Aviation Strategy Of New Entrants Marketing Essay
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Published: Mon, 5 Dec 2016
The commercial civilian aircraft industry can be divided into three sub-segments: single aisle segment, twin aisle segment and regional jets segment. Single aisle segment constitutes narrow bodied long haul aircrafts with passenger capacity of 91 to 200+ seats. Regional Jets segment are aircrafts with seating capacity of 30-90 seats with range of . Twin aisle segment constitutes of wide body structure with twin chassis and long haul aircrafts with seating capacity from 180 to400+ seats.
Before two decades ago, the global aircraft industry was duopoly of Boeing and Airbus. However in early 90’s saw emergence of Embraer and Bombardier competing in lower segments such as regional jets. Till late 2000’s twin aisle and single aisle segments was competed between Airbus and Boeing and Regional Jets were competed between Embraer and Bombardier.
However, by early 2010’s aviation industry saw many new entrants to both segments. Developing nations such as China, Russia and partially South Korea and Japan have been initiating their aerospace industry through various subsidies and incentives in acquiring manufacturing technology and know-how to break duopoly of both the segments.
Market Outlook for next two decades (2010-2029)
Demand for new aircrafts
The total global fleet will double in next two decades from current fleet of 19000 to 36,500. Only 15% of current operating fleet will be service by 2029. Out of new aircrafts delivered by 2029, 56% is to for fleet growth and 44% to replace existing fleet
Largest aircraft segment
The single aisle aircraft will be major and dominant segment, even more than that it is of today. This segment will constitute of 70% of total demand (around 20,000 aircrafts)
Main Market region
Asia-pacific will have highest demand for aircrafts. It would need 34% of total global aircraft by 2029, amounting to 1.3 trillion markets.
New Entrant of new Single-aisle, Narrow body: A brief profile
Most of the new entrants are from Asia-pacific region and mainly government-owned and subsided firms
Increase of heavy traffic and demand for new aircrafts in Asian-pacific countries
Growing demand for narrow body aircrafts for next 2 decades especially Asia-Pacific/
Retirements of many narrow body aircrafts from different current fleets
Constant deregulation and emergence of low cost carriers
The current manufactures produces around 1,000 deliveries per year globally. This is quite difficult for these companies to satisfy the present demand for single aisle aircrafts
These key factors has attracted new aircraft manufactures to emerge mainly in countries which has technical capacity to build such as planes and to meet their highest growing demand of air travel
However few of the new entrants focus on building RJs with seating capacity of 70-90 and move on to larger aircraft by near future, whereas other firms are plans to build single aisle aircraft that compete head on with Boeing and Airbus. Nevertheless, both claim to develop aircrafts which will far more superior to current versions of aircraft that they compete with it
COMAC mainly focus on Single aisle narrow body commercial aircraft segment with. As discussed before, due to high demand narrow body commercial aircrafts. COMAC’s C919 is currently developing to meet the target of first flight by 2014 with seating capacity of 168-190 passengers. Most of experts believe that COMAC latest aircraft such as C919 will not be unbeatable aircraft in terms of technologically or commercially when it starts flying.
The major reason for experts to predict this is because of COMAC high dependence on foreign suppliers such as GE, Hamilton Sundstrand, Honeywell all being a major supplier of Boeing
Irkut, under the umbrella of UAC, and state funded is developing MS-21 which comes out in three variants (150,180 and 210 seats). It was expected to enter into service by 2017. Irkut has joint partnership with numerous foreign firms to supply various components of the aircraft such as Pratt & Whitney for the engines. . The aircraft will include 40% of composite materials and Irkut’s designer’s claims that MS-21 will be 10-15% more efficient that Airbus A320 and Boeing 737 with 15% fuel efficiency, 15% less structural weight and 20% low operating cost. It comes with a relatively cheap price tag of 35 million$.
Till date, 146 firm orders has been placed and with 39 options, mainly from Russian firms such as Aero Airlines and Russian leasing companies
Sukhoi Superjet 100:-
Again under umbrella of UAC, Sukhoi delivered its first regional jet on April 2011 and comes with seating capacity 0f 85-105 passengers and price tag of 23 million $
Sukhoi provides after sales support through SuperJet International joint venture with Italian firm Alenia Aeronautica`. It provides various in support programmes such pilot training, maintenance technical training and spare parts distribution and supply. This is to deliver promised in service support to their clients since Russian firms had poor after sales reputation
COMAC ARJ 21
A new Regional jet manufactured with capacity of 90 passengers by partnership with Bombardier. Its model is based on Mc Donnell-Douglas MD-90. Most of major subsystems were outsourced from mainly North American and European suppliers
Response from current manufacturer
With the emergence of additional competitors in last decade, the major manufactures of narrow-body airplanes being Boeing and Airbus and Regional Jets such as Bombardier and Embraer face high potential disrupting competition. These companies will have to attain and build higher market share quickly to become viable.
