Corporate Strategy: General Environment Analysis

[Eg. What are the motivations and rationale for Airbus to invest in large aircraft?]

[PEST framework]

Political
Opportunity - The European countries: France, Germany, and Britain have come together to
form a joint consortium named Airbus to compete with American manufacturers like Boeings
and McDonnell Douglas. The government took an interest in the aviation industry to protect
European airplane manufacturers' interests from American aircraft manufacturers, preventing
them from becoming sub-contractors to American manufacturers. European Union has
subsidised the Airbus project heavily, allowing Airbus to keep A300 going despite the low market
response and successfully launched A320. With the help of the government, Airbus is able to
strategically place its focus on building-wide bodies and coming up with A380 with the belief of
airlines would continue to maximise existing hub-and-spoke systems and high-capacity aircraft
would help accommodate the growing number of passengers and alleviate airport slot
congestion. (The US-China trade wars also shift Boeing's business to Airbus, increasing the
demand for A300.)

Threat - However, the EU nations, US, and many other countries had signed the open skies
agreement to allow more secondary cities to be able to offer international routes using the
point-to-point model. This allows airlines to respond to market demands and not be subject to
political arrangements between countries on landings and take-offs. The increase in the
point-to-point model has reduced the demand for large aircraft and favour smaller aircraft.
Countries that initially favoured big hubs such as Singapore and Dubai have also begun to offer
more direct flights from a significant number of middle-sized airports. Emirates, one of the
connoisseurs of the A380 also opens up new point-to-point routes. These further reduce the
demand for large aircraft, causing A380 to fall.

Economic
Opportunity - Economic growth especially in Asia has resulted in many large cities establishing
themselves as mega airport hubs. The increase in economic growth has caused an increase in
air travel demand where many relied on the hub-and-spoke to connect flights with other cities
across the globe. London Heathrow Airport and Singapore Changi Airport were examples of
such mega hubs that had motivated airlines like British Airways, Emirates, and SIA to rely on the
hub-and-spoke model, increasing the demand for large aircraft. In addition, the growth in the air
travel industry is expected to continue expanding and the consensus was that the commercial
aircraft industry would become a US$1 trillion market over the next 20 years. The economies of
China and India are also expected to expand rapidly. The increase in higher living standards
increases the volume demands between hubs and Asia. China is seen as the world’s biggest
market for aircraft. This provides an opportunity for airlines to consider using larger aircraft,
increasing the demand for A380.
Threat - However, the 2008 economic crisis has reduced the growth in air traffic. The market
was smaller even after a year, making it even harder to fill the 550 seat wide-body aircraft. This
made the air travel industry revert back to point-to-point mode as airlines realised that it was
more economical to maintain and fly medium-sized airplanes instead of large aircraft. Large
aircraft are only profitable when a full aircraft is run for every flight which is unlikely to happen.
This reduces the demand for large aircraft. In addition, 65% of the total profit in 2019 mostly
come from North America, while Asia-Pacific region accounted for less than 20% of the total
profit. This concludes that despite the high demand in Asia, Airbus is unable to secure the
market share in Asia-Pacific.

Sociocultural
Opportunity - There is a high percentage of passengers that used at least one hub on their
journey and the volume of seats offered for hub-to-hub or hub-to-secondary city markets far
outstripped the secondary-to-secondary city growth rates. In a survey conducted, majority of the
respondents chose their flight based on airfare followed by non-stop service as their prime
motivation to choose a given flight. This implies the growth in large aircraft as large aircraft are
more feasible to undertake, providing a higher comfort standard to passengers, lower fuel burn
per passenger, lower costs per passenger mile, and increase the ability for airlines to carry a
larger number of high-yield passengers. The lower costs incurred by airlines will translate into a
lower fare, attracting travellers who are willing to trade a stopover to reduce costs. This implies
an opportunity and demand for large aircraft.

Threat - However, after the financial crisis in 2008, people are more price sensitive, increasing
the demand for budget airlines. Passengers are more willing to accept smaller cabins on
long-haul flights and are attracted to affordable seats provided by the low-cost carrier. These
passengers who are highly price-sensitive are expected to account for over a third of the
market. The change in customer preference has increased the demand for narrow-body aircraft.
Airlines are more inclined to narrow aircraft due to their extended ranges, fuel efficiency, and
higher maximum take-off weight. Airlines are able to accommodate more passengers with
airplanes that were cheaper to operate than larger and less flexible wide-body aircraft. This
reduces the demand for large aircraft, causing the demand for A380 to fall.

