Boeing and Airbus: Strategic Management in the Air Travel Industry

Over the course of the last decade, the problems facing the commercial airline industry have been extensive. The terrorist attacks, which occurred on September 11, 2001 had a detrimental impact on commercial air travel in the US. Further, recent spikes in oil have also crippled the ability of airlines to provide low cost service for customers. While the changes that have occurred in the commercial airline industry had had the most impact on the airlines, other companies are also struggling in the wake of these problems. Specifically, Boeing and Airbus, two major providers of commercial aircraft worldwide, are now in fierce competition with each other to garner what business is available from commercial airliners.

Although Boeing and Airbus operate in the same industry, the strategic plans adopted by both organizations to attract new business have been notably different. Utilizing this as a basis for research, this investigation examines the differences in the strategic plans developed by these organizations. Through a careful consideration of what has been written about the strategies offered by both organizations, it will be possible to demonstrate which organization is best poised to become the clear winner in this competition. Further, by examining the different strategies used by these two companies a clear overview of how different organizations approach the same problem will be effectively elucidated.

Boeing's Strategy

In order to begin this investigation, it is helpful to first consider the strategies developed both organizations. Considering first the strategy adopted by Boeing, researchers have noted that Boeing's approach to the current airline industry is one that is focused on the belief that consumers want direct flights rather than layover flights that cost them time. According to one author: "Boeing's strongest argument is that the air-travel market is fragmenting. People want to travel direct to their long-haul destinations, not squeeze into huge planes before changing later to smaller ones at crowded hub airports in order to reach their final destination" (The super-jumbo..., 2005, p. 55). With this in mind, Boeing argues that there will be very little interest in developing aircraft that are bigger than the current 747. Researchers note that Boeing bases its theory on aircraft needs from its recent attempts to market stretched versions of its 747. the new aircraft proposed by Boeing, while capable of holding more passengers, were not greeted with favor from airline companies (The super-jumbo..., 2005).

Utilizing this experience as a basis for developing its strategic plan, Boeing has made the decision to leave the jumbo airline market; arguing that if interest in the market increases in the near future, the organization will consider development of new larger aircraft. Although this plan appears to have a solid and salient basis, some analysts note that Boeing's decision to leave the jumbo airline industry may make it difficult for the organization to enter if interest increases. "The long-haul airlines with the greatest need are already buying the new Airbus, and would have little incentive to wait at least three years for a Boeing super-jumbo to emerge" (p. 55). In fact, statistics comparing both Airbus and Boeing show that, as of early 2005, Airbus had been able to beat Boeing on deliveries for the second straight year in a row. The cost advantage of this position has enabled Airbus to begin expansion of its midsize lines, offering airlines an even greater selection of Airbus products.

While the specific design strategy used by the organization is one issue that must be taken into consideration when examining Boeing's strategy, researchers have noted that there are other elements to Boeing's new strategy that must be considered as well. For instance, Holmes (2006) considers the steps taken by Boeing improve the overall innovation in the organization. In particular, Holmes notes that the organization's decision to outsource many of its operations has prompted considerable speculation from analysts: (p. 12). While many laymen would take this to mean that Boeing has employed outsourcing strategies that are unethical, the opposite is true. According to Holmes, Boeing is outsourcing it operations based on who can provide the organization with the most innovative solutions. As such, the cost of acquiring this innovation has no bearing on the decision to outsource.

In addition, Holmes reports that Boeing has also begun developing offsetting agreements with foreign countries. Under these agreements, countries that agree to purchase airplanes will be granted manufacturing work. The measures have allowed Boeing to tap into the fastest growing airplane market in the world-China. To tap into this market, Boeing realized that it would have to offer the country some amount of manufacturing work. In an effort to make this process more profitable for Boeing, the organization decided that offset agreements were the best solution in this case. By combining offset agreements with corporate expansion, Boeing has been able to capture a substantial part of the Chinese aircraft industry.

Although the efforts undertaken by Boeing appear to be in the best interests of improving technology and innovation, Holmes does note that this process of outsourcing has saved the organization millions of dollars each year. Given that Boeing has been forced to compete with the more efficient Airbus organization, Boeing had no choice but to find an innovative solution for reducing costs. Since the September 11, 200 terrorist attacks Boeing has laid off more than 38,000 workers. In the wake of further outsourcing, even more American jobs have been cut from the payroll. What this clearly suggests is that even though Boeing is looking for innovation, the purpose of outscoring still serves one important goal for the organization: it helps them to save money.

Finally, Matlack (2004) in his analysis of the specifics strategy that Boeing is now using to increase the power of the organization notes that executives are asking political leaders in the European Union (EU) to reconsider a 1992 deal that the organization made with Airbus. According to Matlack, (Boeing vs...). Boeing contends that all of the new aircraft developed by Airbus involve money from the EU government. US trade officials believe that the contract between Airbus and the EU warrants some investigation. In an effort to capitalize on this issue, Boeing has worked to raise industry awareness that Airbus may fold if the organization is not able to control its loans. At the present time, EU support of the Airbus organization accounts for one-third of the company's revenues.

Airbus Strategy

Much like the Boeing strategy for development, the Airbus strategy is also multilayered. One author, examining the overall strategy of the organization under the leadership of current CEO makes the following observations:

Airbus has already grown from a Franco-German joint-venture into a fully fledged European affair, with Britain and Spain as shareholders and Italy's aircraft industry a key supplier. Mr. Humbert now sees his role as taking the company a stage further, and turning it into a truly global business. After taking over his first overseas visit was to China, where Airbus has a joint-venture-an engineering centre with a local aircraft manufacturer. The Chinese have been offered a 5% risk-bearing share of the new A350 mid-sized long-haul aircraft (A new pilot..., 2005, p. 64).

