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:

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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

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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

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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.

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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

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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

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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)

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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.

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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.

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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.

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