Airbus & Boeing PDF

BOEINGVERSUSAIRBUS:
ANECONOMICANALYSIS
AThesissubmittedtotheMiamiUniversity
HonorsPrograminpartialfulfillmentofthe
requirementsforUniversityHonorswithDistinction
By
AlanJohnCook
May2008
Oxford,Ohio
ABSTRACT
BoeingVersusAirbus:AnEconomicAnalysis
By:AlanJ.Cook
InbusinesstherehavebeenfewrivalriesasspectacularasthatbetweenBoeingandAirbus.Not
only are bottom lines and stakeholder returns at stake, but also national pride and supremacy of the
skies. These two immense corporations have been battling it out for over four decades. But what
makesthiscompetitionbetweentwoverydifferentfoessoepic?Whatisitthatdrivesthesetwofirms
tocompetesovigorously?Whyaretheycompetingatall?Withonlytwofirmscontrollingtheentire
market, the industry fits the classic definition of an oligopoly and yet we observe neither firm has
undertakencollusionormovedtolimitoutput.
Thispaperwillpresentananalysisofthecompetitiverelationshipbetweentherivalfirmswithin
1
thelargecommercialaircraftmanufacturingindustry (ormoresimplythecommercialaircraftindustry).
This paper will be divided into four main parts, each attempting to answer a pivotal question to our
understanding of the nature of the competition: What does standard economic theory tell us about
oligopolies? What is actually observed in the commercial aircraft industry? What factors drive the
competition?Whatimplicationsdothesefindingshave?
1
Therearemanyfirmsthatmanufactureaircraft,includingBombardierofCanadaandEmbraerofBrazil,howeverAirbusand
BoeingaretheonlymanufacturersofLargeCommercialAircraft(LCA),andassuchthefocusofthisthesiswillbeontheLCA
segmentoftheCommercialAircraftManufacturingindustry.

