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© 2006, I.P.L. Png 1 Airbus v.

Boeing Until 2001, Airbus was a marketing consortium established under French law as a ³Groupe d¶Intérêt Economique´. The four shareholders ± Aerospatiale±Matra (37.9%), British Aerospace (20%), Construcciones Aeronauticas (4.2%) and Daimler Aerospace (37.9%) ± performed dual roles as owners and industrial contractors. Most major decisions required unanimous approval of the shareholders. Airbus was obliged to distribute production work among its shareholders according to political as well as economic considerations. Then, Airbus was re-organized into a single fully integrated limited company. The objective was to streamline operations across national boundaries, reduce costs, and speed production. The re-organization coincided with a consolidation of Airbus market position. As Figure 1 shows, from 31% in 1996, Airbus had steadily increased its share of the market to 57% in 1999, but then dipped sharply to 47% in 2000. Following the re-organization, Airbus recovered and maintained its share in the mid- to high 50s until 2005. In April 2004, Boeing launched the new 7E7 Dreamliner jet with a firm order for 50 aircraft from All Nippon Airways of Japan. The deal was worth about US$6 billion at list prices, with deliveries scheduled to begin in 2008. Eight months later, in December 2004, following considerable speculation, Airbus announced that it would develop the A350. This would compete with the Boeing 7E7 in the market segment of twin-engine medium to long range jets with capacity of 200-300 passengers. Airbus Chief Commercial Officer John Leahy predicted that the A350 would attract a substantial number of Boeing customers and ³put a hole in Boeing's Christmas stocking´.1 Boeing subsequently renamed 7E7 as the 787. It is a completely new design, with development cost estimated to be $8-10 billion. By contrast, the A350 is a derivative of the existing A330, enhanced with a new wing, more fuel-efficient engines, and other new technologies. The development cost would be just 4 billion Euros (equivalent to $5.3 billion). Besides the development cost, aircraft manufacturers also incur substantial costs to manufacture the aircraft. The manufacturing cost is driven by an ³experience curve´. As engineers and workers gain experience in production, they devise new processes to reduce cost. As Figure 2 shows, the experience curve in aircraft manufacturing flattens out once cumulative production reaches the hundreds of units. Airbus and Boeing must set prices for aircraft based on projections of unit costs. Owing to the experience curve, these projections depend critically on forecast

far below its target of 200 by that time. ³The A350 goes up on the ramp in 2010.P. 3 ³AF&NM interview: John Leahy. November/December 2005. The first planes would be delivered in August 2008. However. Why? Investment decisions are forward-looking. Yet. © 2006.2 billion at list prices. Airlines believe that higher oil prices will persist. Seattle Post-Intelligencer. while if only one manufacturer . Boeing had secured 52 firm orders for the 787 (7E7). Table 1 shows that. plus options for 50 additional planes. and the manufacturer may incur a substantial loss on the plane. chief commercial officer. Png 4 Discussion Questions 1. then each will sell 250 units. 2009. An airline can reduce these costs by concentrating its fleet with one manufacturer. and you¶ll see pilots walking over from 330s without any training and flying it. Current losses are sunk costs. 2005. It fits right into the Airbus family. Richard Aboulafia of industry consultant Teal 1 ³A350: Airbus's counter-attack´. By December 2004. amidst continuing losses. In 2004. American and Delta concentrate on buying Boeing planes. but not across manufacturers.2004. it placed a firm order for 18 Boeing 787s. Group remarked that Airbus had succeeded in its goal of ³disrupt[ing] the business case for the 7E7´.. unit costs will be higher than planned. A sharp and sustained increase in oil prices has hurt Northwest and other airlines. with 6 planes delivered in each of 2008. Yet in May 2005. since 2000. Airbus´. If the sales fall short of target. December 11. and that the selling price of each plane is $110 million.sales. Airline Fleet & Network Management.L. Airbus has emphasized that the high degree of commonality among its various models provides airlines with substantial savings in crew training and deployment. and 2010. Why? One reason is economies of scope in maintenance. worth approximately $2. the airline has consistently incurred losses. Suppose that there is demand for 500 units of the Airbus A350-Boeing 787 type of aircraft.´3 2 ³Airbus pushes ahead with rival to 7E7´. and training. I. Assume that if Airbus manufactures the A350 and Boeing manufactures the B787. Northwest¶s operating loss was $505 million and net loss was $862 million. January 25. walking over from 340s with just a very short transition course lasting a couple of days . Northwest is buying new planes. Flight International. repair. while Northwest and United operate a mix of Airbus and Boeing aircraft.. 62-65. so it is important to buy more fuel-efficient aircraft for future operations. Northwest Airlines is one of the world¶s largest airlines. Chief Commercial Officer John Leahy remarked.

Is this a situation of first-mover advantage? Please explain your answer. 3. Further.enters the market. Use a game in strategic form to identify the pure-strategy equilibrium(ia). 2. . How does the experience curve affect the strategic situation? Please explain in qualitative terms. assume that there is no experience curve and that the manufacturing cost is fixed at $85 million per aircraft. it would sell 500 units.