The beginning of flight was made possible by the Wright Brothers, who flew the very first plane in 1903 at Kitty Hawk. The historic occurrence was the first time that humans were able to create machines that were heavier than air and could carry a man[1]. Boeing was among the very first entrants in this sector of manufacturing aircraft that were used both for military services and civilian duties. The company was introduced in 1958 and went on to become highly successful in the field thanks to its strategic management as well as innovation. Airbus, on the other hand, was established in 1970 through a merger of governments, if one may say so. It was established initially under French law and was headquartered in Toulouse, France.
Commercial Aircraft Manufacturing Industry
In economics, different forms of markets merge to create industries that are made possible by individual firms. For this specific analysis on Boeing and Airbus, the market in focus is the oligopoly, which can be defined as one where domination is exercised by only a few firms. These firms, in turn, own a significant, if not all, of the market share of the industry. The commercial aircraft manufacturing industry is dominated by two companies currently, which would mean that it becomes a monopoly. Going into specifics when it comes to the oligopoly structure, the industry points to the definition of a duopoly, whereby two firms control the market. These two firms are Airbus and Boeing. In the subsequent section, I will show the market concentration of these two firms, but it's first prudent to understand the elements that qualify the industry as operating like an oligopoly.
One notable trait is the high capital investments that are required to get into the industry, making the barriers to entry quite high. An example ithat s the production of one Boeing 777 could run up to $10-12 billion, making it quite hard for potential entrants[2]. It even took a government consortium to come up with the Airbus manufacturing in 1967 because of the high capital requirements[3]. Secondly, the interdependence behavior that mostly characterizes an oligopoly. This is when firms join in ventures to create products together in the bid to remove competition.
Market Concentration and Market Share
For an oligopoly, the market share is divided among the participants in the market that join up to make 100%. However, in the duopoly, the two firms share more than 95% of the market[4]. In this market, the debate has been whether other small entrants should be brought into the picture, such as the Embraer of Brazil and Bombardier of Canada. The two firms have taken up positions within the Regional Jet Segment in North America. However, in the large commercial airplanes category, only Boeing and Airbus dominate. While gauging the exact market share can be quite daunting because of the different playing fields, it is quite clear that in the LCA segment, they take up the whole 100%.
Number of jetliners produced
The measure accounts for all the planes each company has issued after an order. It also includes the jetliners that have already been discarded and retired from commercial service. According to Statista, the number of Boeing orders that have been successfully placed from 2003 to 2015 totals 12191. Airbus, on the other hand, has had 13,759 units from 2003 to 2015[5]. These figures clearly show that Airbus in the new millennium has brought about significant competition with Boeing to the point of even clinching the extent of orders. In the new jumbo jet category, the two competitors encountered quite a rough year in 2016 by registering few orders. The Airbus A380 superjumbo ended the year 2016 without having any net orders, while Boeing’s 747 jumbo jets had 17 net orders[6]. More analysis has seen that this high number of jumbo sales by Boeing was a result of the plane carrying more cargo than passengers. The tussle for orders is on the rise in 2017, whereby as of May this year, Boeing and Airbus had delivered 56 and 60 commercial jets respectively. The difference is not as substantial as it was the case at the end of the year 2015, when the difference was 312, whereby Airbus clinched the top spot. When looking at the deliveries, Boeing has shipped 9,522 aircraft of the 737 family ever since it started production in the late 1960s[7]. Airbus, on the other hand, has delivered close to 7160 A320 aircraft since the company began its operations in 1988[8]. When the Boeing figures are filtered only to showcase the aircraft that were delivered from 1988 to March, the year Airbus started deliveries, we arrive at 8,016 units. Therefore, it comes as no surprise to see the small variance between the two companies in terms of deliveries on the same playing field.
Price Theory and Competition
It is almost certain that competition in any form of market will take prices to its focal point. However, in an oligopoly, firms tend to become price takers and not price setters because of their fields of play. As a result, price competition will be very minimal, if at all present. Boeing and Airbus fall into the duopoly category, meaning that they compete between the leader and the follower, or just agree with contractual understandings on things concerning price. Even with that in mind, it is different because of the levels of competition present regarding products. For example, the Boeing 737 and the Airbus A320 directly compete for both market share as well as sales. In 2016, the Boeing 737 Next Generation outsold its adversary, the Airbus A320 family, since being introduction in 1988. Even though in the past couple of years the Airbus A320 has been outperforming the Boeing 737, the two continue to foster a competitive relationship[9]. There is also the issue of categorizing aircraft in terms of their number of aisles.
Price theory models in the oligopoly industry are numbered because of the preferences taken by the participant firms. Since Boeing and Airbus belong to a duopoly, it becomes even more natural to base their pricing models on. One fundamental model is the Cournot model in microeconomics that suggests that two competing companies act independently when it comes to setting their individual prices. Each firm takes into account what it understands about the other and sets its output based on that assumption[10]. For Boeing, setting the price is first governed by the level of demand and its forecast. Secondly, the cost of production is also an important aspect as it helps determine whether the company is making profits or not. Bearing in mind the competition from Airbus, Boeing is keen on setting its price at a level that ensures familiar ground competition, because if it offers an extremely low cost, the nature of competition will cease to be healthy. As a result, the price setting is continuously updated to ensure that the planes are at a level that does not compromise the future. Airbus also uses the same form of pricing, which keeps its main competitor at bay. In this market, the maintenance costs are also a key factor when deciding the listing price and market price. The Cournot-Nash equilibrium is achieved when the level of output is somewhat between what a monopoly would produce and what perfect competition breeds. This balance is what sets the marginal costs that will be equated to the profit-maximizing output levels. A scenario to consider to understand the pricing models employed by both firms entirely is to envision a situation where one company decides to take up all the demand by offering lower prices. It means that the other business will have to lower its costs so as to ensure customers are drawn to its products. The first company will be operating at a level of merely breaking even, but will have more sales. The second firm will be operating at a loss because it lacks revenue from sales. It will decide to drop lower to at least catch up on sales. As a result, an unhealthy form of competition will be created, whereby the two firms will become bankrupt just because they lack a healthy kind of competition.