BoeingVersusAirbus:AnEconomicAnalysis
By:AlanJ.Cook

Approvedby:
,Advisor
Dr.JamesBrock
,Reader
Dr.BarnaliGupta
,Reader
Dr.DeborahFletcher
Acceptedby:
,Director
UniversityHonorsProgram
TABLEOFCONTENTS
Abstract.........................................................................................................................................................3
I.HistoryofJetTravel...................................................................................................................................9
II.StandardOligopolyTheory....................................................................................................................13
Cooperative&NonCooperativeOligopolyModels.............................................................................16
III.CommercialAircraftManufacturingIndustryObservations.................................................................18
NumberofFirms...................................................................................................................................18
MarketConcentrationandMarketShare............................................................................................19
FirmStructures.....................................................................................................................................22
BarrierstoEntry...................................................................................................................................24
Interdependence..................................................................................................................................26
PriceCompetition.................................................................................................................................27
NonPriceCompetition.........................................................................................................................30
Innovations...........................................................................................................................................33
IV.WhatFactorsDrivetheCompetition?..................................................................................................38
InstrumentofNationalPolicy...............................................................................................................39
OrderSize.............................................................................................................................................40
DifferentiatedProducts........................................................................................................................41
FixedOutput.........................................................................................................................................42
ExpandingMarket................................................................................................................................43
Conclusion............................................................................................................................................43
V.WhatImplicationsDoesThisHave?.......................................................................................................45
References..................................................................................................................................................46
Appendix.....................................................................................................................................................48
I.HISTORYOFJETTRAVEL
Inordertotrulyappreciatethisanalysis,itisimportanttocastitintheappropriatelightand
context.Wethereforebeginwithabriefhistoryofthecommercialaircraftindustry.
TheBeginningofFlight.TheWrightBrothersflewtheirfirstplanein1903atKittyHawk.This
was the first instance of heavierthanair powered flight that carried a human being. Airplane
developmentprogressedslowlyuntilWorldWarI,atwhichtimeflightwasrecognizedforthemilitary
advantages it provided. Several small firms cropped up to supply military aircraft. In the interwar
period, plane development took aircraft from being constructed mostly of wood and canvas to
aluminum.TheonsetofWorldWarIIsawtremendousimprovementsinairplanedesignandthelevelof
production.Germanybuiltthefirstpracticalrocketandjetenginepoweredaircrafttowardstheendof
thewar.Uptothispointaircraftwereusedalmostexclusivelyformilitarypurposes,butaftertheendof
WWII,commercialaviationbegantoincreaseinpopularity.Firmsthathadpreviouslyproducedmilitary
airframes for the war switched over production to civilian aircraft. Companies such as Lockheed
Aircraft, Douglas Aircraft, and many smaller companies produced propellerdriven aircraft that
eventuallylaunchedtheageofciviliancommercialjettravel.2
The Jet Age. While civilian travel was firmly in the realm of propellerdriven airplanes, the
militaryspecificallythenewlyformedUnitedStatesAirForcetookinterestinthepotentialuseofjet
enginestopowerfightersandbombers.Boeingbecamealeaderinjetenginetechnology,bothdueto
luck and better engineers. Boeing then decided to take their expertise into the civilian market by
producingacommercialjetliner.Atthetime,othermanufacturersandairlineexecutivesbelievedthat
thecostandrevenuestructurescouldnotbemarriedtoproduceaprofitablejetliner.Thisallchanged
2
Heppenheimer,T.A.ABriefHistoryofFlight.NewYork:JohnWiley&Sons,2001.
withBritainsDeHavillandCometwhichwaspopularbecauseitcouldflyfaster,quieter,andabovethe
weather,providingasmoothertrip.3
Boeingsfirstjetlinerthe707wasintroducedin1958,hadfourengines,andwentontobe
commerciallysuccessful.LockheedandDouglasthenproceededtodeveloptheirownadvancements:
Douglas building the DC8 in 1958 and Lockheed building the turbopowered Electra (propellers
powered by a jet turbine engine instead of pistons, a derivative of the jet engine used). Because of
Boeingsearlyleadandbecauseofstrategicbusinessdecisions,the707wentontobecometheindustry
leader, propelling Boeing to the forefront of large commercial aircraft manufacturing.4 The 707 was
followedbythe727in1963,the737in1967,the747in1968,the757in1983,the767in1982,the777
in1994,andthe787whichiscurrentlyindevelopment.5
TheBirthofAirbus.Inthe1960sthecommercialaircraftindustrywasdominatedbyAmerican
firms:Boeing,McDonnellDouglas,andLockheed.EuropeanproducerssuchasHawkerSiddeleyofthe
United Kingdom, Arospatiale of France, and Deutche Aerospace of Germany realized that
independentlytheydidnothavetheresourcesnecessarytobuildalargecommercialairplane(LCA)that
was capable of competing against the American jetliners. They formed what initially was called the
A300Projectwhichwascollaborationbetweenthethreefirmstoproductamediumrangewidebody
jet.TheA300Projectthenwentontobecomeaformalconsortium:AirbusIndustriewasestablished
underFrenchlawandofficiallyheadquarteredinToulouse,Francein1970.Thememberfirmsofthe
consortium would take responsibility for the design and production of specific components, and the
FrenchpartnerwouldassemblethefinalaircraftAirbusIndustriewasresponsibleforsales,marketing,
3
McIntyre,Ian.Dogfight.Westport,Connecticut:Praeger,1992.
4
5
BoeingCommercialAirplanes.http://www.boeing.com/commercial/products.html.
10
and technical support for airlines. The first A300 entered into service in 1974; however, the United
KingdomwithdrewfromtheventurebeforetheA300reacheditsfirstcustomer.
IndustryCollapse.BothDouglasAircraftandLockheedsufferedserioussetbacksinthe1960s
and the 1970s. With Airbus still in its infancy, this led to a collapse in the commercial aircraft
manufacturing industry. Douglas Aircraft began development of their DC9 in 1963, and determined
that the prototyping process would take too long, so it took the plane directly from paper to
production.Thismeantthatanyproblemswiththedesignhadtobefixedontheassemblyline.The
results were production delays and cost overruns. The problems were too much for the company to
overcome,andDouglaswasforcedtomergewithMcDonnellAircraftamilitarycontractorinorder
to avoid bankruptcy. Douglas became a wholly owned subsidiary of the newly named McDonnell
DouglasandrestartedDC9productionandwentontodeveloptheDC10in1968.6
Lockheedbuiltoneandonlyonecommercialjetliner:theL1011TriStar.Thisplanewasvery
similarindesignandcompeteddirectlywiththeDouglasDC10andindirectlywiththeBoeing727and
747. However, the L1011 had production difficulties that delayed its launch for a year. In addition,
LockheedhadmadethedecisiontocontractwithonlyoneengineproviderRollsRoyceandmidway
through the development of both the L1011 and the new engines that were to accompany it Rolls
Roycedeclaredbankruptcy.ThisfurthersetbacktheL1011,andLockheedlostasubstantialnumberof
orderstotheDC10whichhadbeenreleasedthepreviousyear.Themarketsimplywasnotbigenough
to support three separate firms and the associated development costs of four separate planes.
Lockheedproducedonly250planesandstoppedproductionin1981.7
The Rise of Airbus. The initial success of Airbus was poor; in 1979 only 81 A300s were in
service.However,thelaunchoftheA320in1981markedAirbusasamajorcompetitor.TheA320was
6
7
11
a superior product to the Boeing 737 against which it competed, and Airbus had over 400 confirmed
orders for the A320 before the first production plane flew. 8 The A320 incorporated several
technological improvements over competitors at Boeing and McDonnellDouglas, including flybywire
controlsystems,glasscockpits,andcockpitcommonality.ThesuccessoftheA320propelledAirbusto
develop the A330 and A340 which continued to integrate technological developments. This success,
coupledwiththedemiseofDouglasandexitofLockheed,allowedAirbustoerodeBoeingsdominate
marketshare.Bythe1990s,AirbushadsurpassedBoeingintermsofnumberoforders.9
JetTravelAvailabletotheMasses.Airtravelisnolongerexclusivelyforthebusinesstraveler
orthewealthy.LowcostairlinessuchasSouthwestintheUnitedStates,RyanAir,WizzJet,andEasyJet
in Europe, and numerous lowcost airlines in Asia such as Spice Jet in India or Tiger Airlines out of
Singapore all offer especially low fares. Traditional airlines are constantly driving down the operating
costs, thereby lowering their air fares.10 With the expansion of lowcost air travel to developing
countries such as India, China, Malaysia and Indonesia, jet travel is truly becoming accessible to
everyone.11
8
Newhouse,John.BoeingversusAirbus.NewYork:AlfredAKnopf,2007.
9
10
11
12
II.STANDARDOLIGOPOLYTHEORY
Anoligopolyisanindustrythatisdominatedbyafewfirmsthatcontrolasignificantamountof
themarketforthatindustry.Thecommercialaircraftmanufacturingindustryisdominatedbyonlytwo
firms any fewer and it would be a monopoly. These two firms control the entire market; between
themtheyhave100%marketshareitisnotpossibleforthemtohavemore.Bydefinition,then,the
commercial aircraft manufacturing industry is a duopoly, an oligopoly with only two firms. But the
analysis does not end there. The industry meets the definition of an oligopoly, but meeting the
definitiondoesnotgiveusinsightintothenatureofthecompetition.
Ford, General Motors, and Chrysler. ExxonMobil, Valero Energy, British Petroleum, Royal
Dutch/Shell,Chevron/Texaco.American,United,Delta,Continental,Northwest.AmericanTobaccoCo.,
Ligget&Myers,R.J.Reynolds,PhilipMorrisCo.Ifoneweretopollagroupofeconomists,themajority
wouldagreetheabovementionedcompaniesallactaspartofanoligopoly,intheirrespectiveindustry.
Butwhatcharacteristicsarecommonacrossthedifferentindustriesthatareuniquetooligopoliesand
canbeusedasindicatorsofanoligopolisticrelationship?Whilewecanidentifyseveralkeyindicatorsof
an oligopolistic relationship between firms (listed below), it is in comparing the commercial aircraft
manufacturingindustrytoknownandprevalentoligopoliesthatisthecruxofthisanalysis.
Interdependence & Collusion. When looking at the prevalent oligopolies present today we
noticeseveralkeyindicatorsthatidentifyanindustryasbeingdominatedbyanoligopoly.Arguablythe
most important are interdependence and collusion among the firms within that industry. Firms may
choose to work together to set either output or prices; colluding firms recognize that if they work
togethereitherimplicitlyorexplicitlyprofitscanbeheldartificiallyhigh.However,thiscollusionis
difficult to maintain because each firm has an incentive to cheat. We see that when a firm in an
13
oligopoly moves to gain more market share by lowering their price, the other firms in the oligopoly
movetopunishthedissentingfirmbytheirloweringpricestoo,andallarelessprofitableasaresult.
Interdependence refers to strategic interaction between firms when independently making
marketchoices.Eachfirmconsiderstheactionsofothermarketfirmswhenmakingitadecisions;the
profit of each firm is dependent on the strategies undertaken by the other firms. The resulting
equilibriumisreferredtoasaNashEquilibrium12wherenomarketfirmcanimproveitssituationgiven
thechoicesofallotherfirms.Interdependenceoftenleadstouniformpricingfromfirmtofirm,butnot
necessarilythecollusiveprice.
Barriers to Entry. Interestingly, when looking at the examples of oligopolies listed above, we
notethatnotallofthemareinindustrieswithexceptionallyhighbarrierstoentry.Itisinexpensiveand
technologicallysimpletoproducecigarettes.Ontheotherhand,theproductionofautomobilesandthe
refinementofoilareindustrieswithfairlysubstantialbarrierstoentry;ittakesextremelylargeamounts
of capital equipment to refine oil and significant investments in plants and machinery to produce
automobiles.Whatweobserveisthatineveryexampleofoligopoliestherearesomeformsofbarriers
to entry, whether they are a result of the nature of the industry, as is the case with automobile
manufacturingandpetroleumrefinement,orcreatedartificiallybyparticipantsintheoligopoly,asisthe
casewithtobacco.
Price&NonPriceCompetition. Ina generalsense,firmswould rather bepricesettersrather
thanpricetakers.Thereasonforthisissimple:firmsunderstandtheirowncoststructuresiftheyare
abletosettheirprice,thentheyareabletodeterminetheirownlevelofprofitandthusreachaprofit
maximizingposition.Thereforefirmshaveanincentivetowardsavoidingpricecompetitionwithother
12
NobellaureateJohnNashiscreditedwiththedevelopmentofthisparticularequilibriumconceptinhisworkingametheory.
FormoreongametheoryandNashequilibriums,seeLynne,Pepall,J.DanielRichardsandNormanGeorge."Industrial
Organization:ContemporaryTheoryandPractice."SouthWesternCollegePublishing,1999.223269
14
firmsifatallpossible.Inordertobeapricesetter,afirmmustbeinalessthanperfectlycompetitive
marketwherethefirmhassomeinfluenceoverpriceanddoesnotfaceahorizontaldemandcurve.This
canonlyoccurwhenafirmhassubstantiallyenoughofthemarketthattheycanaffectpricechanges.
Within oligopolies, a price leader sets the first price, and firms in the industry subsequently set their
prices.Thefollowershaveanincentivetoundercutthepriceleaderinordertogainmoremarketshare.
Nonpricecompetitionisverysimilarandoftenservesasanescalationofpricecompetitionto
the next level. To put it a different way, firms have an incentive to isolate their firm and act as a
monopoly.Inaduopoly,thiscanbeachievediffirmstacitlyorexplicitlyagreetolimittheirproductsets
so that they are able have a monopoly on individual types of planes (130150 seats for example).
Observingpriceandnonpricecompetitioncanprovidesignificantinsightintooligopolisticbehavior.
Innovation.Collusioneitherexplicitorimplicithampersinnovationwithinanindustry.This
is because firms have an incentive not to rock the boat and introduce change. The line of logic for
colluding firms is simple: if one changes, all must change in order to compete; change costs money,
which diminishes everyones profit. Therefore, firms that are colluding to keep profits high have an
incentivetoavoidinnovation.1314
Number of Firms, Market Concentration, and Firm Structure. In addition to the above five
characteristics,onecangaininsightbylookingatthefirmstructuresofbothAirbusandBoeing,aswell
as by analyzing the industry in which both firms participate. All of the following models begin by
assumingthatfirmsproduceonlyonegoodinanindustrywithlittleornoproductdifferentiationfor
exampleproductionofoil.
13
Loury,GlennC."MarketStructureandInnovation."TheQuarterlyJournalofEconomics(1979):395410.
14
Reinganum,JenniferF."UncertainInnovationandPresistenceofMonopoly."AmericanEconomicReview(1983):741748.
15
COOPERATIVE&NONCOOPERATIVEOLIGOPOLYMODELS
Economistshaveidentifiedseveralpossibleoligopolystructuresanddevelopedspecificmodels
thatattempttoquantify andunderstand theincentivesthat motivatefirmbehavior.Thereare many
differentmodelsusedtodescribeoligopolisticfirmbehaviorbasedonthewayinwhichfirmsinteract.
Cartels.Sometimescalledtrusts,thesearetheorganizationsoraffiliationsoffirmsthatactively
