The World Aircraft Manufacturing Industry

Introduction

As the globalisation spreads out the whole world, the connection between each country becomes closer. Airplane as one means of transportation also plays an important role to support globalisation. Boeing and Airbus are the two largest commercial aircraft manufacturer in the industry. This essay is focus on the market for commercial aircraft manufacturing by analysing competitive factors in the industry and comparing with personal computers market.

Background

The world aircraft manufacturing Industry can be divided into Military & Space Aero-structure and commercial aircraft (Sedaei.S, 2007). In the Figure 1, it shows the segments of world aircraft manufacturing industry.

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Source: Commercial Aircraft Industry

The passenger commercial aircraft is important in the aircraft manufacturing industry (Sedaei.S, 2007). In the large aircraft manufacturing, Boeing as the first producer, its quick development had made it become nearly a monopoly in the commercial aircraft. It made the prospect of airline worried. During the late 1970s, the nature of the industry was changed by European aircraft manufacturing. France and Great Britain created the Concorde with strong aviation industry, and then combined with West Germany to build up Airbus (Sedaei.S, 2007). Since Lockheed quitted in 1986, and McDonnell Douglas was merged by Boeing Company, the commercial aircraft manufacturing market is an oligopoly dominated by Boeing and Airbus (Besanko, 2007)

Analysis of Commercial Aircraft Manufacturing Industry

Market structure

In the market, a few sellers control a significant amount of the market for the industry, which is defined as oligopoly. In the oligopoly, there are barriers to enter, due to the limitation of technologies and raw materials and so on. Also, the firms in the oligopoly are interdependent, which means that the action of one firm will influence all the other firm. Moreover, the non-price competition is engaged in the oligopoly (Besanko, 2007).

As mentioned above, the commercial aircraft market has been in an effective duopoly by Boeing and Airbus.

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In the Figure 2, it reveals the market share of Boeing and Airbus. These two companies control the whole commercial aircraft manufacturing industry. Because of the oligopolistic between Boeing and Airbus, the competitive relationship will depend on the instances of strategic interaction. According to the market structure of commercial aircraft manufacturing industry, each firm would like to consider the actions of others when making decision (Cook.A.J, 2008).

Competitive Factors

The five-force frame work is the one of efficient ways to analyse the industry. The Figure 3 presents the five forces: internal rivalry, substitutes and complements, entry, supplier power and buyer power.

Figure 3: The Five-Force Framework

Internal Rivalry is pointed to the competition within the industry. Price competition and non-price competition are involved on the competition of firms. Due to the particularity of commercial aircraft manufacturing industry, which is its price elasticity of demand is not large, it is hard to erode profit by cutting down price-cost margin (Besanko, 2007). Therefore, the market engages in non-price competition. In the non-price competition, the firms can make profit by increasing fixed costs, such as new product development, and marginal cost like adding product features (Besanko, 2007). Except for crisis in 2001, Boeing and Airbus keeps backlogs which can take them long time to finish. It is found that neither Boeing nor Airbus can broaden market share rapidly with high fixed costs during this time. However, when it comes to downturn, Boeing and Airbus are willing to decrease the product capacity and make a deal with each other to face the declining backlogs (Tuttle.M, 2004). Recently, in order to make products differentiation, Airbus has developed its A380, which is a double-decker plane with over 550 seats. To maintain the market share, Boeing plans to concentrate on 350-passenger 787 dreamliner which is to be more fuel efficient than the others instead of creating Sonic Cruiser (Boeing.com, nd). Furthermore, the government subsidies is one of the drivers in the competition of commercial aircraft manufacturing. Since the airbus is generated by France, Germany and Great Britain, it received subsidies from European governments. With these subsidies, to some extent Airbus can undercut to the price of Boeing and gain the market share. To Boeing, it is also supported by US government on military aircraft, so that it can remain its competitiveness in commercial aircraft manufacturing (Besanko, 2007).

