By: Paul M. Finnegan

Purpose Today, Boeing and Airbus are the world’s two biggest aircraft makers. They have an oligopoly on all commercial aircraft of 100+ seats. The question is how the competition will change in the future, if one may lose, or if more players enter the game… By looking at historical interaction and current data, a projection can be made

Background Airbus began in 1970 by German and French Governments. Later Spain and UK joined. Airbus benefited tremendously from production subsidies and debt-write offs, and grew to be one of four competitive firms by In 1992, US and EU made an agreement to reduce subsidies but allowed some. This sealed the fate of the two other companies and left Boeing and Airbus Huge barriers to entry in industry. Boeing 777- $14 billion, 787- $10+, Airbus A380-$14+

Three Games Pricing- Boeing and Airbus are constantly adjusting prices in order to gain market share and/or make profits. They compete in all three aircraft divisions(small, medium, large) R & D- The companies are always analyzing the future market and making massive, long-term bets on their interpretations Trade War- Since Airbus began, the two have viciously attacked each other for their subsidies. Airbus claims Boeing is subsidized by US defense, and Boeing claims Airbus gets production subsidies.

Pricing (Large Aircraft Pricing)Airbus High SaleFair SaleBad Sale High Sale$906Θ, $906Δ $453Θn+1 -.1θn, $0 +.1δn$906Θ n+1 -.2θ n, +.2δ n BoeingFair Sale $0 +.1 θn, $453Δn δn$453Θ, $453Δ$453Θ n+1 -.1θ n, $0 +.1δ n Bad Sale $0 +.2 θn, $906Δn δn$0 +.1 θ n, $453Δ n δ n 0, Dollars ($mil) on data from 2004 small= $76 medium= $87.5 Large= $101 Θ 0 + θ­ 1 + θ 2 +…+θ n = Θ n+1 Large has π possible of $453 ($101 x.1 x 800 x.056) Medium has π possible of $784 ($87.5 x.2 x 800 x.056) Small has a π possible of $1872 ($76 x.7 x 800 x.044)

Pricing Historically, Airbus was able to gain a considerable market share from “bad sales”. The philosophy to bring in customers and then encourage “fleet commonality” hurt Boeing in the 1990’s In 1997, Boeing lost money because it could not outlast the slimmer Airbus and its “bad sale” pricing encouraged a demand level which it could not produce. The result was billions in delay fees. Future: The future looks as if the trend of pushing towards bad sales, both bleeding, and then restoring to fair sales will continue with little advantage to one side relative to the other. “High Sales” are not likely since they have never existed and there is little trust between the two companies.

R & D New SmallNew MediumNew LargeDerivative Small Derivative MediumDeriv Large New Small (1-(β+λ))/2, (1- (β+λ)) /2 (1- (β+λ))/1.66,β/1.66 (1-(β+λ)) /1.66, λ/1.66 (1-(β+λ)) /3,1- (β+λ) / 1.5 (1-(β+λ)) /1.66, β / 1.5 (1-(β+λ)) /1.66, λ / 1.5 New Medium β/1.66,(1- (β+λ))/1.66β/2, β/2β/1.66, λ/1.66 β/1.66, (1- (β+λ))/1.5 β/3, β/1.5β/1.66, λ/1.5 New Large λ/1.66,(1-(β+λ)) /1.66λ/1.66,β/1.66λ/2, λ/2 λ/1.66, (1- (β+λ))/1.5 λ/1.66, β/1.5 λ/3, λ/1.5 Derivative Small 1-(β+λ) / 1.5, (1- (β+λ)) /3 (1-(β+λ))/1.5, β/1.66 (1-(β+λ))/1.5, λ/1.66 (1-(β+λ))/2, (1- (β+λ)) /2 (1-(β+λ))/1.5, β/1.5 (1-(β+λ))/1.5, λ/1.5 Derivate Medium β / 1.5, (1-(β+λ)) /1.66 β/1.5, β/3β/1.5, λ/1.66 β/1.5, (1- (β+λ))/1.5β/2, β/2 β/1.5, λ/1.5 Derivative Large λ / 1.5, (1-(β+λ)) /1.66λ/1.5, β/1.66λ/1.5, λ/3 λ/1.5, (1- (β+λ))/1.5λ/1.5, β/1.5λ/2, λ/2

R & D Poor market predictions and their pursuit in R & D kills companies. Lockheed and McDac. Boeing made a huge gamble on the 747; there was little initial demand and the technology for the engines necessary didn’t exist when the product was launched Airbus and Boeing have made different R & D bets. Both see a tripling in air travel over 20 years. Boeing sees only 33% being medium-large, while Airbus sees 50%. Future: R & D game more symmetric than in past (favored Airbus). A380 and 787 were the opposing bets at the start of this decade, and Boeing very clearly made the better one (with efficiency, LAX, 747-8) at present. Thus, more R & D capital to fight in small segment

Trade War Get Domestic Subsidy Attack Subsidy, no WTO action Attack Subsidy in WTO, enforceNeutralConcede a subsidy Get Domestic Subsidy.1,.1.40, 01,0.45,.1.5,.2 Attack Subsidy, no WTO action0,.400, 0.5,.5.25,.2.25,.5 Attack Subsidy in WTO, enforce0, 1.5,.52,20,.750,.1 Neutral.1,.45.2,.25.75,0.2,.2.4,.1 Concede a Subsidy.2,.5.5,.25.1, 0.1,.4.3,.3

Trade War Airbus and Boeing are national assets Constant battle to eliminate subsidies on opponents side in order to gain more foreign exchange earnings, high paying jobs At points when one side feels the most threatened, WTO threat becomes more and more possible Currently in the WTO Attack on both sides, and the ruling will probably be granted to both. They probably won’t enforce the ruling, however (Bombardier and Embraer). Thus, same cycle as before with very rare concessions.

Future Competitors There is a very low probability of any future entrants unless a government is willing to lose a tremendous amount of money over many years for a chance of survival against Boeing and Airbus. Airbus and Boeing can easily under price one segment and make up for it in the other two in order to kill a small aircraft maker. R & D would involve all three segments to avoid this China only benefits from low-cost but fails everywhere else, and Boeing and Airbus are starting to utilize Chinese production. Japanese could do it, but their business culture is risk-averse, also pro US. Russia also has potential, but has shown no strong desire.

Conclusion Boeing and Airbus will continue to have cyclical pricing from fair to bad and back again, limiting their own profits, but keeping out competitors. In R & D, freer trade makes R & D more profitable to competitors, but there are still huge barriers to entry. Boeing has the advantage in this at present. In the Trade war, Airbus may still have a slight advantage, but it is really just a lot of posturing and words due to fear. Finally, no company in the near to medium future has any real shot at penetrating the 100+ aircraft industry. Boeing and Airbus both in it for the long term, exact market shares aren’t certain, but airliners will not let either company become too weak out of self interest.