Airbus-Boeing Duopoly AEM 4160: STRATEGIC PRICING

TESS BERGHOFF, CARLOS CEVALLOS, BRENDAN SHEPHERD

Why the Commercial Aircraft Industry? Arguably, the rivalry between Airbus and Boeing (‘A’ and ‘B’) is the most famous example of a duopoly in the world. These two industry heavyweights have the most comprehensive product lines of commercial aircraft.

We will ignore the much, much smaller manufacturers such as Bombardier, Embraer, Saab, Sukhoi, Mitsubishi, etc.

Fierce pricing competition leads to interesting outcomes.

Allegations of illegal subsidies on both the E.U. (Airbus) and U.S. (Boeing) sides.

Industry Overview B R E N D A N S H E P H E R D

Commercial Aviation Industry Overview $156 billion in industry revenues (2014).

$7.98 billion in net profit (2014).

3.3 billion passengers carried in 2013.

Very high barriers to entry (capital intensive).

Commercial Aviation Industry Key Drivers Oil price.

Largest cost for airliners.

Disposable income.

Consumer confidence.

Emerging markets growth.

Barriers to Entry Cost of aircraft construction and high R&D costs.

Airbus spent an estimated $14 billion on development of the A380. It was doubtful that Airbus would ever break-even until recently.

Reputation/safety concerns.

Would you rather fly on a Chinese-/Russian-built plane or an American-/European-built plane?

Economies of scale necessary to be profitable.

‘Discounts’ needed to sell planes.

Industry Competitiveness HHI of 5,018.

Competitiveness

Future Outlook

Data source: Boeing CMO

Future Outlook Oil prices increased 340% from 2000 to 2013.

Passenger air traffic increased 70% over this same time period.

Efficiency improvements in the industry and the importance people place on airline travel.

Company Profiles C A R LO S C E VA L LO S

Founded December 18, 1969.

Headquarters in Toulouse, France.

European Consortium.

Different parts built all over Europe.

55,000 direct employees around the world.

€3.086 billion profit in 2014 (company-wide).

$3.311 billion at December 31, 2014 EUR-USD exchange rates.

Founded July 15, 1916.

Headquarters in Chicago, IL.

Final assembly in Washington and South Carolina.

Different parts built all over the world.

83,000 direct employees around the world.

$5.446 billion profit in 2014 (company-wide).

Pricing Strategies T E S S B E R G H O F F

Pricing Strategies Price Wars. Discounts & Incentives.

Illegal Subsidies.

Foreign Currencies & Financing.

Price Wars Highest degree of competition and volume of sales in narrow body (single-aisle) market

Narrow and Wide Body Markets Narrow Body Aircrafts (e.g. Airbus A320 vs. Boeing 737-800):

Minimal differentiation.

Compete predominantly on price.

Example: Wide Body Aircrafts.

Airbus A380

525 Passengers

$403.9 Million

259 Orders

Boeing Dreamliner 787

330 Passengers

$290 Million

1,012 Orders

Discounts and Incentives Airlines receive steep discounts due to:

Company loyalty.

Order size.

Order date – especially if the

launch order for a new type.

Aircraft model.

Average discount of 45%.

“Flip Fights” Attempt to poach customers and gain market share.

Competition offers low price to undercut dominant supplier.

Results in “prisoner’s dilemma.”

Both suffer lower profits due to price competition.

Neither gains significant long term market share.

Illegal Subsidies Secretive finances.

Both Boeing and Airbus accused of receiving unfair subsidies from their respective governments.

Allows both companies to offer steeper discounts, and even price below marginal costs.

2012 WTO Investigation Boeing reportedly received $3 billion in illegal U.S. subsidies over an 8-year span.

However; Airbus reportedly received $18 billion in illegal European subsidies over a 20-year span.

Exchange Rate Impacts Airbus

Costs incurred predominantly in Euros.

Aircrafts sold in U.S. Dollars.

Consequentially, Airbus absorbs exchange rate fluctuations as additional costs.

Boeing Costs incurred in U.S. Dollars.

Aircrafts sold in U.S. Dollars.

Foreign Financing Airbus

Greater international presence.

