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STRT-431 Reading Notes 10-12-21

The document discusses the business strategy and aircraft manufacturing industry. It summarizes key points about factors that influence demand for large commercial aircraft like air travel trends, airline purchasing objectives, and government regulation. It also describes major aircraft like the Airbus A380, Boeing 787 Dreamliner, 737 MAX, and 777X and issues around their development and production. New competitors like Embraer and COMAC emerged but faced challenges competing against incumbent Boeing and Airbus.

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Drew Johnson
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195 views5 pages

STRT-431 Reading Notes 10-12-21

The document discusses the business strategy and aircraft manufacturing industry. It summarizes key points about factors that influence demand for large commercial aircraft like air travel trends, airline purchasing objectives, and government regulation. It also describes major aircraft like the Airbus A380, Boeing 787 Dreamliner, 737 MAX, and 777X and issues around their development and production. New competitors like Embraer and COMAC emerged but faced challenges competing against incumbent Boeing and Airbus.

Uploaded by

Drew Johnson
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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STRT-430 Business Strategy 10/12/21 Reading Notes

 To sustain long-term profitability, you must respond strategically to:


o Established rivals
o Savvy customers- can drive down prices by pitting rivals against each other
o Powerful suppliers- constrain profits if they change prices
o Entrants- aggressively steal market share
o Substitute offerings- can lure customers away

Dogfight: In the Secret World Of Airplane Deals, One Battle Up Close --- Boeing, Airbus
Vied to Meet Cutthroat Terms of Iberia; Strong Carriers Call Shots --- Dangling the `Used
Car' Option
 Iberia one of a few airlines financially healthy enough to order new planes
 “200 airlines and only 2 suppliers”
 Iberia went shopping for used airplanes – lots of airlines selling due to industry downturn
 All-airbus fleet would reduce operating costs – making cost of including some Boeing
planes higher. High switching cost
 Resale price guarantees for planes sold years earlier were coming back to haunt Airbus:
Iberia threatened to just sell all of their planes and replace with Boeing, and Airbus would
be picking up the tab!
 Airbus eventually won, by lowering price and providing notable concessions:

Boeing and Airbus: Large Commercial Aircraft, 2000-2001


 Traditionally, aircraft producers were vertically integrated. Used lots of subcontractors
and then took all the parts and assembled them
 Producers did not make engines but collaborated closely with engine makers. Customers
could select from a range of engines with a performance/cost trade-off
 For a while, Airbus and Boeing had been delivering similar amounts of aircraft. But
Airbus has out delivered 2-1 since 2020 due to two major factors:
o Grounding of Boeing 737 Max
o Airbus CEO pressuring airlines to make good on existing contracts. Traditionally,
manufacturers were more lax during times of economic downturn
Factors Influencing Demand for Large Commercial Aircraft
 Demand for air travel
o Expected to increase as developing economies travel more (China)
 Airline route structure
o Hub/spoke model early on
o Over time, nonstop has increased
o Planes selected based on their capacity and range
 Airline purchasing objectives
o Some smaller/niche airlines have only one manufacturer
o But most have many, either by design or through mergers
 Government regulation
o Rules against governments subsidizing too much – national security concerns
New aircraft
Airbus A380
 Airbus projected and placed a bet on the proliferation of hub/spoke model – identified
megacities and said 91% of travel would be between these. Designed new large aircrafts
to suit this vision
o New plane had lots of seats, but was so large that it could interfere with airport
operations – hit things, needed an escort, messed with radio frequencies
o Lots of manufacturing issues and huge delays – caused by miscommunication of
multi-national team. 25% drop in stock and CEO resigned.
o Eventually stopped manufacturing in 2021 after 250 of 300 orders had been
delivered. Break-even point was 1200 deliveries after 20 years
Boeing 787 Dreamliner
 Dreamliner advertised as being super efficient- longer range less fuel per passenger. Lots
of carbon fiber, super lightweight and efficient
 Lower maintenance- more electric, less pneumatic, carbon fiber was more durable,
designed to make it easy to replace engine
 Better passenger experience- less air sickness, better filtration, quieter ac and wall
vibration, etc.
 Overhauled manufacturing process- instead of precisely designing pieces, Boeing just
provided requirements to subcontractors and had them design. Sped up development
time, cut costs, pushed some risk onto suppliers
o Structured payments to that suppliers wouldn’t be paid until the first 787 was
delivered. Gave them strong incentive to fight for success
o Didn’t go super smoothly- some subcontractors were overwhelmed and super late,
and Boeing eventually reversed some of the decisions and made more parts
themselves
 First delivery was THREE YEARS after expected date
 Problems with airplanes difficult to track down because of manufacturer outsourcing
 Toxic culture in new manufacturing plant- dangerous, cover up mistakes/defects
 Delivered 1000 of 1500 orders
Boeing 737 MAX
 New, fuel-efficient design to compete against A320neo
 American Airlines bought big order from Airbus for the first time
 737 MAX would reduce training costs vs. introducing completely new plane
 737 MAX had bigger engine that would cause the airplane to tip and stall – so AA had to
build software to counteract this. Told regulators that pilots could just re-train on a new
iPad
 After disasters – halted deliveries and production for a year. 500 of 4500 orders delivered
Boeing 777x
 Intended for middle-east customers. Emirates
 Similar size to A380 but had wings that could fold, so didn’t have the same airport
problems. Larger engine allowed it to take off in extreme middle-east heat
 Improved on 787 manufacturing by having less parts outsourced. Built a new plant so
they could make the wings
 Delivered ZERO to date. FAA strict in providing approval
New competitors emerge
 Embraer- leader of small planes
 Bombardier- launched a small aircraft designed to target anticipated increase in desire for
point-to-point travel. Couldn’t beat Boeing and Airbus on price, but promised to deliver
one time.
o Suffered from network effect- customers had trouble committing because they
saw nobody else did. Didn’t have confidence in maintenance infrastructure at
airports
o Failed project was sold to Airbus. Bombardier now only does private planes
A new global rival
 Chinese COMAC- Had $72 billion in support from the Chinese government. C919 was
sloppy and too heavy

