The civil aircraft industry - power point presentation

The Civil Aircraft Industry Strategic Management BU3004

 Aurélia Moretto  Christelle Mfufu  Erik Groothuis

The Civil Aircraft Industry

Embraer ERJ 195

Bombardier C Series

Airbus A 380

SUMMARY 

Determine the underline structure of your company’s industry and discuss the key competitive challenges for incumbents.



What are the Key Factors for Success (KFS) that companies in the industry must satisfy in order to ensure survival and seek competitive advantages?



What are the emerging threats and opportunities in the industry in the next five years and why? How will these impact players' competitive strategies?



Given your level of analysis, discuss if you consider the industry to be attractive to new entrants and why. If a company decides to enter the industry what positioning strategies do you suggest and why?

QUESTION 1 

Civil Aerospace Industry structure



Actors 

Type of incumbents   

  

Market concentration Market share Market segmentation

Customers Suppliers Government



Macro­environmental analysis: PESTILE



Operating economy analysis  

Industry and product life cycle Industry growth



Micro­environmental analysis: Porter’s 5 forces



Key competitive challenges

Thank you for your attention!

Any questions? questions

Civil Aerospace Industry structure 

The aircraft industry or aerospace industry is the industry supporting aviation by building aircraft and aircraft parts. This includes aircrafts and parts used for civil aviation and military aviation. In other word, this industry is about making and selling commercial airplane. Wikipedia



The global civil aerospace industry, more precisely in the 110 seat­plus segments, is an oligopoly structure with two major players (Boeing and Airbus) and other key incumbents like Embraer and Bombardier.



This is an industry with a high degree of competitive rivalry and it used to be a duopoly between Boeing and Airbus.



In the civil aircraft parts industry (or civil aircraft manufacturing industry) the manufacturers combine assembly units from major suppliers (Tier One) to produce the final aircraft product. The parts business requires a high degree of service and local interaction with the airline companies. The duo Boeing­Airbus controls the standards that aircraft parts suppliers must meet.



Civil aerospace industry is cyclical (long cycle sector) and tied to the airline industry and profitability.



There is a tight correlation between airline profitability and aircraft orders as orders to manufacturers from airlines only increase once airline profitability sustained.

Case study

Actors: incumbents (1) 

Point­to­point traffic vs. Hub­to­spoke traffic 

Boeing rely on direct connecting link from point­to­point (town to town= medium traffic) whereas Airbus focus on hubs (international traffic and local traffic) 



The point­to­point model favours the development of smaller capacity aircraft flying to final destination The hub­to­hub model favours the development of larger capacity aircraft flying less frequently between hubs in which the passengers are fed into spokes on smaller capacity aircraft. Case study

Actors: incumbents (2) 

Market concentration 

In addition to this concentration of companies, the aerospace component industry and market are concentrated geographically in the Triad.Wikipedia

Ge ograph i c al c o nc e nt rat i on

5%

6%

14%

75%

US A Eu r op e J apan Oth e r a re a s

Asian Market Share 0%

28%

Boeing

Actors: incumbents (3)

Airbus 72%

US Market Share  5%

Market share 

Boein g Geographically

Other (including Bom bardier and Em braer)

28%

Airbu s 66%

Oth er (in clu d in g Bombard ier an d Embraer)

European Market Share

Boeing

14% 35%

Airbus

Latin American Market Share Boein g 23% 47%

30%

Airbu s

Oth er (in clu d in g Bombard ier an d Embraer)

51%

Other (including Bombardier and Embraer)

Actors: incumbents (4) 

Market segmentation: regional vs. large commercial aircraft (1) Regional Aircraft

Embraer

Bombardier

Up to 50 seats

ERJ 135; EJR 145CRJ 100;

CRJ 200; CRJ 440; Dash 8 Q 100; Dash 8 Q 200

Over to 50 seats

E 170; E 175; E 190; E 195CRJ 700;

CRJ 900; Dash 8 Q 300; Dash 8 Q 400

Actors: incumbents (5) 

Market segmentation: regional vs. large commercial aircraft (2)

