Bloomberg News reports that Boeing Co. (NYSE: BA) set another sales record in 2007. While it's not yet clear whether Boeing sold more than its competitor, Airbus, the 1,413 commercial jets Boeing sold last year highlight the power of effective competitive strategy.
I'm in the middle of writing a book about Boeing and have found it fascinating to examine the competition between Boeing and Airbus. In the 1990s, Airbus decided that it could beat Boeing by building the biggest jumbo aircraft on the market. By contrast, Boeing -- which was then under pressure from Airbus -- listened to the airlines and heard them say that they were facing competitive pressure from low-cost, point-to-point airlines like Southwest Airlines Co. (NYSE: LUV) -- whose strategy I analyzed in Value Leadership -- and needed mid-range aircraft that were more fuel efficient.
The result was that Boeing introduced a very popular aircraft, the 787 Dreamliner, and Airbus produced -- after several big delays -- the Airbus A380 -- which has not done as well. It turns out that Boeing bet correctly on meeting airlines' changing needs. And since jet fuel is the second-biggest cost for an airline, Boeing benefited from oil prices creeping up to $100 a barrel. Meanwhile, the long range, jet-fuel guzzling A380 has been less appealing to many airlines.
The issues facing investors are:
- Whether Boeing -- whose stock trades 19% below its 52-week high -- can build enough 787 Dreamliners by the deadlines it's given to those customers; and
- Whether Boeing's announcement that it will sell fewer than 1,000 aircraft in 2008 is a negative surprise.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.
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Reader Comments (Page 1 of 1)
1-04-2008 @ 9:39AM
Tonny said...
Wow, the inaccuracies in this article are staggering.
You claim Boeing built the 787 as a competitive response for airlines facing challenges from Southwest and other low cost carriers? The 787 is an international, long range, mid-sized aircraft. Southwest doesn't fly anywhere outside of US and Mexico, the 787 has NOTHING to do with the competitive nature that airlines are facing from low cost carriers. Low cost carriers use airplanes like the Boeing 737 or Airbus 320 to do their flying.
Secondly claiming the Airbus 380 is a "jet fuel guzzling" aircraft only highlights your stupidity. The A380 is the most fuel efficient aircraft on the market, and bested the 747 from Boeing which is was meant to replace by lowering fuel consumption by almost 20%, while giving passengers more room and more comfort.
Thirdly, saying that Boeing's announcement of selling less than 1,000 aircraft next could be negative, you fail to mention that this year Boeing built 441 aircraft, and target building approx. 460 aircraft in 2008. Selling less than 1,000 aircraft would still mean that Boeing has booked over 2 full years additionally of production, on top of it's already overflowing order book that is full for almost 3/4 of a decade. In fact the wildly popular 787 isn't available for delivery if you bought one today until sometime in 2014 or 2015.
You claim you are "writing a book" about this industry? Have you spent more than 15 minutes doing any actual research or will your book be comprised of headlines from USA Today (aka the McPaper) of the past 4 years? Good grief!
1-04-2008 @ 5:31PM
Dave Crook said...
An amazing version of revisionist recent history. In 1996 Airbus announced they would build their super large transport the A380 after consulting with many of the world's major airlines to build what they wanted, but also to build what they (Airbus) also wanted; to break the Boeing monopoly of large aircraft profits.
Boeing responded by offering a larger 747. It was not successful.
Boeing then responded with the comic book sonic cruiser, essentially a hoax with maybe 10 % reality involved. It was interesting enough to keep plane buyers wondering about the future and perhaps not committing to Airbus planes. The sonic cruiser evaporated as quickly as it appeared.
Then Boeing offered the 787. It has sold very well. I am sure everyone hopes it will work.
Meanwhile, the A380 is finally in the air. Early reports say it is a magnificent aircraft from both operator and passenger points of view.
Airbus A380 sales projections over 25 years are 1200 aircraft. Lets round that to 1,000 units or 40 sales per year. They have sold about 200 units, a 5 year backlog. At $300 million per plane, even 800 sales is $24 billion in sales. (Yes there have been discounts)
Finally, it may be true that the A380 has also pushed Airbus to No. One in sales and production. By showing customers that they were continuing to invest and build the world's most advanced planes, customers would continue to buy other airbus planes, A320s, A330, A340s, and now A350s.
Unlike McDonnell Douglas whose MD80s sold well, they ran out of steam and folded without new products coming on line. Airbus has avoided this to produce a complete line of aircraft; headed by the incomparable A380.
Cheers! Dave Crook
1-04-2008 @ 11:57AM
ken said...
I would think Boeing made the decision to build the 787 based on business principles and listening carefully to it's customers, where in my opinion Airbus made it's decision based on a nationalistic idea of supremacy over Boeing, an ill advised turn of events it turns out. Today we see EADS shares have tumbled drastically and appear to be in a dangerous dive toward the bottom of the barrel. Airbus has many problems to face, not the least of which is the exchange rate, which makes every airliner sale a possible loss to the company.
Airbus has been poorly managed and interference from governments has hindered it's ability to function as a stand alone business, and the future looks just as bleak. Airbus in spite of huge orders this year is in serious straits, the A380 is still sucking huge amounts of capital, the A350 is yet to be finalized, the m400 military aircraft is months behind schedule, and looks to be getting worse.
To say the future looks uncertain for Airbus would be an understatement.
1-07-2008 @ 4:10PM
Rich said...
The A380 is "potentially" the most fuel efficient aircraft on the market. There is currently only one flying; Singapore Air's. With only 471 seats. it is not as fuel efficient as other aircraft flying today. The A380 could only be the most fuel efficient aircraft if it is configured for more seats. Remember most long haul aircraft fly at 80% capacity(377 passengers in the case of the A380). The A380 weighs 200 tonnes more than a 747. Corsair has a 747 with 587 seats . Also remember the A380 uses two landing slots. A 747 only uses one landing slot. So the A380 actually hurts airport capacity. British Airways A380 will only have 440 seats and the Quatas A380 will only have 450 seats.