ABOUT BOEING
The Boeing Company is a major aerospace and defense corporation, founded by William E.
Boeing in Seattle, Washington. Boeing has expanded over the years, merging with McDonnell
Douglas in 1997. Boeing Corporate headquarters has been in Chicago, Illinois since 2001.
Boeing is made up of multiple business units, which are Boeing Commercial Airplanes (BCA).
Boeing Defense, Space & Security (BDS); Engineering, Operations & Technology; Boeing
Capital, and Boeing Shared Services Group. Boeing was incorporated in Seattle, Washington by
William E. Boeing, on July 15, 1916, as "Pacific Aero Products Co." following the June 15
maiden flight of one of the two "B&W" seaplanes built with the assistance of George Conrad
Westervelt, a U.S. Navy engineer. Many of Boeing's early planes were seaplanes. During World
War II, Boeing built a large number of B-17 and B-29 bombers. Many of the workers were
women whose husbands had gone to war. In the beginning of March 1944, production had been
scaled up in such a manner that over 350 planes was built each month. After the war, most orders
of bombers were canceled and 70,000 people lost their jobs at Boeing. The company aimed to
recover quickly by selling its Stratocruiser (the Model 377), a luxurious four-engine commercial
airliner developed from the B-29. However, sales of this model were not as expected and Boeing
had to seek other opportunities to overcome the situation.
The product line of Boeing is mentioned below:
Commercial Airplanes
737
747
767
Group 6-FinA1-SM2 Page 3
BOEING: REDEFINING STRATEGIES TO MANAGE THE COMPETITIVE MARKET
777
787 Dreamliner
Boeing Business Jets
Boeing Aircraft Trading
Commercial Aviation services
Other Services
Fig1: Boeing 787first flight
SWOT ANALYSIS OF BOEING
Boeing is engaged in the design, development, manufacturing, sale and support of commercial
jetliners, military aircraft, satellites, missile defense, human space flight, and launch systems and
services. The company is one of leading producers of commercial aircraft. It has customers in
more than 90 countries around the world and is one of the largest US exporters in terms of sales.
The company’s large scale of operation enhances its market penetration opportunities and gives
it substantial bargaining power. However, changes in the budgetary priorities of the US
Government could directly affect the company's operating results
Group 6-FinA1-SM2 Page 4
BOEING: REDEFINING STRATEGIES TO MANAGE THE COMPETITIVE MARKET
Strengths
Large scale of operation Boeing is the global market leader in design, development,
manufacture, sale and support of commercial jetliners, military aircraft, satellites, missile
defense, human space flight and launch systems and services.
The company is one of two major manufacturers, equipped to produce aircraft capable of
carrying more than 100 passengers for the worldwide commercial airline industry, and
the second-largest defense contractor in the US.
Boeing is one of the leading producers of commercial aircraft and offer a broad spectrum
of commercial jetliners designed to meet passenger and cargo requirements of both the
US and non-US airlines.
The company has customers in more than 90 countries around the world and is one of the
largest US exporters in terms of sales. In addition, Boeing has greater scale in terms of
revenues, compared to other players in the market.
Strong association with Federal Government
Focus on R&D
Weaknesses
Weakening financial performance
Boeing has recorded declining efficiency in terms of profits and margins. The company
recorded operating profit of $3,950 million during FY2008, a decrease of 32.2%
compared to 2007.The net profit was $2,672 million in FY2008, a decrease of 34.4%
compared to 2007.
In addition, Boeing has recorded weak margins as compared to its competitors. Its
operating margin and net profit margin in 2008 were 6.5% and 4.4%, respectively, which
is considerably lower than its competitors, BAE Systems (10.3% and 10.6%); General
Dynamics (12.5% and 8.4%); Lockheed Martin (12% and 7.5%); and Raytheon (11.2%
and 7.2%), during the same period.
The company’s weak financial performance implies poor cost management and decision
making by the management. Continuation of this trend could reduce availability of
resources to pursue growth plans.
Group 6-FinA1-SM2 Page 5
BOEING: REDEFINING STRATEGIES TO MANAGE THE COMPETITIVE MARKET
Legal proceedings the company is involved in various lawsuits, claims and legal
proceedings, including commercial and contract disputes, employment matters, product
liability claims, environmental liabilities, intellectual property disputes and other personal
injury claims, arising out of the conduct of the company’s business. In 2006, Boeing was
named as a defendant in a lawsuit filed in the US District Court for the Southern District
of Illinois. The complaint alleges that fees and expenses incurred by Boeing
Sluggish performance in key segments: Boeing has recorded sluggish operational
performance in its key segment. Commercial airplanes, the largest business segment of
the company, accounted for 45.9% of the total revenues in FY2008.
Opportunities
Inorganic growth: Boeing has been expanding its portfolio of products and strengthening
its position in the industry by acquiring assets or organizations. For instance, in
November 2008, Boeing acquired Tapestry Solutions, a San Diego-based company
specializing in software systems and services.