Technological
Opportunity - Airbus had 15 different facilities across 4 countries in Europe, where parts and
assemblies were manufactured with the latest aviation technology. This aviation technology had
forged ahead with new airframes and engines that will burn lesser fuel, less noise, and be more
efficient in flying. This allowed Airbus to develop an aircraft that is more fuel efficient which was
a major competing criteria among airlines. This provides an opportunity for Airbus to develop
cost savings aircraft that would be beneficial to airlines and passengers.

Threat - However, Airbus had invested a huge amount in its R&D and development costs for its
A380. Despite the high development cost, A380 has several engines and technical problems
that need to be solved during the manufacturing process. Furthermore, large aircraft are too
costly and took a long time to upgrade. The estimated cost of upgrading a large aircraft could be
over US$45 million which is almost half the list price of a smaller aircraft. The high development
costs and technical problems reduce the demand for A380. The low flexibility of being
re-configured to meet the cargo market also caused Airbus to forgo the opportunity to tap into
the fast-growing cargo market.

Sustainable Physical Environment

Opportunity - Airbus had made an effort to come up with 3 environment-friendly commercial
aircraft ideas that used hydrogen as their primary fuel source, with the ambition of making zero
emissions a reality by 2035. This is in line with the air transport industry's long-standing goal of
reducing its carbon footprint by 50% below 2005 levels by 2050. Airbus' ESG initiative would
paint a holistic picture of sustainability in the long run, attracting investors and thus increasing
stock prices. This also attracts passengers and airlines who are environmentally friendly to
support Airbus.

Conclusion: With the change in market trends, the demand for large aircraft declined, and it is
advisable for Airbus to stop the production of A380. Despite the failure of A380 and losses
incurred from the project, Airbus is still able to maintain a competitive advantage and retain its
position as a leading leader through other aircraft models.

Business/ Competitive Strategy: Porter’s 5 Forces Mode

[Eg. What is the attractiveness of the aircraft industry?]

[Porter 5 framework]

Suppliers Bargaining Power (high)

Both Airbus and Boeing depended on a huge ecosystem of suppliers globally for the
manufacturing of the aircraft. They purchased parts such as engines, wings, frames, and flight
instruments from many long-term suppliers who were heavily reliant on the manufacturer for
revenues. Any changes in specifications, quality standards, or delivery dates could significantly
and adversely affect the supply chain and production timeline of the planes. It may take up a
long time to look for alternatives hence, showing that suppliers do have high bargaining power.

Buyer Bargaining Power (moderate)

Airlines usually invest in models that were technologically similar to the ones they already
owned to enable cross-crew qualification. They also looked for attributes like fuel efficiency,
operational costs per seat, number of seats, and range when deciding which aircraft to
purchase or lease. This implies that airlines are price sensitive and would prefer aircraft that
would result in cost savings. However, the aircraft industries are dominated by Airbus and
Boeing, which results in buyers having low substitutes. Hence, they have moderate bargaining
power.
Competitive Rivalry (moderate)
The aviation industry is mainly dominated by Airbus, Boeing, and McDonnell Douglas. In 1992,
Boeing has a market share of 57% followed by McDonnell Douglas with 20% and Airbus with
16%. However, in 2005, Airbus and Boeing both have a market share of around 50%. The
duopoly implied a lower competitive rivalry. Not many competitors are entering the market other
than China’s COMAC. There may be other potential rivalry entering the industry as the air travel
industry is said to be growing and the commercial aircraft industry would become a US$1 trillion
market over the next 20 years. Hence, despite the high barrier, there may be other competitors
entering the market and seize and the market share. Furthermore, there may be high exit
barriers due to the high capital and time needed. Therefore, the competitive rivalry is said to be
moderate.

New Entrants (low)

Airlines would either purchase or lease a plane and place orders with the manufacturer for a few
years in advance, as places could take anywhere between 1-2 years to be produced and
delivered. The purchase of aircraft is a huge investment decision as it is very costly. It is said
that the process of developing a plane typically took 2-5 years and the total cost of development
as a rule of thumb was estimated at US$20 million per seat of launch for a new plane. The high
capital and time needed make it difficult for new entrants to enter the aircraft industry, hence the
new entrants are said to be low.

However, China being a growing market has started to manufacture its own planes with
Shanghai-based aerospace manufacturer, Commercial Aircraft Corporation of China (COMAC).
COMAC has also started to design other planes in different market segments, and could
potentially become a competitor of Airbus and Boeing. COMAC was perceived as the third
option in the market for planes with more than 100 seats, coming behind Airbus and Boeing.

