To:The Boeing Company, Board of Directors
Date:October 3, 2005
Re:Options and Recommendations in Response to Airbus
We have recently discussed Airbus's effective effort in capturing market share in the past few years. We have also agreed that I will conduct an analysis of the underlying circumstances concerning the situation, address the challenges facing Boeing, provide options available to Boeing, and recommend actions to be taken. I will provide an analysis of the Aerospace industry, an analysis of the firms involved, and an analysis of the international implications concerning the situation.
The aerospace industry is dominated by three major companies: Boeing, Airbus, and McDonnell Douglas. Boeing has long been the dominant market share leader. However, due to the recent downfall of McDonnell Douglas, Airbus has gained significant market share and is threatening Boeing's position as the market leader.
The Nature of the Aerospace Industry
The aerospace industry is a long-term engagement. It is typical for the development of a new plane to take an average of five years before the model even begins production. Thus, the research and development costs are extremely high and have been estimated at a cost of up to $20 million per seat. Manufacturers usually do not even break even until 400 units have been produced, which can take up to 12-14 years after research and development begins. Therefore it is very difficult for new companies to enter this market. It would take a huge capital investment for a company to even get started, with no guarantee of any type of success.
Boeing funds its own research and development costs
The nature of the funding of research and development costs is very influential in this industry. Boeing has long been a leader in developing new technology in aerospace. The research and development costs associated with new technology are extremely high. Boeing has received some funding from the U.S. government through defense contracting, such as contracts to develop and produce military aircraft that also have commercial uses. However, most of Boeing's research and development cost have been funded from within the company.
Airbus funds research & development costs through government subsides
Contrary to Boeing, Airbus's research and development costs are subsidized by European governments. Airbus and the European governments claim that subsidies are needed for Airbus to compete with the dominant aerospace producers, such as Boeing and McDonnell Douglas. Due to the large costs of research and development and Boeing's dominance of the market share, Airbus contends that they would not even be able to stay in the market without government intervention. European governments are willing to fund Airbus because they see aerospace production as highly lucrative industry in which American companies almost have a monopoly over.
Challenges facing Boeing
Boeing has long been the market leader in the aerospace industry and never has seriously been threatened from this position. Even with Airbus's extensive effort to gain market share, they are still significantly behind Boeing. However, Airbus is planning the introduction of two new planes the A-330 and A-340 which would be the first real competitor to Boeing's 747. The challenges that Boeing now faces are to maintain its current market share while having increased competition and to do so while still maintaining profitability. Boeing also faces challenges in technology development; European government subsides allow Airbus to match new Boeing technology within short periods of time.
Airbus's A-330 and A-340 threaten Boeing's 747
Boeing has long monopolized the large jumbo jet sector of the industry. The Boeing 747 is in a class of its own. It seats up to 400 people and up till now has not faced any direct competition. No other manufacturers have...