The airline industry is cyclical, with periodic downturns and upturns. Events like 9/11 and SARS can have negative impacts on airline travel, creating an industry downturn that hurts manufacturers. Economic downturn is key to understanding the market presented in the case & WSJ article. I will analyze the industry from the perspective of a downturn, but the industry would likely change significantly during good economic times. Internal Rivalry – High threat to long run profits
The downturn causes decreasing demand. There are high fixed costs ($8B - $15B in a single plane development + working capital + PP&E!) that create fierce competition as it becomes a volume game to cover as much of the fixed costs as possible. Not all airlines need very large aircraft so each sale is important, especially in a downturn. Capacity is augmented in large increments which give increased incentive to win plane orders. Because of high switching costs for buyers, there is increased incentive to be the preferred supplier. Entry – Low threat to long run profits
The high fixed costs (FC) and a long development period (5 yrs) create large barriers to entry. The FCs provide an incentive to sell at nearly any price with a positive contribution margin, making the entire industry less profitable. Airlines have a high cost of switching suppliers because the total cost of ownership (TCO) rises with multiple planes in a fleet (pilot/mechanic training, increased spares, maintenance, etc.). Thus new entrants are unlikely to be able to garner many buyers. A steep learning curve also makes it difficult to enter this industry. Boeings actions to outsource more parts design may lower a barrier to entry because it enables suppliers to vertically integrate. Also, the govt. policy change will lower the barrier to entry because the duopoly will no longer have a subsidy to operate. Even with these two issues lowering the barriers to entry, there are still sufficiently high barriers that...
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