Large commercial Aircraft

Airbus

Boeing

Embraer

Bombardier

Single aisle 100 seats

A 318

B 717

100­200 seats

A 319; A 320; A 321

B 737

Twin aisle 200­300 seats

A 300; A 310; A 330

B 767; B787

300­400 seats

A 340

B 777

Over 400 seats

A 380

B 747

ERJ 190; ERJ 195

C 110; C 130

Actors: incumbents (6) 

Interplay between Aircraft manufacturers. Case study (Exhibit 10 updated)

700

Passe n ge r c apac ity

600 500 400

Boe in g

300

Air bu s

200

Bom ba r die r

100

Em br a e r

0 0

1950

1960

1970

1980

Time

1990

2000

2010

2020

Actors: Customers 

4 main business markets    



Short­haul vs. Long­haul 



Legacy Majors: Lufthansa, Varig, America Airlines, British Airways Asia­pacific: China Airline, Japanese Airlines, All Nippon Airways Leasing companies: debis AirFinance…

Low cost carriers (LCC): Ryanair, Easyjet, JetBlue, Southwest PricewaterhouseCoopers

In addition, the global customers are divided between fully integrated national carriers offering both intra­ regional (short­haul) and intercontinental services (long­haul), and LCC offerring inter­regional services only (short­haul). case study

B2B environment P28 29 ERIK 

Main difference between B2B and B2C    

Market structure and demand Nature of the buying unit Types of decisions Decision process

Actors: suppliers 

Key collaborators and location. 

The aircraft manufacturers and particularly Boeing, have suppliers all around the world



There is a correlation between the number of suppliers and their location and the global sales of the aircraft manufacturer. For example, the USA correspond to 66% of Boeing’s global sales and at the same time the USA are the most important Hub in Boeing organisation. Moreover, Latin America represents only 1% of Boeing’s sales and Embraer (Brazil) is the only collaborator of Boeing in the region. Case study



For the construction of an aircraft the companies need a variety of raw materials like steel plates or plastic parts. This can be purchased from many suppliers on the world market. In addition the aircraft companies need a lot of parts they can only get from a small number of manufacturers like plane tires (Goodyear, Bridgestone, Michelin) or high tech components (Siemens, Honeywell). Stefan Lacher et. al



Last and most important group are the suppliers that deliver components that have to do with the plane’s efficiency and nevertheless with its security. These are parts like the hull and the engines (Rolls­Royce, General Electric).1 The aircraft manufacturers normally develop new planes together with these suppliers and form therefore long­term strategic alliances. Stefan Lacher et. al

Actors: governments 

Aircraft purchase involve a tripartite negotiation between the Aircraft manufacturer, the airline and the host government. Case study



Sector economically important that justify government intervention. Steven McGuire, 2006



Example of government power: 

Governments, such as the US and the EU governments, used to financially help aircraft manufacturers via subsidies. This mainly caused the WTO litigation between Boeing and Airbus that also has affected Japan­US relationship regarding sub­contracting. Steven McGuire, 2006

 



In certain case, the host government imposes penalty if the aircraft manufacturer does not meet its Industrial. Case study In the case of China, the government has been particularly forceful in securing FDI from Boeing either through the establishment of joint ventures (e.g. TAECO in 1997 and BHA in 1998). Case study Policy and regulatory decisions by governments can also have a dramatic impact on the demand for civil transport aircraft. Boeing.com

Legend

Americas

Europe

As

­ = negative effects; 0 = neutral effects; + = negative effects

USA

Canada

S.A

UK

France

Germany

China

+ + ­ 0 ­ ­

+ + 0 ­ ­ ­

+ + 0 ­ ­ ­

+ + ­ 0 ­ ­

+ + ­ 0 ­ ­

+ + ­ 0 ­ ­

+ + 0 0 ­ ­

+ ­ ­ + ­

+ ­ + + ­

+ ­ + + ­

+ ­ + + ­

+ ­ + + ­

+ ­ + + ­

+ ­ + + ­

•US military awarded a 35­billion­dollar aircraft deal to Europe's Northrop

+ ­

+ 0

+ 0

+ +

+ +

+ +

+ 0

•Global population growth in developing countries.