Allows Airbus to offer more attractive financing to airlines within its consortium.

Boeing Must rely on import-export

market to assist in financing.

Raw Data C A R LO S C E VA L LO S

Airbus Historical List Prices 2001 2002 2003 2004 2005 2006 2007e 2008 2009 2010 2011 2012 2013 2014 2015

A300 Family

A300-600R 110.0 117.2 119.6 124.0 128.5

A320 Family

A318 41.8 44.6 45.5 48.8 50.4 52.8 56.0 59.1 59.1 62.5 65.2 67.7 70.1 71.9 74.3

A319 48.7 51.8 55.9 58.9 60.5 63.3 66.8 70.3 70.3 74.4 77.7 80.7 83.6 85.8 88.6

A320 53.7 57.2 59.6 62.6 64.3 66.8 71.9 76.9 76.9 81.4 85.0 88.3 91.5 93.9 97.0

A321 65.6 70.0 72.5 74.9 78.0 81.6 86.0 90.3 90.3 95.5 99.7 103.6 107.3 110.1 113.7

A319neo 83.9 88.8 92.0 94.4 97.5

A320neo 91.2 96.7 100.2 102.8 106.2

A321neo 105.9 113.3 117.4 120.5 124.4

A330 Family

A330-200 129.2 138.6 142.6 150.2 157.9 164.4 172.7 180.9 180.9 191.4 200.8 208.6 216.1 221.7 229.0

A330-300 143.3 153.1 159.0 166.5 174.9 182.8 191.8 200.8 200.8 212.4 222.5 231.1 239.4 245.6 253.7

A330-800neo 249.6

A330-900neo 284.6

A340 Family

A340-300 153.5 165.3 172.3 179.6 187.6 196.1 205.8 215.5 215.5 228.0 238.0

A340-500 167.0 179.2 187.4 196.6 206.0 215.5 226.3 237.1 237.1 250.8 261.8

A340-600 178.0 190.0 197.8 206.9 216.8 226.8 238.1 249.4 249.4 263.8 275.4

A350 XWB Family

A350-800 162.0 169.3 189.0 208.7 208.7 225.2 236.6 245.5 254.3 260.9 269.5

A350-900 179.3 188.2 214.4 240.6 240.6 285.2 267.6 277.7 287.7 295.2 304.8

A350-1000 269.6 269.6 285.2 299.7 320.6 332.1 340.7 351.9

A380 Family

A380-800 251.3 264.0 274.5 282.6 292.0 306.3 316.9 327.4 327.4 346.3 375.3 389.9 403.9 414.4 428.0

"e" denotes estimates for 2007 list prices.

Sources: Airbus Press Centre, Flightglobal.com, and Aviationtoday.com.

Average Airbus List Prices (in millions USD)

Boeing Historical List Prices 2000 2001 2002 2003e 2004 2005 2006 2007 2008 2009e 2010 2011 2012 2013 2014

717 Family

717-200 35.0 37.3 37.5 38.8 40.0

737 Family

737-600 42.0 44.8 45.0 46.5 48.0 49.5 51.0 53.5 55.0 56.0 56.9 59.4

737-700 47.5 50.8 51.0 52.9 54.8 56.5 59.0 62.3 64.0 66.0 67.9 70.9 74.8 76.0 78.3

737-800 56.5 60.8 61.0 63.3 65.5 67.8 70.5 74.8 76.8 78.8 80.8 84.4 89.1 90.5 93.3