Elasticity of Goods
Both Boeing and Airbus have the commercial jets category as their primary avenue for revenue, so the point of focus on elasticity will be on it. One thing to note about elasticity is that it depends solely on the presence of substitutes. Airbus and Boeing products, for example, the A320 and 737, respectively, are close competitors, and buyers perceive them as close substitutes. Airlines only experience expense when it comes to the amount of fuel their aircraft use while flying. Bearing in mind that only Boeing and Airbus can produce aircraft for the airlines, it means that elements of price do not play a significant role in buying aircraft. Other things, however, come into play, such as the maintenance costs and expenses, such as fuel. This means that even if demand goes up, the two companies mostly compete for efficiency, which is highly valued by the airlines that offer the most demand. It is then accurate to claim that the elasticity of commercial jets is inelastic for both Boeing and Airbus. However, it is not perfectly inelastic because of the presence of substitutes since these firms produce competing products.
Competitive Pressures
Technology
When Airbus was introduced back in the 1970s, it sought to bring advanced technology to the field in its provision of aircraft. Today, the fight is still present between the two companies on which one will triumph the terms of technology. One such example is the use of composite materials in the construction of the craft bodies. The Boeing 787 was the first large airliner to use 50% composite in the body creation process[11]. This differs from the 53% used by Airbus A350[12]. Airbus is known for a more intentional approach in configuring more computer properties in their models. An example is the computer override system that gives more power to the craft itself in situations of overriding commands. Boeing, on the other hand, leaves that preference for individual pilots who are given the task of overriding processes. This is quite important because different airlines require different overriding channels, and this poses an excellent avenue for competition between the two companies.
Safety
In air travel, safety is quite important, so it comes into play a lot when consumers demand crafts. The 737 and A320 families boast of a good safety record, making it a tie. However, earlier families such as the Boeing 707, 727, and 737 and the Airbus A300 and A310 have had bruised safety records [13]. Even though the current state assures good safety for all the crafts, buyers tend to go deeper into the history books in determining what type of planes offer the best safety elements.
Production
Each company is expected to fulfill demand in the market that calls for timely deliveries that ensure quality and consistency. Boeing enjoys good production relations with Japanese companies such as Mitsubishi and Kawasaki, which form a significant percentage of their supply chain. So some production procedures for Boeing are facilitated by some of these alliances, making it possible for it to feed the Asian market, which is quite substantial. Airbus’s production, on the other hand, is mostly concentrated in the European region following its ties to the three founding European states. Even though it secured a production line in Tianjin, China, the company still relies heavily on its European assemblies[14].
References
Airbus. (n.d.). Historical Orders and deliveries 1974-2009.
Airsafe. (n.d.). Plane crash rates by model.
Boeing. (2008). Boeing: From the ground up.
Boeing. (2017). Orders and deliveries.
Gate, D. (2007, July 31). Airbus 350 Muscles in on the 777. Retrieved from Seattle Times.
Heppenheimer, T. A. (2001). A Brief History of Flight. New York: John Wiley & Sons.
Loury, G. C. (1979). Market Structure and Innovation. The Quarterly Journal of Economics, 395-410.
Marsh, G. (2008, January 5). Airbus takes on Boeing with composite A350 XWB.
Nasdaq. (2017). 20-year Market Outlook for Jetliners: Airbus vs. Boeing.
Reuters. (2017, September 20). Airbus opens China A330 plant amid market push.
Statista. (2017). Airbus and Boeing Aircraft Orders 2003-2006.
Tanaka, Y. (2001). Profitability of price and quantity strategies in an oligopoly. Journal of Mathematical Economics, 35, 409-418.
Thornton, D. W. (2007). Airbus Industrie. New York: St Martin's Press.
[1] Heppenheimer, T. A A Brief History of Flight. New York: John Wiley & Sons, 2001.
[2] Gate, Dominic. “ Airbus 350 Muscles in on the 777.” Seattle Times. 31 July 2007.
[3] Thornton, David Weldon. Airbus Industrie New York: St Martin’s Press, 1995.
[4] Loury, Glenn C. “Market Structure and Innovation”. The Quarterly Journal of Economics (1979): 395-410.
[5] Aircraft andBoeing: Aircraft orders 2003-2016.
[6] Airbus A380 superjumbo.
[7] “Orders and deliveries”. Airbus.
[8] Historical Orders and deliveries 1974-2009” Airbuss S.A.S
[9] 20-Year Market Outlook for Jetliners: Airbus vs. Boeing
[10] Tanaka, Yasuhito. “Profitability of price and quantity strategies in oligopoly.” Journal of Mathematical Economics 35 (2001): 409-418.
[11] “Boeing 787:From the ground up.”
[12] Marsh, George, “Airbus takes on Boeing with composite A350 XWB.” Materials Toda.5thth January 2008.
[13] “Plane crash rates by model” 15 December 2016.
[14] “Airbus opens China A330 plant amid market push” Reuters.
