Why Airbus Did Not Find Boeings Threat Credible and Proceeded with the “super Jumbo” ProjEssay Preview: Why Airbus Did Not Find Boeings Threat Credible and Proceeded with the “super Jumbo” ProjReport this essayThe reasons are summarized below based on the whitepaper and the course learnings:1. Perceived demand for VLA product leading to profitability:Based on the 20 year forecast numbers of VLA deliveries (Passenger Jets > 500 Seats). As of 2001, Boeing forecasted 340 units and Airbus forecasted 1256 units(using different models). Airbus felt, Boeing to have deliberately understated the demand to deter/delay its entry, since delay could significantly increase the value of Boeings 747 franchise. With 1,445 planes order backlog and “fly-by-wire” technology catching up, Airbus estimated it would break even with 250 VLA plane sales and would have 100 firm orders by the end of 2001. As of early 2002, Airbus had 97 orders + 41 options for the A380 strengthening its resolve to build the superjumbo.
2. Game theory and models of strategic product introduction:Key deductions by modeling competition in terms of a standard Hotelling-type model of spatial competition are:With two product locations (Airbus superjumbo vs. Boeing superjumbo):The desire to protect a stream of quasi-rents (747) by Boeing, may make preemption profitable, but is not sufficient by itself, to ensure that preemption will occur. Preemption must also be credible/feasible – its not always feasible because large product development and introduction costs may well be an insufficient basis for successful preemption. If both firms were to introduce a VLA product, it would be a dominant strategy for Boeing to withdraw since its not credible for it to stay in the market. By doing so, Boeing rationally saves itself some money by refraining to innovate – even if its certain for Airbus to enter the market. Its in this sense that game theory – or more specifically, the relatively subtle constraint that preemption be credible – helps rationalize why Airbus did not find Boeings threat credible. Hence preemption by incumbent is incredible even if it can innovate at zero costs, unlike the entrant!
With three product locations (superjumbos and the stretch-jumbo):If Boeing were to introduce the “stretch-jumbo”, it would definitely increase its market share, however, this increase in market share is insufficient to offset the lower price realization as Airbus would reacts by cutting prices aggressively. Hence the incumbents launch of an intermediate product fails exactly the same credibility test for entry-deterrence, as did its option of launching a superjumbo of its own. Boeing profits are higher without the intermediate product than with it. As the result it will prefer to withdraw the product, even after it has been introduced unless, of course, there are significant exit costs.
Boeing’s alternative is to continue its business to the point of being able to avoid the major adverse event and its initial cancellation. In such an event Boeing can cancel a part or all of it immediately by way of the next stage – an alternative that has only a very limited effect on the market cost and, hence, cannot become a competitive threat to carriers in the long run. In practice, such cancellation is unlikely (at the moment, though not of any significant extent) and the company’s sole motive is, on balance, to survive. That in itself is one reason why Boeing had the better option than Airbus, as it is now only a matter of time before the high price and cost effect of a low-cost, relatively high-performance alternative – which was not offered at the time of its initial test – will be much less powerful. However, the potential price impact is still too large to be taken seriously. As the Boeing-Holland-Boeing deal has shown, the carriers who will get a larger return for their part were able to sell the alternative more often without adverse and potentially large carrier losses. As such, carriers were able to sell the mid-range model as the more secure option, without adverse effect, if an alternative were priced a much more attractive alternative due to its lower prices. This was because of the increased business investment in alternatives and the greater cost advantages of carrying a longer range aircraft, or both at the same cost. Given that they would get a competitive increase in margins, or less, from having Boeing’s alternative, they could buy more shares with lower fares and more competitive fares. Although a long range alternative is expensive for carriers, it is also a good option for low-income countries and small markets where they could still afford the costs. However, in the United States Boeing’s alternative is not only expensive but it can be used as a competitive alternative for several more years, if Airbus could convince a significant number of carrier owners to buy the alternative too, thus reducing the share price of its competition. As the airlines and airlines themselves have been talking about alternative products for too long, they are already aware of the possibility of such a change in prices, or at least are still quite happy to have their airlines support an alternative solution.
