Examining the Markets
The following is a detailed examination of the current trends affecting the U.S. airlines industry. It shows both the positive and negative impact of such trends on the two types of airlines that currently dominate the U.S. aviation industry, namely legacy carriers (large airlines such as Delta, American Airlines, U.S. Airways) and Low Cost Carriers (Southwest and JetBlue). The reason such an examination has been conducted is due to the different attributes of the A380 and 787 in terms of how they cater to distinct consumer markets. As such it is expected that through the presentation of the following data set a clearer picture can be obtained regarding the risk factors both Boeing and Airbus will encounter in the face of such trends.
Risk Factors and Main Stakeholders in the U.S.
Risk Factors and Main Stakeholders in Asia
One of the more interesting pieces of information presented by the case study is its statement indicating that China will lead growth in air travel within the upcoming years. This is actually quite true to a certain extent given the growth of the Chinese economy as of late and the subsequent increase in wealthy Chinese tourists that have taken an interest in air travel (Rebollo & Baidal, 2009: 559-570). What must be understood though is that upon further investigation into the current state of the airline industry it was seen that it wasn’t just China that will be a market leader in air travel but rather the entire Asian region (Waguespack, Rhoades & Tiernan, 2007: 59-71). As of late, the current economic downturn has affected local markets to such an extent that sales of not only U.S. based companies but of European based companies as well have been sagging for the past 3 years. As the U.S. economy has been estimated to barely reach a 1% growth rate by the end of 2011 with an uncertain growth rate in 2012 this signifies a concurrent decline in consumer spending making the future of both U.S. and European economies uncertain in light of the possibility that consumer spending within both regions may continue to be in decline for the next 3 or 4 years (Poon & Waring, 2010: 197-213). Despite this grim economic forecast the economies of Asia (particularly the Philippines, China, Japan, India, Malaysia, and Singapore etc.) have actually experienced steady and spectacular economic growth which has translated into increased consumer spending within the region within the past 4 years. This has actually been good news for the airline industry due to the correlation between high economic growth and subsequent increases in the number of passengers on airlines.
Based on the article “From Large to Small” it can be seen that there is a current predilection within the Asian region for utilizing wide bodied twin engine aircraft such as the 787. In fact studies indicate that this is a trend that began at least five years ago wherein there was a dramatic shift in the region towards planes with small frames. The reason behind this can actually be connected to the rise of several Asian budget airlines within the region whose business models emphasized affordability rather than luxury. Not only that, as the effects of globalization within the Asian region continues to expand various regional hubs have developed which service a variety of far flung destinations resulting in budget carriers being the plane of choice for travel to such areas. As a result of such events budget airlines within the Asian region have outstripped the growth of network carriers resulting in more airports having structural frames designed for receiving planes like the 787 rather than massive monstrosities like the A380. When examining the current Asian market it can be seen that wide body two engine planes dominate a large percentage of the airplanes currently being utilized. As mentioned earlier this is due to the rise of various low budget airlines that have grown within the past five years. As such the entry of the much larger A380 into this current market sparks several questions regarding compatibility with several of Asia’s regional airports. On the other hand what must be taken into consideration is the fact that in terms of long range capability and overall passenger accommodation the A380 far outstrips the 787 but in terms of fuel efficiency and compatibility with Asia’s regional airport infrastructure the 787 would be a better contender. On the other hand other examinations of the A380 and its place in the future of aviation indicates that as the number of airline passengers per year in the world reaches an estimated 16 billion within the next 40 years this is indicative of massive growth potential. Utilizing planes such as the 787, while affordable, will definitely set the some airline companies back in terms of being able to handle increased passenger capacity and as such would cause the company to lag behind its rivals that have focused on increased capacity rather than fuel efficiency and compatibility with airport infrastructure (O’Donnell, 2004: 26-30).