Favourably for all of above manufacture order and backlog books are currently full till 2016, but the question is to whether how much market share they can attain coming decades.
Lately, current manufactures are forced to collaborate by joint partnership and strategic alliances with new entrants to have a part of their market share or to have a great market share in new entrant’s countries.
Lately, Bombardier and COMAC signed a joint partnership agreement to develop complementary narrow-body airplanes, but non-overlapping, that has a seating capacity of 100-149 passengers for Bombardier and 156-190 passengers for COMAC. This partnership poses a great threat to Airbus/ Boeing duopoly whose major revenue is from this segment. Moreover this partnership will also give considerable advantage for both Bombardier and COMAC on one of the fastest growing market- Chinese Aviation Market where both Airbus and Boeing has placed high bets on. Its expected China market would have about 10% of the total global airplane or fleet by 2030 due high air travel demand.
Embraer, on the other hand, whose market share are mainly involved Regional Jets segment with seating capacity of 98 to 122 seats. Recently Embraer considered and then later rejected a prototype of stretching its 190-195 E-jet. However, it is very likely to resume this prototype or build a larger narrow-body aircraft if new entrants from China (ARJ 21) and Russia (MG 21) move to Embraer’s core RJ market.
Embraer’s is considering a new larger aircraft; however it’s not announced officially. It’s believed that Embraer’s managerial are waiting for Boeing’s plans for developing a replacement for its successful version of 737.
At present, Boeing and Airbus are sole manufacturers of all sizes of large civil airplanes. However the importance of narrow-body, single aisle segment cannot be overstated. According Boeing’s forecast, this segment will account to 60% of total sales and 47% of total revenue in period of 2011-2030. Even though both the companies has delivered roughly equal numbers of narrow-body aircrafts, the estimated demand of above 20,000 airplanes by 2030 suggests that the their market share will lose if they do not keep ahead of competition or not capable of delivering airplanes for their next decade aircraft hunger customers.
On the contrary, delivering almost 20,000 aircrafts by 2030 is impossible task for both companies combined at present state of its production rate. Either both companies has come up with strategies to meet this demand by doubling their production rate and or letting their competitors take some extent of this market share in this segment to meet this predicated high demand and supply chain.
In both ways, either due to high competitive that duopoly is going to face in next decade or either due to constant pressure from buyers for newer aircraft with more fuel efficient and lower carbon footprints; Airbus has announced an upgrade of A320 family with option of two high efficiency engines by 2015(A 320 neo). However, Airbus relieved it does not have any plans for a newer aircraft until late 2020’s. Initially Boeing was reluctant for an upgrade especially with old aged 737’s and planned for a newer small aircraft by 2020, however with Airbus move for new engines and sighting fierce competition from Chinese, Russian, Canada and brazil firms, it announced re engine 737’s and dropped the plan for new aircraft in this segment
Boeing and Airbus have great advantage due to the complete access of aerospace technologies, high learning curve, excellent network distribution, highest credibility. Even though they don’t appear to take competition for granted. It is clear that a new firm without compromising safety, ability to deliver within the time frame and their overall competitiveness is enough to challenge their duopoly.
New entrant’s Future outlook
Currently COMAC, Irkut and Sukhoi mainly focus to develop aircrafts in single aisle and regional jet segments. The market demand for single aisle segment is very high that these new firms will have abundant market space for their products if their aircraft are proven efficient
Regional Jets segment, on the contrary, is not much promising (8% of total aircraft by 2030) and will be likely fierce competition from Embraer and Bombardier. This segment will have five to six manufactures completing for much smaller demand aircrafts. In future, it’s highly possible that some firms will go close its production unit in this segment. Chinese and Russian firms, being new to this segment would be main victims if demand further decreases since they will be the last option for an airliner to opt due to risk faced by newcomer in market.
Even though Boeing and Airbus do not produce any RJ’s , they fear that these future circumstances will affect their companies. Five companies competing for a very relative less demanded market would force current RJ manufacturers enter into upper segment (mainly single aisle) of aircrafts thus increasing further competition.
COMAC, initial focus would be on its own hungry domestic market. Boeing has calculated that China would need 5,000 aircrafts by 2030. China now owns 9% of total global aircraft fleet, and by 2030 it would rise to 15%. Boeing is current leader and wants to retain its position by market share more than 50%. COMAC has set its sights on grabbing one third of the domestic market in next two decades.