Think
Use a Five Forces analysis to understand the threats to (and sources of) profit in the
widebody aircraft market at the time of the Iberia negotiation (2002-2003). Note that the
Wall Street Journal article on the Iberia purchase focuses on price competition. Remember
that you are looking for the fundamental economic issues that lead to price competition,
not just descriptions of the price competition itself.
 Suffering airline industry left few companies in financial shape to purchase airplanes. So,
the airlines that did buy had more bargaining power
 High switching costs for airlines made new entrants unlikely, made it costly for airlines
to switch between existing manufacturers
 Industry decline led to increase in used airplane sales which presented attractive
substitute to customers (airline companies)

In addition to the industry characteristics you described in question 1, describe the factors
particular to Iberia, including actions Enrique Dupuy has taken in the course of the
negotiations, that have helped Iberia obtain very low prices for the planes it is buying.

 Dupuy played a hard bargain – gave very few concessions throughout the process. He
made both Boeing and Airbus believe that he was seriously considering purchasing used
aircraft, which were significantly cheaper
 Airbus obviously had leverage as the incumbent as switching costs were high, but Dupuy
had negotiated a resale price guarantee on the aircraft which would decrease switching
costs. Made Airbus believe that they might actually sell the entire fleet and replace with
new or used Boeing.
 Always was talking about the competitor – ex. would reference his conversations with the
other execs and told Airbus salesperson when he was going to look at used Boeing jets.
Was very transparent.

Consider Boeing’s decision to introduce the 787 Dreamliner aircraft. What threats to
profitability raised by your Five Forces analysis do you think the 787 will address? What
threats will it not address or even exacerbate?
 Responded to rival’s creation of the A380 by creating a long-range aircraft that was more
efficient top operate

Boeing adopted a new supply chain strategy for the design and production of the 787
Dreamliner, which resulted in very lengthy delays in bringing the plane to market. Was
this more the consequence of poor strategy or poor execution?

Class discussion
Rivalry
 - Only 2 players
 + homogeneity
 - Switching costs
 + high buyer motivation
 + large, infrequent sales
 + capacity high relative to demand (9/11)
 + High fixed costs relative to variable costs for manufacturers
Entry
 - entry costs are very high
 - reputation is important
 - Hub + spoke
 - Permission from regulators takes a while
 + Government subsidized airlines (COMAC, China)
Substitutes
 + Used planes
 - Leasing
Buyer Power
 - Many buyers
o + Not many buying at that time
 - no willingness to pay for specific planes. People don’t care. Switching isn’t a big deal
so no pressure for buyers to stick with a manufacturer
Supplier power
 - Dual sourcing
 - Engine manufacturers RR + GE have interests aligned
 + Complexity (parts)
 + Labor

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