attempttoincreasetheirprofitsthroughcollusivebehaviorthatincreasesprices.Firmsthatarepartof
acartelwillformallyagreetolimittheiroutputorraisetheirprices.Theultimategoalisforallfirmsto
cometogetherandmaketheirdecisionsasamonopolywould.Marketforceswouldnolongerdivideup
market share; the member firms would agree how the market would be divided. This model is an
exampleofacooperativeoligopolymodel.
CournotModel.Unlikeacartel,thefirmsinaCournotmodeloligopolyactmoreindependently.
Eachfirmtakesintoaccountwhattheybelievetheotherfirmswilldowhentheysettheiroutput.All
firmswithintheindustrysimultaneouslysettheiroutputusingtheirunderstandingofthestrategiesof
all other market participants. This equilibrium is known as a Cournot Nash equilibrium. The level of
outputissomewherebetweenwhatamonopolywouldproduceandwhatperfectcompetitionwould
produce.
StackelbergModel.IntheStackelbergmodelthereisadominant,orleaderfirm,andarivalor
followerfirm.Thedominantfirmwillsetitsoutputfirstbasedonwhattheypredicttheotherfirmwill
do. The rival firm then sets its output based on what the best response by the follower. In this
oligopolisticenvironment,thelevelofoutputwillbegreaterthaninasimpleCournotmodel.
BertrandPriceSettingModel.Inthepreviousmodelstheoligopolistssetoutputandthemarket
forcessettheprice.However,intheBertrandmodeltheoligopolistsetspricesandthenletsconsumers
16
determine how much of their product they wish to buy. The equilibrium in the Bertrand model is
insensitivetodemandsincepriceissetonlyasaresultofthefirmscosts.Whenthevariousoligopoly
firmsproducedifferentiatedproducts,thegoodsarestrategiccompliments.
17
III.COMMERCIALAIRCRAFTMANUFACTURINGINDUSTRYOBSERVATIONS
InordertomeaningfullyanalyzethecompetitiverelationshipbetweenAirbusandBoeing,itis
importanttolookattheaforementionedfactors.Thesefactors,whenlookedatinconjunctionwithone
another,canprovideapictureofthecompetitiverelationship.
NUMBEROFFIRMS
Whenlookingatthecommercialaircraftindustry,therearethreemainsegments:
1)largecommercialairplanes(LCA),
2)regionaljets,and
3)privatejets.
Currently, only Airbus and Boeing belong to this LCA segment, with firms such as Embraer of
BrazilandBombardierofCanadatakinguppositionswithintheRegionalJetsegmentinNorthAmerica,
and firms such as Gulfstream and LearJet round out the private jet market. There are striking
differencesbetweentheLCAandregionaljetsegments.TheLCAmarketistrulyglobal,whichwillbe
discussed later, while the regional jet market remains localized generally to one hemisphere
BombardierandEmbraertypicallydonotsellaircraftinEuropeorAsiaforexample;thosemarketsare
generallyservedbydifferentfirmswithinthoseregions.15
This is not to say that there is not some overlap both Boeing and Airbus also sell their LCA
privatelytoindividualsandcorporationsandEmbraerdoesproducearegionaljetthatbordersonthe
LCAcategorybuttheoverlapisminimal,andthereareonlyahandfulofprivateownersofBoeingor
Airbus jetliners. In addition, the private jet market is minuscule in comparison to the LCA, and small
comparedtotheregionaljetmarket.BecauseofthewidedifferencebetweentheLCAandregionaljet
15
18
segmentsandbecauseoftheminimaloverlap,thefocusofthispaperwillbeonthecompetitionforthe
productionandsaleofLCAwithinthecommercialaircraftindustry.
MARKETCONCENTRATIONANDMARKETSHARE
As mentioned above, there are only two firms that share nearly 100% of the market. While
there are still older planes produced by defunct Soviet firms as well as some European manufactures
suchasBritishAerospaceorFrancesAerospatialethatremaininlimitedcommercialservice,itissafeto
say that nearly all LCA were produced by either Boeing or Airbus16. Therefore the market is highly
concentratedandqualifiesasaclassicduopoly.
Within the commercial aircraft industry, there are many different methods to measure the
relativemarketshareofeachfirm. Generallyspeaking,thedifferent methodsdependuponwherein
theaircraftslifecycleone measures: Numberofjetlinersproduced,number of jetliners in service, or
thenumberofjetlinersordered.
Numberofjetlinersproduced.Thismeasurewouldcountalloftheplanesthathaveeverbeen
built. This would include discontinued jetliners and jetliners that have been retired from active
commercialservice.Thiswouldnot,however,includeplanesthatwerebuiltasprototypesorwereused
as demonstrations of concept. The question then becomes, do you include the planes produced by
firmsthathavesincebeenacquiredormergedwithBoeingorAirbus?Forexample,doesonecountthe
planesproducedbyMcDonnellDouglasaspartofthejetlinersproducedbyBoeing?
Thereareargumentsoneachside.Originallytheplaneswereproducedincompetitiontoone
another;thereforeonecouldarguethatentirejetlinerproductlinesmightneverhavebeenproducedif
thefirmshadbeenonefromthebeginning.Fromtheotherperspective,becausetheacquiredfirmis
16
BoeinghasabsorbedviamergerMcDonnellDouglas,andallotherAmericanfirmsplanesarenolongerinservice;currently
onlyBoeingandAirbusproduceLCA.
19
nowpartofthecompanytheyhaveacquiredalltheassets,debt,etc.fromtheacquiredfirmthenit
should follow that the purchasing firm has acquired the right to count the purchased firms planes as
part of their market share. In addition, it is common practice to increase your claim to market share
afteramergeroracquisitionProcter&Gamblewouldcertainlyincreasetheirclaimtotheshareofthe
toothpaste market if they were to acquire Colgate. In fact, antitrust action looks at the combined
market share of the two firms after merger or purchase to determine whether or not to allow the
combination to proceed. Due to this precedent, this analysis will include under Boeing all planes
producedbyacquiredfirmsandunderAirbusallplanesproducedbyacquiredfirms.
Intermsofthenumberofjetlinersproduced,Boeingwinsaclearvictory.Thisisinnosmallpart
because of Boeings early arrival into the manufacture of large commercial jetliners. In addition, the
1997 merger with McDonnellDouglas (McDonnell earlier merged with Douglas to form McDonnell
Douglas in 196717) has also helped to increase Boeings overall market share, since both Boeing and
DouglaswereproducingjetlinerslongbeforetheAirbusconsortiumformed.Ifonelooksmorerecently;
since2000,weseethatBoeingsdominanceisnotasclear.Since2003,Airbushasactuallyheldthelead
intermsofthenumberofplanesdeliveredperyear.In2007AirbusandBoeingweredeadeven,with
eachproducing44718and44119respectively.(SeeExhibit1,2&3forabreakdownofmarketshareby
numberofjetlinersproduced.)
NumberofJetlinersinService.Thismeasurewouldbeverysimilartothenumberofjetliners
producedbutitwouldexcludethoseplanesthathavebeenremovedfromactivecommercialservice.It
would again raise the question of whether or not to include the planes produced by firms that were
eventuallyacquired.Forthesamereasonsasgivenabove,thisanalysiswillcontinuetoincludeplanes
17
PriortothemergerwithDouglas,McDonaldneverparticipatedinthecommercialaircraftmanufacturingindustry,having
onlyeverproducedmilitaryaircraft.
18
BoeingCommercialAirplaneshttp://active.boeing.com/commercial/orders/index.cfm
19
AirbusS.A.S.websitehttp://www.airbus.com/en/corporate/orders_and_deliveries/
20
produced by acquired firms in the market share of the purchasing firm. Implicitly this measure in
conjunction with the measure of jetliners produced will provide the number of jetliners retired by
subtractingtheformerfromthelatter.
Theusefullifeofajetlinerisaround25years,thusclearlylimitingtheperiodthismeasurelooks
into history.20 The window of time that this measure looks at is from the present (2007) back
approximatelyuntil1980. Thereforethismeasureismostrelevantin determiningmarket sharesince
1980.SinceAirbusdidnottakeoffuntilthe1980s,thegapwithBoeingbegantocloseaboutthistime.
Therefore Boeing is no longer the only major provider of jetliners in this measure, though Boeing still
retainedtheleadbecauseofthestrongpresencepriorto1980.Therearesomeratherimportantthings
tonotice:While thehistoricalpositionofboth companiesis certainlyimportant,itdoesnotcarry the
sameweightascurrentperformance.Upuntilthelate1990sBoeingwastheclearwinner.In2000we
observethat,forthefirsttime,AirbuswasdeliveringmoreplanesperyearthanBoeing.21
NumberofJetlinersOrdered.Whilebothofthepreviousmeasureshavelookedsolelytowards
the past for measures of market share, the number of jetliners ordered can give us insight into the
future. Orders should eventually equate into deliveries, and therefore should equate into future
payment streams. It is for these reasons that number of orders is the most frequently cited in news
reporting.
Thenumberoforderscanbebrokendownintothreemaincategories:ordersdelivered,orders
notdelivered,andtotalorders.Towhichonelooksdependsmostlyuponthemotivationsbehindthe
analysis:Onewouldlookatordersdeliveredtogaugepastperformanceofajetlinerssales;onewould
lookatordersnotyetdeliveredtogaininsightintothefuturehealthofajetlineranditsmanufacturer;
20
21
BoeingCommercialAirplaneshttp://active.boeing.com/commercial/orders/index.cfm&AirbusS.A.S.website
http://www.airbus.com/en/corporate/orders_and_deliveries/
21
andonewouldlookatthetotalnumberoforderstogettheoverallpictureintermsofjetlinerssales
performance.Eachmeasureprovidesimportantinsightforthepurposeofthispaper.
Instartingwithtotalnumberofjetlinersordered,itbecomesquiteclearthattheBoeing737has
beenthemostsuccessfuljetlinerinproduction,with7,676orderedasoftheendof2007.22Oneshould
alsonotethattheA320AirbusdirectcompetitorwiththeBoeing737andallofitsderivativeshave
garnered less than half the number of 737 orders.23 However, when looking at the larger planes
producedbyeachcompetitor,itisclearthatBoeing747isoutpacingAirbusA380.Boeinghasbuilta
commanding dominance with its 777 and 787 Dreamliner. Orders for each are 1,044 and 817
respectively, which significantly surpass the number of orders for the A330, Airbus second most
successfulplanebehindtheA320.24
Both Airbus and Boeing have seen significant growth in the number of aircraft ordered since
2000;jetlinersaleshavekeptpacewiththegrowthinairtravel.Whatisinterestingtonoteisthatboth
firms have seen near identical growth. Airbus, however, saw Boeing surpass them in orders for 2005
and2006,butregainedtheleadin2007.25(SeeExhibits4,5&6forabreakdownofmarketshareby
numberofjetlinersordered.)
FIRMSTRUCTURES
Boeing.TheBoeingCompanyisapubliclytradedfirmregisteredwithSecuritiesandExchange
Commission in the United States and listed on the New York Stock Exchange (ticker symbol BA). The
firmisownedbyshareholdersvia1,012,261,159outstandingsharesofBoeingStock(2006Boeing10K),
22
BoeingCommercialAirplaneshttp://active.boeing.com/commercial/orders/index.cfm
23
24
25
BoeingCommercialAirplaneshttp://active.boeing.com/commercial/orders/index.cfm&AirbusS.A.S.website
22
makingitapubliclyownedfirmmanagedbyaboardofdirectorsontheshareholdersbehalf.26Boeing
regularly publishes its financial information in both its SEC filings (10K and 10Q, among others) and
distributes an annual report to its shareholders. These filings and reports contain extensive detailed
informationonBoeingscommercialairplanesdivision,theentityresponsibleforthedesign,testing,and
manufactureofallBoeingcommercialjetliners.27
Airbus.ThecurrentstructureofthefirmnowknownasAirbusS.A.S.isextraordinarilycomplex
anddifficulttofullydiscern.AirbusS.A.S.wasformedafterthemergerofDaimlerChryslerAerospace
AG (DASA) of Germany, AerospatialeMatra of France, and Aeronauticas SA (CASA) of Spain to form
EuropeanAeronauticDefenseandSpaceCompanyorEADS.Asaresultofthemerger,EADSnowholds
80%ofthesharesofAirbusS.A.S.Theremaining20%isownedbyBAESystems,aBritishfirm.Allfour
firms, DASA, Aerospatiale, CASA, and BAE, were the original founding firms of the Airbus Consortium.
EADSisasimplifiedjointstockcompanythathasmajorshareholderssuchasSOGEADEaFrenchstate
owned holding company, SEPI a Spanish stateowned holding company, and Daimler AG, with the
Frenchgovernmentdirectlyowningaportionofthepubliclytradedshares.28Daimlerispartiallyowned
by the German government, and BAE Systems is partially owned by the British crown29. In addition,
EADS is traded on six public stock exchanges in Europe. Though the connection is not direct, Airbus
S.A.S.continuestobepartiallyownedandcontrolledbythegovernmentsoffourEuropeancountries.
EADSandBAESystemseach publishannualfinancialreports. However,AirbusS.A.Sdoes not
publiclydistributeitsfinancials.Inaddition,theAirbusfinancialinformationisnotdirectlycontainedin
eithertheEADSorBAEreports.ItisthereforeverydifficulttodetermineAirbussfinancialstatus.For
furtherclarificationofAirbussfirmstructure,pleaserefertoExhibit7.
26
BoeingCompany.Form10K.Chicago,IL:BoeingCompany,2006.
27
SeeforexampleBoeings2007AnnualReport:BoeingCompany.AnnualReport.Chicago,IL:BoeingCompany,2007.
28
29
TheBritishCrownnowholdsonlyaminorityshareofBAESystemsduetopartialprivatization.
23
BARRIERSTOENTRY
Barrierstoentryexistforanumberofreasons,buttheendresultisthatthereislimitedentry
intoamarketorindustrybecausethehurdlesthatmustbeovercomearegreat,andthereforefirmsthat
arealreadypartoftheindustryormarkethaveanadvantageandareinsulatedfromcompetitionfrom
newentrants.Withinthecommercialaircraftindustry,thisisespeciallythecase.Toillustratethepoint,
it took a government consortium formed by three European countries that directly subsidized its
creation to enter the commercial aircraft industry in 1967.30 It took the resources of three national
governmentstoformafirmcapableofcompetingagainstthetwolargeentrenchedfirmsatthetime:
Boeing and McDonnellDouglas. Specifically related to the commercial aircraft industry, there are a
numberofbarrierstoentryworthdiscussing.
Financing. The cost to design, prototype, build, and deliver a new LCA is immense. For the
Boeing 777 the development costs were estimated to be $1012 billon31. The new Airbus A380 has
estimateddevelopmentcostsof12billion($16.2billion)32.Whennewplanesaredeveloped,itisoften
the case that the firms producing them will have little idea as to how many they must produce to
achieveprofitability.Thefirmsproducingtheseplanesspendyearsdesigning,prototyping,testing,and
building them before they ever go into production and the first one is delivered to a customer.
Therefore financing is especially difficult given the long time horizon and the significant degree of
uncertainty. Inaddition,theseLCAdevelopment plansarenotoriousforgoingover budget. The777
30
Thornton,DavidWeldon.AirbusIndustrie.NewYork:St.Martin'sPress,1995.
31
Gates,Dominic."Airbus350Musclesinonthe777."SeattleTimes31July2007.
32
FactboxSizinguptheAirbusdoubledecker.12November2007.2February2008
<http://www.reuters.com/article/companyNewsAndPR/idUSL1267687320071112?pageNumber=2>.
24
wasoriginallybudgetedatonly$2billion33.TheA380wasinitiallyestimatedtocost8.8billion($11.9
billion)whenapprovedbythesupervisoryboardofAirbus34.
Engineering.AircraftofthesizeproducedbyBoeingandAirbusrequiresignificantengineering
experienceandknowhowinordertosuccessfullydesign,test,andproduceaviablejetliner.Italmost
bogglesthemindtocomprehendwhatisrequiredtodesignaircraftthatmustsuccessfullycarry130to
555passengersanywherefrom250to10,000milesdailyyearroundwithoutfailurefor25yearswhile
remainingeconomicallyprofitableforairlines.35Thetaskisdauntingtosaytheleast.Toputthisinto
perspective,Boeinghasonlydesignedeightplanesfromscratchsincetheystartedbuildingjetlinersin
1955.36Airbushasonlydesignedfoursince1969.37
Technology.ThecommercialaircraftmanufacturingindustryhasoftenbeencomparedtoNASA
style programs in their drive to develop and implement new and innovative technological solutions.
Commercialjetlinersarebehindmilitaryaircraftandspaceflightintermsofthevolumeoftechnological
developments.38Inorderforafirmtobecompetitiveinthisindustry,itmustkeeppacewiththerateof
technological change. At the current stage of development, either Boeing or Airbus is capable of
building a plane that will ferry passengers from point A to B. It is how quickly, efficiently, quietly,
comfortably, and safely that matters. Improvements in these areas arise because of design
improvementsviatechnologicalchange.Newentrantsandcurrentcompetitorsalikecanonlyexpectto
be competitive if they are able to produce and bring to market technology that improves upon the
existingjetliners.
33
34
Norris,Guy.AirbusA380:Superjumboofthe21stCentury.Osceola,WI:ZenithPress,2005.
35
36
BoeingCommercialAirplanes.http://www.boeing.com/commercial/products.html.
37
AirbusS.A.Shttp://www.airbus.com/en/aircraftfamilies/
38
25
Production&Logistics.Everyjetlinercontainsliterallyhundredsofthousandsofparts,ranging
insizefromrivetstoseatstooverheadcompartments.Afterdesigningthesecomponents,theymust
thenbemanufacturedandbroughttogetherintooneaircraftinoneplace.Thisisamonumentaltask
that has brought down previous market participants. The primary reason for the collapse of Douglas