+ + + +

+ + + +

+ + + +

+ + + +

+ + + +

+ + + +

+ + + +

­ + ­ ­ +

­ + ­ ­ +

­ + ­ ­ +

­ + ­ ­ +

­ + ­ ­ +

­ + ­ ­ +

­ + ­ ­ +

+ ­ ­

+ ­ ­

+ ­ ­

+ ­ ­

+ ­ ­

+ ­ ­

+ ­ ­

­ ­ ­

­ ­ ­

­ ­ ­

­ ­ ­

­ ­ ­

­ ­ ­

­ ­ ­

S.A: South America; US: United States of America; UK: united kingdom

Political

•The new SCM code (Subsidies and Countervailing Measures) •Bilateral Agreement for Large Civil Aircraft •WTO litigation between US and Europe •WTO litigation between Bombardier and Embraer •Political instability, terrorism (09/11) •Deregulation remove barriers to entry for LLC so more competition

Economical

•Aircraft manufacturer rely on subsidies •Fuel price increase •Depreciation of US dollars •Increasing world wide demand for commercial airlines •Currency fluctuations, tariffs, price controls and labor regulations •Increasing international division of labor

Grumman/EADS group

Socio­cultural

•Increase in average life expectancy in western civilization.

•Increase of disposable income in developing countries.

•Culture, language influences

Technological

•High research and development costs •Use of military technologies in the civil aircraft market •Pressure for lower weight and lighter materials • Dependence on specialist suppliers •Technological change is increasing the importance of non­aerospace

technologies for industry

Legal

•Competition laws •Employment laws, Health and Safety •Environmental laws

Ecological

•Green issues •Pressure for lower weight, carbon emission and noise •Climate protection on charge

Operating economy analysis 

Industry life cycles: the long­term nature of the Aerospace industry cycle Case study updated

2010­2011

GDP fall

Downward spiral

PEAK Passenger Demand

Delivery & Manufacturer Profits

1997 (2007)

(traffic and load factors)

Airline Orders

1995 (2005)

Airline Company Profits

Airline Company Profits

1994 (2004)

Airline Orders

1992 (2003)

Delivery & Manufacturer Profits

Passenger Demand (traffic and load factors)

Recovery curve

GDP Growth

1992

TROUGH

Operating economy analysis 

Aircraft industry product life cycle (market)

PricewaterhouseCoopers

Operating economy analysis 

Industry growth: 20 years of market potential

Boeing.com

Micro-environmental analysis 

Click here to see the Civil Aircraft Industry Five Forces

Key competitive challenges (1) 

Asia­Pacific growth 





Growth in air travel in the Asia­Pacific region is the primary driver behind the expected increase in air travel over the next 20 years.

Based on Airbus’ forecasts, this will lift the region’s share of global passenger traffic from 25% in 2003 to 31% in 2023. As a consequence, by 2023 the Asia­Pacific region will account for a larger share of passenger traffic than North America (26%) and only just be behind Europe (32%).

Driving this performance is the continued economic development of China, where passenger traffic is expected to grow by an annual average rate of over 8% through to 2023 – compared with half that in the USA and just over 5% in Europe.

PricewaterhouseCoopers

Key competitive challenges (2) 

New customers: different needs 





The major national airlines used to be the traditional major customers of the LCA and RJ manufacturers. This no longer seems to be the case. In particular, two very different customer groupings, LCCs and aircraft leasing companies, are now major customers.

The forecasts predict that the LCCs will account for 30% of global capacity by 2015, whilst the leasing companies’ share of the world fleet is expected to have risen from 25% in 2003 to 30% by the end of 2005. The current importance of leasing companies reflects their increase in orders prior and lower order deferral and cancellation rate relative to the airlines.

An analysis of Airbus’ and Boeing’s October 2005 order backlog reveals that both groups were already as important as their traditional customers – the majors.

PricewaterhouseCoopers

Key competitive challenges (3) 

Potential of regional jet 



GE predicts that, by 2015, LCCs and regional carriers will provide 50% of global seat capacity and RJs would be expected to be best placed to serve this segment. To date, RJ usage has largely been a US affair. All of the major airlines either own or are affiliated with regional carriers and the US domestic market is well established and offers scale – both in demand and in airspace.