Diversification: COMAC has further entered to different segment of aircraft leasing collaborating with PuDong development Bank. Experts believe that through this COMAC can gain popularity credibility for its aircrafts through leasing while at same time explore fast growing aircraft leasing market
Russia is well known for manufacturing warplanes, however in recent years prioritized global civil aircraft market by diversifying production. Sukhoi SuperJet 100 and Irkut MS-21 are main aircraft at production at the moment.
Irkut and Sukhoi plans to target on mid-range regional jets segments, mainly competitors being Embraer and Bombardier.
Sukhoi claims that SuperJet 100 has considerably low operating cost and lower price tag of 35 million$ which has attracted a lot low cost regional airlines.
Sukhoi and Irkut mainly targets at its own domestic airline market and CIS countries airliners and South East Asian markets. With exceptional range of 4500 kms and capacity of 100 seats, most demand is yet to come from South-East Asia where distance are huge between islands in Oceania.
However , a recent test run crash in Indonesia had an adverse effect on the company. This incident has caused cancellation of ordered aircrafts such as of Karithika Airlines. This has caused for more power of buyer, demanding and negotiating more discounts and concessions.
Replacement aircraft segments:-
Future looks further promising for new entrants where coming year’s falls into a time where all major operating fleets require replacement aircrafts for their ageing fleets. Ryan Air had consulted COMAC, Irkut and Sukhoi for replacement of its fleets even though it has not been confirmed yet.
However, with even favourable conditions such as demand, they face numerous challenges to a become a major global player
Challenges faced by new entrants
All of these new entrants, with no doubt will certainly face numerous challenges that will decide whether they will succeed or fail. These Chinese and Russian (also Japanese) have not either built competitive commercial aircraft or has fewer track records of current aircrafts
Many risks are involved such as capital, funding, meeting the desired performance, to deliver on time, to attract customers from their well-established current aircraft fleets, stiff competition and at the end to make profit for airline companies
It’s quite known that it requires large capital or investment to build an aircraft. It is often described as'” betting the company ‘” when overall risks are calculated. Therefore, for building an incompetent aircraft can jeopardise a manufacturing company as a whole. Airliners too doesn’t want to have a commercial aircraft fleet for its operations
Airliners are main buyers of aircrafts. Fleet complexity helps to provide flexibility, however, it is regarded as a disadvantage on long run since it increase cost of training programmes, maintenance personnel, different operating procedure and parts inventories.
Since Deregulation, and with emergence of low cost carriers, most of airlines network was constructed based on one or two type’s aircraft( for example: Southwest having fleet of &737, JetBlue’s fleet of A320s and Embraer 190). This strategy has helped to achieve growth more rapidly and minimize cost and move to different sector that was controlled by large legacy carriers.
An Example such as South West (737) has fewer options to switch between the manufactures. Boeing therefore has tremendous ‘”First mover advantage'”. In this scenario an airliners has to stick with current aircraft manufacture even if competitors product is attractive as 737 has already become its fleet’s backbone
The risks are even more complex when parts and assistance are concerned. The COMAC and UAC aircrafts will have provide assistance and parts delivery to wherever their aircrafts fly on 24/7 and next day delivery basics. An aircraft that cannot fly means loss to their client and hence becoming least popular.
Reputational Risk, Uncertainty and Inefficiency
The biggest concern of any airline while purchasing an aircraft would be its reputation and its history. The many will face stiff unwillingness for the purchase that have not previously has any track record of establishing successful aircraft.
It is quite unlikely for any European and US airliners to financially commit to purchase an aircraft that has no or limited track record even if it’s up to recommended standards and with limited distribution channels of after sales services and parts delivery
Further Entry challenges
Threat of Entry force according to Porter’s five forces of competition can be applied to understand new entrant’s challenges
Supply side Economies of scale
This barrier is crucial in aviation industry, as it need huge R&D expense to launch new programmes and to break even in mass production
Demand side benefit of scale
Segments like single aisle aircraft are high in all over world. Initially China will face high difficulty in conquering international market but huge domestic market is more than enough to establish its presence.
Russia, unlike china, has less demand for aircrafts in their domestic market. Firms like Sukhoi and Irkut plans to market their aircrafts to their own domestic, former soviet union countries and many South East countries where they have close ties for last 5 decades( for ex: India and Indonesia)
Customer switching cost
Airlines being the major customer, it is quite expensive for an airline to switch between different manufactures as it involves various training cost, increases fleet complexity and heavy infrastructure to support its fleet
Incumbent advantages; independent of price
The learning curve and experience curve is an important element in aircraft manufacture firms especially being a labour oriented industry. The process and know-how to build aircraft is result of experience curve that has taken decades to develop.
Unequal access to distribution channels
Chinese and Russian firms lacks track record of creating international distribution channels for their products and service. Russian already has a poor track record of distribution of its spare parts and products.
