In the market for large aircraft demand the emerging niche for very large aircraft (VLCT aircraft seating more than 400 passengers) saw only two competitors: Boeing and Airbus. Even though both competitors’ moves were clearly marked by technology enhancements, and different target markets but both exhibited strategic interdependence.
Option with Boeing:
Boeing being the market leader for almost a decade as a manufacturer of large commercial aircraft and had also reached economies of scale, the need to sustain its market share it presumed that “customers might demand for new”. Any potential growth was only through taking super leap and making VLCT jumbo aircraft which needed huge investment beyond Boeing’s financial reach (that too for an uncertain future market)
Boeing had the technology advantage over airbus because Boeing had already tested and launched Boeing 747 (a large passenger carrier). Only stretch of design was needed to build up “jumbo dream line VLCT aircraft”. But being a private firm and not state run the kind of investment required to develop new carrier and also the uncertainty of the future market were problems. It had the option to continue to manufacture famous “Boeing 747” and not go for VLCT Jumbo.
But the VLCT superjumbo was a strategic commitment of more than average interest because of its sheer size, irreversibility and potential impact on industry structure if nothing goes bad. VLCT was seen as a potential to reduce congestion at airports as maintenance cost at airports is high and flight delays due to congestion adding more to the cost. So Boeing had all the reasons to go for making of new VLCT.
Option with Airbus:
On the other hand competitor Airbus also had potential to grow and flourish in Europe market and also had strong political lobby in support.
But difficulty with Airbus was the new technology development altogether and the time constraint that will go into getting the new design. The capital, investments were very high but the riskiness of expenditures of this magnitude was magnified by the fact that Airbus has to spend essentially the entire amount before it makes its first delivery in an industry which was still growing not like Boeing. If, however, the launch succeeds, Airbus was expected to dislodge Boeing as the market leader in commercial aircraft after more than 40 years of market dominance by the latter. So Airbus also had all the favors to build a VLCT Carrier.
It seemed clear that each competitor had the power to develop a brand new VLCT independently irrespective of time and cost, fact that huge massive investments and capital were required, the fact that both can incur very large losses in case of uncertainty of future market which otherwise can be mitigated working together and the fact that if succeed in launching independently the intense competition in the pricing that will follow up between the two for same customers.
Given these considerations, question is : SHOULD THE 2 GIANTS BOEING AND AIRBUS COLLABORATE IN MAKING OF THE VLCT DREAM LINE JUMBO?
ANSWER IS: NO.
1. Nash equilibrium /Game Theory –
• Boeing being market leader having first move advantage of technology and integrated supply network will ask for higher share than Airbus. Differential sharing cannot be agreed.
• Boeing approached two of the weakest links in the Airbus consortium for negotiation. This move made Airbus fear that Boeing trying to break the consortium and target its market. Hence Airbus doesn’t trust.
• Both knew they were Monopolies in their respective markets. Collusion was never an option.
2. Talks also failed due to subsidizing issues and European government financing cheap loans .Boeing opposed to undue subsidies as unhealthy competition.
3. Also buyers and suppliers in both the markets have different benefits altogether. Boeing had profit sharing integrated with...