Airbus : from Challenger to Leader

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1) Causes of the situation

a) History

- Late 1960’s: Britain, France and West Germany launched Airbus Project. Attempt of European governments to end American manufacturer’s monopoly of aerospace industry.

- July 1967: Britain quit project due to differences with other partners.

- 1970: Airbus Project reorganized and named Airbus Industrie: A French German company incorporated in France

- 1971: Spain joined consortium with 4.2% stake thru state-owned CASA.

- In 1979, British Aerospace Systems (BAE systems) entered the consortium with a 20% stake

b) Background

- The aerospace industry can be divided into three categories: defense contracts, space programs and commercial aircraft. This discussion is specifically on commercial aircraft industry.

- Airbus HQ – initially in Paris but shifted to Toulouse (France) in 1974

- Each partner assigned specific production and assembly tasks. Consortium coordinate, design, develop, finance and production of partners.

- Airbus products and market share:

i. First product: A-300B – widebody twin-jet plane with 226 passenger capacity. Second product: A-300-B2, 250 seater

ii. 1975, receive first order and gained 10% market share.

iii. 1978, 26% market share. Launched A-310, 218 passenger capacity two class configuration: first of its kind with two –man cockpit with six-CRT display.

iv. 1979: British Aerospace Systems (BAE Systems) joined consortium with 20% share. Announced launch of A-320 a single-aisle 130-170 seater.

v. 1985-86: Market share increased to 25%

vi. 1996: Market share increased to 35%

2) Assessing the industry environment (external environment)

- PEST – framework to understand environment in which business operates and how it can influence the industry and the company - PEST is the external factors that affect an organization - Political factor, Economic factor, Socio cultural factor and technological factor

a) Political Factors

1. Regional integration - European Economic Community (EEC) / European Common Market established in 1957.

2. Government legislation- Even though the partner countries have different laws and regulations, the onset of EEC has helped Airbus to grow within a common set of laws & regulations under EEC.

3. Political Risk - Low political risk since EEC main objective apart from economic cooperation is ending the frequent and bloody wars between neighbors, which culminated in the Second World War.

4. Middle East may prefer non US manufactured airlines

b) Economic Factors

1. Cost of production lower:

i. Sophisticated production practices – line-manufacturing method resulting in 51% higher productivity difference compared to Boeing

ii. Exploit expertise of partners resulting in low designing and manufacturing cost

iii. Less HR problems – lean workforce and relied on contract workers

2. Currency exchange rates – very low exposure exchange rate fluctuations because funds for the initial years were provided by the member partner countries with no repayment conditions. After 1992: Bilateral deal between European governments and U.S. government had impact when the agreement stipulated that the loans should be repaid with interest within 17 years.

3. Cost of capital – have member partner government providing cheap loans to the consortium. After 1992: Bilateral deal between European governments and U.S. government limited the financial help to Airbus to develop any new model to 33% of its total development costs.

4. Oil prices, the economic downturn – will affect the demand profitability of airline industry and thus will affect the demand for the aircraft

c) Social Factors

1. As a result of the Sept. 11 attack on the U.S., air passenger traffic dropped tremendously. This has resulted in airline companies being bankrupt and cancelling a lot of orders for new aircraft....
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