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9-707-447REV:NOVEMBER15,2013RAMONCASADESUS-MASANELLERICHALEXANDERVOIGTJORDANMITCHELLAirbusvs.Boeing(A)Inthesummerof1992,thesamequestionlingeredthroughouttheexecutiveranksofBoeingandAirbus:Woulditmakesenseforbothcompaniestojoinforcestoinvestigatethepossibilityofaverylargecommercialtransport(VLCT),otherwiseknownasasuperjumbo?Whileitsconfigurationwasnotyetfullydetermined,itwasestimatedthataVLCTwouldholdbetween550and800passengersandwouldsellforbetween$150millionand$250million.Ifdeveloped,theVLCTwoulddwarfthelargestplanecurrentlyavailable—Boeing’sfamous747.Recently,inJuly1992,Airbushadshockedtheindustrybywinningalucrative100-planeleasingdealwithlongtimeBoeingcustomerUnitedAirlines.Also,BoeingandAirbuswerebattlinghead-to-headinanattempttosecureordersfortheirnewlydesignedlonger-range,medium-sizedplanes—Boeing’s777andAirbus’sA340.Amidthegruelingcompetition,U.S.andEuropeangovernmentshadfinallyendedasix-yeartradedisputeresultinginacapongovernmentsubsidiesinaircraftmanufacturing.Now,bothcompanieswereeyeingthesuper-jumbomarket.BoeingandAirbushadbothbeenshoringupinterestfrompotentialJapanesepartnerstocontributeresourcesforthedevelopmentofasuperjumbo.Atthesametime,thethirdmarketplayer,McDonnellDouglas,wasbandyingaroundthepossibilityofdevelopingitsownsuperjumbo.ShouldAirbusgoaheadanddevelopitsownversionofasuperjumbo(theA3XX)?ShouldBoeingdevelopalargerversionofthe747?WhatwouldBoeingandAirbusgainbyteamingup?Whatcouldtheylose?Theanswerstothesequestionswoulddeterminethefutureofbothcompaniesformanyyearstocome.TheCommercialAirlineIndustryTheglobalaviationindustrywassizedatapproximately$100billionasof1992.Thesinglelargestsegmentwasthemanufactureandsaleoflargecommercialaircraft,whichtotaled$38.5billionin1991.1Thesaleoflargecommercialaircraftwasexpectedtogrowto$40billionbytheendof1992.Theworldwidecommercialaircraftfleetwasmadeupofnearly8,000passengerand1,200cargoplanesspreadoutover450airlinesandoperators.Largecommercialaircraftweredefinedasairplaneswith100ormoreseats.Largeaircraftmadeup90%ofthefleet,whilesmallerairplanesProfessorRamonCasadesus-Masanell,ErichAlexanderVoigt(TiggemanAssociates),andResearchAssociateJordanMitchellpreparedthiscase.ThisrevisedversionwaspreparedbySeniorLecturerIanMackenzieandProfessorRamonCasadesus-Masanell.Thiscasewasdevelopedfrompublishedsources.HBScasesaredevelopedsolelyasthebasisforclassdiscussion.Casesarenotintendedtoserveasendorsements,sourcesofprimarydata,orillustrationsofeffectiveorineffectivemanagement.Copyright©2006,2007,2013PresidentandFellowsofHarvardCollege.Toordercopiesorrequestpermissiontoreproducematerials,call1-800-545-7685,writeHarvardBusinessSchoolPublishing,Boston,MA02163,orgoto—electronic,mechanical,photocopying,recording,orotherwise—withoutthepermissionofHarvardBusinessSchool.707-447Airbusvs.Boeing(A)accountedfortheremaining10%.2TheVLCTwasdefinedasaplaneover400seatsorwiththecapacitytohaulmorethan80tonsoffreight,andasof1992thereonlyexistedonemodel:theBoeing747“JumboJet.”Therewerethreemainmanufacturersoflargecommercialaircraft:Boeing,Airbus,andMcDonnellDouglas.Boeinghad57%oftheexistingfleet,McDonnellDouglashad20%,andAirbushad16%.Theremaining7%oftheinstalledbasewasspreadoutoversmallerordefunctaircraftmanufacturers.3Forexample,LockheedfromtheU.S.hadexiteditscommercialaviationdivisioninthe1980safteritfailedtobecomeprofitableinthesector(itfocuseditseffortsondefenseaircraftthereafter).Commercialaircraftmanufacturerspurchasedpartsfromthousandsofsuppliers.Formajorcomponentsoftheairplanesuchasengines,wings,frames,andflightinstruments,aircraftmanufacturerssoughttoestablishlong-termrelationshipswithsuppliers.Oftenforthedevelopmentofnewplanes,suppliersofmajorcomponentswererequiredtoinvestmillionstocoverdevelopmentandspecializedequipment.WhileBoeingandMcDonnellDouglasbuilttheirplanesonU.S.soilandAirbusbuiltitsplanesinEurope,thegeographicreachofsuppliersspreadthroughouttheworld.Forexample,Boeinghadlong-standingarrangementsforairframeswithJapanesesuppliersthatwouldbearbetween10%and20%ofthedevelopmentcostsofBoeing’slatestproject,the777.BoeingandMcDonnellDouglasalsoworkedwithanumberofEuropeansuppliers,suchasAeritalia,foraerostructuresandcomponents.Conversely,Airbushadover500industrialpartnersfromtheU.S.AirbusequippeditsplaneswithenginesfromGeneralElectric(GE)andCFM(ajointventurebetweenGEandSNECMA,aFrenchmanufacturer).4AirlineshadthechoicetoeitherpurchaseaplaneoutrightorleaseitfromacompanysuchasInternationalLeaseFinanceCorporation.Airlinestypicallyorderedfrommanufacturersfourtofiveyearsinadvanceofthepredicteddeliverydate:aminimumofoneortwoyearswasneededtomanufacturetheplanes(whichwereallmoreorlesscustombuilt).Airlinessecuredfuturedeliverydatesbyplacingadditionalairplaneordersintothefutureduetothemanufacturers’limitedproductioncapacity.Airlinesmanagedtheirexistingfleetplusthebacklogoforderstoplanfortheirdesiredfleet.Onaverage,largeaircrafthadausefullifebetween1