Rising global defense spending Global military expenditure and arms trade form the
largest spending in the world in 2007.The global defense spending was more than $1
trillion in 2007 and has been rising in recent years.
The US remains the largest market by far, yet the defense budget is expected to reach its
peak in 2009 as growth is driven by the demands and consequences of the war in certain
places around the world.
Growing demand for commercial airplanes: The commercial airplane market is expected
to grow to $2.8 trillion by 2027. By that year, the global commercial airplane fleet is
expected to double as compared to the existing fleet size. It is projected that the passenger
traffic would grow at 4.8% annually till 2027, requiring approximately 28,600 new
commercial airplanes to meet the increasing traffic.
Threats
Group 6-FinA1-SM2 Page 6
BOEING: REDEFINING STRATEGIES TO MANAGE THE COMPETITIVE MARKET
Change in the US budgetary priorities Boeing is dependent on the US government for
majority of its revenues. Changes in the budgetary priorities of the US Government, or
the DoD, could directly affect the company's operating results.
Issues arising from fixed-price contract: The company performs a portion of engagements
on a variety of fixed-price contract vehicles. The IDS segment of the company derived
50% of total revenue in FY2008 from fixed-price contracts. Fixed-price contracts require
the company to price contracts by predicting expenditures in advance. In addition, some
of the engagements obligate the company to provide ongoing maintenance and other
supporting or ancillary services with limitations on its ability to increase prices.
Labor market woes in the US: The US economy is facing a serious challenge in its labor
market. In recent times, tight labor markets, increased overtime, government mandated
hike in minimum wages and a higher proportion of full-time employees are resulting in
an increase in labor costs, which could materially impact the company's results of
operation.
COMPETITION WITH KEY COMPETITOR: AIRBUS
Airbus is in tight competition with Boeing every year for aircraft orders. Though both
manufacturers have a broad product range in various segments from single-aisle to wide-body,
their aircraft do not always compete head-to-head. Instead they respond with models a bit
smaller or a bit bigger than the other in order to plug any holes in demand and achieve a better
edge. The A380, for example, is designed to be larger than the 747. The A350 XWB competes
with the high end of the 787 and the low end of the 777. The A320 is bigger than the 737-700 but
smaller than the 737-800. The A321 is bigger than the 737-900 but smaller than the previous
757-200. Airlines see this as a benefit since they get a more complete product range from 100
seats to 500 seats than if both companies offered identical aircraft.
In recent years the Boeing 777 has outsold its Airbus counterparts, which include the A340
family as well as the A330-300. The smaller A330-200 competes with the 767, outselling its
Boeing counterpart in recent years. The A380 is anticipated to further reduce sales of the Boeing
Group 6-FinA1-SM2 Page 7
BOEING: REDEFINING STRATEGIES TO MANAGE THE COMPETITIVE MARKET
747, gaining Airbus a share of the market in very large aircraft, though frequent delays in the
A380 program have caused several customers to consider the refreshed 747-8. Airbus has also
proposed the A350 XWB to compete with the fast-selling Boeing 787, after being under great
pressure from airlines to produce a competing model.
There are around 5,102 Airbus aircraft in service, with Airbus managing to win over 50 per cent
of aircraft orders in recent years. Airbus products are still outnumbered 3 to 1 by in-service
Boeings (there are over 4,500 Boeing 737s alone in service). This however is indicative of
historical success - Airbus made a late entry into the modern jet airliner market (1972 vs. 1958
for Boeing).
Airbus won a greater share of orders in 2003 and 2004. In 2005, Airbus achieved 1111 (1055
net) orders, compared to 1029 (net of 1002) for the same year at rival Boeing. However, Boeing
won 55% of 2005 orders proportioned by value; and in the following year Boeing won more
orders by both measures. Airbus in 2006 achieved its second best year ever in its entire 35 year
history in terms of the number of orders it received, 824, second only to the previous year. In
August 2010, Airbus announced that it was increasing production of A320 airliners, to reach 40
per month by 2012, at a time when Boeing is increasing monthly 737 productions from 31.5 to
35 per month.
ORDERS
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
Airbus
328
271
777
1341
790
1055
370
284
300
375
520
476
556
460
326
106
125
38 136
101
404
421
Boeing
472
142
662
1413
1044
1002
272
239
251
314
588
355
606
543
708
441
125
236
266
273
533
716
Sources 2010: Airbus net orders until September 30 (http://www.airbus.com/en/corporate/orders_and_deliveries/)
Boeing net orders until October 21 (http://active.boeing.com/commercial/orders/index.cfm)
Group 6-FinA1-SM2 Page 8
BOEING: REDEFINING STRATEGIES TO MANAGE THE COMPETITIVE MARKET
DELIVERIES
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
Airbus
380
498
483
453
434
378
320
305
303
325
311
294
229
182
126
124
123
138
157
163
95 105
Boeing
346
481
375
441
398
290
285
281
381
527
491
620
563
375
271
256
312
409
572
606
527
402
Sources 2010: Airbus deliveries until September 30 (http://www.airbus.com/en/corporate/orders_and_deliveries/)
Boeing deliveries until September 30 http://active.boeing.com/commercial/orders/index.cfm?
content=displaystandardreport.cfm&optReportType=CurYrDelv)
SUBSIDY CONFLICTS
Boeing has continually protested over "launch aid" and other forms of government aid to Airbus,
while Airbus has argued that Boeing receives illegal subsidies through military and research
contracts and tax breaks.
