Introduction
In the summer of 1992, chief executives of Airbus and Boeing were contemplating whether to join
the hands to investigate the possibility of a Very Large Commercial Transport. Besides, Airbus and
Boeing, Mcdonnel Douglas was also bandying around the opportunity of creating a Super Jumbo Jet.
A VLCT would hold between 550 and 800 passengers and would sell for between 150 million dollar
and 250 million dollars. The single largest segment of the Aviation industry was the manufacturing of
Large commercial flights which was around 38.5 Billion Dollars in 1991. The two American
companies commanded a combined market share of 77% and Airbus had a market share of 16%.
Airbus was an European Company but its supplies came from Countries such as the USA, Japan, etc.
Airbus had 500 industrial suppliers from the USA. Boeing received around 55%-65% of the total
orders and the rest went to Airbus and Mcdonnel Douglas.
Production Facility
Boeing had two principal manufacturing sites in Everett, Washington and Renton, Washington. It
imported machine parts from 9 national sites and 5 global facilities. Renton was used to produce
737,757, wing-line production, painting and used for subassembly. The Global partners organization,
responsible for managing the international suppliers was in Everett.
Airbus had 3 existing aircraft family lines segregated by the number of seats. Design centres were in
the UK, France, Spain, Germany, etc. The planes were assembled in cities such as Toulouse. There
were 15 different facilities across 4 different countries. Manufacturing facilities for Nose and centre
fuselage were in France, the aft fuselage in Germany, the tail plane and belly faring in Spain, the
wing construction and the electronics in the UK.
Why Jumbo Jet
With the reduction in cost price of per seat of travel owing to the configuration of super jumbo have
passenger capacity between 550 and 800, very large commercial transport (VLCT) has become the
next big thing in the aviation industry, to make travel through air much more affordable. To cash in
this opportunity big names in the market are contemplating over the thoughts of its production.
However, the task not being an easy one the two big players Boeing and Airbus are facing a dilemma
of whether to sail solo in the operation or split their bills and opt for a duopoly practice.
Lead Time- The time consumed in making an aircraft alone will be large as a lot of time will go in
research and development and other activities and formalities necessary for the production.
However, when the companies will join forces the knowledge transfer can take place and hence time
consumed will be less and a better version of aircraft can be produced.
Financial Constraints
Boeing
Amount Measurement
Price of Each Jumbo Jet (150-250 Mn Dollar) 200 $ Million
Margin (in %) 20% %
Margin (In Dollars) 40 $ Million
Demand over 20 years for Jumbo Jet 500
Current Market Share 53%
Total Profit Earned if all sales made by Boeing 10.6 $ Billion
Avg Cost in R&D for Jumbo Jet ($5 to $20 Bn) 12.5 $ Billion
Beta 0.9
Expected Loss (Without taken into account cost of capital involved) -1.9 $ Billion
So, the high beta of the industry and the considerable amount of loss that would be incurred by
Boeing, even after being the market leader, the decision to go individually for the project will not be
a good one.
Operational Constraints
Technology constraints- The new aircraft being manufactured should be integrated with state of
technological advancements that could be made compatible with hardwares of existing aircraft to
speed up the process. This is however a challenging task and possess a roadblock in the journey of
the development.
Raw materials for Airbus- Boeing having an edge in its ability to access raw materials necessary to
build an aircraft owning to its relations with Japan which is a major source of raw materials. Airbus
definitely has a negative edge as Boeing has a headstart in the race and Airbus can lose on the
opportunity to capatalize in the competition which will also increase its variable cost of the
operating process.
Competition
The entire market is B2B segment. There's a direct competition between the two market leaders
with a little difference. Launching the high-end heavyweight flights would probably crack a lot of
market proportion as they can share the established base of their customers. Also the bargaining
power in the case of a joint venture would be exponentially high and together they can absorb more
losses. Given the product-life cycle ranges, the competition would also have an impact on the cost of
development and sales and they will experience of economies of scale.
Conclusion
Given the circumstances of the case, it would be ideal if Boeing and Airbus collaborate for the
development of VLCT.
