Professor Nicolas Kuzm
Topic Paper 3:
Boeing Aircraft Company vs. Airbus
Fall 1, 2012
September 2, 2012
For decades, Boeing and Airbus have struggled for dominance in the large commercial aircraft market. In 2010 and 2011, the World Trade Organization ruled that each firm has received illegal subsidies from the governments of the United States and the European Union, which have enhanced their competitive positions. This paper considers the nature of these rulings and the future competitive environment in the global jetliner industry. This paper will also demonstrate how Boeing and Airbus approach the aircraft marketplace, how they are alike and different (particularly their production processes), where the rivalry is likely to head, and the most probable outcome of their ongoing competition. History of the two Companies:
In 2000, America had a services trade surplus of $79.8 billion and a good trade deficit of $449.5 billion, resulting in a total trade deficit of $369.7 billion (U.S. Census Bureau, 2001). Founded in 1916, Boeing Company was the only maker of big commercial jets in the United States and is the largest U.S. exporter today. If Boeing loses substantial market share to its foreign competition, the U.S. trade-deficit situation will almost certainly worsen and the U.S. economy (in terms of good-paying jobs and future technological developments) will unavoidably suffer. During the 1996-2000 period, Europe-based Airbus boosted its global market share in the over-100-seat airplane market from 21 percent to nearly 50 percent (Matlack et al., 2001). The March 6, 2001 issue of The Wall Street Journal reported (Michaels, 2001): From its base in France, Airbus has eaten steadily into the home market of U.S. aerospace icon Boeing Co. over the past decade, and it hopes to keep biting off market share. Today, almost 10 percent of the big commercial jets flying around the U.S. are Airbus models. The consulting firm Avmark Inc. of Arlington, Va., projects that the Airbus share will near 15 percent in 2013. Northwest Airlines, US Airways and UAL Corp.'s United Airlines have each received their 100th Airbus plane. United has ordered more Airbus planes than any other airline worldwide. Airbus was founded in the late 1960s in the hope of preserving the remnants of Europe’s fragmented commercial jetliner manufacturing base, consolidating it, and growing it into an international competitor. At that time, the global market for large commercial jetliners was overwhelmingly dominated by American firms. Boeing, Lockheed and Douglas Aircraft controlled about 90% of the market. The governments of France, Germany, Britain and Spain recognized that in order to meet the challenge from the Americans and overcome the huge barriers to entry in the industry, they needed to combine their resources. In 1970 the Airbus consortium was officially established, and the governments of the four countries made major commitments for financial support of this enterprise. This support came largely in the form of loans at below-market rates to fund the bulk of the development costs for the A300, the first airliner produced by this consortium. Government loans were also provided to European suppliers of Airbus, particularly Rolls-Royce, which produced the engines that were used to power the Airbus aircraft. This method of financing, called launch aid, has been utilized to support the development of the entire family of jetliners now produced by Airbus, and has contributed significantly to the growth of Airbus. As time passed, this funding evolved from direct grants to reimbursable advances that were linked to sales. Under this system, loans from Europe’s governments are repaid gradually with each aircraft or engine that is sold. However, if sales fail to reach specified goals, the loan is not fully repaid. Thus, the governments assume a portion of the market risk of...