But this looks set to change: as European deregulation gathers pace, regional carriers are expected to develop the European market in the next decade.

Key competitive challenges (4) 

Environment protection 







Policy makers are being forced to turn their attention to the environment and aviation is not yet seen as a model citizen.

Up to now, limiting the environmental impact of aviation has been the responsibility of the Committee on Aviation Environmental Protection (CAEP). Part of the International Civil Aviation Organisation (“ICAO”), it is comprised of governments, industry groups and pressure groups. The CAEP issues priorities and recommendations every three years and this has produced internationally recognised standards and recommended practices adopted across the industry.

Perhaps surprisingly, the aviation industry rather than roads (the main transport polluter) has come under the microscope first. This may reflect more than just politics, as aviation’s 5% annual growth rate (and hence emissions growth) is high when compared to those of other industries.

And, unlike other industries (automotive, for example), aviation has limited opportunities to reduce its future emissions due to the long design and useful life (potentially 65 years from development to retirement) of an aircraft. So whilst much is made of the introduction of more fuel efficient ‘planes (like the Boeing 787), their overall impact is limited by the fact that many older, less fuel efficient aircraft will be fit to fly for years to come.

PricewaterhouseCoopers

Key competitive challenges (5) 

Technological change  

 

Technological change undermined incumbent firms by presenting them with technical challenge they do not possess the competencies to cope with The drive for weight reductions and environmental compliance has reinforced the specialisation of the supply network. Increasing technological specialisation tilts the power relationship between suppliers and the final assembler.

R&D costs cannot be absorbed by military contract like in the past.

The importation of lean production techniques has benefited firms that have considerable exposure to non­aerospace activities like the Japan’s ‘Big Three’ firms Mitsubishi Fuji and Kawasaki that are not aerospace manufacturers but who are able to leverage technology and management practices learned elsewhere to aerospace.

Steven McGuire

QUESTION 2 

Key factors for Success definition 

KFS and CFS



Value chain



Sustainable competitive advantage



Strengths and Weaknesses

Key Factors for Success 

In an industry, the KFS, sometimes referred to as Critical Factors for Success (CFS), are those resources, skills and attributes of the organisations in an industry that are essential to deliver success in the market place. Lynch 2006



It is best to consider the CFS as factors internally to the organization that are imperative to operational success. In this way, a meaningful connection is established between the two terms. KFS are the set of competitive factors that an organization needs to satisfy in its external environment, and in so doing, it must possess a relevant set of CFS that can effectively be matched against these external conditions. Lecture 4

KFS

CFS

External

Internal

Design

R&D

Technology Quality

Innovative ability Low manufacturing cost based, cost reduction

Good relation with suppliers, strong network

Access to foreign market Skilled work force Brand recognition

Strong organizational structure After sales service

Distribution

Security

Safety

Market knowledge

Marketing communication

Firm infrastructure HRM Technology development Procurement

Government support, financial policy, accounting, regulatory compliance, company culture

Boeing Value chain

Procurement training Managing relationship with suppliers

Hiring & training of engineer, pilots…

Skilled workers

Qualification of suppliers (Tier One suppliers) New  materials, Partner

R&D, Strategic Partnerships, strong contracts, military technology

Training for competitiveness

People familiar with international economies and politics

Product development Market research Regulations and policies

The concept of value added can be used to develop the organisation’s sustainable competitive advantage and therefore, build the KFS within CAD/ CAM system, Assembly of plane & part the industry.

Procurement training Customer relationship Managing relationship with suppliers

tracking

Tracking of issues Discounts

The value ­chain identifies where the value is added in an organisation Concurrent engineering ­ Involvement of customers ­ Flexible manufacturing in product definition ­ Materials and links the part of the organisation. ­ Wideprocess choice in capacitywith the main functional ­ Promotion, advertising qualification 

­ Worldwide presence

­ Engine selection ­ Partners and Joint programs ­ Electronics…

with “family” concept ­ Fly­by­wire technology ­ Short development cycles ­ Quick to market with short manufacturing cycles

INBOUND LOGISTIC

OPERATIONS

Lynch 2006

OUTBOND LOGISTIC

­ US lobbying and foreign government ­ Selling powerful partners ­ Facilitation of financing

