Global Aircraft Manufacturing, 2002\u20132011
Case
Author: Jennifer Brown, Craig Garthwaite, Susan Crowe, Charlotte Snyder & Greg Merkley
Online Pub Date: January 04, 2017 | Original Pub. Date: 2016
Subject: Applied Economics, Financial Investment\/Analysis, Evaluation in Business & Management
Level: | Type: Direct case | Length: 10007
Copyright: \u00a9 2016 Kellogg School of Management, Northwestern University
Organization: Airbus SE| Boeing | Organization size: Large
Region: Global | State:
Industry: Manufacture of other transport equipment
Originally Published in:
Brown, J. , Garthwaite, C. , Crowe, S. , Snyder, C. , & Merkeley, G. ( 2016). Global aircraft manufacturing,
2002\u20132011. 5-414-754. Evanston, IL: Kellogg School of Management, Northwestern University.
Publisher: Kellogg School of Management
DOI: https:\/\/dx.doi.org\/10.4135\/9781526401342 | Online ISBN: 9781526401342
\u00a9 2016 Kellogg School of Management, Northwestern University
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https:\/\/dx.doi.org\/10.4135\/9781526401342
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Abstract
At the dawn of the twenty-first century, Boeing and Airbus, the leading manufacturers of large
aircraft, were locked in a battle for market share that drove down prices for their new planes. At
about the same time, the two industry heavyweights began developing new aircraft families to
address the future market needs they each projected.
Aircraft take many years to develop, so by the time the new planes made their inaugural flights,
significant changes had occurred in the global environment. First, emerging economies in the
Asia-Pacific region and elsewhere were growing rapidly, spawning immediate and long-term
demand for more aircraft. At the same time, changes to the market for air travel had created
opportunities for new products. These opportunities had not gone unnoticed by potential new
entrants, which were positioning themselves to compete against the market leaders.
In October 2007, the Airbus superjumbo A380 made its first flight. The A380 carried more
passengers than any other plane in history and had been touted as a solution to increased
congestion at global mega-hub airports. Four years later the Boeing 787, a smaller long-range
aircraft, was launched to service secondary cities in a point-to-point network.
The case provides students with an opportunity to analyze the profit potential of the global
aircraft manufacturing industry in 2002 and in 2011. Students can also identify the actions of
participants that weakened or intensified the pressure on profits within the industry.
Case
On October 26, 2011, an All Nippon Airways (ANA) jet landed in Hong Kong after a four-hour flight from Tokyo.
This was no ordinary flight\u2014it was the maiden commercial voyage of the Boeing 787 \u201cDreamliner\u201d aircraft.
Calling the event \u201cthe long-awaited day,\u201d ANA president and CEO Shinichiro Ito described the aircraft as a
\u201cgame-changer.\u201d \u201cFor Asia, we are convinced this aircraft will become the mainstay of our fleet.\u201d 1
The flight was the culmination of nearly 10 years of work and numerous delays as Boeing changed many of
its processes for design, production, and financing. Vice president and general manager Scott Fancher said,
\u201cIt\u2019s been a difficult journey.\u201d Looking at his boarding pass, he added, \u201cI can\u2019t tell you how much I\u2019ve been
waiting to hold this in my hand.\u201d 2
The first decade of the 21st century was noteworthy for the rest of the global aircraft industry as well: Airbus
was selling the superjumbo A380, a plane that carried more passengers than any other in history; the AsiaPacific region and other emerging economies were growing and spawning demand for more aircraft; new
airline trends were creating opportunities for new products; and new entrants were positioning themselves to
compete against industry heavy weights Boeing and Airbus.
Commercial Aircraft Industry
Global revenue for commercial aircraft manufacturing in 2009 was $127 billion. 3 The industry\u2019s products
were sold directly to airlines as well as to companies that leased products to airlines. Commercial aircraft
were expensive ($30 million to $200 million per plane) and extremely complex\u2014a Boeing 747 was made
up of millions of parts and nearly 200 miles of wires and tubing. 4 Designing aircraft was correspondingly
time-intensive: the process from initial research to flight test could take up to 10 years. It was also extremely
capital-intensive: although the actual costs of producing a new aircraft were closely guarded, Boeing chief
financial officer Greg Smith acknowledged that the company had spent $13.2 billion through June 2012
building its 787 Dreamliners, 5 and total development costs for the Airbus A380 were estimated at around
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$13 billion in 2006. 6
Once designed, airplanes were labor-intensive to manufacture. The workforces of both Boeing and Airbus
were heavily unionized, and both periodically experienced labor-related work stoppages. Boeing had suffered
five machinist strikes since 1977, the most recent of which occurred in 2008 and lasted 58 days. 7 Airbus,
which employed workers who were members of multiple unions, experienced a strike in 2007 when it tried
to implement cost control measures. 8 However, there were signs that the influence of unions on aircraft
manufacturing might change in an age of capital mobility. Although all previous Boeing aircraft had been
assembled in the Seattle, Washington, area, in 2009 the company opened a Dreamliner plant in South
Carolina\u2014a \u201cright-to-work\u201d state. a Similarly, Airbus decided to open a plant in Alabama, a state that also had
a \u201cright-to-work\u201d law. 9
Historically, the largest single procured cost for an aircraft was engines. An aircraft manufacturer typically
approved two or three different engines for each model, and the customer made the final engine choice.
All aircraft manufacturers had development agreements with multiple engine makers, which collaborated to
cultivate relationships with customers. The leading engine manufacturers were Pratt & Whitney, Rolls-Royce,
and General Electric; these players had also joined with smaller companies to form joint ventures such as
CFM International, International Aero Engine, and Engine Alliance. 10
In 2012 four environmental and customer trends had particular potential to influence aircraft manufacturers\u2019
profitability: demand for air travel, airline route structure, airline purchasing objectives, and government
regulation.