Aircraft was their inability to manage their supply chain and bring together airplanes at a reasonable
cost.39Boeingstroubleinthelate1980swasinlargepartduetothencurrentleadershipsinadequate
managementofpartprocurementandlogistics.40
INTERDEPENDENCE
One of the key indicators of true oligopolistic behavior in industries such as oil, tobacco,
automotivemanufacturing,orairlines,isinterdependenceamongfirmswithintheindustry.Thisismost
obviouswhenthefirmscolludetosetpricesandoutput,erectbarrierstodeternewentrants,orlimit
competitioninotherways.Theformofthiscollusioncanbeeitherexplicitorimplicit.Ineveryindustry
mentioned, we observe explicit collusion through joint ventures and mergers or implicit collusion in
settingpricesorlimitingtechnologicaldevelopments.Whenlookingatthecommercialaircraftindustry,
there have been several joint ventures between Boeing and Airbus. Most of these have taken place
surroundingtheinterestindevelopingasuperjumbo.41However,noneofthejointventuresresulted
inanythingtangible.AirbuseventuallywentaloneanddevelopedtheA380.Inhindsightitappearsthat
manyofthepastjointventureswereanattempttolearnoftechnologicaldevelopmentsbeingmadeby
theotherfirm.42Thisexampleprovidesadirectinstanceofstrategicbehavior.
39
40
Lawrence,PhilipK.andDavidW.Thornton.DeepStall.Hampshire,England:Ashgate,2005.
41
42
26
PRICECOMPETITION
Itstandstoreasonthatwithinacompetitiveindustrytherewillbecompetitionbasedonprice;
incompetitiveindustriesthefirmsbecomepricetakersandnotpricesetters.However,inarelatively
noncompetitive industry there will be little price competition. As with most things in economics,
pricing is not this black and white in the commercial aircraft manufacturing industry. While the two
firmsarematureandhaveanextensiveproductline,alltheirproductsdonotdirectlycompetewithone
another.Forexample,theBoeing737andAirbusA320directlycompeteforsales,buttheBoeing747
hasremainedunchallengedforalmost30years.Theresultisthatpricecompetitionisfierceforsome
planesthe737versustheA320whilethereremainednocompetitionforothers,liketheBoeing747
fordecadesuntilthedevelopmentbyAirbusoftheA380.43
Discounts.Whenanewplaneisindevelopment,themanufacturingfirmsetsapriceforthat
airliner. However, no airline ever actually pays that price. Each customer receives discounts off the
stickerprice,andthisbecomesthedefactopriceforpurchasingthatjetliner.Inaddition,largerorders
receive additional discounts on top of the original discounts. The size of the discounts is a closely
guardedsecrettheresultisthatthepriceanyoneairlinepaysforaplaneisdifficulttodetermine.This
strategyisknownaspricediscriminationwhereBoeingandAirbusaretakingadvantageofeachairlines
different willingnesstopay. The actual revenue that Airbus or Boeing receives from an order is
extremelynebulous.44
Underpricing. The Boeing 747 for almost 30 years went unchallenged by Airbus. Until the
developmentoftheA380,Airbushadnoplanethatcouldcarry400+passengersoverdistancesbeyond
10,000miles.Withlittlecompetition,Boeingwascapableofchargingahigherpricethanperhapswould
otherwise be the case within a competitive environment. The Airbus A330 and A340 have enjoyed
43
44
27
significantsuccessinEuropebecauseofthenonpricecompetitionthatisdiscussedinthenextsection.
TheBoeing737andtheBoeingA320areverysimilarplanescarryingsimilarnumbersofpassengersover
similardistances.Thereforethe737andA320directlycompeteforairlinecustomers.Thesignificant
competition drives down the price of airliners offered by both firms. In the competition to get large
orders,bothfirmshavebeenaccusedofunderpricingtheir737orA320inordertolandthedeal.This
isfinancedbytheprofitseachfirmmakesonthesaleofthemorelucrative747andA330/40.Estimates
placethepureprofitgeneratedonthesaleofeach747tobeapproximately$25million.45
Ordersize.Itisoftenthecaseinthecommercialaircraftindustrythatlargeorderscanmakeor
breakafirm,especiallyatthecriticalpointwherefirmshaveinvestedsignificantlyinthedevelopmentof
anewplane(suchastheprototypingprocess)buthaveyettorealizesignificantsalesofthatplane.An
example would be Douglas Aircrafts DC8, which was bogged down in costoverruns and production
delays.TheCompanywouldhavebecomeilliquidandfailedadecadeearlierhaditnotbeenfortimely
orders by Northwest Airlines and Delta Airlines. More recently, the success of the Boeing 787
DreamlinerhasbeeninparttheresultoflargeordersfromseveralEastAsianairlinessuchasVietnam
Airlines,Quantas,andAllNipponAirways,andtheChinesegovernment.46
Itshouldbenoted,however,thattheAirbusA380developmentprojectwaskeptafloatinpart
because of the orders for private luxury jets from wealthy individuals and heads of state such as the
kingsofseveraloilproducingMiddleEastcounties.Inthesecases,theabilitytoincorporateuniqueand
extravagantluxurytrumptheoperationeconomicsthatairlinesusuallyface.47
GovernmentSubsidies.Perhapsoneofthemostcontentiousissuesinthecompetitionbetween
Boeing and Airbus has been subsidization of each firm by their respective governments: The United
45
Sell,T.M.WingsofPower.Seattle:UniversityofWashingtonPress,2001.
46
47
AirbusS.A.S.AnnualReview.Toulouse,France:AirbusS.A.S,2005.
28
States militarys indirect subsidization of Boeing, and the French, German, Spanish, and United
KingdomsdirectsubsidizationofAirbus.
Because Airbus was formed as a direct result of the governmental actions of the French,
German, and United Kingdoms legislatures, there traditionally has been a strong link between the
governments of the consortiums stateowned firms. The majority of the subsidization came during
Airbuss first two decades, when they were the severe underdog and did not have sales that would
generate cash organically. In the past, this has been most strongly represented in direct launch aid
appropriatedfromthetaxrevenueofthenationalgovernments.TheentirelaunchcostfortheA300&
A320camefromgovernmentsubsidies.48 Someof thelaunchfinancing had toberepaid atfavorable
interestrates,whilesomeofthelaunchmoneywouldneverhavetobereturned.Todate,itisunclearif
alloftheloanstoAirbusfromthemembergovernmentshavebeenrepaid.Subsidiescontinuetothis
day: the launch of the new A380 was partially subsidized through loans that must be repaid with
interest.49
BoeingwasamanufacturerofmilitaryaircraftbeforeitbecamealeadingproducerofLCA.In
fact,Boeing wasabletodevelopitsfirstcommercialjetairlinerbecauseofthetechnologyandknow
howithaddevelopedintheconstructionofmilitaryjets.Boeingremainstothisdayoneofthelargest
defensecontractorsfortheUnitedStatesmilitary50.Thereisstrongevidencetosuggestthattheprofits
derived from its military business helped keep the firm liquid and solvent when the LCA segment of
Boeingwasdoingpoorly.Inaddition,thereisstrongevidencethattheresearchanddevelopmentthat
48
49
Contrada,JohnDella."SubsidyWarCouldHarmBoeingMoreThanAirbus,UBReseracherSays."UniversityofBuffalo
Reporter24June2004.
50
ForaperiodoftimeBoeingactuallyexitedthedefenseindustrybuthassincereenteredandbecomeamajorparticipant
withthe1997mergerwithMcDonnellDouglas
29
produces new technologies and materials for military applications also find their way into Boeings
jetliners.51Thoughthesubsidizationmaynotbeasdirect,itisrealnonetheless.
NONPRICECOMPETITION
NationalizedAirlines.WithinEuropethefoundinggovernmentsoftheAirbusconsortiumhave
historically applied significant pressure on the national airlines to buy Airbus jetliners. Several of the
airlines most notably Air France are partially owned by European governments. Especially in the
beginning,thenationalcarrierswereAirbusonlycustomers.52OutsideofEurope,AirIndiaisownedby
theIndiangovernment,AirChinaisownedbytheChinesestate,andSingaporeAirlinesisownedbythe
Singapore government. In addition, there has always been a strong link between the Japanese
government and several Japanese airlines.53 The link between airlines and governments provides a
unique opportunity for competition between Airbus and Boeing. Governments have used their
influence over airline executives to encourage them to buy the planes of the firm that has a large
presenceintheircountry.IfeitherAirbusorBoeinghasasubassemblyplantinacountry,thiscreates
jobs and can improve the local economy. Government policy makers see this, and then wish to
encourageAirbusorBoeingtoexpandtheiroperationsintheircountry.Thesegovernmentofficialsalso
understandthatexpansiononlycomesifthemanufacturerisdoingwell.Thereforeinthemindsofthe
governmentofficials,theyequatetheirairlinepurchasingAirbusorBoeingproductswithprovidingjobs
andeconomicimprovements.54
ThistypeofnonpricecompetitionisespeciallyimportanttodevelopingcountriessuchasIndia
andChina,becausejettravelisgrowingfastestinAsia.Developingcountrieshaveaddedpressureto
createjobsandtobringinforeigndirectinvestment.BecauseofChinaslargegeographicalsizeandthe
51
52
53
54
Sparaco,Pierre."TransatlanticQuarrel."AviationWeek&SpaceTechnology6September2004:2627.
30
level of influence over the airlines by the government, both Airbus and Boeing have been putting
significant effort into sourcing subassemblies from China.55 What makes this especially important in
China is the fact that jetliners are often bought by the Chinese government on behalf of the Chinese
airlinesandnotbytheairlinesdirectly.56
Jetliner Financing. Airbus has historically had a unique advantage over Boeing that is often
overlooked.ThisisAirbusabilitytosupplyfinancing(throughtheconsortiumsmembergovernments)
at attractive terms for the purchase of their aircraft. Airbus logic is simple: If airlines cannot get the
cash, they cant buy their planes. Therefore Airbus began to assist airlines that could not obtain
financingintheglobalcreditmarkets.Airbusthenrealizedthattheycouldusefinancingasanadditional
meansofcompetitionwithBoeingtosecureordersofplanes.Originallythefinancingwasdoneonan
adhocbasis directlyinvolvingthegovernmentsof theconsortiumsmembers,mostoftenFrance. As
timeprogressedandAirbusbegantoturnaprofitasaresultoftheiroperations,theybegantoofferup
financingstillwiththeassistanceofmembergovernmentstoallcustomers.57
BoeinghashadlittleopportunitytoofferupcompetitionforAirbusattractivefinancing.Boeing
isaprivatefirm,thustheyresponsiblycannotoffertermsbetterthanAirbusorwhattheglobalcredit
marketoffersandremainaviablecompany.ThereforeBoeinghashadtorelyontheU.S.governments
ImportExport bank as a means for assisting struggling airlines to finance Boeing jetliner acquisitions.
Thesuccessofthishasbeenhitormiss,andhasresultedinmoredisputeswithAirbusthananyother
issue.Boeingcontendedthatwithoutthefinancing,Airbuswouldnothavesoldmanyoftheirplanes,
55
56
57
31
andthattheonlyreasonmanyairlineswentwithAirbusproductsoverBoeingproductswasbecauseof
thefinancing,notbecausetheyofferedasuperiorairplane.58
To date, this remains one of the most hotly debated issues regarding the competitive
relationship between Airbus and Boeing. It has spawned a number of congressional hearings and
investigationsaswellasanumberofinternationaltreaties.Asaresult,undertheUSEUAgreementon
TradeinLargeCommercialAircraftin1992andWorldTradeOrganizationguidelinesdevelopedaspart
ofUruguayRoundoftheGeneralAgreementonTariffsandTradein1994,financingthesaleofjetliners
remainslegal,thoughitisnowhighlyrestricted.59
Government Intervention. National pride and LCA manufacturing has intrinsically been linked
sincePanAmericanAirwaysbeganinternationalairtravel.Thishascontinuedtothecurrentday,with
national pride on the line with each new jetliner sale. The headsofstate of the United States and
severalEuropeannationshaveactivelygotteninvolvedinordertoseethatadealforthesaleoftheir
respectivejetlinersmakesitthrough.ThePresidentofFrancehasbeeninvolvedinnumerousdealswith
foreignairlines.PresidentBushhelpedsealthedealwithChinain2004duringavisitbythePremierof
thePeoplesRepublicofChina.60
Governmentinterventionalsocomesintheformofgovernmentprotectionfortheirrespective
firms.TheUnitedStatesCongress,theDepartmentofState,andtheWhiteHousehaveoftenbecome
involvedinattemptstoprotectBoeingfromwhattheyviewasunfaircompetitionfromAirbus.France,
Germany,andtheUnitedKingdomcontinuouslyplayaroleintheEuropeanjetlinersales.Theresulthas
beenseveraltradeagreementsbetweentheUnitedStatesandtheEuropeanUnion,thelatestofwhich
is the 1992 USEU Agreement on Trade in Large Commercial Aircraft. There are also continuous
58
Tomlinson,Richard."BehindtheLatestBoeingAirbusSpat."Fortune1November2004:14.
59
Holmes,Stanley."Finally,ABoeingAirbusShowdown."BusinessWeekOnline7October2004.
60
32
complaints filed in the World Trade Organization on behalf of either Airbus or Boeing. The latest of
there was a 2005 complaint filed by the United States against the European Union, and a cross
complaint filed by the EU against the United States. Each alleged that illegal subsidies had been
providedtotheirrespectivejetlinermanufacturer.Theresultwasthateachsidewasfoundguiltyand
thereforenosanctionswereimposed.
INNOVATIONS
Intherelativelyrecentcommercialaircraftindustryenvironment,onecanobservethefollowing
phenomena:
1)Boeingisthedominantfirm,
2)BoeingbecomesflushwithpastsuccessandallowsAirbustotakethelead,
3)Airbusisthedominantfirm,and
4)AirbusbecomesflushwithpastsuccessandallowsBoeingtotakethelead.
Inthe transitionfrom1to2,andfrom3 to4,oneofthekey factorsdrivingthechangefrom
leadertounderdoghasbeenthetechnologicaldevelopmentbythethenunderdogthatbegintoendear
theinnovatorintheeyesoftheairlineexecutives.Oftheinnovationslistedbelow,thefirstandsecond
weredevelopedasameanstoerodeBoeingsupremacyoverAirbusduring1)above.Theinnovations
listed third, fourth, and fifth were developed as a means for Boeing to reclaim the dominant position
during3)above.
FlybyWireSystems.TheBoeing707,727,original737,original747,andtheDouglasDC9,the
McDonnellDouglas MD8 were all built with control surfaces that were connected to the cockpits
peddlesandyokeviasteelcablesrunningthroughouttheplanesfuselageandwings.Whenthepilot
pushedapeddleinthecockpit,thisappliedtensiontothecableattachedtoit,whichinturncausedthe
flightsurfacetomove.Suchsystemswerecomplicatedtodesign,engineerandproperlycalibrate.This
33
typeofconfigurationrequiresthatthesteelcablesbeproperlytensioned,andsignificanteffortmustbe
madebytheairlinestomaintainthesecomplexsystemsoperatingthroughouttheentireplane.61When
AirbuswaspreparingtobuilditssecondairplanetheA320itwasnotinapositiontoengineerand
buildsuchacomplexsystem.62Thiswasbecausethewingwasmadebyonecompany,thefuselageby
another, the cockpit by a third, and the wing box by yet another firm and all with little interaction
between the various firms. Each used different computeraided drafting systems that were
incompatible. To design a system that extensively ran throughout the entire plane was logistically
impossible given Airbus structure. Therefore designers were forced to turn to another method of
controlling the planes flight surfaces. 63 Flybywire was at the time in its infancy with little
commercial application. Airbus saw this technology as a solution to its problem. In developing this
technology,itquicklybecameapparentthatitwassimplertodesignandbuildanddidnotrequirethe
airlinestoperformcostlymaintenanceandcalibration.64Airbushasincludedthistechnologyinallofits
jetliners.Boeingwasveryresistanttointegratingthisnewtechnologyinitsdesignsbecausethenew
technologywouldrequiretheirengineerstomoveupasteeplearningcurve.65
CockpitCommonality.In1978whenAirbuswaspreparingtolaunchthedevelopmentofanew
LCA,ithadonlyoneproduct,theA300.Atthesameperiodintime,Boeinghadadiverseproductset
rangingfromthe727,737,757,767,and747.HowwasAirbustocompetewiththiscompleteproduct
offeringwithonlytwoplanes?Airbusanswerwascockpitcommonality.EachofBoeingsplaneshad
different cockpit configurations. This was further compounded because each derivative also had
differentconfigurations.Ifapilotwascertifiedtoflya737,heorshecouldnotalsopilota757.A747
61
62
Airbusfirstplanewasbuiltusingconventionalmethods;thiscausedsignificantdelaysthatnearlybroughtdowntheproject.
Airbushaddifficultyovercomingtheseengineeringchallenges,andputthefirmataseveredisadvantagewhenpreparingto
launchtheirsecondplane.
63
64
65
BernsteinResearch."CommercialAircraftUpcycleClimbingHigherwithGlobalDemand."2006.
34
100pilotcouldnotflya747300.66Inaddition,eachpilotmustflyacertainnumberofhourseachyear
inordertomaintainhisorhercertification.Thiscouldbequiteexpensiveforthelessfrequent747and
767flights. Airbussawanopportunityto configuretheir cockpitssuch that A300pilots couldalsobe
certifiedontheirnewplanes,whichweretobesmaller.Thereforepilotscouldflythemorefrequent,
shorterroutesintheirnewA320tomaintaintheircertificationfortheA300.Inaddition,pilotscould
easily be moved between routes and plane types. For airlines, this meant increased flexibility and
decreasedtrainingcosts.67