Different investment strategies
There are four characteristics that are in demand within a technology oriented enterprise, namely: high market responsiveness, fast developments, low cost, and finally high levels of creativity, innovation and efficiency. It is in this regard that the investment strategies of Boeing and Airbus were influenced and as such will be discussed in this section of the study. First and foremost what must be understood is that there are distinctly two types of carriers within the aviation market today: legacy carriers and low cost carriers (Beirne, 2004: 30). Legacy carriers are composed of some of the oldest airlines within the industry today or are a result of subsequent mergers and acquisitions over the past 2 decades (ex: American Airlines, Delta, U.S. Airways, Lufthansa etc.) (Blurring the boundaries, 2011: 58). Low cost carriers on the other hand have actually come about rather recently and are defined by their no frills, low cost, and above all lean business models that emphasize savings for clients (Chacon & Mason 2011: 271-290). While LCs (Legacy carriers) continue to be the dominant form of travel, LCCs (low cost carriers) have been noted as continuing to eat away at their market share due to recent trends in consumer purchasing behavior wherein affordability has been at the forefront of their purchasing decisions given the nature of the current financial environment (which is still reeling from the 2008 financial crisis) (Chia-Mei, 2009: 237-256). LCs have attempted to respond to this shift by developing their own low cost alternative which lasted between 2001 to 2007 with various incarnations of LCCs under the legacy carrier brand however these carrier failed to be competitive enough compared to traditional LCCs since they were still under the business model of LCs and thus were subject to the same spiraling costs (Graham & Vowles, 2006: 105-126) (Chung & Whang, 2011: 1335-1340). Coupled with the current trend in the development of a variety of regional hubs and small airports in not only the U.S. but in other markets such as Asia (the Hub and Spoke system) this created the potential for LCCs to further expand their markets since travel between different hubs and spokes was more cost efficient and cheaper for passengers when utilizing LCCs as compared to LCs (Gray, 2008: 22).
Before proceeding any further it is necessary to first define the hub and spoke system so as to give a clearer understanding to the uninitiated. The hub and spoke system is based on the concept of ancient steering wheels seen on ships wherein there is a central hub for guidance with various pieces of wood connected to spokes located all around the hub in a roughly circular formation which were used to steer the ship (Greer, 2009: 779-789). In the case of airlines the hub in question is actually a large capacity airport comparable to JFK in the U.S., Heathrow in the U.K. or the central hub of Qatar airlines in Qatar which acts as a central terminus for airplanes coming from far of destinations. The spokes on the other and are smaller regional airports where there are fewer passengers and have far less capacity as compared to the hubs. It is usually the case that passengers from various spokes (the regional airports) are connected via flight routes to the hub and from there are transferred to other airplanes for farther distances (Hamlin, 2011: 48). Unfortunately travel between regional airports to the main hubs was costly for legacy carriers given the short distances, high fuel costs and the fact that there were fewer passengers per plane. In order to lower their cost of operations in response to increased fuel and maintenance costs several legacy carriers have in effect “given up” short term routes which have few passengers in between and have opted to instead focus on a strategy devoted to long distance travel instead resulting in travel destinations in between hubs instead of from the main hubs to smaller regional airports (Kingsley-jones, 2011: 19). Taking advantage of this, various low cost carriers took over these routes due to their ability to operate far more efficiently resulting in an agreement between carriers wherein low cost carriers would in effect dominate the regional market with legacy carriers dominating the long distance travel routes. It is based on this particular market that the decisions made by Boeing and Airbus to develop the 787 and the A380 become all the more evident. First and foremost, it must also be noted that the various studies examining the airline industry have indicated that that single highest cost for an airline is purchasing an airplane and as such it is unlikely that legacy carriers will be able to immediately replicate the operational strategy of LLCs given the cost of new planes and the fact that many of today’s carriers are trying to reduce costs whenever possible. This is evidenced by the fact that the attempt by the LCs to replicate the strategy of the LCCs failed by the end of 2007 since they in effect couldn’t afford the type of planes required for their strategy to actually work. What must be understood is that the secret behind the success of low cost carriers is the fact that they use newer, smaller, composite materials planes that were far more fuel efficient as compared to legacy carriers whose planes were older, bulkier and were composed of heavier materials thus increasing the cost of fuel. In fact it can be seen that the business strategy of low cost carriers actually revolved around the use of smaller and more fuel efficient planes since this in effect allowed them to travel in between a variety of regional hub destinations without succumbing to the spiraling fuel and maintenance costs that is rampant among legacy carriers.