Demand for Air Travel
Although the growth in world air travel had varied considerably year to year since the 1970s, it averaged about
5 percent annually, a rate about twice the growth of world GDP. 11 Despite this overall expansion of demand,
there were many years in which the global airline industry operated at a loss (see Exhibit 1). Between
1978 and 2011, nearly 200 airlines in the United States alone filed for bankruptcy protection, although many
ultimately were able to emerge from it. 12
The economic growth of developing countries in the early 21st century created opportunities to open a
number of potentially profitable new airline routes. For example, international routes between China and other
countries offered tremendous potential. However, international routes were not the only opportunities\u2014intracountry routes were also expanding. For example, the market potential for point-to-point service within China
was larger than in Europe and North America due to the large number of populous Chinese cities (see Exhibit
2). By 2011, China was building 150 new airports in parts of the country that had previously had no air service,
bringing the total number of Chinese airports to 325. By comparison, the United States had 1,000 airports
that could accommodate commercial jets and another 4,000 that could handle propeller planes and small
corporate jets. 13
Airline Route Structure
Passenger volume was the primary factor that determined whether an airline could serve a route profitably.
In order to consolidate passengers flying into or out of small cities, many airlines used hub-and-spoke route
systems, with major cities serving as \u201chubs\u201d to connect smaller routes, or \u201cspokes.\u201d For example, a traveler
flying from Hartford, Connecticut, to Kansas City, Missouri, could fly from Hartford to an airline hub in Chicago,
Cincinnati, or Charlotte and then connect to a second flight to get to Kansas City. Hub-and-spoke systems
were also used internationally; for example, travelers on Emirates Airlines flew from London to Dubai and
then on to Riyadh, rather than directly from London to Riyadh.
By 2011, the hub-and-spoke system had been the predominant model for decades, but recent trends
suggested the rise of an alternate system: point-to-point routing. Travelers typically preferred nonstop flights,
and airlines such as Southwest Airlines successfully appealed to this preference by building point-to-point
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route networks. \u201cWe focus on nonstop traffic,\u201d said Southwest CEO Gary Kelly in 2005. \u201cWe\u2019d prefer fewer
connections. It\u2019s what customers want least. It raises the bar. It is extra work for no more money. It\u2019s a lot
cheaper for us to fly you nonstop.\u201d 14
Though Southwest operated entirely in the United States, airlines such as EasyJet and Ryanair in Europe
and AirAsia in Asia did the same with short-haul international flights. Worldwide, the number of routes served
by nonstop flights grew from just under 6,000 in 1985 to more than 10,000 in 2005. 15
Airline Purchasing
An airline considering an aircraft purchase had to consider multiple factors, not least of which was the size and
range of a given airplane. In 2012 there were four categories of commercial jet aircraft based on passenger
capacity and flight range:
\u2022 Regional jets (less than 100 seats) for short-haul routes b
\u2022 Narrow-body or single-aisle jets (100+ seats) for short- to medium-haul routes
\u2022 Wide-body or twin-aisle jets (100+ seats) for medium- to long-haul routes
\u2022 Very large, jumbo, or superjumbo jets (400+ seats) for long-haul routes
Airport and runway design could limit which aircraft an airline could use on a particular route. For example,
San Diego International Airport could not accommodate nonstop service to Asia until Boeing\u2019s 787 was
produced because its runway was too short for other long-haul jets taking off into Pacific headwinds. 16 Los
Angeles International Airport (LAX) spent $50 million for taxiway improvements and $50 million updating two
gates in the international terminal in order to accommodate the Airbus A380. Even with these improvements,
however, LAX reported that service vehicles had to be moved off taxiways and runways to accommodate the
huge jet, which needed \u201can official escort of operations vehicles.\u201d 17 The plane was so large that it had the
potential to interfere with the airport\u2019s instrument landing system; as a result, air traffic controllers ensured
that the plane had priority and moved in and out as efficiently as possible. Gridlock was projected if multiple
international carriers tried to use the jets at the airport more frequently. 18 Other airports reported incidents
of the wingtips of A380s colliding with buildings or other planes. Although travelers could board an A380 from
five U.S. cities in 2011, no American carriers had purchased the plane. 19
Runway and gate capacity constraints also influenced which aircraft an airline might fly into particular cities. In
2012 London Heathrow was operating at full capacity, with 1,300 flights per day. 20 By 2025, 14 U.S. airports,
including LAX, Hartsfield-Jackson Atlanta International, John F. Kennedy International, LaGuardia, and San
Francisco International, were projected to face extreme congestion that could lead to delays throughout the
country. 21
In addition to selecting size and range, airlines also had to choose which manufacturer\u2019s aircraft to buy.
Airlines\u2019 maintenance costs were higher with a fleet made up of multiple aircraft types and manufacturers
because of the need to stock a greater variety of parts and train maintenance personnel, and operating costs
increased because flight crews needed to be trained and certified for each aircraft. 22 Despite the additional
cost of flying different types of aircraft, most airlines maintained a mixed fleet either by design or as a result
of mergers (see Exhibit 3). Some low-cost carriers, such as Southwest Airlines and Ryanair, flew only Boeing
737s in an attempt to avoid the added costs of fleet complexity.