MARKETING AND SALES

­ Repairs pare parts ­ Maintenance service ­ Inspections and tests ­ upgrades ­ Training facilities for customers ­ Discounts

SERVICE

Sustainable Competitive Advantages 

SCA is an advantage over competitors that cannot easily be imitated. Lynch, 2006

Boeing/ Airbus

Embraer/ Bombardier

- High performances

­ RJs market dominance

- LCA Market dominance







The advantage should be significant to make a difference Sustainable against environmental change and competitor attack Recognisable and liked to customer benefits

- Global presence - “Tier One” suppliers

- High technology -Manufacturing efficiency - Economy of scales - Product portfolio

Strengths and weaknesses 

Strengths   

 





Duopoly/Oligopoly Brand Image Technological advances, lucrative R&D incentive Strong global network Broad product line that covers most major market niches Range of capabilities from OEM segments in­service support providers Cost advantages



Weaknesses  

  

Failed to get US Air Force contract A hierarchical, ridged, and semi­ autocratic management style, which is a product of its military heritage Labour problems Dependence on suppliers Dependence on governments and WTO­ incompatible subsidies

Question 3 

Opportunities in the civil aircraft industry in five years    



Environmental opportunities Political regulations Social opportunities Increasing demand

Threats in the civil aircraft industry in five years     

Economical Political Social issues Demand Competition

Opportunities (1) What are they?

 Environmental  ISO 14001 certification.

Why?

 Proof of ethical production and care of

 Investment in R&D would

 It eliminates import duties on all aircraft,

 More generally, governments, the industry and

environmental matters.

 95% of current fleet will be recycled or replaced by more eco­efficient aircrafts. Lean materials Designed features to lower the volume of CO2 allow higher performance and less consumption of fuel.  Existence of alternative fuels such as alcohol.

 Political regulations:  WTO’s plurilateral agreement on trade in

civil aircrafts.  WTO’s Uruguay round.

Their impact on the industry strategy.

other than military aircraft, as well as on all other products covered by the agreement — civil aircraft engines and their parts and components, all components and sub­ assemblies of civil aircraft, and flight simulators and their parts and components. Trade barriers suppression.  Help aircraft trade e.g. China and France: Mr Sarkozy sold 160 airbus to China last November.

allow the companies to be considered as an ethical company and also gain market shares on the future market of recycling and replacement of aircrafts.  Research on alternative fuels.  Creation of an environmental office by Embraer in October 2007.

airlines should establish a clearer and more consistent dialogue on where the whole sector is going, with the aim in particular of dispelling confusion about the motivation for government action on taxation and security.

Opportunities (2) What are they?

 Social opportunities:  Growth of purchasing power in

Why?

Their impact on the industry strategy.

 Allow profits of the airline industry which

 The aircraft manufacturers should be ready for a new

 Development of new LCC in Latin America and

 Embraer and bombardier can keep improving their

means an increasing need of aircraft.

cycle (innovation…)

Western countries and in some emerging countries (Eastern Europe, China..)  Increasing demand:

 Increase in aircraft orders

through 2020.  Growth of Regional jet Aircraft orders from airlines companies, especially LCC The Russian airlines will need more than 900 passenger aircraft over the next 20 years in response to the strong growth in this market Asia­pacific growth

Asia due to the growing number of passengers (Latin America are expected to purchase some 1,468 new aircrafts over the next 20 years).  To replace the old aircrafts they used to answer the growing demand.  Increase of the RJ segment due to the LCC demand in this segment  Demand for the period 2007­2016 (for passenger aircrafts of 100 seats and more) : Asia­Pacific : 3,673 Europe : 2,627 North America : 2,412 Latin America

: 771

Middle East : 506 Africa : 464 CIS : 340

RJs aircraft to meet customer’s needs.  Plane such as the 787 Dreamliner and the A380 should become the Star products for the demand of the long­haul and large capacity aircrafts

Threats (1) What are they?

 Economical:  Depreciation of US dollar.  Oil price increasing.

 Political:  Conflicts between countries.

 Social issues:  Growth of inflation in many

Why?

Their impact on the industry strategy.

