There is a need to build a very large commercial transport (“VLCT”) but the cost would be daunting even for the top two aircraft manufacturers Airbus and Boeing. The design and manufacture of a VLCT which can carry between 550 to 800 passengers is expected to require the creation from scratch of new technology and new design teams. There are so many things to consider and there are so many hurdles to overcome but one way to approach the problem is for Airbus and Boeing to join forces and develop a VCLT. Yet, upon closer examination of available data one can surmise why both companies are reluctant to travel this path.
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The global aviation industry was worth $100 billion in 1992 (Casadesus-Masanell, Voigt, & Mitchell, p.1). However, there is another major reason why Airbus and Boeing must develop VCLT’s and this is not only about the expected growth of the industry – more or less 50% in the coming years – but also the fact that major airlines all over the world are complaining about congest airports and therefore the logical solution would be the use of a bigger aircraft that can double its carrying capacity.
Aside from the demand there is also the issue of cost. The development cost of building a VLCT is pegged between $5 billion to $20 billion. This is partly based on the fact that Boeing spent $5 billion to build its largest aircraft the Boeing 777. But the cost can easily escalate considering also the other aspects of designing a new aircraft such as engineering, regulatory approval, prototype construction, and assembly, parts planning, and financing (Casadesus-Masanell, Voigt, & Mitchell, p.6). This has prompted many to conclude that a mismanagement of resources can easily break the future of any aircraft manufacturing company that will attempt the development of a new VCLT.
Joint partnership between Airbus and Boeing to develop a super jumbo aircraft will surely split the risk but there are many issues that have to be resolved before that could happen. The first pertains to sharing of technology. This is a sticky issue because even when Boeing used Japanese industries to construct the 777’s frame it did not share core technologies with these firms; however, this may not be the case when it is time to jointly develop a VCLT with Airbus. There is also suspicion that Boeing is not really into partnership but looking for a way to split Airbus in two.
The second issue concerns the way Airbus received subsidies from their respective governments and this is interpreted as unfair trade practice. And finally, Boeing it seems may risk more and gain little in respect to Airbus because Boeing is the market leader, have a near-record backlog, have a strong balance sheet and will post record earning in this year and the next (Casadesus-Masanell, Voigt, & Mitchell, p.12). But this confidence is tempered by the fact that 62% of revenues were generated from customers outside the United States. There is still a good reason why Airbus and Boeing must work together.
The anticipation of growth in the airline industry as well as the nagging problem of airport congestion increased the demand for a VCLT in the near future. It makes a lot of sense for Airbus and Boeing to join forces and share the risk as well as the reward of developing a VCLT that will allow both companies to get a major slice of the market. However, there are many issues that both companies will have to resolve beforehand. But more importantly both companies are wary of each other and there was even suspicion on the side of Airbus that Boeing is interested only in splitting the organization into two. As of the moment talks are ongoing but it is unclear if these two giant companies will agree to work together.
Casadesus-Masanell, Ramon, Erich Voigt, & Jordan Mitchell. Airbus vs. Boeing. Harvard Business School. 2007. 1-19.
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