Airlines focused on the total cost of ownership when purchasing aircraft: airline analysts modeled the life
cycle implications of a proposed aircraft over an estimated service life of 20 years. 23 Because an aircraft
sale included more than just negotiating the purchase price, aircraft purchase agreements were extremely
complex, often running hundreds of pages in length and addressing everything from engines and cabin
interiors to operating performance and training. 24
Finance companies also purchased aircraft to lease to airlines under a variety of arrangements. Traditionally,
many airlines used finance leases, which allowed them to pay for planes over time with tax-deductible
payments. Increasingly, airlines had been turning to operating leases under which they essentially rented the
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aircraft and shifted the risk of loss in its resale value to the leasing company; more than one-third of the
world\u2019s airline fleet in 2011 was rented in this manner. 25 GE Capital Aviation Services was a major player
in aircraft leasing, and Boeing and Airbus themselves offered lease and sale of used aircraft acquired from
trades and lease returns.
Government Regulation
Aircraft manufacturers were subject to numerous and extensive safety and environmental regulations
established by U.S., European, and international bodies. Most regulators based their policies on standards
and recommended practices set forth by the United Nations\u2019 International Civil Aviation Organization.
Compliance was often costly and not always straightforward. For instance, the Boeing 737-700 and 737-800
models with enhanced exit doors were certified by the Federal Aviation Administration (FAA) in the United
States in 1997 and validated by the European Joint Aviation Authorities (JAA) in 1998, which enabled the use
of these aircraft in Europe. However, French aviation authorities rejected the JAA ruling and for the next six
years required carriers to block off four passenger seats when the aircraft were used in France. 26
The United States and the European community signed an agreement on trade in civil aircraft in 1992 that
limited government subsidies for aircraft production. However, the United States and the European Union
each filed a complaint with the World Trade Organization (WTO) in 2004 and 2005, respectively, alleging that
the other had violated the agreement. In separate judgments, the WTO ruled that both had offered their major
manufacturers subsidies\u2014the European Union to Airbus, for the development of the A380, and the United
States to Boeing, for the development of the 787. Compliance measures were pending in 2012. 27
Major Competitors
At the beginning of the 21st century, Boeing and Airbus accounted for roughly 60 percent of the global
commercial aircraft industry and shaped how planes were designed, manufactured, and marketed. 28 By
2011, however, the industry was changing; Boeing and Airbus were still the only producers of very large
commercial aircraft, yet several regional jet manufacturers, including Bombardier and Embraer, had expanded
their portfolios to include planes with larger seating capacity. Moreover, firms in China, Russia, and Japan
were developing new products to serve the growing demand for smaller jet aircraft.
Boeing
After building a successful timber company in Seattle in the early 1900s, William Boeing developed a passion
for \u201cflying machines.\u201d Taken with the desire to \u201cbuild a better airplane,\u201d Boeing and a handful of employees
designed a twin-float seaplane in Boeing\u2019s boathouse and flew it for the first time in 1916. 29 As the United
States entered World War I in 1917, the new Boeing Airplane Company secured a U.S. Navy contract to
build training planes. When orders of military aircraft dwindled after the war, Boeing began manufacturing
mail planes and promoting commercial aviation. By 1929, the company had become a conglomerate known
as United Aircraft and Transport Corp., encompassing airlines, aircraft manufacturers, engine manufacturers,
and even a school for pilots and maintenance personnel. The jet age dawned in 1954 when the company
introduced the Dash-80, the plane that was the prototype for the 707, the first of the famous \u201c700\u201d Boeing
aircraft families, which had its inaugural flight in 1957. 30
Between 1967 and 1970, Boeing introduced two other innovative jets: the 737 narrow-body, which was
designed for smaller airports with shorter runways, and the 747 double-aisle jumbo jet. The 737 became
Boeing\u2019s best-selling airplane family of all time. 31 The 747 was expected to help reduce airport congestion:
it held up to 490 passengers, had more cargo space than any other aircraft, and could fly 6,000 nautical miles
c without refueling.
The 747 was designed and built in only 16 months by a group at Boeing known as \u201cThe Incredibles,\u201d but its
launch was ill-timed; it was conceived during a boom in air travel but was delivered in an economic recession
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during which many airline seats remained empty. 32 Poor sales of the jet in its early years almost bankrupted
Boeing. By the late 1970s, however, economic conditions had changed, and demand from airline and freight
company customers increased. Boeing eventually built 21 models of the 747, which remained the largest civil
aircraft in service until the launch of the Airbus A380. 33
In 1978 Boeing announced the production of two new aircraft families: the 757, a more efficient narrow-body,
and the 767, a wide-body twin-engine airplane that could carry 216 to 290 passengers on long-haul routes.
34 In 1985 the 767 became the first twin-engine passenger aircraft approved for long-range overseas flights.
35 In the late 1980s Boeing began studies to produce a 767 with more seats, which led to the development of
another new aircraft family, the 777. The 777 was designed in collaboration with airline customers, particularly
United Airlines. General Electric built the GE90 engine\u2014the most powerful jet engine of its time\u2014exclusively
for the plane. 36
As Boeing introduced each new aircraft family, it refined its development and manufacturing processes.
Design was done by Boeing, which provided detailed drawings and specifications to a large number of
subcontractors that produced many of the parts and components. Boeing then gathered these parts in its
facilities, manufactured the major components of the fuselage, and assembled the plane that rolled out on the
tarmac. 37
Advances in technology and customer demand for operating efficiency prompted Boeing to announce another
new aircraft program in 2003: the 7E7. The \u201cE\u201d stood for efficient: the plane was originally intended to fly 200
to 300 passengers on routes of 3,500 to 8,000 nautical miles at the highest speeds while using 20 percent
less fuel per passenger than comparably sized jets. 38 A worldwide online vote to name the plane took place
in 2003, and in January 2005 Boeing officially christened the new program the 787 Dreamliner.
