Airbus: From Challenger to Leader

Abstract:
The case study focuses on the growth of
Airbus and it also covers extensively the
competition in the aerospace industry.

The case provides a detail account of the

structure of the aerospace industry and the
nature of competition in the industry. It
explains how Airbus achieved a leadership
position in the industry with market share
increasing from 13% in 1995 to 57% in 2002.

The case also provides information about the

Airbus's A-380 aircraft and how the success
of this model could provide a competitive
advantage for Airbus.

Issues:

» Understand how innovative product development can lead to competitive advantage,

catapulting a company to the No. 1 position

"In prior years we found customers somewhat cautious about supporting Airbus. This
year it has become acceptable and, frankly, even stylish to laud Airbus and to chastise
Boeing."

- Excerpt from Bear Stearns Analyst Report as reported in Fortune in August 1999.

"We are not here to buy market share."

- - Noel Forgeard, Chairman, Airbus Industrie, in August 1999.

Boeing's Nightmare

In October 2002, The Seattle Times, a local newspaper published from Seattle, USA,
where Boeing is headquartered, carried a headline story, Boeing is slipping to No. 2.
According to the newspaper report, Boeing's sole competitor, Airbus Industrie (Airbus)
had bagged an order from EasyJet1 for 120 A-319 jets. EasyJet was one of Boeing's most
loyal customers (Refer Exhibit I for a profile of Boeing). Analysts felt that after EasyJet's
shift away from Boeing, other low-cost airlines would follow suit in opting for Airbus.

Airbus seemed all set to take market

leadership in the low cost segment from
Boeing for the first time. From the mid-1990s
onwards, Airbus had steadily increased its
market share. By the late 1990s, Boeing and
Airbus had an equal share in the market. Rival
Boeing accused Airbus of resorting to heavy
price cutting in order to beat off the
competition. It also accused Airbus of
producing aircraft for which it had not
received orders and creating a glut in the
market. But Airbus rejected the allegations
saying that it was in the market to make
money and not to buy market share. Some
analysts were of the opinion that Airbus was
able to increase its marketshare because of the
financial support it received from its
consortium partners. However, others
attributed Airbus' success to its fuel-efficient
jets, which were economical to run.

The Takeoff

The history of Airbus dates back to the late 1960s, when Britain, France and West
Germany launched the Airbus Project. Airbus was a desperate attempt by the European
governments to end the monopoly of American manufacturers in the aerospace industry.

At that time, American manufacturers

dominated the global aerospace industry and
European aircraft manufacturers were unable
to compete with American players. The big
three of Europe - Britain, France and West
Germany - came together to salvage European
pride and industry. Due to differences with the
other partners, Britain quit the project in July
1967, and in 1970 the Airbus Project was
reorganized and named Airbus Industrie, a
Franco-German company under French law.
In 1971, Spain joined the consortium with
4.2% stake through state-owned
Construccciones Aeronautics S.A (CASA).
Initially, Airbus had its headquarters in Paris;
 in 1974 the headquarters were shifted to
Toulouse (France).

The Takeoff Contd...

Each partner in the consortium was assigned specific production and assembly tasks, and
the consortium was responsible for coordinating designing, development, financing and
production activities of the partners.

Airbus' first product was the A-300-B - a

widebody twin-jet plane with a capacity of
226 passengers. The next product was the A-
300-B2, a 250-seater. By 1975, Airbus was
able to garner 10% of market share, and
received first time contracts from Eastern
Airlines2 and Thai Airways.3

By the end of 1975, Airbus had orders for 55

aircraft. By 1978, Airbus' orders had increased
to 133, and it had a 26% market share by
value. It also launched A-310 with a 218-
passenger capacity in the two-class
configuration.

The A-310 had a two-man cockpit with a six-

cathode ray tube display, replacing dials - the
first of its kind in the aviation industry.

In 1979, British Aerospace Systems (BAE Systems) entered the consortium with a 20%
stake, and in the same year, Airbus announced that it would launch a single-aisle aircraft
with a seating capacity of 130-170; the aircraft was later called the A-320.

In the early 1980s, Airbus experienced

difficulties in financing the A-320 project,
since all the Airbus partner governments had
not approved the program. While the French
government had approved the project, both
British and German partner governments
wanted more time to measure the market
potential for the plane. Another problem was
that the consortium had not yet made money
on products already in the market. By 1985-
86, Boeing's market share had decreased to
46%, with Airbus having increased its share to
 25%. With Airbus's increasing market share,
Boeing began to accuse Airbus of using unfair
trade practices by getting heavy subsidies
from its European governing partners. The US
government too started pressurizing the EU to
reduce subsidies to Airbus...

EXCERPTS

Note on Aerospace Industry

The history of the aerospace industry dates back to 1917, when the US government built
an aeronautics research center in Langley, Virginia. In the subsequent years, there was
close private and public sector collaboration in the industry.

The US government's investment in the

aerospace industry was substantial, before and
during the Second World War. After the
Second World War, US manufacturers had
distinct technological and financial advantages
over their European competitors. Prior to the
Second World War, Britain had been the
leader in the aerospace industry. However, it
failed to retain its leadership position due to
the lack of a proper corporate and regulatory
climate. The industry continued to be a high
priority area for governments after the Second
World War. Western governments invested in
the industry to an increasing extent after the
war. While military aviation received federal
funding in the US, in Europe, governments
provided funds for civil aviation...

Flight To Success

In 1970, when Airbus Industrie was set up, the commercial aircraft market was totally
dominated by US aircraft manufacturers led by Boeing. Boeing dominated the world
market with its 747 jumbo jet family of aircraft.

Although Airbus had great difficulty in

breaking into the market initially, over the
years, it managed to attract more and more
customers.
Though some attributed Airbus' success to the
subsidies it received from European
governments, others felt that Airbus
succeeded because of its production efficiency
and innovative product development.

Innovative Product Development

In the 1970s, the aerospace industry was in a

transition. The regulatory set-up in the
American market restricted price wars among
existing carriers and the entry of new
carriers...
EXCERPTS Contd...

The Gamble

In order to increase its market share, Airbus decided to enter the super jet category (400
seater). In 1998 it announced that it would be developing a super jumbo jet with a
planned initial investment of $10 billion.

If it took off, Airbus's A-3XX (later called A-

380) would end the monopoly of Boeing's
747 in the over-400 seats category.
According to company sources, the A-380
would be a double-decker plane with a
seating capacity of 555 passengers (137 more
than the Boeing 747). The super jumbo
would be priced at $213 million and was
expected to fly by 2004 (later the launch date
was postponed to 2006). The main challenge
for Airbus was to raise the funds required to
manufacture A-380. Finally, Airbus was able
to split the total costs of development of the
project as follows: around 40% would be
funded by its suppliers such as Saab
(Sweden), 30% would be in the form of
government loans bought in by partners, and
the remaining 30% would be the consortium's
own funds...
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