The Global Large Aircraft Market

Outline

• Objective• Industry History• Boeing Corporation• Airbus Industrie• Industry Competition• Large Aircraft Competitive Analysis• Strategic Recommendation

Objective

• Analyze and recommend a competitive strategy for Boeing within the large aircraft market (500+ passenger seats)– Boeing’s Options:

• Maintain current product • Develop and produce an improved 747• Design a completely new aircraft

Industry History

• Wright Brothers’ first flight in 1903• First half of the century, rapid development of

industry – Aeroplane Co., Bae/Aerospatiale, Bell, Boeing, Curtiss,

Grumman, Lockheed, Martin, Messerschmitt, and Pratt & Whitney

• Second half of the century, consolidation of manufacturers– Boeing and Airbus remain

Boeing Corporation

• History– Commercial production began with 707 in 1954– Pan Am inaugural transcontinental flight in 1958– First 747 rolled off the production line in 1968

• Current Business Units– Commercial Aviation– Military Aircraft & Missile Segment– Space and Communication

Boeing Corporation

• Largest aerospace manufacturer in the world– Over 13,000 commercial aircraft delivered– Represent 65% of world’s air transportation

market– 1999 Financial Performance

• Revenues $58 Billion• Net Operating Income $4.7 Billion• EPS of $2.49

Airbus Industrie

• Owned by consortium– European Aeronautic Defense and Space

Company – BAE System

• Created an Airbus Integrated Company to manage the commercial sector

• Utilizes production facilities across Europe– Allows efficient use of specific skills by division

Industry Competition

• Intensity of Competition

Highly Competitive (Unfavorable)

• Availability of Substitutes

• Bargaining Power of Buyers

• Bargaining Power of Suppliers

• Threat of New Entrants

Limited Substitutes

(Favorable)

Limited Quantity/Interdependency

(Neutral)

Limited Quantity/Interdependency

(Neutral)

High Barriers

(Favorable)

Large Aircraft Competitive Analysis

• Projected Demand

• Strengths and Weaknesses

• Economic Risk

Market Forecast2000 through 2019 Deliveries

$1.5 trillion (22,315)

14%

6%42%

44%

Large

500+seats

400-500seats

SmallerJets

IntermediateTwin-Aisle

Single-Aisle

A330

757767

A320

737 717

777

A340

747

A3XX

Projected Demand

330

927

1500

0

500

1000

1500

Boeing Analysts Airbus

Large Aircraft Demand Through 2019

• 20 year market forecasts vary greatly

Strengths & Weaknesses

Maintain Product (Option 1)

Strengths

• No capital expenditure

Weaknesses

• Limited range• Limited capacity• Reduced efficiency• Inferior technology

Strengths & Weaknesses

Improved 747 (Option 2)

Strengths

• Enhanced performance

• Commonality of ground crews

• No additional training of service crews or pilots

• Existing airport facilities

• Competitive operating efficiencies

• Meet noise level guidelines

• Seat-mile cost savings (3-5%)

Weaknesses

• Limited range

• Limited capacity

• Inferior technology

• Operating Efficiencies

Strengths & Weaknesses

New Aircraft (Option 3)

Strengths

• Equivalent to Airbus (technology)

Weaknesses

• High investment

Economic Risk

• Maintain Current Product– Requires no investment

• Develop and Produce an Improved 747– Requires limited investment of $4 Billion– Breakeven of 170 aircraft

• Design a Completely New Aircraft – Requires significant investment, approximately

$14 Billion– Breakeven at 528 aircraft

Boeing Competitive Strategy Analysis(Estimates; $ in Millions)

Boeing Airbus A3XXNo Build Build 747X Build New B-No Build B-747X B-New

Investment $0 $4,000 1 $14,000 2 $14,000 1 $14,000 $14,000

Margin per Airplane1,4 $21 $24 $27 $27 $27 $27

Breakeven 0 168 528 528 528 528

Market Share 20% 40% 50% 80% 60% 50%

Estimated Profit330 $1,400 ($900) ($9,600) ($7,000) ($8,800) ($9,600)927 $3,900 $4,800 ($1,700) $5,700 $700 ($1,700)1,500 $6,400 $10,300 $5,900 $17,800 $9,900 $5,900

1 Source: “Boeing Gets Blown Sideways”; Business Week Magazine; October 16, 20002 Assumes Boeing's cost to develop and build a newly designed large aircraft is comparable to Airbus's cost3 Estimated based on total large plane market; Source: Boeing Corporation4 Estimated based on calculated breakeven; 10% reduction for 'Build 747X' and 20% reduction for 'No Build'

Strategy Recommendation

• Medium Term (Through 2005)– Commit to competing in the Large Aircraft Market– Focus on producing and selling next generation 747– Highest projected return on investment

• Long Term (Beyond 2005)– Further evaluate market based on orders– Proactively monitor demand– May need to produce a new Large Aircraft to stay

competitive

Lets Take Off…!Lets Take Off…!