Technological and process advances from the Dreamliner project, including advancements in fuel efficiency,
lower carbon emissions, and passenger comfort, helped drive the introduction of new models in several of
Boeing\u2019s existing aircraft families. For example, the Boeing 747-8 Intercontinental and 747-8 Freighter, which
were rolled out starting in 2012, claimed 13 percent lower operating costs than the previous 747 model,
39 and the 737 MAX, scheduled for delivery in 2017, promised excellent fuel efficiency in the narrow-body
market. 40
Airbus
Airbus was created as a consortium of European aircraft manufacturers in 1967 to counter the dominance of
American aircraft manufacturers Boeing, Lockheed, and McDonnell Douglas, which together accounted for 80
percent of the aircraft market. d Representatives from the governments of Germany, France, and Britain (and
later, Spain and the Netherlands) agreed to combine the small aircraft manufacturers from their respective
countries. Without such an agreement\u2014and with the Boeing 747 about to enter service\u2014Europeans risked
losing hundreds of thousands of jobs and having their national airlines become wholly dependent on
American suppliers for new aircraft. 41
The first Airbus product was the A300, the world\u2019s first twin-engine wide-body aircraft. Up to that point, all
wide-body (two passenger aisles) aircraft had been built with three or four engines; a two-engine design
reduced both the initial purchase cost and the fuel costs to operate it, which became an attractive feature
during the 1970s oil crisis. The A300 carried 226 passengers in two classes and was smaller, lighter, and
more fuel-efficient than its three-engine competitors, but Airbus initially had little success selling to airlines.
When the sales outlook was especially bleak in the late 1970s, Airbus leased four new A300s to Eastern
Airlines for six months with no requirement that they be purchased. After the test, Eastern ordered 23 A300s
in 1978. 42
Airbus continued to grow its family of commercial jets throughout the 1980s. In 1987 Airbus rolled out the
A320, a smaller 150- to 180-seat narrow-body jet that was a direct competitor to the Boeing 737. A new
model of the A320, the A320neo (\u201cneo\u201d stood for \u201cnew engine option\u201d) included more efficient engines and
reductions in noise and CO2 emissions.
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Echoing Boeing\u2019s development path for its 767 and 777 aircraft, Airbus next introduced the A330 and A340,
aircraft that could fly longer routes and seat more passengers than the A320. In 2000 Airbus announced
its plans to build the A380\u2014a superjumbo jet that could carry more than 500 passengers on long-haul
routes\u2014and enter the 747\u2019s competitive space (see Exhibit 4). Its expanding product line enabled Airbus to
take market share from Boeing during the 1990s and finally surpass its American rival in 2003 (see Exhibit 5).
Since the late 1990s, Airbus had developed sales offices, training centers, design and engineering support,
customer service, and spare parts supply operations through joint venture arrangements with companies
and consortia in India, Russia, China, and Japan. In 2012 Airbus had operations in eight countries: France,
Germany, Spain, United Kingdom, China, India, Russia, and Japan.
Manufacturing was spread among 12 Airbus facilities in five countries. (See Exhibit 6 for a depiction of
the production process of one A320 aircraft.) In 2012 Airbus announced plans to build its first American
factory in Mobile, Alabama. The facility was to open in 2015 and would eventually employ 1,000 people
in manufacturing the A320neo. Airbus hoped the plant would reduce costs and encourage U.S. sales: \u201cWe
needed to be visible in the States under the Airbus flag,\u201d Airbus president and CEO Fabrice Bregier said. 43
Bombardier
Joseph-Armand Bombardier had an early passion for innovative transportation: in 1922, at the age of 15,
he built his first \u201csnow vehicle\u201d to transport people across winter roads in rural Quebec, Canada. In 1942
Bombardier founded L\u2019Auto-Neige Bombardier Limitee to manufacture a 12-passenger snowmobile. After the
1973 oil crisis, the company shifted its manufacturing expertise to mass transit rolling stock such as subway
cars and later diversified into the aerospace sector in 1986 with the acquisition of Canadair, a Canadian
manufacturer of wide-body business jets and amphibious firefighting aircraft. 44
During the late 1980s and 1990s, Bombardier expanded its aerospace business with the acquisition of Short
Brothers, Learjet Corporation, and Boeing\u2019s de Havilland unit, which made it the third largest civil aircraft
manufacturer in the world. 45 In 1989 Bombardier launched the Canadair Regional Jet (CRJ), the world\u2019s
first 50-seat jet. A 70-seat version followed in 1997 (CRJ700), an 86-seat version in 2000 (CRJ900), and a
100-seat version in 2007 (CRJ1000 NextGen). The CRJ1000 NextGen claimed to have the \u201clowest operating
cost per mile for operators in its market segment, while delivering extra range, exceptional reliability, and a
greener footprint.\u201d 46
Launched in 1996, Bombardier\u2019s \u201cQ-Series\u201d turboprops were a quieter, updated version of Boeing\u2019s Dash
8 family, which had been acquired with de Havilland in 1992. The original Dash aircraft held 37 to 56
passengers and had proved to be a dependable short-haul plane that could take off and land on very short
runways. Turboprop planes used less fuel and needed shorter runways than regional jets, but they were
louder and had higher engine maintenance costs, shorter ranges, and lower cruising speeds. Turboprops
lost market share to regional jets through much of the 1980s and 1990s, but when jet fuel prices spiked in
the mid-2000s turboprops enjoyed renewed interest from airlines. In 2008 Bombardier launched the 74- to
80-seat Q400 NextGen turboprop, which burned less fuel, generated less CO2, and cost roughly 18 percent
less than 70-seat regional jets in production. 47 By June 2012, Bombardier had delivered almost 1,100 QSeries turboprops. 48
Bombardier Aerospace generated revenues of $8.6 billion in 2011, predominantly from three product groups:
business aircraft, commercial aircraft, and customer services. The commercial aircraft group produced QSeries turboprop planes, CRJ regional jets, and a narrow-body jet not yet in service called the CSeries. 49
Embraer
Empresa Brasileira de Aeronautica S.A., known as Embraer, was created by the Brazilian government in
1969 with the goal of turning military research and development into engineering and industrial capacity in
the production of civil aircraft. Its first product was named Bandeirante (\u201cpioneer\u201d in Portuguese), a 15- to
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21-passenger twin-turboprop plane; it was eventually used by civil and military customers around the world.