Engine Configurations. Conventional wisdom had always held in LCA that four engines were
needed to cross the Atlantic or Pacific oceans; in case one engine failed there would still be three
enginestomakethetrip.Capitalizingonthiswisdom,whenAirbusbuiltitsA330andA340,theybuilt
theA330withtwoenginesforshorterroutes,andtheA340withfourenginesforlongerinternational
routes.Besidestheengineconfiguration,thefuselage,cockpit,andwingswerethesame.68However,
fourengineshaveonemajorproblem:Cost.Fourenginesconsumemorefuelthananequivalenttwin
engineairplane.Fourenginesalsorequiretwicethenumberofsparepartsandtwicethemaintenance.
While this wisdom held, there were not engines capable of producing the thrust required to
propel a jumbo jet with only two engines. In the 1980s and early 1990s highbypass turbofan jet
engines were developed that produced substantially more thrust than previous simpler turbojet
engines. These new highbypass turbo fan engines were more reliable, consumed less fuel, and
producedmorethrust.Boeing,lookingatthehighlysuccessfulA330andA340,wastryingtofindaway
togainacompetitiveadvantageinthejumbomarket.Tothatend,Boeingdevelopedandreleasedthe
66
67
68
35
777in1994withonlytwohighbypassturbofanengines.The777wassignificantlymorefuelefficient
thantheA340,andthe777thenpropelledBoeingbackintodominance.69
FuelEfficiency.Withthepriceofoilcontinuingtorisewithnoendinsight,continuingpressure
hasbeenplacedontheairlinesintermsoftheirfuelcosts.Thisinturnhasbecomeanincentiveforthe
aircraft manufacturers to develop the most fuel efficient planes possible, with the firm capable of
producing a fuel efficient plane gaining a sizable competitive advantage. For Airbus and Boeing, the
pathtowardsfuelefficiencyhasbeenonefulloftwistsandpotholes.Airbusoriginallyhadpickedupthe
banneroffuelefficiencyasameansofgaininganedgeoverBoeingintheirearlylife.AsAirbusmatured
and gained success, they became riskaverse and unwilling to move away from the designs that had
servedthemwellinthepast.Unfortunately,fuelefficiencyisarelativetermdependentonwhereoneis
in time; that which was considered fuel efficient a decade ago may now be a gas guzzler today.
During Airbus complacency, Boeing took up the banner of fuel efficiency, and this became a primary
concerninthedevelopmentofthe777.Fuelefficiencyrosetoprimesignificanceinthedevelopmentof
the 787 Dreamliner.70 There is no doubt with crude oil prices rising above $100 a barrel that fuel
efficiencywillcontinuetobeanimportantconsiderationforairlineexecutives.
Composite Materials. Another consequence of the rise in importance of fuel efficiency is the
increaseduseofcompositematerialsinLCAconstruction.Compositematerialslikecarbonfiberweigh
less than steel or aluminum and also provide greater strength. This allows aircraft manufacturers to
save substantial weight on the airframe. This directly translates into fuel savings, since less fuel is
requiredtotakeoffandfly.Compositesalsoofferopportunitiesfornewmanufacturingtechniques.For
example,thefuselageofthenewBoeing787Dreamlinerwillbeoneuninterruptedcarbonfiberpiece.
Thiswillsaveasignificantnumberofmanhours,sincethousandsofrivetswouldbeneededtoattach
69
70
36
hundredsofaluminumfuselagepanelstogether,whichwouldhavebeennecessarygivenconventional
manufacturing techniques. In fact, the 787 will be constructed of over 50% composite materials,
including the fuselage and wings.71 Composite materials are the newest development in jetliner
manufacturing and potentially represent the largest development since the highbypass turbo fan jet
engine.72
Both Airbus and Boeing demonstrated an inclination towards avoiding innovation when they
had dominate status. Boeing was unwilling to begin incorporating new technologies while they held
nearmonopoly standing. Airbus has also shown an unwillingness to accept new risk while they have
heldthemarketsharelead.Bothhavealsoshownthatmarketshare,andthereforecompetition,canbe
increasedviainnovation.
71
72
37
IV.WHATFACTORSDRIVETHECOMPETITION?
It is clear that the commercial aircraft manufacturing industry is oligopolistic. There are only
twofirmsthatmake uptheentiremarket. Airbus andBoeingscompetitive relationshipisconstantly
characterized by instances of strategic interaction. The above analysis makes it clear that each firm
considers the others actions when making decisions. Both firms take into account the competitive
position of the other firm. But the question that remains is why, despite all the incentives towards
collusion, do these firms compete so vigorously? For that matter, what is the unique nature of their
competitionthatmakesitparticularlyfierce?
Allfirmshaveincentivestomaximizeprofits.ThisisjustastrueforbothAirbusandBoeing.The
commercial aircraft is an oligopoly. Therefore, they are in a unique situation to exploit opportunities
that are not available to more competitive firms. Because of the extreme barriers to entry in the
commercial aircraft market, the commercial aircraft industry is insulated from new entrants and
additional competition. In a duopoly, firms can collude either tacitly or explicitly to set output,
prices, or both such that they can produce at the profitmaximizing position. This can be achieved in
oneoftwomainways:
1) Bothfirmscanproducesimilarproductsetssothattheycancollectivelylimittheir
outputandfixprices;or
2) Sufficientlydifferentiatetheirproductssothattheycanhaveanichemonopolyof
theirproducts.
In either case the goal is to control the level of output so that they can set the price. The
question then becomes, do we see either 1) or 2) above in the commercial aircraft industry? If not,
whatincentivesoractivitiesoverridetheconductwewouldexpect?
38
WhatbecomesclearintheanalysisaboveisthatAirbusandBoeingdonotbehavelike1)or2).
If competition is a spectrum, at one end are pricesetting monopolies, and at the other are perfectly
competitivepricetakers(seeExhibit8).Oligopoliesaretraditionallyfoundclosetothemonopolyend.
In this case there are a number of factors that push the commercial aircraft industry away from
monopoliesandtowardsperfectcompetition.
INSTRUMENTOFNATIONALPOLICY
Becauseofjetlinersintrinsictiewithhightechnology,thesheernumberofemployeesneeded
tomanufactureaircraft,andbecauseofalinkbetweenaviationandnationalpride,commercialaircraft
manufacturing has historically served as an instrument of national policy for the respective home
governments.
TechnologyInrecentdecadestheprestigeandsuccessofanationhascometobelinkedwith
hightechnology. There are a number of reasons for this from the ability of nations to defend
themselves withnewandimprovedtechnology,totheability toprovidebetterquality oflifethrough
new gadgets, to the esteem that comes from being on the cutting edge. This is all exemplified in
jetliners because of their close tie to military aircraft and because jetliners are often the first to
commerciallyimplementsnewtechnologies.TheUnitedStatesgovernmenthasmadeitclearthatthey
wishtopromotetheadvancementofcurrenttechnologiesandthedevelopmentofnewtechnologies.
Europeangovernmentshavedonethesame.AirbusandBoeingcanbeheldupasprimeexamplesof
howtheirfirmsareabletobreakintonewfrontiers.
EmploymentCommercialaircraftarelargemachines,oftencontaininghundredsofthousands
ofparts.Assuchittakesanextraordinarynumberofemployeestomanufacturejetliners.Largeorders
foraircraftcankeepcitizensemployedforyearstocome.BoeingorAirbuscanthenserveasameansof
employment for large numbers of people if governments are able to influence or manipulate aircraft
39
sales.Nationalgovernmentsworkingincooperationwithamanufacturercanensurethatthecompany
inquestionhasbusinessandthereforehasjobsfortheircitizens.
NationalPrideFormanynationsacrosstheglobe,thereisprideinwhattheircountryiscapable
of producing: the French are proud of their wines and cheese, the Americans proud of the space
programandthecuttingedgetechnology,etc.ThisisalsothecasewithjetlinerstheAmericansare
veryproudofBoeingandtheFrench,Germans,andBritishareveryproudofAirbus.Thisisnothardto
understandwhenonethinksofthetremendouseffortthatmustgointoproducingaviablejetliner.To
that end, jetliners have come to symbolize engineering and technical mastery, and thus pride in the
productsofBoeingandAirbus.Thisaddsanadditionalmotiveformanufacturebeyondsimpleprofit:
Prestige. One cannot underestimate the importance that prestige has played in the motivations of
airlineexecutivesandjetlinermanufacturerslikeAirbusandBoeing.
ORDERSIZE
Air travel has become less expensive in recent years with lowcost and nofrill airlines. The
resulthasbeenincreasednumbersofaircraftordersandalsoaircraftordersize.Orderscanbetensof
millions of dollars upwards to hundreds of millions of dollars. This creates a tremendous amount of
pressuretobringinthatsale,especiallysincealargeordercanbooktheproductionlineformonthsor
evenyearsatatime.Orderscanalsobeinfrequentinnature,especiallysurroundingthedevelopment
ofanewjetlinerbyeitherfirm.Thisinfrequencycanexacerbatetheimportanceofobtainingorders.In
essence, so much can be at stake that an incentive towards collusion is overridden by the need to
ensurethesuccessofyourplane.
The commercial aircraft industry is characterized by tremendous fixed costs, including the up
frontcostsassociatedwithdesigning,prototyping,andmanufacturingthefirstjetliner.Thesecostsare
difficulttodetermineinadvance,andarenoteasilyshedinthecaseofhardertimes.Thekeytostability
40
inthisindustryseemstobetheabilitytodevelopandmaintainasignificantbacklogoforders.Indoing
so, one ensures a continuing revenue stream far into the future; when an order is placed, a down
paymentisplacedwiththeremainingbalancetobepaidupondelivery.InthecaseofBoeing,atthe
end of 2007 they had a back order of 3,427 aircraft and Airbus had 4,336, with 375475 planes being
producedeachyear.Theywillnotreceivethemajorityoftheirpaymentuntilthedeliveriesaremade,
whichmeansthateachfirmcanexpectalargeflowofrevenueforyearstocome.
DIFFERENTIATEDPRODUCTS
Standardoligopolistictheoryoftenassumesthatfirmsproduce onlyoneproductand thatthe
productsmanufacturedbyeachfirmintheindustryarehomogenous.Whenfirmsareproducingraw
materials like copper or oil, it is simple to have a single uniform product among oligopolistic firms.
However,inthecaseofcommercialaircraftmanufacturing,theproductsarelargeandcomplicated;it
wouldbeverydifficultforAirbusandBoeingtodesignandbuilttwoidenticalplanesindependently.As
aresult,eachfirmmakessmalldecisionsinanumberofdirectionsthatchangeplanesthataremeantto
serve the same purpose. While both planes will take you from point A to point B, each does so with
little differences like seat width, entertainment options (personal screens versus one main screen for
example)orairhumidityduringflight.BoeingplanesuseayokepilotingsystemwhileAirbusplanesuse
ajoystick.Thesedifferencesbetweenjetlinersinvariablycauseairlinestochoosebetweenoneorthe
other;preferencesforoneplaneoveranothercanthendevelop.
Inthecaseofthecommercialaircraftmanufacturingindustry,asingleplanewillnotsatisfyall
customers.Planesareneededtoflylongdistancerouteswithhundredsofpassengersandshortroutes
with only 130 passengers. In addition, the person who wants to buy a longdistance plane will most
likely also want to buy a shortdistance plane. This gives rise to different products. Each firm could
choosetoproduceatonerangeofthemarketforexample,Boeingcouldchoosetoonlyproducelong
41
distance and Airbus could choose to produce only shortdistance planes but both firms have
attemptedtodevelopcompleteproductsetsthatarecapableofmeetingairlineseveryneed.Partof
thisisbecauseofthedevelopmentofcommonalitybetweenplanesandtheutilizationofeconomiesof
scale; it is cheaper for airlines to maintain one maintenance crew for Airbus planes than two
maintenancecrewsforAirbusandBoeingplanes,forexample.73
FIXEDOUTPUT
Withmanyproductsitisveryeasytovarythelevelofoutputwithinafirm.Withjetlinersitis
simply not possible to turn a knob and build immense planes faster. Significant investment in plants,
buildings,andequipmentisneededfirst.Thisalsomeansthatfirmscannoteasilysettheirproduction
outputinadvancewhereisonetoparkdozensofcompleted747s?Eachplanecanrepresenttensof
millions to hundreds of millions of dollars in investment and it is difficult for any firm to carry such
inventory for very long. The end result is that output is predetermined and fixed, and is known in
advance by all firms in the industry. Therefore the incentive is to make sure that your firm does not
havetoshutdownorbuildplanesforinventorybothofwhichcarrysignificantcosts.Inlookingatthis
from a different perspective, Airbus and Boeing have only within the last three years seen significant
growthinaircraftorders.Itwouldtakedecadesforcapitalinvestmenttoincreaseproductionbyonly
fiftypercenttopayoff.Thereforethemarketforjetlinerswouldhavetoincreasesubstantiallyovera
sustainedperiodinordertojustifysuchaninvestment.
73
Irwin,DouglasA.andNinaPavcnik."AirbusVersusBoeingRevisited:InternationalCompetitionintheAircraftMarket."NBER
WorkingPaperSeries.Cambridge:NationalBureauofEconomicResearch,December2001.
42
EXPANDINGMARKET
Because of the tremendous increase in air travel, the commercial aircraft industry has seen
recordlevelsofnewjetlinerorderssince2005;BoeingandAirbuseachsawtriplethenumberoforders
in 2005 than what they saw in 2004.74 With such expansive growth, there are many opportunities to
gain market share in expanding markets like the East Asian markets discussed earlier. With the
explosive growth in air travel in developing countries like China, India, and Malaysia, there are
significantopportunitiesforincreasedgrowthinthoseregions.Recordordersizesarebeingloggedby
eachfirmfromairlinesoperatingintheareasofgrowththisprovidesthesameincentivesasdescribed
intheaforementionedOrderSizesection.75
CONCLUSION
Thecommercialaircraftmanufacturingindustryischaracterizedbyrelativelyfixedoutput.Thiscoupled
with the infrequent aircraft orders, and the significant longrun uncertainty because of extended
product lifecycle, means that the normal forces of supply and demand are distorted. Research and
development of a new jetliner takes years, and it takes additional years or decades to realize the
completereturnonthatjetliner.Costsremainnebulousforthemanufactureofeachindividualjetliner
as a result. Because of the steep learning curve associated with developing new products, there is a
significantadvantagetothefirmthatdevelopsnewplanesfirst.Thistranslatesintoanadvantagefor
thefirmthatinnovatesfirst.Moreoverthecommercialaircraftindustryistrulyinternationalinscope,
andthereforestrategictradepolicyonthepartofboththeUnitedStatesandtheEuropeanUnionplays
a role in shaping the competition. Boeing and Airbus compete so vigorously because they face a
74
"AirWar."Economist25June2005:12.
75
43
marketplacewheresupplyisrelativelyconstantanddemandisintermittent;thisismadeallthatmuch
worsewithuncertainty.
44
V.WHATIMPLICATIONSDOESTHISHAVE?
Withinflexiblesupply,uncertainty,andadoseofnationalpride(irrationality),ourassumptions
that predict duopolistic behavior no longer holds. The commercial aircraft manufacturing industry
indicates models that predict incentives towards collusive behavior and limited output are not easily
applied to all industries. The model has not failed, but merely was designed to reflect the reality
representedbydifferentindustries.Wemustrecognizeandaccountforthedifferencespresentedby
thecommercialaircraftmanufacturingindustry.
Every industry is unique, including the commercial aircraft manufacturing industry. For many
thesedifferencesarewhatmakethefieldofeconomicsinteresting.Ifwecoulddevelopamodelthat
was easily applied to every industry, there would be nothing left to carry our interest. The standard
modelprovidesaframeworkforoutanalysis,buttheuniquecircumstancesineachindustryarewhat
provideitspirit.Thecommercialaircraftmanufacturingindustryisanoligopoly,butwhatisthenature
ofthecompetition?Whatdrivesthecompetition?Answeringthesequestionscanbecomejustabout
asmuchaboutpsychologyasmathematicalmodels.Thecommercialaircraftindustrycertainlyprovides
muchtosatiateourcuriosity.
45
REFERENCES
Aboulafia,Richard."AirbuspullsclosertoBoeing."AerospaceAmerica38.4(2000):1618.
"AirWar."Economist25June2005:12.
AirbusIndustries."GlobalMarketForecast20032004."Toulouse:AirbusIndustries,2003.
AirbusS.A.S.AnnualReview.Toulouse,France:AirbusS.A.S,2005.
AirbusS.A.S.GlobalMarketForecast20042023.BlagnacCedexFrance:AirbusS.A.S,2005.
BoeingCompany.AnnualReport.Chicago,IL:BoeingCompany,2003.
.AnnualReport.Chicago,IL:BoeingCompany,2004.
.Form10K.Chicago,IL:BoeingCompany,2006.
Contrada,JohnDella."SubsidyWarCouldHarmBoeingMoreThanAirbus,UBReseracherSays."
UniversityofBuffaloReporter24June2004.
FactboxSizing up the Airbus doubledecker. 12 November 2007. 2 February 2008