Threat of Substitute Products (low)

There is little close substitute for Airbus and Boeing. Passengers can travel through the mode of
cars, rail trains, and helicopters for short-distance trips. However, this is not applicable to
long-distance trips. Hence, there is little substitute for aircraft manufacturers.
Revenue - Cost

Airbus POV: A380 is sold at US$445.6 million per plane with a development cost of US$25
billion. This results in a negative profit margin, stating A380 is incurring a loss. This makes it
impossible for Airbus to recover the production costs from sales.

Key Success Factors

[Eg. What do you see are the key success factor for this industry?]

[Key Success Factors vs Critical Success Factors]

1. Ability to recognise changing trends

Airbus POV: Airbus felt that the very large aircraft market had the potential to grow. Airbus
foresaw a market for 1,200 super-jumbo passenger aircraft by 2025. Hence decided to launch
the A380 to meet the market demand and maintain a competitive advantage over its
competitors.

However, Airbus failed to see an increase in air traffic due to the consequent passenger growth
and volume demands between hubs. This caused many airlines to start exploring point-to-point
routes with smaller aircraft, lowering the demand for large aircraft. Despite that, Airbus managed
to adapt to the changing trends and redesign its competitive mid-size wide-bodied jet A350 to
A350XWB “extra wide body”.

Boeing POV: Boeing foresees the market trend of airlines adopting the hub-and-spoke model.
Hence, Boeing launched the first very large commercial aircraft B747 to cater to the long-haul
market, taking international air travel to a new level of excitement. The humongous success of
B747 has became the cash cow for the company where 70% of Boeing’s operating profit during
the 90s comes from B747.

When Boeing’s competitor, Airbus, successfully launched A380, Boeing responded to the
market by coming up with a completely different strategy and product compared to the A380.
Boeing has announced to develop the refined longer version of B747, the B747-8 which would
use fuel-efficient engines to carry 450 passengers. This decision is changed after Boeing
noticed the congestion at hub airports and concluded that airlines would demand smaller and
faster jetliners instead of large aircraft. Boeing projected that the passenger traffic would grow
by 4.9% year on year and the airline industry would need a larger number of smaller aircraft and
single-aisle airplanes. Hence, they reverted the B747-8 project and start working on a new
project called B747 Dreamliner which received overwhelming responses from airlines. Their
mid-size B777 has became the company’s most lucrative model. Boeing ability to recognise the
change in demand patterns allows them to maintain a competitive advantage over its
competitors.

Airlines POV: With the increased in air congestion of about 60% at hub airports in Asia, many
airlines had started to explore point-to-point routes with smaller aircraft. Airlines such as
Singapore and Dubai began to offer more direct flights from a significant number of middle-sized
airports. Airlines had also realised that smaller models were more feasible for meeting customer
demand and adapting to changing market conditions such as upgrading old planes than large
aircraft. With Airline's ability to recognise the changing trends, they are able to maintain a
competitive advantage over their competitors.

2. Costs of aircraft

Airbus POV: The very large aircraft supported the hub-and-spoke configuration by facilitating
more seats per plane, higher fuel efficiency, and lesser cost per seat for airlines. This results in
cost savings as higher revenue can be earned while maintaining the same amount of fixed
costs. The reduction in operating costs provides an incentive for airlines to purchase aircraft
from Airbus, maintaining Airbus's competitive advantage.

However, the high development costs provide a downturn for Airbus as more orders are needed
for the project to break even. In addition, production delays, complex fixes, and re-tests increase
the project costs for A380, making it almost impossible to recover the production costs from
sales. This results in huge losses of around US$219 million (in a year) on the A380 project.

Boeing POV: One of the reasons for the success of B747 is the affordable prices offered to
passengers. Boeing is able to provide comfortable air tickets at affordable prices to the forefront,
resulting in humongous success as a passenger as well as a cargo aircraft. Similarly, the new
project B747 Dreamliner is able to use 20% less fuel compared to other similar-sized airplanes
and provided a 10% lower cost per seat-mile compared to any other aircraft. The reduction in
operating costs and cheaper purchase price than Airbus 380 provides an incentive for airlines to
purchase aircraft from Boeing, maintaining Boeing’s competitive advantage.

Airlines POV: Offer travellers a seat-only air travel experience for much cheaper ticket prices.
Passengers becoming more price sensitive has changed the market trend and increased the
demand for budgeted airlines.

