Airbus

Problem Statement Airbus is currently the market leader in the aerospace industry. The company must decide on growth strategies by utilizing its core competencies, while taking into consideration the environment and business conditions. The Company also needs to develop defense strategies against Boeing, its major competitor, and attack strategies in order to maintain its top leadership position in the long-term. Situational Analysis Vision Statement To maintain the top market leadership position in the aerospace industry by creating the best, safest, most reliable and fuel-efficient aircraft through innovation and technology. Mission Statement To meet the needs of airlines by producing the most modern and comprehensive aircraft family on the market, complemented by the highest standard of product support. Key Facts The key facts of the case have been summarized in Appendix K; these facts outline the history of Airbus as well as the timeline of the aerospace industry. * * * * * * * * Industry Analysis During the early 1990s, many global aerospace commercial manufacturers discontinued operations due to poor demand. This created a near-duopoly for Airbus and Boeing. There are few main products in the large commercial airplanes for two categories: the narrow-and wide-body jets designed to carry passenger and freight traffic, respectively. The industry forecast the revenue passenger kilometers (RPKs) for the next two decades would grow at 5% per year. See Appendix A. For aircraft orders between 2000 and 2009, Airbus received 6452 orders, while Boeing received 5927. The competition was intense, and each company regularly accused the other of receiving unfair state aid from their respective governments. Current Strategies Airbus continues to focus on innovative product development and efficiencies to maintain its leadership postion; see Appendix H for detail strategies. * * * * * * * * Internal Environment Analysis VRINE Model is presented in Appendix B Airbus can capitalize on its strengths and opportunities to be competitive in the segment; however, the Company has weaknesses and threats that it needs to overcome in order to maintain its market leadership. See Appendix J. * * * * * * * * External Environment Analysis PESTEL Airbus faces challenges from many sources. There are political restrictions, environmental regulations, social impacts, technological advances, economic barriers as well as legal issues to consider. See Appendix I for an in depth analysis of these external forces. * * * * * * * * * * * * * Five Forces Model The biggest threats for Airbus are (1) rivalry against Boeing due to low differentiation of their aircrafts and (2) high bargaining power of buyers. The other three forces: threats of new entrants, threats of substitutes, and bargaining power of suppliers can be assessed as Low. For details refer to Appendix C. Competitor Analysis Indirect Competitors Indirect competitors to Airbus include automobiles, trains, and ships. Most of the indirect competitors exist for short distances but there is almost no other alternative to flying for longer distances. Direct Competitors Direct competitors to Airbus aircrafts A 318, 219, 210 and 321 are a series of Boeing Aircrafts, Bombardier C-Series, and Embraer E-Jets. Embraer, located in Brazil, is in fourth place in the world production of civil aircrafts. Bombardier, located in Quebec, is the number three producer of civilian aircrafts. Embraer and Bombardier are minor competitors to Airbus when compared to Boeing, its largest competitor (48% of the market share of Airbus and Boeing based on sales from 2001 to 2010). For details refer to Appendix D. Both Boeing and Airbus have good safety records on recently manufactured aircraft and seek gaining efficiencies by subcontracting production of aircraft components or assemblies to other manufacturers. Both Airbus and Boeing experience a strong support by their parent companies. However, the difference lies in product strategy: Boeing has no match to Airbus’ A380, but is highly successful with its B787 in the mid-size, long-range segment. For details of their product models refer to Appendix E and F and Appendix G for orders and deliveries. * * * * * * * Financial Analysis There is high risk with investments in the aerospace industry. The required investment in the Airbus model A-380 aircraft is equivalent to the company’s net worth. The cost structure of the aircraft model from designing to launching is around $4 billion, broken down as of follows: Development | 40% | Tooling | 20% | Work-in-process and overhead expense | 40% | Normally, the main challenge for Airbus financially was to raise the funds required to manufacture the A-380. Airbus successfully split the costs of project development through financing, as follows: Suppliers | 40% | Government Loan | 30% | Consortium's own funds | 