Airbus vs. Boeing in VLA market.
I. INTRODUCTION
In December 2000, Airbus formally committed to develop and launch a super jumbo plane known as the A380 at a launch cost of $13 billion. Prior to and after Airbus’ commitment, Boeing started and canceled several initiatives aimed at developing a “stretch jumbo” with capacity in between its existing jumbo (the 747) and Airbus’ planned super jumbo.
In addition to making the super jumbo one of the largest product launch decisions in corporate history, this figure represented 26% of total industry revenues in 2000 ($45.6 billion) and more than 70% of Airbus’ total revenues in 2000. The inherent risk associated with this major strategic commitment is magnified by the fact that Airbus must spend the entire amount before it delivers the first plane. History has shown that many firms including General Dynamics, and, more recently, Lockheed, have failed as a result of attempting such bet-the-company product development efforts. If, however, the launch effort does succeed, Airbus is expected to dislodge Boeing as the market leader in commercial aircraft after more than 50 years of market dominance by the latter.
This paper presents an analysis of this new product commitment and, more generally, of competition in very large aircraft (VLA is defined as planes capable of seating more than 400 passengers).
II. CASE BACKGROUND
In the early 1990s, Airbus and Boeing independently began to study the feasibility of launching a super jumbo. Both agreed there was a growing need for a super jumbo because of increasing congestion at major hubs. Alternative solutions were seen as either infeasible, in the case of greater flight frequency, or ineffective, in the case of flights to secondary airports. Fairly quickly they realized that there was room in the market for only one competitor.
Finally, Boeing and Airbus agreed to collaborate on a joint feasibility study for a Very Large Capacity Transport (VLCT) plane that could hold from 550 to 800 passengers. When the collaboration began in January 1993, they envisioned the plane would cost $10 to $15 billion to develop (with estimates ranging from $5 to $20 billion) and would sell for $150 to $200 million each. Their preliminary demand estimate was reported to be 500 planes over the next 20 years.
In July 1995, however, the collaboration ended. Airbus realized that Boeing’s participation in the joint effort may have been only to stall the market so that Airbus did not develop anything itself. The two firms also disagreed at a very fundamental level about industry evolution. Boeing maintained that increased fragmentation in the form of point-to-point travel would solve the problem of congestion at major airports. Airbus, on the other hand, believed that hub-to-hub travel would continue to grow.
With the collaboration over, both competitors returned to independent study of the super jumbo market. For its part, Boeing considered two updated and “stretched” versions of its popular 747 jumbo jet. In fact, Boeing never formally announced it was going to develop the [next page]