Despite the success of the Bandeirante, by 1990 Embraer was losing money rapidly. 50 After the company
was declared bankrupt in 1994, the government sold a majority share to a group that included Brazilian
investment banks and pension funds. However, the Brazilian government retained a seat on the board and
veto power over changes in company ownership, technology transfers, and Air Force contracts. 51
Embraer\u2019s first regional jet, the 50-seat EMB 145, entered service in 1996. Continental Express, a regional
airline in North America, agreed to purchase 25 of the planes. Embraer developed a family of aircraft around
the EMB 145 (renamed ERJ 145, which stood for \u201cEmbraer Regional Jet,\u201d in 1998 52 ), and in 2011 the
company was the market leader for commercial jets with less than 120 seats. 53
Commercial Aircraft Corporation of China
When the People\u2019s Republic of China was established in 1949, the new government set up the Civil Aviation
Administration of China (CAAC) to oversee nonmilitary aviation and operate commercial flight service in
the country. e During its first decade, the CAAC built fighters, bombers, and transport aircraft with Soviet
assistance and later undertook its own projects. 54 CAAC\u2019s first jet aircraft was certified and delivered to
the military in 1956, and other models followed. 55 Boeing and CAAC began to partner together in the more
open international climate of the 1970s and 1980s: CAAC purchased Boeing 707s in 1972, and Boeing began
purchasing Chinese-made parts and investing in expanding production and improving quality in Chinese
suppliers. 56
In 1980 the first large passenger aircraft designed and built in China (known as the Y-10) made its first
flight. 57 However, the Y-10 project was abandoned a few years later due to funding and other problems.
The Chinese government, which was then pursuing a strategy of exchanging market access for technology,
embarked on a joint project with McDonnell Douglas, but the effort produced little success. 58
China\u2019s most successful large aircraft initiatives used a system integration approach in which engines, major
electronic systems, and other components were purchased from domestic and international suppliers and
assembled in China. 59 In 2000 the MA-60, a 50- to 60-seat regional turboprop, was put into operation. 60
In 2008 the ARJ21, a 78- to 90-seat short- to medium-haul turbofan, had its first successful flight, but later
encountered delays in the certification process.
The state-owned aerospace manufacturer Commercial Aircraft Corporation of China (COMAC) was
established in 2008 as the successor to the Aviation Industry Corporation of China (AVIC). As part of its fiveyear plan for 2011-2016, China declared aviation one of \u201cseven major strategic industries\u201d for the next phase
of the country\u2019s growth. According to the plan, public investment in China\u2019s future aerospace sector would be
1.5 trillion Chinese RMB, or roughly US$230 billion, a 50 percent increase compared to the previous five-year
plan. 61 The city of Xi\u2019an alone employed more than 250,000 aerospace engineers and assembly workers,
about eight times as many as in the Seattle area, the hub of America\u2019s aerospace industry. 62
New Commercial Aircraft Models, 2000\u20132011
As they responded to the evolving demand for commercial aircraft, Airbus, Boeing, and their competitors
pursued new and diverse projects: Airbus designed an ultra-high-capacity plane; Boeing developed a longhaul aircraft that improved efficiency and passenger experience; regional jet manufacturers updated their
product lines; and international partnerships redefined the future of aircraft manufacturing.
Airbus A380
Airbus described the A380 as the \u201cfirst true wide-body double-decker\u201d and the \u201csolution for 30 years of
overwhelming growth in the air transport industry.\u201d 63 The aircraft had its origins in design work done in 1988
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for an ultra-high-capacity airliner, although the Airbus board did not announce formal development of the A380
until December 2000. It had a range of 8,300 nautical miles and a seating capacity of 555 people in three
classes on two levels (or 853 in a single class).
The aircraft was scheduled to enter service in 2005, and Airbus received 50 firm orders from several airlines
by the end of 2000. The largest order at the time came from Australia\u2019s Qantas Airways, which historically
had operated a Boeing fleet. 64
The passenger version of the A380 was the most spacious airliner ever built. It offered wider seats, broader
aisles, and 50 percent more floor space than its nearest competitor-space that could be configured to include
lounges, bars, or even a casino. The plane was designed to generate 50 percent less noise during take-off,
giving it the quietest interior cabin in the sky. 65 The A380 also boasted fuel consumption comparable to an
economical family car\u2014about three liters of fuel per passenger per 100 kilometers. 66
In Airbus\u2019s view of the future, the A380 would address traffic congestion at busy airports by transporting more
passengers per flight on long-haul, high-traffic routes at lower costs than previously had been possible. In
2011 Airbus identified 39 \u201cmega cities\u201d worldwide-including London, Hong Kong, New York, and Dubai-that
had more than 10,000 daily passengers flying on nondomestic routes longer than 2,000 nautical miles. It
forecast that population growth would increase the number of mega cities to 87 by 2030 and that 91 percent of
long-haul travel would be between airports in these cities, with many passengers continuing to points beyond
on \u201cspoke\u201d routes served by single-aisle aircraft. 67
The A380 was the most complex commercial jet Airbus had ever produced; for example, the A380 had
100,000 wires, far surpassing the 60,000 wires in its second-largest jet, the 360-seat A340-600. 68
Thousands of engineers at 16 sites in four countries had to be coordinated to manufacture and assemble
parts at Airbus and subcontractor facilities throughout Europe, following which large sections of the plane
were moved by sea, river, land, and air to France for final assembly. 69 Airbus maintained responsibility for
most of the design, but suppliers assumed more than $3 billion in financial risk and were asked to \u201cdesign and
build to performance,\u201d meaning that they had to figure out how to meet Airbus performance standards within
the Airbus architecture. 70
Shortly after the A380\u2019s first test flight in 2005, Airbus executives publicly acknowledged that the plan was
experiencing manufacturing problems. A six-month delay was attributed to problems with wiring for passenger
entertainment systems, complexities in designing different cabin interiors for each airline, and weight issues.