737-900/-900ER 60.0 64.3 64.5 66.9 69.3 71.8 75.3 79.5 81.5 83.7 85.8 89.6 94.6 96.1 99.0

737 MAX 7 82.0 85.1 87.7

737 MAX 8 100.5 103.7 106.9

737 MAX 9 107.3 109.9 113.3

747 Family

747-400/-400ER 184.5 197.0 198.0 205.3 212.5 220.8 231.8 244.0 250.3

747-8 277.5 292.8 300.5 309.0 317.5 332.9 351.4 356.9 367.8

757 Family

757-200 73.5 76.5 77.0

757-300 80.5 85.3 85.8

767 Family

767-200ER 99.8 106.0 106.5 110.4 114.3 118.3 123.0 130.0 133.3 138.7 144.1 151.5 160.2

767-300ER 113.8 121.0 121.5 125.8 130.0 134.8 141.0 149.3 153.0 158.7 164.3 173.1 182.8 185.8 191.5

767-400ER 126.3 132.0 132.5 137.1 141.8 146.5 153.3 161.5 165.5 173.1 180.6 190.2 200.8

777 Family

777-200 151.5 161.5 162.3 168.0 173.8 180.0 186.5

777-200ER 160.3 171.3 172.0 178.3 184.5 191.3 201.3 212.5 218.3 225.3 232.3 244.7 258.8 261.5 269.5

777-200LR 199.8 200.8 206.5 212.3 220.5 231.0 243.8 250.5 256.5 262.4 275.8 291.2 296.0 305.0

777-300 180.0 190.3 191.0 197.9 204.8 212.0 222.0

777-300ER 216.5 217.5 224.6 231.8 239.5 250.8 264.5 271.8 277.9 284.1 298.3 315.0 320.2 330.0

777-8X 360.5

777-9X 388.7

787 Family

787-3 130.0 140.5 148.8 152.8

787-8 130.0 152.8 162.0 166.3 175.7 185.2 193.5 206.8 211.8 218.3

787-9 183.3 194.5 199.8 208.9 218.1 227.8 243.6 249.5 257.1

787-10 288.7 297.5

"e" denotes estimates for 2003 and 2009 list prices.

Source: http://www.boeing.com/commercial/prices through use of internet archive Wayback Machine.

Average Boeing List Prices (in millions USD)

Single-Aisle Workhorses Showdown

All Single-Aisle Workhorses

A318 vs. B737-600

A319 vs. B737-700

A320 vs. B737-800

A321 vs. B737-900ER

Is Newer Better? Yep.

A330 Family beats B767 Family

Twins or Quads?

Twins

A340-300 vs. B777-200ER

B777-200ER beats A340-300

A340-500 vs. B777-200LR

B777-200LR beats A340-500

A340-600 vs. B777-300ER

B777-300ER beats A340-600

Jumbos or Superjumbos?

Too soon to tell

Real-World Pricing Aircraft leasing company Amadeo (previously d/b/a Doric) paid $234 million per A380 in a 20-plane order.

Initially announced at the 50th Le Bourget Airshow in 2013.

42% discount relative to 2013 list price!

Final agreement at 2014 Singapore Airshow.

43.5% discount relative to 2014 list price!

Real-World Pricing Brazilian airline GOL ordered two 737-800s in 2004.

Basic airframe price just over $57 million (just under 13% discount).

Additional $1.25 million in buyer-furnished equipment (e.g. AVOD).

Real-World Pricing Delta Air Lines received a 51% discount on 737-900ERs.

100 aircraft order placed in 2011.

Paid just $44 million per plane.

Real-World Pricing Southwest is a 737-only airline and launch customer for the new, more efficient MAX versions of Boeing’s best-selling plane.

In 2011, the airline secured an order of 150 737 MAXs around $35 million a frame (whopping 65% discount), with 150 more options.

Real-World Pricing Air India paid an average price of $110 million each for their first eight Dreamliner 787-8s.

Order placed in 2006 (28% discount relative to list price).

Real-World Pricing The current average discount rate on wide bodies is 40-50%.

Compare to 50-60% on narrow bodies.

Recommendations Airbus

Avoid cost overruns/excessive R&D spending.

SELL, SELL, SELL as many A380s as possible to recoup losses.

Focus sales efforts on SE Asia and other emerging markets.

Boeing

Avoid cost overruns/excessive R&D spending.

Close down 747-8 production line.

Develop a true 757 replacement to battle the A321neoLR.

Boeing pitches the 737-900ER as a replacement but it doesn’t fill the gap 100%, maybe 95% at most.

Focus sales efforts on SE Asia and other emerging markets.

Airlines

For better discounts, pick a preferred manufacturer and stick with them for a long time to build loyalty (and fleet commonality).

Order in bulk and as early as possible (invest in fleet-planning).

Questions?