Strategies undertaken to overcome challenges: how will it survive
Chinese and Russian firms are faced with heavy barriers of threat and great risks. Fortunately this firms adopted different strategies to overcome this hurdles and to become major player in the industry.
Decentralization and risk sharing practices
It is very costly and extremely technical in design and manufacturing new technologies in an aircraft. As a result, new companies have been creating joint partnership and alliances with western and international aerospace firms to reduce financial and operational risks.
Decentralization refers to sub dividing various sub-assemblies to multiple suppliers in order to increase high level of expertise in production. Also it can be more cost effective hence a firm is specialized in producing has greater learning and experience curve and high production capacity. New entrant’s strategy is to increase productivity, reduce cost and risks through Decentralization and risk sharing ventures. It also enables for higher sales as particular firm has higher market appreciation and credibility factor. For Example COMAC c919 has same Pratt & Whitney engines that of proposed A320neo, which gives a competitive edge and reassurance of their customer as heart of an aircraft being same in both aircrafts
Chinese or other countries government is aware of Boeing/Airbus high interest in their market. Various negotiations and through contractual, they negotiate with current manufactures to outsource sub assembly or parts production of aircrafts that operate within their legal jurisdiction of their domestic manufacturers. Also cost differentials play a great role in decisions and maximize profit. Labour costs, material and taxes are cheaper in developing countries and can benefit their customers due to the allocation of resources globally
For Ex: China has negotiated with Boeing to produce leading edges of 747 manufactured by Chinese firms.
Over 30 foreign partnership companies were involved in throughout Sukhoi Super Jet life phases. Astonishingly, Boeing more or less was main consultant for design and manufacturing program.
C:UsersRemal al khaleejDesktopAviation managementRisk sharing of ERJ program.jpg
Risk Sharing of ERJ 195
At current scenario, Experts believe at moment they have adopted Low price strategy, however in an industry where risks are higher, less margin means less chance of survival and to re-invest
COMAC and UAC firms should use hybrid competitive strategies as entry strategy where it seeks to achieve differentiation(innovation) and comparatively low price. It can help them to attain high sales volume.
Conclusion with possible outcomes
In my opinion, future of new entrants will face with a lot opportunities and demand and same time with high potential risk and threat of barrier’s entry and aviation being high sensitive industry, a small change in political or economic climate is enough for a firm to go bankrupt.
Even if COMAC , Irkut and Sukhoi developed successful aircrafts, the demand for aircrafts is huge that most manufactures in single aisle segments will have order books full. Therefore new entrants are in evitable in the aviation industry. Current Duopoly production rate will not satisfy half of the aircraft hunger airliner companies
With emergence of new entrants, the duopoly of Airbus /Boeing will face intense competition however it may not weaken their viability. Both have good reputation and credibility will continue to attract customers. Moreover the twin aisle segment is still untouched by new entrants where they enjoy all benefit of duopoly. It is should be noted that emergence of new entrants is due to the incompetency of Airbus/Boeing. There are large macro global forces that are shifting the industry beyond the scope and control of any single company.
At the same time, Chinese and Russian firms are highly unlikely to produce aircrafts for all their domestic demand. It will have to dependent upon foreign manufactures to meet its demand. This has led to competition of acquiring strategic alliances between the current manufactures with these countries so that they trade the know-how knowledge if given a bigger market share.
However in my opinion, COMAC or Russian firms would concentrate on international market even if not fulfilling their own domestic market, because these firms have compete internationally for the recognition of a truly global brand.
This means that Chinese airliners would have to dependent upon on foreign manufactures to meet its demand. Therefore initially COMAC aircraft will not bring direct competition with Airbus and Boeing. However with 90 seater ARJ-21 which at final stage, will compete head on with Bombardier and Embraer which are capable of carrying 60 to 100 passengers
Therefore emergence of new entrants won’t bring direct competition to Boeing/Airbus in any near future but hits head on with Bombardier and Embraer segments
Similarly, attaining complete know-how knowledge is always a gateway for building larger aircraft that is mainly controlled by Airbus and Boeing. Even entry to relative small RJ market is not based on viability motivation, rather to use as learning experience, developing know how to knowledge in manufacturing, selling and after support in the global market . If these firms are successful in developing efficient airplanes in lower segments, it is quite possible that they will move on bigger segments in future thereby threating the whole duopoly
Therefore from facts, western manufactures are losing competitive edge and that future of aviation industry manufactures will internationally integrated and rise of firms as global producers of aircrafts should not be a surprise compared to their rapid technological and economic growth.
It’s quite sure that the manufactures that provide current demands of customer such fuel efficient, less carbon foot prints, less operating cost, higher credibility and efficient will win the battle and only time can reveal who is winner!!
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