In June 2006 Airbus announced that deliveries would be delayed by another six months, which meant that
only nine of the 25 promised aircraft were delivered by the end of the year. The announcement resulted in
not only a 25 percent drop in the airline\u2019s share price but also the resignation of both the Airbus CEO and the
CEO of Airbus\u2019s parent, European Aeronautic Defence and Space Co. (EADS). 71
Singapore Airlines flew the first A380 commercial flight between Singapore and Sydney, Australia, in October
2007\u201418 months behind schedule. By 2012, Airbus had taken a total of 257 orders for A380s, of which 80
had been delivered. 72
Boeing 787 Dreamliner
The Dreamliner was designed for long-haul, point-to-point routes with moderate passenger volume. Boeing
offered two models that could carry 210 and 290 passengers, respectively; both had a range of up to 9,000
nautical miles. f The 787 cost less to operate than other planes of the same size (Boeing 767 and Airbus
A330) in large part because of the use of lighter composite materials, such as carbon fiber, in the airframe
and primary structure. Although these nonmetal materials had been used in other aircraft, a much greater
percentage of the Dreamliner airframe was manufactured from composites (see Exhibit 7). 73 Other efficiency
gains came from new GE and Rolls-Royce engine technology that delivered 10 to 15 percent lower fuel
consumption and lower emissions. 74
Although Boeing had used composites for several components on the 777, the effect of thousands of
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pressurization cycles on composites as massive as the 787 skin were not known. \u201cThis is a piece of aviation
history,\u201d said Walt Gillette, Boeing\u2019s vice president of engineering, manufacturing, and partner alignment.
\u201cNothing like this is already in production. Boeing and our partners developed everything, including the
design, tools that served as the mold, programming for the composite lay-down, and tools that moved the
structure into the autoclave.\u201d 75
The Dreamliner\u2019s design included other features to reduce costs for airlines. Maintenance needs were
reduced by replacing pneumatic systems with electrical ones that required fewer parts to maintain and
replace. 76 In addition, the 787 engine-wing connection interface was designed to enable the engines to be
removed and replaced within 24 hours. According to Boeing 787 propulsion director Ron Hinderberger, \u201cIt is
not uncommon for an airplane to serve three or four carriers in its lifetime. Leased airplanes have even more
operators; being able to easily transition into a new fleet is important.\u201d 77
The 787 enhanced airline revenue opportunities by offering greater cargo volume, which Boeing believed
would lead to more stable revenue flow based on its forecast that air cargo would triple from 2010 to 2030. 78
The aircraft also promised revenue enhancement as a result of more flying days and greater route flexibility.
The Dreamliner\u2019s design not only addressed the needs of airlines, it also addressed the needs of passengers.
The composite fuselage enabled the cabin to be kept at higher air pressure than other airplanes of the same
size, which meant more oxygen and less incidence of air sickness. 79 The 787 also used a powerful air
filtration system that made cabin air cleaner and healthier. Other innovations included increased humidity,
quieter air conditioning, less wall vibration, larger windows with passenger-controlled tinting, and new
turbulence-detecting technology that reduced in-flight bumpiness. 80 (Exhibit 8 shows how United Airlines
describes the new passenger features of the 787 Dreamliner.)
In 2003 Boeing made a deal with a consortium of Japanese companies\u2014Mitsubishi Heavy Industries,
Kawasaki Heavy Industries, and Fuji Heavy Industries\u2014to build the fully assembled Dreamliner wing, and
the Japanese government provided aid to support the aircraft\u2019s development. 81 Thomas Pickering, Boeing\u2019s
senior vice president for international relations, commented on the arrangement: \u201cWe said, \u2018let\u2019s spread the
risk and spread the benefit\u2019\u2026 they get the advantages but they [Japan] also carry the burden.\u201d 82 The first
order of 50 Dreamliners was placed by All Nippon Airways in 2004, followed by another order from Japan
Airlines later that year. 83
The People\u2019s Republic of China placed the next order in 2005 on behalf of Chinese airlines. Several months
prior, Boeing announced that the airplane\u2019s rudder would be made in the Chengdu plant of China\u2019s AVIC.