3. Quality of aircraft

Airbus POV: The complex fixes and re-tests has resulted in Airbus to lose buyers. This can be
seen from Emirates, A380 biggest and most ardent client deferred 12 orders from 2017 to 2019
due to engine problems. In the end, Emirates cancelled a total of 39 planes ordered. SIA also
experienced a delay in its first order and a faulty engine issue in 3 of its 11 A380 jets. Technical
problems including minor cracks on part of its wings have caused SIA to lose interest in Airbus
A380 jets. In the end, SIA decided not to extend its lease on its early batch of aircraft, reducing
its order total from 24 to 19 airplanes. This shows the poor quality of aircraft loses buyer
interest, resulting Airbus losing its competitive strategy.

Boeing POV: Boeing B747 was designed for long-haul flights with lightweight structure built
from composite materials, reducing maintenance and replacement costs. Furthermore, Boeing’s
Dreamliner with state-of-the-art and more recent engine technology was likely to be more fuel
efficient and provide better quality than Airbus 380. The good quality also affects the demand for
Boeing airplanes where Boeing received orders from more than 50 airlines for its 895
Dreamliner’s.

Competitive Strategy: Business Strategy - how to compete

[Would you recommend the company to (a) maintain the business strategy adopted for
your company, or (b) change to another business strategy in order to sustain your
company’s competitiveness? Why?]

Current Business Strategy: Differentiation

Airbus POV: Airbus believed that airlines would continue to maximise existing hub-and-spoke
systems and therefore decided to launch the A380 to help accommodate the growing number of
passengers and alleviate airport slot congestion. The A380 is designed based on the feedback
given by airlines with its operating costs reduced by 15-20% than the existing Boeing B747-400.
This gives Airbus a competitive advantage to compete with Boeing as not only does the A380
able to meet airlines need for large aircraft, but also lowered airlines operating costs which
Boeing did not manage to make.

A380 offered a suite of services that were packaged and customised to meet customer needs.
Many airlines are able to provide new solutions, consolidate frequencies and introduce new
routes through the use of A380, allowing airlines to reduce traffic in their runaways optimise their
network, focus on peak travel times and create some savings in the process. The large seating
capacity allows more passengers in one flight, reducing the passenger cost which translates to
a lower fare, helping airlines to attract travllers who are price sensitive. The interior design was
also flexible and allowed different class configurations depending on the airline needs across
short as well as long-haul flights. The A380 cabin was considered one of the quietest and most
spacious in the sky. On-board bars, lounges, and even showers can be added in, increasing the
comfort of travel. The flexible arrangement of seats to accommodate economy, business and
luxury travellers, and the ability to provide better airfares makes A380 one of the most popular
jets amongst the passengers, allowing Airbus to maintain its competitive advantage.
Airbus also redesign its A350 mid-sized wide-bodied jet to make it even wider and re-release it
as the A350XWB to compete when Airbus sees the increasing trend where more airlines used
smaller and faster jets and point-to-point systems. Other than the 2 airplanes mentioned, Airbus
does have many other airplanes that are unique from one another. Furthermore, Airbus
airplanes used hydrogen as their primary fuel source that is environment friendly. With Airbus
strategy of offering unique products that differ from its competitors, the current business strategy
Airbus adopt is Differentiation.

Proposed Business Strategy: Outpacing

Airbus POV: Airbus should integrate low cost with differentiation and come up with a business
strategy that is outpacing so that it can outpace its competitors and move ahead in the
competition. With its current business strategy of differentiation, the cost of producing the
aircraft is not at its lowest. Airbus estimated the developing costs for A380 to be around US$10
million, and a total of US$11.9 after including the operating costs. However, the total project
costs for A380 became US$25 billion, resulting in a huge loss of around US$219 million a year
for the A380 project. This makes it impossible for Airbus to recover the production costs from
sales. Furthermore, the use of hydrogen as their primary fuel source requires a lot of work on
technologies, demonstrators, testings, regulations, and certification, which increases the
research and development costs. This implies the importance of manufacturing aircraft at a
lower cost other than providing unique aircraft to serve the needs of airlines and passengers.
With the integration of low cost and differentiation, Airbus can outpace its competitors and move
ahead in the competition.

[Eg. What is the profit potential of the airline industry?]

[Competitive]

- Industry structure (value chain)

- Industry dynamics (porter 5 + non-competitive eg. customer taste & preference,
government regulation)
- Industry economics (revenue vs costs)
- Key success factors
- Core/ distinctive competencies (resources + capabilities)
- Competitive advantage
- Competitive strategy (push differentiation → outpacing)