Keep your eyes on the market

Volume 6 Letter 3

Sometimes the competition in an industry can get so fierce that the competitors try to outdo each other rather than win customers. Such is the case in the airline industry where Airbus and Boeing have been in a bitter battle for the last decade.

Boeing had spent years in a leadership position in the “Big Bird” market when Airbus entered the market with a fleet of smaller planes. Soon after, Airbus began to move up into larger aircraft challenging the Boeing position.

The veteran airline had information indicating that there was a limited market for bigger, long haul aircraft and so Boeing had been reluctant to invest heavily in a redesign of their successful 747. Airbus saw this as an opportunity to beat Boeing at their own game and announced that they would build a double decker 550 passenger aircraft called the A380. The A380 is so big that airports need to modify their infrastructure to accommodate it.

Aware that Airbus’ future R&D budget was securely locked into the development of the new megaplane, Boeing announced their next big move. They were going to build a plane for the point to point market. The new “Dreamliner” was to be made mostly of composite materials and be super fuel efficient . Their timing couldn’t have been better.

Expecting a direct challenge of their monster plane, Airbus was surprised to see Boeing attack a different market segment altogether. Where as Airbus has invested millions into flying huge amounts of people from major hub to major hub expecting passengers to complete their journeys on smaller aircraft, Boeing has chosen to fly passengers directly to their destinations. As open sky agreements and global deregulation moves forward this appears to be a good call.

Another difficulty for Airbus is as Loren Thompson, an aerospace expert at the Lexington Institute in Arlington, Va., suggests that while larger aircraft may decrease the congestion on the runways, it moves that congestion to the waiting rooms, baggage carousels and customs areas putting even more stress on airport infrastructure.

In response to Boeing’s Dreamliner, Airbus has announced that they will launch an A350 aircraft in 2010 (a redesign of the A330) to compete with Boeing in the midsize wide body market. Unfortunately, the plane will be narrower and heavier than the Boeing product which will launch two years earlier.

Airbus is in a bind with 15 billion euros committed to the A380. They will have the biggest plane in the air but with only 159 orders after five years of selling, Airbus will need double that amount just to break even.

In their desire to get the best of Boeing, Airbus neglected to consider the needs of the airports, the airlines, and the passengers. A bit like the Hatfield’s and McCoy’s, Airbus seems to have forgotten what the real fight is for.

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