Mike Bair, who headed the 787 program, suggested that additional contract work would go to China through
Boeing\u2019s major subcontracting partners: \u201cOur expectation is that there\u2019s a fair amount of this airplane that
ultimately is going to be produced in China.\u201d 84
With the 787, Boeing made significant changes to its supplier relationships and manufacturing process,
which the company claimed would reduce development time by 24 months and trim costs by $4 billion. 85
Boeing moved away from its traditional \u201cbuild to print\u201d process, in which it internally developed detailed plans
and contracted with suppliers to build parts to exact specifications, to a \u201cbuild to performance\u201d process that
required suppliers to produce components that performed to Boeing\u2019s requirements. 86
In comparison with the 737 production process, in which Boeing was the main systems manufacturer
and subsystems assembler, production of the 787 relied much more heavily on partnerships with strategic
suppliers (see Exhibit 9). Tier 1 suppliers served as both designers of systems and integrators that assembled
different parts and subsystems produced by Tier 2 suppliers (see Exhibit 10). Large subassemblies were
constructed around the world and transported to Boeing\u2019s facility in Everett, Washington, on a \u201cDreamlifter,\u201d
a hollowed-out 747-400 passenger plane that reduced delivery time from one month to one day. 87 Boeing
hoped to assemble each Dreamliner in only three days on the Everett production line. In all, Boeing
outsourced more than 60 percent of the Dreamliner\u2019s production, including all 11 major subassemblies, using
a web-based planning system to coordinate the activities of more than 100 suppliers in 12 countries. 88
Boeing believed that this system would keep manufacturing and assembly costs low while spreading financial
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risk to suppliers; for example, no Tier 1 supplier would receive payment for its development costs until Boeing
delivered its first 787, giving suppliers a financial stake in the successful completion of the project. 89 In
addition, suppliers gained experience designing and assembling large sections of a complex commercial
aircraft, activities that were previously performed by Boeing engineers.
Unfortunately, rather than speeding up the delivery, the new process resulted in significant delays. \u201cWe gave
work to people who had never really done this kind of technology before, and then we didn\u2019t provide the
oversight that was necessary,\u201d said Boeing\u2019s commercial aviation chief Jim Albaugh. 90 Some of the parts
arriving in Everett did not fit together, and late deliveries by producers of crucial sections of the plane stopped
the entire assembly process. Some Tier 1 suppliers were unable to meet their output quotas, and other
suppliers faced parts shortages from their subcontractors. 91 As a result, Boeing was forced to reverse some
of its original outsourcing decisions; for example, in 2009 it spent $1 billion in cash and credit to acquire its
fuselage manufacturing partner Vought Aircraft Industries. 92 At the time of the purchase, Vought\u2019s CEO said
that the firm had already invested twice what it had anticipated in its attempts to fulfill the Dreamliner orders.
93
The delivery date for the 787 was delayed at least six times between 2006 and 2010 (see Exhibit 11). 94 The
plane was finally completed more than three years after the original delivery date\u2014a delay that cost Boeing
millions of dollars in fines and concessions to customers. 95 Despite the lengthy delay, orders and excitement
for the Dreamliner remained strong, and there were more than 800 planes on order at the end of 2011. 96
Larger Regional Jets
In 2002 Embraer introduced a new family of four \u201cE-Jets\u201d with seating capacities of 70 to 120 and a maximum
range of 2,200 nautical miles. E-Jets quickly became popular with regional and low-cost airlines-U.S.-based
JetBlue Airways ordered 100 Embraer 190s in 2003. 97
Embraer began manufacturing ERJ 145s in Harbin, China, in 2002 under a joint venture agreement with
AVIC. In 2010 Embraer negotiated to extend the joint venture for an additional five years, but AVIC announced
that it had developed a commercial plane with specifications similar to the E-190 that it planned to deliver
to domestic carriers beginning in 2014. China agreed to purchase 20 E-190s manufactured in Brazil, and
the Chinese government allowed Embraer to continue its joint venture with AVIC under the condition that the
Harbin facility be converted to manufacture Embraer\u2019s business jets. 98
As it renegotiated its agreements in China, Embraer faced a rapidly strengthening currency in Brazil that put
pressure on export profits. Expecting executive jet and defense jet sales to be \u201crelatively flat,\u201d Embraer saw
commercial airline growth as the only segment with short-term profit potential, 99 and company executives
began considering development of a new jet capable of carrying 130 or more passengers. An aircraft of
this size would allow Embraer to compete on some of the busiest short-haul routes in the world: between
European capitals and the shuttle between Sao Paulo and Rio de Janeiro. 100
In 2008 Bombardier announced it would expand its line of aircraft and build a new series of narrow-body
planes. CEO Pierre Beaudoin said, \u201cThe CSeries family of aircraft will revolutionize the economics and
network strategies for airline operations in the 100- to 149-seat commercial market.\u201d 101 Some industry
analysts considered the CSeries risky: although it appeared there would be strong demand for fuel-efficient
narrow-body aircraft in the next 10 to 20 years, it would be hard to compete with Boeing and Airbus on price.
102 However, Beaudoin said the airplanes would be delivered on time-something Boeing and Airbus rarely
accomplished.