30% | The A-380 is to integrate a series of new technologies befitting the Airbus flagship for the century. About 25% of the aircraft will be made from composites - a greater proportion than on previous aircraft: 22% carbon fibre reinforced plastic and 3% GLARE, a fibre metal laminate. Airbus states that the A380, aimed at the major long-haul routes, will embody the most advanced technologies while providing 15 to 20 percent lower operating costs than its rival. It will typically carry 555 passengers - 35 percent more than its rival - yet will burn less fuel per passenger and produce only half the noise on take-off than its rival. Alternatives Decision Criteria Timing - The solution(s) must be timely in order not to lose market share to competitor(s). Organizational effectiveness - The solution(s) must work within the framework of the Airbus organization. Risk - The solution(s) must be in line with financial returns and risk requirements set by Airbus’ consortium of owners. Cost Feasibility – The solution(s) must be feasible considering the limited resources available to finance new products. Market Sustainability – The solution(s) should sustain Airbus’ market leadership. Capacity – The solution(s) must be within the capacity of the functional levels. Regulatory Restrictions – The solution(s) are in agreement with the regulatory requirements of governments and agencies Alternatives Alternative 1 - As a global company, Airbus should pursue growth in market share through market penetration and product development through strategic alliances with companies in countries or regions where there is demand for its innovative products. * Market penetration will expand Airbus business in the aerospace market. * Product development will exploit the R&D advantage of Airbus. * Strategic alliances should facilitate global presence. Pros * There is risk sharing among the companies in the strategic alliance. * Gain access to market in the country or region tapping available knowledge and critical relationships (including political) necessary to sell commercial aircrafts. * Maximize strengths of partners to succeed in the market. * It is within the capacity of Airbus with its business model in India, Japan, UAE and Russia. Cons * Requires significant financial investment. * Differences in culture and management styles are potential ongoing concerns. * Difficulty in reporting requirement because of differences in standards. Alternative 2 - Airbus should defend its market leadership position by adopting blocking and global services strategies, as well as frontal attack strategy. * The A-380 new product is a means for frontal attack. * Boeings’ 7E7 could be blocked by making sure that Airbus A-330/340 models are not made obsolete. * Strategic alliance is a strategy for global services. Pros * There is sufficient advantage in terms of product innovation and production efficiency that guarantees lower price and operational efficiency for airlines. * Address growing demand for larger aircraft to address environmental issues, such as noise and pollution and fuel conservation. Cons * Boeing is a giant corporation capable to counter-attack Airbus defense strategies. * High risk involved with huge investment, uncertain market for A-380 and market category monopolized by Boeing. Alternative 3 - Airbus should consider merging with Boeing. Pros * Achieve economies of scale. * Create monopoly resulting to very high entry barrier. Cons * Strategy may not be favourable to the market and industry in general, because of the absence of competition. * Government intervention very likely, with their restrictions and regulations making the process more complicated. * Issues that are difficult to address may arise, such as management control, investment valuation and reporting which will prolong and make the process costly. * Differences in corporate culture may make or break the planned merger. Alternative 4 - Airbus to adopt status qou by implementing its current differentiation strategy through production efficiency and innovation. Pros * Investment required is minimal. Cons * Strategy may not be sufficient to sustain market leadership. * * * * * Recommendation It is recommended that Airbus implements alternative 1 - to pursue growth in market share through market penetration and product development with strategic alliance with companies in countries or regions where there is demand for its innovative products and alternative 2 - defend its market leadership position by adopting blocking and global services strategies. Both alternatives should contribute directly to higher market share and result to sustained market leadership position in the long-term. Implementation Plan A. Strategic Alliance Implementation Plan Short term 1. Create a project team. 2. Conduct market research to: * identify country or region with demand for Airbus aircrafts - for additional new products or replacement of aging aircrafts; * determine needs of the airline operators; * identify potential partners in the strategic alliance. 