Boeing/Airbus Case Write Up
Competition in the Commercial Aircraft Business
With only a few large companies across the globe (Boeing, MD, and Airbus), the commercial aircraft industry essentially exhibits the qualities of an oligopolistic competition with intense rivalry. Here is an analysis of competition in the commercial aircraft business using Porter’s Five Forces.
Figure 1: Porter’s Five Forces Applied to Aircraft Industry Barrier to entry: - High barriers to entry, to a certain extent help understand the risks involved in operating in the aircraft industry.
1. Initial Capital Requirements: - Huge initial development period and very high investment costs, tooling costs, and WIP are necessary even before the company starts
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It could almost be viewed as a power game between governments.
4. Sunk Costs: - Big sunk costs. It is difficult to exit from the industry. Surviving and beating competition is the only way to do business.
Airbus and A380: Risks Involved and Sensitivity Analysis
Airbus was planning to introduce the A380 in direct competition to Boeing 747 to compete in the large aircraft sector. The rivalry between Airbus and Boeing was already intense. Boeing’s market share reduced from 70% in 1974 to 45% in 1990 while Airbus’s market share had increased from 1% to 34% during the same time (Exhibit 5). Encouraged by this increase in market share, Airbus was contemplating the introduction of A380. Development of new product line is extremely expensive in the Aircraft sector. Following is a quantitative analysis of the project to calculate the risks involved in introducing a new line of Aircrafts.
Please refer to the attached excel file for NPV and sensitivity analysis. All assumptions are stated in the excel files.
Four scenarios are examined and the following is the summary of results for each of them.
Scenarios Discount Rate11% Discount Rate 6%
Basic NPV Analysis $ (2458.71) $ 1927.24
Decrease in sales price to $180 million $ (3366.54) $ 31.74
Increase in sales volume to 16% $ 189.32 $ 8633.58
Decrease in sales volume to 8% $ (3505.71) $ (647.00)
Decrease in Profit Margin to 20% $ (3457.32) $ (227.64)
• The most glaring conclusion that can
Bombardier (BBD) business has evolved from the early years of snowmobile manufacturing to a diversified business in the transportation industry. Now, more revenue comes from its aerospace division in comparison to recreational products and even transportation. BBD wanted to expand its transportation division (BT) and had recently concluded the negotiation of Adtranz, a company twice the size of BT. Using the Strategic Analysis Framework, below is the rationale to justify the acquisition of Adtranz for BBD.
The purpose of this article written by Jon Ostrower is to inform the public of the changed Boeing is making to the current pension and retirement plans of its employees. The article states, “Boeing Co., following other U.S. companies moving away from traditional pension plans, said Thursday that it would freeze the pension benefits of more than 68,000 nonunion employees, and will shift those workers to 401(k) retirement-savings plans, starting in 2016” (Ostrower, 2014). The change from a prior pension plan is directly associated with incurring costs for the company to continue to pay employees retirement after they have left the workforce. Ostrower explains the statistics of company’s who currently provide pension plans and explains the reasons
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LabCo is a construction firm that customizes and manufactures large, industrial machinery and equipment and sell to its customers. Its customers include Aerospace and Transport Planes industry. LabCo negotiates a contract with its customers on either a fixed-price or cost-plus basis. The company 's accounting policy to recognize revenue outlines that revenues and fees are recognized using the percentage-of-completion method, which is based on contract costs incurred to date compared with total estimated costs at completion. The other policy that they use is the completed-contract method, which is used when reliably dependable estimates of the total costs to be incurred under a specific contract cannot be made.
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