One of the interesting aspects of the current airlines industry is the increasing rivalry between legacy and low cost carriers and the attempts of low cost carriers such as Jetblue and Southwest etc. to expand into longer distance domestic routes within the U.S. Research data from Boeing has shown that there has been a significant rise in orders for twin engine 787s in several markets including the U.S. The reason behind this sudden upsurge has been indicated as being the direct result of the development of not only an increasing amount of regional hubs within Asia but in the U.S. as well (Lennane, 2006: 34-37). One of the unique aspects of the 787 is that not only is it well suited for local domestic flights between short distance flight routes but it actually also capable of long distance flights. As such, the reason behind this sudden upsurge in sales is connected to the subsequent expansion of low cost carriers that see the fuel efficiency of the 787 wide bodied aircraft as one of the best means of entering into the main stream long distance flight market in order to rival legacy carriers. The reason why this particular strategy would be effective is due to the fact that many of the legacy carriers at the present have been reducing the amount of flights to particular routes in order to save on fuel and operational costs (Ko & Hwang, 2011: 391-405). As indicated by various studies one of the main issues with new carriers entering into the main stream market is the strangle hold many legacy carriers have over landing slots and departure gates in many of the regional hubs within the U.S. As such carriers reduce operations for cost savings the end result is the opportunity for local low budget carriers to assume these vacated slots and offer passengers low cost rates for tickets which the low cost carriers can afford due to higher fuel efficiency of their planes (Lin, 2012: 637-651). From 2009 to 2012 it can be assumed that the evolution of the rivalry between LLCs and Legacy carriers will intensify as a direct result of the factors that have been indicated. This may in fact lead to a potential price war in the future with LLCs gaining the ability to outstrip legacy carriers due to them having better planes (Leonard, 2005: 379-382). In response to this legacy carriers have focused more on business and first class passengers due to the higher fees derived from such customers. Taking this into consideration it could be possible that one potential evolution of the current situation is a separation of the types of passengers that particular airlines cater to with LLCs catering to ordinary consumers that are looking to save on their fairs while legacy carriers on the other hand could focus on developing better services and amenities and focus more on business and 1st class passengers. Taking all the factors that have been mentioned into consideration the investment strategies of both Boeing and Airbus in the development of the 787 and A380 becomes all the more evident. Through the development of planes that are more fuel efficient Boeing is looking to capitalize on the growing low cost carrier market which focuses on utilizing fuel efficient planes in order to decrease operational costs. Airbus on the other hand is looking to capitalize on the fact that in response to the growth of LLCs, legacy carriers have now opted for a system that involves hub to hub travel focusing on large amounts of business class and first class passengers due to the greater amount of money derived per passenger as compared to average passenger rates. With the size and amenities available on the A380 such a strategy can definitely be implemented to a great degree of success.
Catering to Business Class Passengers
Based on data from various studies that have examined the airline industry within Asia it can be seen that the primary consumer segment that legacy carriers are trying to target for entry into the Asian market are the business class passengers (Maldutis, 2004: 66). Taking this into consideration it can be seen that the A380 with its far more spacious interior and its ability to accommodate more amenities by virtue of its size makes it an attractive option for catering to business class clientele. The interior of the 787, while large, is still quite small when compared to the interior of the A380 and as such can have only limited amenities in comparison (O’Leary, 2007: 50-54). On the other hand interior modifications can be made on the 787 to fit the desired amenities that the company ordering may require however this of course sacrifice the number of people that can be seated.