3. Prepare feasibility study for the project to be undertaken. 4. Secure management approval for the project. 5. Initiate discussion with potential partners and submit the selected partner(s) in the strategic alliance for management approval. 6. Draft terms and conditions of the alliance for approval and signature of partners. 7. Establish functional requirements. Human Resources: * Create the organizational structure * Hire managers and staff * Train staff Financing: * Secure financing for operation and investment required. Production: * Identify manufacturing location and sources of raw materials. Sales and Marketing: * Gather feedback from potential customers. 8. Monitor progress. Long-term Implement plans at functional level, including completion of plant construction, working with potential customers to close sale, ensuring that delivery of sold aircrafts are done on time and other operational requirements. B. Implementation Plan for Defence and Attack Strategies Frontal Attack * Study the strengths and weaknesses of Boeings’ 747 model. * Design and build A-380 to be superior than 747. * Price A-380 to be lower than 747. * Promote A-380 as a better substitute for 747 with its advance features. Blocking Defence * Study the strengths and weaknesses of Boeings’ 7E7. * Ensure that A-330/340 are not made obsolete by 7E7. * Otherwise, match 7E7 with new product model. Global Services Defense * Strengthen technical support through proper training programs for internal and external customers. * Heighten customer satisfaction by ensuring that functional levels are perfectly coordinating to meet customer needs. * Maintain strong positive relationship with value chain partners. Contingency Plan In case the recommendation to implement alternatives 1 and 2 are not feasible, then alternative 4 is the next best option - to adopt status-qou by implementing Airbus current differentiation strategy through production efficiency and innovation. Although the current strategy brought Airbus to top leadership position, it is not a guarantee that it is enough to sustain the company’s current position in the long-term with Boeing up for challenge to gain back the leadership position. References Appendices Appendix A – Forecasted Airline Passenger Data Forecasted airline passenger traffic in 2027 in revenue passenger kilometers (RPKs) | Region | Africa | Latin America | Middle East | Europe | North America | Asia-Pacific | Asia Pacific | 20 | 11 | 280 | 920 | 750 | 3060 | North America | 20 | 470 | 90 | 1040 | 1750 | | Europe | 350 | 410 | 270 | 1260 | | | Middle East | 60 | - | 120 | | | | Latin America | 6 | 440 | | | | | Africa | 100 | | | | | | Source: http://www.deloitte.com/assets/Dcom-Global/Local%20Assets/Documents/dtt_holdingpattern_v3.pdf Appendix B – VRINE Model Attribute / Resource | Valuable' | Rare' | Inimitable & non-substitutable' | Exploitable' | Ownership structure (80%-EADS and 20% BAE) | Yes. The financial backing and reputation of the shareholders are valuable to compete in this industry. | Yes. Fewer countries and governments can afford to invest in aircraft manufacturing. | No | No | Financing arrangements with suppliers and European governments | Yes | Yes | Yes | Yes | Use of CAD in designing aircrafts | Yes. It reduces engineering hours in the design process; brings out better designs. | No | No | No | Wider choice of aircrafts | Yes. Very economical to operate | No | No | No | Identical cockpit design across aircraft models | Yes | Yes | Yes. It would be difficult for competitors to imitate this capability as it will be costly to retool their manufacturing processes. | No | Producing fuel-efficient jets | Yes | No | No | No | Line-manufacturing method of assembling aircrafts | Yes | No | No | No | Manufacturing units all over the world | Yes | No | No | No | Human resource management | Yes. Hiring contract workers helps in controlling labour costs. | No | No | No | Appendix C – Five Forces Porter’s Analysis Appendix D – Market Statistics Appendix E – Airbus Product Models AIRBUS Aircraft | Description | Seats | Max | Launch date | 1st flight | 1st delivery | Production ceased | A300 | 2 engines, twin aisle | 228–254 | 361 | May 1969 | 28 October 1972 | May 1974 Air France | 27 March 2007 (561 built) | A310 | 2 engines, twin aisle, modified A300 | 187 | 279 | July 1978 | 3 April 1982 | December 1985 Air Algérie | 27 March 2007 (255 built) | A318 | 2 engines, single aisle, shortened 6.17 m from A320 | 107 | 117 | April 1999 | 15 January 2002 | October 2003 Frontier Airlines | | A319 | 2 engines, single aisle, shortened 3.77 m from A320 | 124 | 156 | June 1993 | 25 August 1995 | April 1996 Swissair | | A320 | 2 engines, single aisle | 