Substitutes is an important factor affect the demand of products. To make profit, substitutes operate in the same way by stealing business and enhancing the internal competition (Besanko, 2007). In terms of the airline, the substitute for Boeing and Airbus is the airplane made by others. In detail, it is not economical that using medium and large capacity to fly with nonstop point-to-point travel. Thus, it forced Canadian manufacturer Bombardier and Brazilian Manufacturer Embraer to fill in this gag. These two manufacturers created “regional jets”, and 2000 regional jets sold to date. Undoubtedly, it shocked to traditional workhorses Boeing 737s and Airbus 320s. However, the demand for air travel is climbing up, and some carriers suppose to choose Boeing and Airbus to maintain profitability (Cook.A.J, 2008). Some indirect substitutes include the other means of transportation, such as high-speed rail in Japan, which can only impact on regional aircraft in certain routes (Besanko, 2007).

Barriers to entry depend on the limitation of raw materials and technologies and so on. The commercial aircraft manufacturing is a special industry with high development costs and experience-based advantage, which makes difficulties on entering. For example, the Airbus takes $ 13million to manufacture the A380. That will be a large amount to an incumbent and the non-experienced will make incumbents to be risky (Besanko, 2007).

Suppliers and Buyers are another two forces. Boeing and Airbus can get raw materials and components from supplier markets. In order to tie up with suppliers, Boeing has set up its Global Airlines Inventory Network, which can order spare parts from suppliers directly (Besanko, 2007). Concerned with buyers, each has limit power which are airlines and leasing companies. Because of the few substitutes, the minimum backlogs orders can be kept with its rival competition. Moreover, during the recession, the orders can be canceled by buyers. The cancellation will influence the profitability (Lipczynski.J, 2001).

Comparison with personal market

Personal computers have possessed an important position in the daily life. The personal computer varies in different types: workstation, desktop computer, single unit, nettop, laptop, netbook, table PC, Ultra-mobile PC, home theater PC and pocket PC (Reimer.J, 2005). Also, there are many competitors in the market for personal computers, such as HP, Dell, Acer, Lenovo, Apple, ASUS and Toshiba. Therefore, the market for person market can be described as monopolistic competition.

Different from oligopoly, the monopolistic competition involves many producers and consumers, and no exact business can control the whole market (Lipczynski.J, 2001). For instance, the Boeing and Airbus almost control the commercial aircraft manufacturing industry. Whereas, different brands in horizontal differentiation and different types in horizontal differentiation exist in personal computers and they are substitutes. In the short run, it can behave as monopolies to gain profit wit market power. In the long run, due to the freedom of entry and exit, it can behave like perfect competition (Besanko, 2007).

Also, the new product development in personal computers market is independent. The firms can make decisions despite of effects come from the competitors (Shepherd.W.G, 1997). For instance, in the commercial aircraft manufacturing, Boeing and Airbus are interdependent which means the actions of one will entirely influence the other. Once Airbus develops A380 as new product, Boeing abandon its original plans to develop 787. Without the government subsidies, the innovation seems to be difficult owing to the high fixed cost. On the contrary, the producers in personal computer can develop new product based on customer preferences independently.

Compared with personal computers, the growth opportunities in commercial aircraft manufacturing are limit. Because of the oligopoly, non-price competition and interdependent relationships is included. Boeing and Airbus have its own customer loyalty, the high operation cost and technologies. It is hard for them to stealing business and market share from each other. However, in the personal computer market, free entry makes the entrants can obtain the profits when sellers set prices above marginal cost, and can offer customers much more new flavors, styles, and so on (Besanko, 2007).

Conclusion

Overall, the market structure of commercial aircraft manufacturing industry is oligopoly. Boeing and Airbus possess the largest market share in duopoly. The competitive factors come from both internal and external, which are internal rivalry, substitutes, barriers to entry, suppliers and buyers, influence the firm growth, new product development and pricing of the commercial aircraft manufacturing market. Compared with the market for personal computers, they are different owing to different market structure which is monopolistic competition. The personal computers can do innovation freely and large space to grow.