\u201cThe CSeries family offers the greenest single-aisle aircraft in its class,\u201d said Gary Scott, president of
Bombardier Commercial Aircraft. \u201cThese game-changing aircraft emit up to 20 percent less CO2 and up to
50 percent less NOx, fly four times quieter, and deliver dramatic energy savings\u2014up to 20 percent fuel burn
advantage as well as up to 15 percent improved cash operating costs versus current in-production aircraft of
similar size. The CSeries aircraft will set a new benchmark in the industry.\u201d 103
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Planes from New Manufacturers
In 2008 COMAC announced plans to build the C919, a narrow-body jet with 160 to 190 seats (comparable
to the Airbus A320 and the Boeing 737). When the company introduced plans to select suppliers of engines,
airborne equipment, and materials through an international bidding process, it urged interested foreign
suppliers to create partnerships with Chinese manufacturers. 104 COMAC chose the LEAP-1C engine
manufactured by CFM (a joint venture between GE and the French Snecma) and lined up an array of
American and European suppliers, including Honeywell, Crane AE, Rockwell Collins, and Parker Aerospace
(see Exhibit 12). 105
The first orders for the C919 were booked in 2010; customers included China\u2019s three largest airlines and GE
Capital Aviation Services. 106 In 2011 GE entered into a joint venture with AVIC to produce sophisticated
avionics, the electronics for aircraft communications, navigation, cockpit displays, and controls-the same
avionics used on the 787 Dreamliner. 107
COMAC was also at work on a regional jet\u2014the ARJ21, which had its first flight in 2008\u2014but deliveries initially
scheduled for 2011 were delayed due to certification troubles. Describing the ARJ21, author James Fallows
said the plane had \u201cabout the same number of seats as models from Embraer or Fokker\u2014seventy-eight in a
normal configuration\u2014but because of various inelegant aspects of design and manufacture, it weighs about
ten thousand pounds more. In aviation, this is a crippling disadvantage.\u201d 108
According to aviation expert Richard Aboulafia, \u201cWe know that this plane, the ARJ21, is completely useless\u2026
It amounts to a random collection of imported technologies and design features flying together in loose
formation.\u201d 109 The challenges were daunting, but some competitors recognized China\u2019s determination to
succeed. Jim Albaugh, who headed Boeing\u2019s commercial aircraft division until retiring in June 2012, said:
\u201cWhether [the C919 is] a good aeroplane I don\u2019t know, but eventually they\u2019ll get it right.\u201d 110
Other manufacturers of regional jets included Mitsubishi and Sukhoi. The MRJ (Mitsubishi Regional Jet) was
a 70- to 90-passenger regional jet that was in final manufacturing in 2012. The first aircraft to be designed
and produced in Japan since the 1960s, the MRJ was expected to complete its maiden flight in 2013.
Russian aircraft manufacturer Sukhoi, which in 2006 had merged with five other major aircraft makers into
a single entity with substantial government control, developed the 75- to 95-seat Superjet 100 (SSJ 100).
The plane undertook its first commercial flight in 2011 and was beginning to attract some interest from
airlines outside of the former Soviet Union, having received 170 orders, 42 of which were from Indonesia. 111
However, the first planes delivered have suffered from reliability problems, and on May 9, 2012, an SSJ 100
crashed during a demonstration flight in Indonesia, killing all on board.
Future Outlook
Expanding markets and growing demand for more efficient planes made for a positive outlook for aircraft
manufacturers. Both Boeing and Airbus predicted 5 percent annual growth between 2011 and 2030, which
would create demand for more than 30,000 aircraft. 112 Although they disagreed about the makeup of the
demand for large aircraft, they agreed that the majority of sales would be narrow-body (100 to 200 seats) and
midsize (200 to 400 seats) wide-body aircraft.
Both companies expected a large share of the growth to come from the Asia-Pacific region, with China driving
much of the increased demand. Boeing\u2019s forecast included 8.8 percent annual growth in domestic Chinese
air travel, which would create demand for 3,400 new aircraft by 2026, nearly quadrupling the country\u2019s fleet.
113
Despite the challenges Boeing and Airbus faced in developing and producing the 787 Dreamliner and the
A380, and despite the new competitors that had begun to make a play for their share of the market, the two
airlines remained optimistic about global sourcing in future aircraft development. 114
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Note: \u00a92016 by the Kellogg School of Management at Northwestern University. This case was developed
with support from the December 2009 graduates of the Executive MBA Program (EMP-76). This case was
initially prepared by Susan Crowe and then revised by Charlotte Snyder and Greg Merkley \u201984, under the
supervision of Professors Jennifer Brown and Craig Garthwaite. Cases are developed solely as the basis for
class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations
of effective or ineffective management. To order copies or request permission to reproduce materials, call
847.491.5400 or e-mail cases@kellogg.northwestern.edu. No part of this publication may be reproduced,
stored in a retrieval system, used in a spreadsheet, or transmitted in
any form or by any means\u2014electronic, mechanical, photocopying, recording, or otherwise\u2014without the
permission of Kellogg Case Publishing.
Notes
a. \u201cRight-to-work\u201d laws allow employees to decide whether or not they want to join a union, thereby preventing
compulsory union membership. In the United States, there were 23 states with such statutes in 2012.
b. Definitions of route length vary, but for the purposes of this case, a short-haul flight took less than three
hours; a medium-haul route took between three and six hours; and a long-haul route took more than six hours.
c. A nautical mile is 1,852 meters (or approximately 1.15 miles).
d. Today, Airbus is a division of the European Aeronautic Defence & Space Co. N.V., a pan-European
corporation that is also parent to aerospace and defense divisions Astrium, Cassidian, and Eurocopter.
e. Since 1987, CAAC has acted solely as a government agency. Its namesake commercial airline service was
divided into six airlines: Air China, China Eastern Airlines, China Southern Airlines, China Northwest Airlines,
China Northern Airlines, and China Southwest Airlines.
f. Boeing originally announced a third model, the 787-3, with a larger seating capacity and shorter range. In
2010 this model was cancelled due to a lack of demand. \u201cThe End of the 787-300,\u201d Aviation News Online,
December 14, 2010.
Endnotes<\/p>\n\n\n\n
Global Aircraft Manufacturing, 2002\u20132011CaseAuthor: Jennifer Brown, Craig Garthwaite, Susan Crowe, Charlotte Snyder & Greg MerkleyOnline Pub Date: January 04, 2017 […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"var(--ast-global-color-4)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"footnotes":""},"categories":[1],"tags":[],"class_list":["post-10113","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"acf":[],"yoast_head":"\n