150 | 180 | March 1984 | 22 February 1987 | March 1988 Air Inter | | A321 | 2 engines, single aisle, lengthened 6.94 m from A320 | 185 | 220 | November 1989 | 11 March 1993 | January 1994 Lufthansa | | A330 | 2 engines, twin aisle | 253–295 | 406–440 | June 1987 | 2 November 1992 | December 1993 Air Inter | | A340 | 4 engines, twin aisle | 239–380 | 420–440 | June 1987 | 25 October 1991 | January 1993 Air France | A340-200: September 2008 | A350 | 2 engines, twin aisle | 270–350 | 475 | 2006 | 2012 (scheduled) | mid-2013 (scheduled) Qatar Airways | | A380 | 4 engines, double deck, twin aisle | 555 | 853 | 2002 | 27 April 2005 | 15 October 2007 Singapore Airlines | | Appendix E – Boeing Product Models BOEING Model | Description | Capacity | First Flight | 737 | Twin-engine, single aisle, short-to medium range narrow-body | 85-215 | April 9, 1967 | 747 | Fourengine, partial double decker, twin aisle main deck, single aisle upper deck, short range (SR models), medium- to long- range wide body | 365-580 | February 9, 1969 | 767 | Twin-engine, twin aisle, medium- to long-range, ultra long-range (200LR), large wide body | 301-500 | June 12, 1994 | 787 | Twin-engine, twin aisle, long-range wide body | 210-330 | Dec 15, 2009 | | | | | Appendix G – Orders and Deliveries Data Competition between Airbus and Boeing 1989 TO 2011 Appendix H – Detailed Listing of Current Strategies PRODUCT DEVELOPMENT | PRODUCTION EFFICIENCIES | STRATEGY | Designing aircraft models using computer-aided design thereby shortening the design process. | Adopting a line-manufacturing method that made the process of assembling aircraft easier; | Hub-and –spoke system – relies on moving large numbers of passengers between major regional hubs. | Offering wider choice of aircraft models. | Employing lesser workers per aircraft and yet increasing productivity by 51% compared to Boeing; | | Producing airplanes with newer designs using a common cockpit configuration across models. | Maintaining better human resource management through the use of contract workers. | | Producing fuel-efficient aircraft that are more economical to operate. | | | Incorporating new technologies in its aircraft resulting in better operating efficiencies. | | | Appendix I – PESTAL ANALYSIS Political | Many of the world’s aircraft manufacturers are wholly or partly owned by governments who make procurement decisions, including placement of manufacturing facilities regardless of the economic benefits. | Tension between countries may influence a decision to favour one manufacturer to another depending on the political standing of the country the manufacturer is located in. | Environmental | New aircrafts with high efficiency engines are in demand to reduce CO2 emissions. | Larger aircrafts can reduce the frequency of flights reducing congestion of the airports, reducing air traffic, and minimizing air pollution. | Social | Liberalization of travel between countries can increase demand for aircrafts. | More people can afford air travel due to change in the life style. | Technological | Aircraft Industry requires the highest possible investment in R&D and innovations in both light material and alternative fuels to negate the effect on increasing oil prices. | | Economic | Economic recession can potentially affect air travel demand. Impact of terrorist attacks, wars could also affect demand. | Increase in oil price can decrease demand for aircrafts.Changes in currency value may affect demand for aircrafts by different manufacturers. | Legal | Aircraft manufacturers rely heavily on subsidies thus launching lots of debates on the unfair trade practices | Aircraft accidents may launch multi-million lawsuits and affecting sales of aircrafts | Appendix J –SWOT ANALYSIS STRENGTHS | WEAKNESSES | OPPORTUNITIES | THREATS | Core competencies customer-oriented product development: 3-D paper airplanes are used for performance, cost estimation, demonstrating new technology, and assessing potential buyers. | Owned by a consortium with partners safeguarding their own interests. | High cost of fuel demands large aircrafts like A380 | Financial crisis in EU zone | Innovative designs produce fuel-efficient jets and allow airlines to spread maintenance costs across airbus fleet. | Aircraft manufacturing plants are spread all over Europe. | 5% increase in traffic annually | Increase cost of fuel | Identical cockpit configuration allows airline companies to use the same crew across Airbus aircrafts. | Slow decision making processes. | Market demands more environmental-friendly aircraft | Strong competition from Boeing to regain its lost market share | Sophisticated manufacturing practices enabled Airbus to increase production efficiency using fewer workers. | New product development is costly and risky as they have not yet reached breakeven on the A380. | | New competition from Canada and China |