<http://www.reuters.com/article/companyNewsAndPR/idUSL1267687320071112?pageNumber=2>.
Holmes,Stanley."Finally,ABoeingAirbusShowdown."BusinessWeekOnline7October2004.
Irwin,DouglasA.andNinaPavcnik."AirbusVersusBoeingRevisited:InternationalCompetition
intheAircraftMarket."NBERWorkingPaperSeries.Cambridge:NationalBureauofEconomicResearch,
December2001.
46
Lawrence,PhilipK.andDavidW.Thornton.DeepStall.Hampshire,England:Ashgate,2005.
Loury,GlennC."MarketStructureandInnovation."TheQuarterlyJournalofEconomics(1979):
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Lynne, Pepall, J. Daniel Richards and Norman George. "Industrial Organization: Contemporary
TheoryandPractice."SouthWesternCollegePublishing,1999.223269.
MorringJr.,Frank."WashingtonOutlook."AviationWeek&SpaceTechnology20June2005:21.
Norris,Guy.AirbusA380:Superjumboofthe21stCentury.Osceola,WI:ZenithPress,2005.
Reinganum, Jennifer F. "Uncertain Innovation and Presistence of Monopoly." American

EconomicReview(1983):741748.
Rodgers,Eugene.FlyingHigh.NewYork:TheAtlanticMonthlyPress,1996.
Schwartz,NelsonD."ReadyforTakeoff."Fortune7February2005:20.
Sell,T.M.WingsofPower.Seattle:UniversityofWashingtonPress,2001.
Sparaco,Pierre."TransatlanticQuarrel."AviationWeek&SpaceTechnology6September2004:
2627.
Tomlinson,Richard."BehindtheLatestBoeingAirbusSpat."Fortune1November2004:14.
47
APPENDIX
Exhibit1:Boeingjetlinerdeliveries1958through2007
Exhibit2:Airbusjetlinerdeliveries10974through2007
Exhibit3:ChartgraphingthedeliveriesofAirbusandBoeing1958through2007
Exhibit4:Boeingfirmordersreceived1955through2007
Exhibit5:Airbusfirmordersreceived1974through2007
Exhibit6:ChartgraphingfirmordersreceivedbyAirbusandBoeing1955through2007
Exhibit7:Airbusfirmstructurediagram
Exhibit8:CompetitiveSpectrumdiagram
DataforExhibits1,3,and4Source:BoeingCommercialAirplaneswebsite
http://active.boeing.com/commercial/orders/index.cfm
DataforExhibits2,3,and5Source:AirbusS.A.S.website
48
Exhibit1
BoeingDeliveriesfrom19582007
Total TotalD&
YEAR 707 717 727 737 747 757 767 777 787 Boeing DC8 DC9 DC10 MD11 MD80 MD90 MD TOTAL
1958 8 8 8
1959 77 77 21 21 98
1960 91 91 91 91 182
1961 80 80 42 42 122
1962 68 68 22 22 90
1963 34 6 40 19 19 59
1964 38 95 133 20 20 153
1965 61 111 172 31 5 36 208
1966 83 135 218 32 69 101 319
1967 118 155
4 277 41 153 194 471
1968 111 160
105 376 102 202 304 680
1969 59 114
114 4 291 85 122 207 498
1970 19 55
37 92 203 33 51 84 287
1971 10 33
29 69 141 13 46 13 72 213
1972 4 41
22 30 97 4 32 52 88 185
1973 11 92
23 30 156 29 57 86 242
1974 21 91
55 22 189 48 47 95 284
1975 7 91
51 21 170 42 43 85 255
1976 9 61
41 27 138 50 19 69 207
1977 8 67
25 20 120 22 14 36 156
1978 13 118
40 32 203 22 18 40 243
1979 6 136
77 67 286 39 35 74 360
1980 3 131
92 73 299 18 41 5 64 363
1981 2 94
108 53 257 16 25 61 102 359
1982 8 26
95 26 2 20 177 10 11 34 55 232
1983 8 11
82 22 25 55 203 12 51 63 266
1984 8 8
67 16 18 29 146 10 44 54 200
1985 3 115 24 36 25 203 11 71 82 285
1986 4 141 35 35 27 242 17 85 102 344
1987 9 161 23 40 37 270 10 94 104 374
1988 165 24 48 53 290 10 120 130 420
1989 5 146 45 51 37 284 1 117 118 402
1990 4 174 70 77 60 385 3 139 142 527
1991 14 215 64 80 62 435 31 140 171 606
1992 5 218 61 99 63 446 42 84 126 572
1993 152 56 71 51 330 36 43 79 409
1994 1 121 40 69 41 272 17 23 40 312
1995 89 25 43 37 13 207 18 18 13 49 256
1996 76 26 42 43 32 219 15 12 25 52 271
1997 135 39 46 42 59 321 12 16 26 54 375
1998 282 53 54 47 74 510 12 8 34 54 564
1999 12 320 47 67 44 83 573 8 26 13 47 620
2000 32 282 25 45 44 55 483 4 5 9 492
2001 49 299 31 45 40 61 525 2 2 527
2002 20 223 27 29 35 47 381 381
2003 12 173 19 14 24 39 281 281
2004 12 202 15 11 9 36 285 285
2005 13 212 13 2 10 40 290 290
2006 5 302 14 12 65 398 398
2007 330 16 12 83 441 441
TOTAL 1,010 155 1,831 5,600 1,396 1,049 959 687 12,687 556 976 446 200 1,191 116 3,485 16,172
Exhibit 2
Exhibit2
AirbusDeliveriesfrom19742007
Year A3001 A3202 A3303 A3403 A350 A380 TOTAL
1974 4 4
1975 8 8
1976 13 13
1977 15 15
1978 15 15
1979 26 26
1980 39 39
1981 38 38
1982 46 46
1983 36 36
1984 48 48
1985 42 42
1986 29 29
1987 32 32
1988 45 16 61
1989 47 58 105
1990 37 58 95
1991 44 119 163
1992 46 111 157
1993 44 71 1 22 138
1994 25 64 9 25 123
1995 19 56 30 19 124
1996 16 72 10 28 126
1997 8 127 14 33 182
1998 14 168 23 24 229
1999 8 222 44 20 294
2000 8 241 43 19 311
2001 11 257 35 22 325
2002 9 236 42 16 303
2003 8 233 31 33 305
2004 12 233 47 28 320
2005 9 289 56 24 378
2006 9 339 62 24 434
2007 367 68 11 1 447
TOTAL 810 3,337 515 348 1 5,011
1
A300includesallA300sandallA310,whichareaderivativeoftheoriginalA300
2
A320includesallA318s,A319s,&A321s,whicharederivativesoftheoriginalA320
3
TheA330&A340havethesamefuselageandwingsbutdifferentnumbersofengines;theyarethereforetheA340istechnicallya
derivativeoftheA330butiscountedseparatelyhere
Exhibit 3
Exhibit3
Deliveries19582007
800
700
600
500
Deliveries
400
300
200
100
Year
Airbus Boeingw/Mergers Boeingw/oMergers