 Influence the international economy and

 Need for the companies to look after their

 Prevent aircraft trade ex:

bad relations between us and Russia. Aircraft sold to Russia by EU.

Use of diplomacy in their business relations.

 Decrease of airline companies profits

 Need for the companies aircraft manufacturers to

 Orders depending on airlines profits. Ex:

 Targeting the profitable airlines

stock markets.  Threats the whole economy to collapse.

(following the pyramid of Maslow).

stakeholders.  Reduction of costs to avoid bankruptcy.  Need to invest in R&D to tackle the use of oil.

target their clients.

countries which is a threat to consumption, especially in the airline industry.

 Demand:  Orders cancelled.

British Airways cancelled 12 airbus A300.  Cancellation of A380 and 787

 Prevents the risk of cancellation with a

consultation/ prevention scheme  Anticipation with focusing on star products in order to balance the loss.

Threats (2) What are they?

 Competitions:  United Aircraft Building Corporation (Russia)

composed by Mikoyan, Sukhoi, Ilyushin, Tupolev, Yakovlev and Irkut.  CATIC / AVIC (China) with products comparable to Boeing 767­200ER and 737­200 (but more efficient in term of fuel comsuption due to turboprop system).

Why?

Their impact on the industry strategy.

 The Chinese government invest a lot in this

 Newcomers are experienced companies with huge

company in order to help it to become as competitive as the major companies in aerospace industry.  African market is neglected by the major companies Chinese company AVIC take the opportunity to develop its market share on this continent without facing a fierce competition..

government backup. They are not feared about competition and seemed to be competitive in all the fields of manufacture.  Boeing, Airbus, Embraer and Bombardier have to be careful and look closer their competitors to still get competitive advantage. They also have to take into account the whole world to keep growing and stop the competition.

QUESTION 4 

Reminder of the background



The potential new entrants: China and Russia (and Japan)



Attractiveness of the industry… 

… via the analysis of the competitors’ profile:   



GAP Analysis Strategic Groups (cognitive map) Portfolio analysis: Business Strategy Matrix

Advices to new entrants 

Positioning strategies   

Strategic Marketing Ecological

Reminder of the background (1) 

Asia­pacific growth (for example the Olympic Games in 2008)



Different needs from the customer (airline needs different aircrafts)



Growth of Regional jet (because of the low cost airlines this segment will grow)

Reminder of the background (2) 

As can be seen from the graph the future perspectives look positive concerning the demand of airline traffic.

The potential new entrants (1) 

For the new entrants, as seen in the Five Forces tool, highly competitive and government support is needed.  

China & Russia are the potential new entrants (medium term) in the 110+ seat airplane market.

The government is supporting both:  

the China Aviation Industry Corporation (AVIC)  70­80 seats the Beriev Aviation Company from Russia  66 seats



Due to the almost unlimited amounts of subsidies of the government China and Russia are able to cooperate with some of the most advanced companies in the world like General Electric and Sagem. As a result, they are also capable of building aircrafts with more capacity.



Along with financial strength and access to technology, both have large home markets.

So in conclusion can be said that these companies can be competitive on the global civil airplane market.

PricewaterhouseCoopers, Boeing.com

The potential new entrants (2) 

Special comment: 

Japanese industry has been a major subcontractor, a minority partner, in Boeing programs. The Japanese companies are just impatient to build an airplane that's in the same class, the same quality, as those in the Western world.

Steven Udvar – Hazy, 2007



There is an increasing role of the “Big Three” firms: Mitsubishi, Fuji and Kawasaki. All are diversified manufacturers that can leverage aerospace technology. Around 35% of Boeing 787 is produced in Japan.Steven McGuire, 2006

Advices to new entrants 

Strategic advices:  



Focus on Asia Focus on the RJs market: development in the US and Europe.

Marketing advices: 

Differentiation:    

It requires: i.e. extensive R&D, product design ...

It provides: i.e. brand loyalty, supplier power ...

Approaches: technology, features ...

Examples of differentiation: 

Service differentiation: 



Speed, delivery, installation, repair, customer training, consulting services, high skilled personnel.

Ecological advices: 

“Clean aircrafts”