In July 2004 former Boeing CEO Harry Stonecipher accused Airbus of abusing a 1992 bilateral
EU-US agreement providing for disciplines for large civil aircraft support from governments.
Airbus is given reimbursable launch investment (RLI), called "launch aid" by the US, from
European governments with the money being paid back with interest plus indefinite royalties, but
only if the aircraft is a commercial success. Airbus contends that this system is fully compliant
with the 1992 agreement and WTO rules. The agreement allows up to 33 per cent of the
programme cost to be met through government loans which are to be fully repaid within 17 years
with interest and royalties. These loans are held at a minimum interest rate equal to the cost of
government borrowing plus 0.25%, which would be below market rates available to Airbus
without government support. Airbus claims that since the signature of the EU-U.S. Agreement in
1992, it has repaid European governments more than U.S.$6.7 billion and that this is 40% more
than it has received.
Group 6-FinA1-SM2 Page 9
BOEING: REDEFINING STRATEGIES TO MANAGE THE COMPETITIVE MARKET
Airbus argues that the pork barrel military contracts awarded to Boeing, the second largest U.S.
defense contractor, are in effect a form of subsidy, such as the controversy surrounding the
Boeing KC-767 military contracting arrangements. The significant U.S. government support of
technology development via NASA also provides significant support to Boeing, as do the large
tax breaks offered to Boeing, which some people claim are in violation of the 1992 agreement
and WTO rules. In its recent products such as the 787, Boeing has also been offered direct
financial support from local and state governments.
In January 2005 the European Union and United States trade representatives, Peter Mandelson
and Robert Zoellick respectively, agreed to talks aimed at resolving the increasing tensions.
These talks were not successful with the dispute becoming more acrimonious rather than
approaching a settlement.
In August 2010, the WTO ruled that the European Union's funding to Airbus through the use of
loans with below market rates, and research grants and infrastructure/runway funding initiatives
were illegal.
FINANCIAL ANALYSIS
The gross profitability margin of Boeing has steadily increased through the years from
2002 to 2006.The profitability in 2002 was 14.9% , it increased to 18.02% in 2006.
Boeing is investing more and more in research and development .This is a good strategy
since the airline industry is very competitive and as airplanes are grouped based on size,
range and technology, it will be wise for the company to invest heavily in R &D as a part
of their long term planning.
The debt to equity ratio of Boeing has approximately doubled from 2005 to 2006,in 2005
it was .97 and in 2006 it is 2.01 but this leverage is justifiable on the account that they
have a strong interest coverage ratio though the level of debt has increased the interest
coverage ratio on the other hand has also increased.
P/E ratio was quite high in 2003 at 39.50 however in 2005 it went down to 19.50 .This
implies less faith by Boeing investor however due to better financial performance in 2006
the P/E has risen to 28.20.
Group 6-FinA1-SM2 Page 10
BOEING: REDEFINING STRATEGIES TO MANAGE THE COMPETITIVE MARKET
Though the gross profit margin has increased the net profit margin has decreased, this is
due to high income tax paid by Boeing in year 2006.
Net margin also increased from 2005(3.3%) to 2006(5.6%) for a net change of 2.3
percentage points, indicating that Boeing is doing a better job at controlling its costs.
Cash flow grew to be 12 percent of revenue, up $.5 billion from $7 billion in 2005.
Current and quick ratio of Boeing is less than industry average that shows that Boeing
has more short term liability.
CONCLUSION
Boeing was the pioneer of commercial jet liners.707 jetliner had capacity for 156 passengers and
helped the United States become a leader in commercial jet manufacturing. Airbus , which was a
small player in airplane industry, emerged as an industry giant by focusing on the needs of the
market. Other players either went out of the business or merged with the giants. Both companies
adopted different strategies to develop market and acquire customers. Initially Airbus focused on
A-380,but due to delay its customers like Virgin and FEDEX got frustrated and cancelled the
order with Airbus and booked order with Boeing. Same is happening with Boeing in case of 787
Dreamliner which is delayed several times and now it is scheduled in 2011.The Boeing currently
holds the lead in the aerospace industry. With growth in Asian market, both Boeing and Airbus is
targeting these markets with improved products and with the help of political relationship.
Group 6-FinA1-SM2 Page 11