Exhibit4
BoeingFirmOrdersReceivedfrom1955to2007
Total TotalD&
YEAR 707 717 727 737 747 757 767 777 787 Boeing DC8 DC9 DC10 MD11 MD80 MD90 MD TOTAL
1955 70 70 73 73 143
1956 53 53 39 39 92
1957 25 25 10 10 35
1958 31 31 10 10 41
1959 17 17 18 18 35
1960 62 80 142 4 4 146
1961 76 37 113 21 21 134
1962 17 10 27 24 24 51
1963 42 20 62 20 23 43 105
1964 71 83 154 30 33 63 217
1965 135 187
83 405 70 209 279 684
1966 101 149
35 83 368 116 159 275 643
1967 87 125
61 43 316 57 66 123 439
1968 40 66
49 22 177 36 88 63 187 364
1969 12 64
28 30 134 16 44 29 89 223
1970 13 48
21 20 102 8 34 21 63 165
1971 9 26
48 7 90 4 24 18 46 136
1972 18 119
14 18 169 28 46 74 243
1973 12 92
42 29 175 73 31 104 279
1974 16 88
47 29 180 41 13 54 234
1975 9 50
35 20 114 21 9 30 144
1976 4 113
39 14 170 35 16 51 221
1977 14 133
37 42 226 22 34 23 79 305
1978 6 125
145 76 38 49 439 41 45 27 113 552
1979 1 98
78 72 45 294 27 33 14 74 368
1980 21 68
95 49 64 11 308 6 12 14 32 340
1981 38
121 23 3 5 190 2 8 19 29 219
1982 5 11
71 14 2 2 105 48 87 135 240
1983 15 1
64 24 26 20 150 2 43 45 195
1984 131 23 2 15 171 6 117 123 294
1985 274 42 45 38 399 3 106 109 508
1986 6 212 84 13 23 338 5 11 120 136 474
1987 11 177 66 46 57 357 2 20 88 110 467
1988 312 49 148 83 592 2 44 239 285 877
1989 241 56 166 100 563 18 135 153 716
1990 11 111 122 95 52 28 419 37 50 27 114 533
1991 70 31 50 65 24 240 10 23 33 273
1992 114 23 35 21 30 223 7 10 26 43 266
1993 101 2 33 54 30 220 6 10 16 236
1994 67 16 12 17 112 4 9 13 125
1995 42 169 32 13 22 101 379 9 14 39 62 441
1996 438 56 59 43 68 664 10 17 17 44 708
1997 314 36 44 79 54 527 11 2 3 16 543
1998 41 354 15 50 38 68 566 13 24 4 41 607
1999 237 35 18 30 35 355 355
2000 21 374 26 43 9 116 589 589
2001 3 188 16 37 40 30 314 314
2002 32 162 17 8 32 251 251
2003 8 206 4 7 11 13 249 249
2004 8 152 10 9 42 56 277 277
2005 570 48 19 153 232 1,022 1,022
2006 739 72 10 77 160 1,058 1,058
2007 850 25 36 143 369 1,423 1,423
TOTAL 1,010 155 1,831 7,676 1,521 1,049 1,011 1,044 817 16,114 556 976 446 200 1,191 116 3,485 19,599
Exhibit 5
Exhibit5
AirbusFirmOrdersReceivedfrom1974to2007
1
Year A300 A3202 A3303 A3403 A350 A380 TOTAL
1974 20 20
1975 16 16
1976 1 1
1977 16 16
1978 73 73
1979 127 127
1980 47 47
1981 54 54
1982 17 17
1983 7 7
1984 21 14 35
1985 53 39 92
1986 24 146 170
1987 56 58 114
1988 45 116 3 3 167
1989 87 146 107 81 421
1990 71 300 25 8 404
1991 52 18 5 26 101
1992 32 81 1 22 136
1993 9 13 1 15 38
1994 95 30 125
1995 6 81 9 10 106
1996 15 235 42 34 326
1997 7 364 64 25 460
1998 32 437 24 63 556
1999 0 408 32 36 476
2000 2 388 110 20 520
2001 61 175 52 2 85 375
2002 0 235 24 31 10 300
2003 6 155 54 35 34 284
2004 2 279 51 28 10 370
2005 7 918 64 15 87 20 1,111
2006 673 104 15 15 17 824
2007 914 198 23 290 33 1,458
TOTAL 966 6,288 970 522 392 209 9,347
1
A300includesallA300sandallA310,whichareaderivativeoftheoriginalA300
2
A320includesallA318s,A319s,&A321s,whicharederivativesoftheoriginalA320
3
TheA330&A340havethesamefuselageandwingsbutdifferentnumbersofengines;theyarethereforetheA340istechnicallya
derivativeoftheA330butiscountedseparatelyhere
Exhibit 6
Exhibit6
Orders19552007
1600
1400
1200
1000
Orders
800
600
400
200
Year
Airbus Boeingw/Mergers Boeingw/oMergers