Thus, Airbus now faces the challenge of working from the European market outward. In addition to offering cooperative agreements with China, the organization is also considering the development of a new plant in the United States. All of these efforts are based on the desire of the organization to expand its current operations.

The central tenet of Airbus' expansion focuses on risk-bearing contracts in which suppliers and purchasers take some risk for the organization's decision to develop in their country. Expansion projects in both Europe and Asia require the governments of these countries to assume some risk for undertaking manufacturing operations of Airbus products. While this method helps Airbus to ensure that it will be able to bring its products to the market after they are produced, researchers have noted that in the wake of the 9/11 terrorist attacks, many of the suppliers for Airbus have cut back on their risk-sharing agreements. As a result of this process, Airbus is finding it difficult to efficiently manage its overall supply chains. If this occurs over the long-term, it could make it difficult for the organization to retain its efficiency and competitive edge (A new pilot..., 2005).

In an effort to ensure its long-term economic advantage, Airbus has begun scaling back its production. Sparaco (2002) notes that executives from Airbus have noted that by scaling back production in the organization, Airbus should be able to regain its dominance in the market after the impacts of 9/11 abate. What this effectively demonstrates is that Airbus has not taken notably drastic steps to overcome the obstacles that have been created as a result of the attacks. For the most part, Airbus is moving forward with a "business as usual attitude" which will prevent the organization from undergoing any significant restructuring in the near future. Although uncertainties still exist with respect to the airline industry, Airbus projects that its growth will continue at a steady 4.9 percent per year. Unlike Boeing, Airbus has argued that massive layoffs are not necessary to save the organization.

Comparing the Two Strategies

Clearly, both organizations have employed notably different plans for their strategic development. On one hand Boeing has selected to take a reactionary approach to the problem by slashing costs, downsizing the organization and outsourcing for efficiency and innovation. Airbus, on the other hand, has chosen to remain calm about the issue and focus on systematically reducing production and developing risk-sharing agreements that will enable the organization to cut costs if certain products fail. While it is difficult to know for sure, which organization will ultimately win this battle, researchers have noted that Boeing has recently been awarded in new contracts from airlines located in the Asia-Pacific region which could account for more than $16.8 billion in sales. Specifically, Holmes (2005) notes that interest in Boeing's 787 Dreamliner has given the organization close to 100 new sales in recent months. This boost seems to suggest that Boeing has made the right choice in its overall development strategy.

Despite the fact that Boeing seems to be showing a clear advantage in recent aircraft sales, Holmes does note that Airbus may be able to outbid Boeing and provide similar aircraft at a lower price. According to Holmes, "Of course, in the bare-knuckles aviation game, a Boeing triumph is hardly assured. Airbus, famous for aggressive sales tactics, could swoop in at the last minute and undercut Boeing on price" (Boeing...). What this effectively suggests is that Airbus may not be out of the competition yet. Given the fact that Airbus has historically been able to offer its products at a reduced cost, when compared with Boeing, it is possible that Airbus could hinder the ability of Boeing to complete its sales and garner a notable competitive advantage. Holmes argues that if Boeing gains the advantage at this point, it may take several years for Airbus to recover.

While it is possible that Airbus could out maneuver Boeing in the final day of contract negations, Holmes does report that in the past year, the organization has had some trouble delivering its mid-sized, four-engine A340. Delivery problems have angered key companies. . Because the Airbus organization chose to reduce production as a means of reducing costs, lowered production levels have made it difficult for the organization to produce efficiently. While the organization needs to maintain these production levels in order to remain efficient, this process is clearly preventing the organization for meeting its deadlines. This coupled with the fact that the A340 has been identified as a "gas-guzzler" has served as the basis to diminish Airbus' reputation

Conclusion

Although current research on the strategies of both Airbus and Boeing clearly suggests that Airbus may be able to over take Boeing, this does not seem likely. In response to the drastic changes that have occurred in the airline industry, Boeing made the changes that were necessary to ensure the overall development of the organization. Although this process was challenging and painful for the organization at times, its actions appear to be paying off. Airbus, unfortunately, has made no significant changes, even though they airline industry has changed so notably in recent years. Given the fact that Boeing has made changes to respond to an evolving industry and Airbus has done relatively little, it seems reasonable to argue that, in the end, Boeing will ultimately be the winner. If Airbus had responded to the crisis with something more than just a "business as usual" attitude, it is possible that it may have been able to undercut Boeing's prices. At the present time, however, this just does no seem possible.

References

Holmes, S. (2005). Boeing roars ahead. Business Week Online. Accessed March 13, 2006 at: http://www.businessweek.com/bwdaily/dnflash/oct2005/nf20051027_3025_db016.htm.

Holmes, S. (2006). Online extra: Boeing's global strategy takes off. Business Week Online. Accessed March 13, 2006 at: http://www.businessweek.com/magazine/content/06_05/b3969417.htm.

Matlack, C. (2004). Boeing vs. Airbus: It's getting ugly. Business Week Online. Accessed March 13, 2006 at: http://www.businessweek.com/magazine/content/04_38/b3900083_mz054.htm.

A new pilot for Airbus. (2005). Economist, 377(8446), 64.

Sparaco, P. (2002). Airbus puts positive light on current, future business. Aviation Week & Space Technology, 156(11), 60-63.

The super-jumbo of all gambles. (2005). Economist, 374(8410), 55-56.