Competition in the Commercial Aircraft Business
With only a few large companies across the globe (Boeing, MD, and Airbus), the commercial aircraft industry essentially exhibits the qualities of an oligopolistic competition with intense rivalry. Here is an analysis of competition in the commercial aircraft business using Porter’s Five Forces.
Figure 1: Porter’s Five Forces Applied to Aircraft Industry
Barrier to entry: - High barriers to entry, to a certain extent help understand the risks involved in operating in the aircraft industry.
1. Initial Capital Requirements: - Huge initial development period and very high investment costs, tooling costs, and WIP are necessary even before the company starts producing and selling aircrafts. It takes over 5 years of development and production costs before company starts earning revenues. Commitment to buy and investments from launch customers are crucial.
2. Economies of Scale: - Company had to have a substantial amount of orders in order to earn economies of scale. Otherwise the cost of production would usually be more than the selling price of the aircraft.
3. Government Role: - Government is an important stakeholder for the aircraft business. Government subsidies and protection play a huge role in the aircraft business. (Discussed later in the write up)
4. Learning Curve: - The learning curve is very steep. Companies learn from year by year’s development and by internalizing the lessons learned. Boeing was formed in 1916 and Airbus in 1970. Both these companies have progressed step by step learning from each product and technology they have built and also from their failures.
Buyers: - It’s essential for aircraft manufactures to have a global presence and to attract buyers from all over the world. Buyer power is usually high.
1. Few Buyers: - Although there are various airline companies, they are still small in number. For aircraft manufacturers it is important to have as... [continues]
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