Exhibit7

DASA
German
DaimlerChrysler Government
AeroSpaceAG
SOGEADEaFrench
Aerospatiale
StateHolding
Matra
Company
EADS
CASA SEPIaSpanish
80%Ownership StateHolding
AeronaucticasSA Company
SixPublicStock
Exchanges
AirbusS.A.S. Private
Shareholders
French
Government
BritishCrown
(MinorityStake)
BAESystems
20%Ownership Private
Shareholders
(MajorityStake)

Exhibit8

Monopoly
Duopoly
Oligopoly
MonopolisticCompetition
PerfectCompetition

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BOEINGVERSUSAIRBUS:

technological improvements over competitors at Boeing and McDonnellDouglas, including flybywire

Interdependence refers to strategic interaction between firms when independently making

Price&NonPriceCompetition. Ina generalsense,firmswould rather bepricesettersrather

thatattempttoquantify andunderstand theincentivesthat motivatefirmbehavior.Thereare many

relativemarketshareofeachfirm. Generallyspeaking,thedifferent methodsdependuponwherein

theaircraftslifecycleone measures: Numberofjetlinersproduced,number of jetliners in service, or

approximatelyuntil1980. Thereforethismeasureismostrelevantin determiningmarket sharesince

tonotice:While thehistoricalpositionofboth companiesis certainlyimportant,itdoesnotcarry the

AG (DASA) of Germany, AerospatialeMatra of France, and Aeronauticas SA (CASA) of Spain to form

EADSandBAESystemseach publishannualfinancialreports. However,AirbusS.A.Sdoes not

uncertainty. Inaddition,theseLCAdevelopment plansarenotoriousforgoingover budget. The777

A320camefromgovernmentsubsidies.48 Someof thelaunchfinancing had toberepaid atfavorable

adhocbasis directlyinvolvingthegovernmentsof theconsortiumsmembers,mostoftenFrance. As

Inthe transitionfrom1to2,andfrom3 to4,oneofthekey factorsdrivingthechangefrom

767flights. Airbussawanopportunityto configuretheir cockpitssuch that A300pilots couldalsobe

twofirmsthatmake uptheentiremarket. Airbus andBoeingscompetitive relationshipisconstantly

themselves withnewandimprovedtechnology,totheability toprovidebetterquality oflifethrough

Standardoligopolistictheoryoftenassumesthatfirmsproduce onlyoneproductand thatthe

FactboxSizing up the Airbus doubledecker. 12 November 2007. 2 February 2008

Reinganum, Jennifer F. "Uncertain Innovation and Presistence of Monopoly." American

Airbus Boeingw/Mergers Boeingw/oMergers

Airbus Boeingw/Mergers Boeingw/oMergers

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