It must be noted though that the recent financial crisis has negatively affected carriers in such a way that many are reluctant to shift into the A380 model. Issues such as cost reductions, maintaining current fleet status as well as the practicality of using such aircraft were taken into consideration and as such delays in their construction were actually welcomed. While it may be true that sales for the A380 have increased within the Middle East and Europe the fact remains that the Asian markets which legacy carriers are trying to expand into call for another approach rather than the A380 at the present (Maldutis, 2004: 66). When examining the various factors that have been shown in this paper so far it can be seen that focusing on the A380 at the present would be a terrible idea for carriers attempting to expand into Asia due to problems related to overall structural compatibility with regional airports (Stapleton, 2008: 1). On the other hand this is not to say that A380s should not be used at all, Narita airport for example has a sufficient enough infrastructure to accommodate the A380 however this is not indicative of other airports within the Asian region which have far smaller plane capacities.
Strategic Options
The airline industry can proceed under two potential strategies when examining what particular type of plane to purchase given a particular situation:
- Since Legacy carriers places an emphasis on business class passengers the larger space on an A380 would enable far more spacious accommodations as compared to the 787 and would enable the airline to seat far more business class passengers (Private route for legacy carriers, 2011: 7).
- The 787 is a far more fuel efficient and cost effective plane which is a popular model currently utilized within the U.S. and Asian. By utilizing this popularity low cost carriers could possibly expand to more regional hubs and locations in the future due to the fact that their airports could easily accommodate the 787 with few problems, if any at all.
Managing Risk Factors
Developing New Business – Innovations and Applications
Various studies indicate that research and development into new ways of producing and utilizing technology is one of the practices most often seen in technology intensive enterprises. This is due to the fact that technology has as of late been under a constantly accelerating level development and as a result has enabled new players to enter into markets whereas in the past distinct barriers to proper entry would have been present (Flottau, 2005: 40). As such failure to sufficiently innovate along with new technological trends and products can be thought of as a failure on the part of the managerial practices at a company since being able to anticipate trends and use them to either reach greater market penetration or keep the company relevant to consumers is a necessity in today’s technology intensive market economy. It is based on this that it can be seen that the development of new business approaches based on current trends in technology as well as innovating current business practices to take into account new consumer trends that have developed as a result of technological innovation as well is an important practice that technology-intensive enterprises should do in order to continue to stay relevant. Taking into consideration the diverging trends in the airline industry involving the focus of legacy carriers on 1st and business class customers while low cost carriers focus on customers on a budget it can be seen that one way in which either Boeing or Airbus could sufficiently innovate themselves in order to prevent being trapped into a particular customer segment is to offer alternatives for either LCCs or LCs. This could come in the form of Boeing offering a similar concept to the Airbus A380 while Airbus on the other hand could offer something similar to the 787. By doing so this prevents the company from potentially collapsing should the airline industry experience a subsequent shift wherein one type of plane is preferred over the other instead of the balance that can be seen in the present.
Financial Appraisal
With a total of 851 orders for the Boeing 787 with each unit costing $150 million it can be stated that the 787 has been a financial success for the company given its focus on providing aircraft to low cost carriers (De Neufville, 2008: 35-68). As indicated by various case studies, consumers continue to dictate the way in which airlines operate with greater numbers of passengers resulting in better situations for the industry
(Fageda, Jiménez & Perdiguero, 2011: 658-669). Studies such as those by Fageda, Jiménez & Perdiguero ( 2011) indicate that within the next several years the amount of passengers using airlines is expected to triple, as such it can be expected that buyer power will continue to be an important influence in the airline industry just as it was before (Fageda, Jiménez & Perdiguero, 2011: 658-669). Combined with indicators that there will be a subsequent growth in regional airports in both Asia and the U.S. it can be expected that various low cost carriers will subsequently expand to meet the demand resulting in better prospects for Boeing regarding its sale of 787s. It must also be noted that while various economists have stated that the U.S. economy is recovering and that it is likely that there will a significant increase in passengers within the next 50 years the fact remains that the period of 2009 to the present is marked with a significant degree of financial inability especially when taking into consideration the possible ramification of the European Debt Crisis on the American economy since Europe acts as America’s second biggest market. As such it is likely that within the upcoming years should the global economic situation continue to stagnate more people will opt to use low cost carriers for their travelling needs which would result in more sales of the 787.
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