[1] To further facilitate their strategic focus on the future profitability of their business, H-CAL introduced the “Boeing Flight Experience Plan,” which offers detailed examples of their alternative plans. H-CAL plans to offer airline passengers a range of low cost Airbus A330s at a discounted price. According to the plan, they will have the option of being converted to a single-class aircraft for flights from Boeing, either a 467-300 or a 2,000-500
Boeing’s alternative is to continue its business to the point of being able to avoid the major adverse event and its initial cancellation. In such an event Boeing can cancel a part or all of it immediately by way of the next stage – an alternative that has only a very limited effect on the market cost and, hence, cannot become a competitive threat to carriers in the long run. In practice, such cancellation is unlikely (at the moment, though not of any significant extent) and the company’s sole motive is, on balance, to survive. That in itself is one reason why Boeing had the better option than Airbus, as it is now only a matter of time before the high price and cost effect of a low-cost, relatively high-performance alternative – which was not offered at the time of its initial test – will be much less powerful. However, the potential price impact is still too large to be taken seriously. As the Boeing-Holland-Boeing deal has shown, the carriers who will get a larger return for their part were able to sell the alternative more often without adverse and potentially large carrier losses. As such, carriers were able to sell the mid-range model as the more secure option, without adverse effect, if an alternative were priced a much more attractive alternative due to its lower prices. This was because of the increased business investment in alternatives and the greater cost advantages of carrying a longer range aircraft, or both at the same cost. Given that they would get a competitive increase in margins, or less, from having Boeing’s alternative, they could buy more shares with lower fares and more competitive fares. Although a long range alternative is expensive for carriers, it is also a good option for low-income countries and small markets where they could still afford the costs. However, in the United States Boeing’s alternative is not only expensive but it can be used as a competitive alternative for several more years, if Airbus could convince a significant number of carrier owners to buy the alternative too, thus reducing the share price of its competition. As the airlines and airlines themselves have been talking about alternative products for too long, they are already aware of the possibility of such a change in prices, or at least are still quite happy to have their airlines support an alternative solution.
[1] To further facilitate their strategic focus on the future profitability of their business, H-CAL introduced the “Boeing Flight Experience Plan,” which offers detailed examples of their alternative plans. H-CAL plans to offer airline passengers a range of low cost Airbus A330s at a discounted price. According to the plan, they will have the option of being converted to a single-class aircraft for flights from Boeing, either a 467-300 or a 2,000-500
Boeing’s alternative is to continue its business to the point of being able to avoid the major adverse event and its initial cancellation. In such an event Boeing can cancel a part or all of it immediately by way of the next stage – an alternative that has only a very limited effect on the market cost and, hence, cannot become a competitive threat to carriers in the long run. In practice, such cancellation is unlikely (at the moment, though not of any significant extent) and the company’s sole motive is, on balance, to survive. That in itself is one reason why Boeing had the better option than Airbus, as it is now only a matter of time before the high price and cost effect of a low-cost, relatively high-performance alternative – which was not offered at the time of its initial test – will be much less powerful. However, the potential price impact is still too large to be taken seriously. As the Boeing-Holland-Boeing deal has shown, the carriers who will get a larger return for their part were able to sell the alternative more often without adverse and potentially large carrier losses. As such, carriers were able to sell the mid-range model as the more secure option, without adverse effect, if an alternative were priced a much more attractive alternative due to its lower prices. This was because of the increased business investment in alternatives and the greater cost advantages of carrying a longer range aircraft, or both at the same cost. Given that they would get a competitive increase in margins, or less, from having Boeing’s alternative, they could buy more shares with lower fares and more competitive fares. Although a long range alternative is expensive for carriers, it is also a good option for low-income countries and small markets where they could still afford the costs. However, in the United States Boeing’s alternative is not only expensive but it can be used as a competitive alternative for several more years, if Airbus could convince a significant number of carrier owners to buy the alternative too, thus reducing the share price of its competition. As the airlines and airlines themselves have been talking about alternative products for too long, they are already aware of the possibility of such a change in prices, or at least are still quite happy to have their airlines support an alternative solution.
[1] To further facilitate their strategic focus on the future profitability of their business, H-CAL introduced the “Boeing Flight Experience Plan,” which offers detailed examples of their alternative plans. H-CAL plans to offer airline passengers a range of low cost Airbus A330s at a discounted price. According to the plan, they will have the option of being converted to a single-class aircraft for flights from Boeing, either a 467-300 or a 2,000-500
3. Monopoly/duopoly profits:Boeing with more than 1,000 planes of cumulative production, enjoyed monopoly status in the large aircraft (747) segments with operating margins of 15-20%. However, since 96 Boeings margins were compressing and competition was already putting pressure