So how then would Boeing respond in retaliation of Airbus’ attempts to becoming the market leader for the VLA market? Insights from the case allow us to recognize 5 possible approaches that Boeing would employ. 1) Boeing may challenge the launch aid by filing a complaint with the World Trade Organization (WTO) on legal grounds. However, Boeing itself might be vulnerable to WTO sanctions for alleged subsidies on its military contracts and its use of foreign sales corporations (FSC).
2) Boeing may invest heavily in research and development, backed by their financial strength, to compete directly against the A3XX in terms of cost efficiencies. Thus cutting its prices on the 747. At least this strategy might divert sales away from the A3XX; it might even deter launch completely by making the economics sufficiently unattractive. 3) Another approach would be to also invest heavily in research and development, but is an attempt to develop a competing super jumbo jet. This approach involved the greatest financial risk because Boeing would have to invest $13 billion only to share the VLA market with Airbus4) Develop a stretch version of the 747 (E.g.
747X). Apart from cost, there was this question of whether the 747’s older style and technology could stand up to the newer A3XX in terms of passenger comfort and operating efficiency. 5) Finally, Boeing may adopt a “wait-and-see” approach to see if the demand for VLA would rise to new peaks as they remain skeptical that the demand for such aircrafts are still small (i.e.
ignore the potential threat for the moment). In fact, no response might be the best option as this gives the market leader more opportunities to enhance profitability by concentrating on its existing product-line while Airbus was tied up developing the A3XX.Whichever option Boeing selects, it had to be consistent with the firm’s renewed emphasis on shareholder value as they regard shareholder value being the single most important measure of their long-term success. These responses would be of paramount importance later in our report analysis where the actions undertaken by Boeing would thus create scenarios that affects the profit margins of Airbus’ launch. 20-year forecasts for large commercial aircraft would have to be generated due to enormous up-front investment and the lengthy time period for development.
The 2000 forecasts agreed that there would be significant growth in the air transportation industry. Worldwide passenger traffic would almost triple in volume by 2019 – Airbus forecast an average annual growth rate of 4.9% while Boeing forecast growth of 4.8% per year.More importantly, Airbus, using the GMF (Global Market Forecast) Model, predicts that there would be 1550 new aircrafts seating 500 or more passengers. This is shown in Exhibit 3 where the figures comprise of 1235 passenger planes and 315 cargo planes. This is compared against Boeing’s estimate of only 600 new VLA Aircrafts, 270 of which would be cargo planes, leaving demand for only 330 aircraft seating 500 passengers or more.
The latter does not believe the demand for very large airplanes is small.As pointed out in the article, this discrepancy between the 2 forecasts could be traced to conflicting assumptions regarding the relative importance of flight frequency, new route development, and aircraft size. Airbus believed that increasing frequencies and new routes would only be short-term solutions to the problem of growing demand. Airport curfews, gate and runway capacity and passenger arrival preferences would limit the ability to increase frequencies at many airports.However, intuitively, applying present day context with the terrorism attacks and the subsequent crash of many major economies, it has put an even more pessimistic cover on the forecast of Airbus.
Although the increased curfews and security checks may push for the idea of A3XX’s large seating capacity, however, they are more vulnerable as likely terrorism targets. The sharp decline in confidence of airport security has also lead to even larger drops in passenger traffic growth. Ultimately, it may not justify the case for operators to hold purchase A3XX as the seating capacity may not be fully utilized until the periods of uncertainties have tide past.
Airbus’ “star” market being Asia, too, may now be a wrong focus as many parts of Asia are having much political and economic problems of their own.Ultimately, our opinion is that Boeing’s forecast is overly pessimistic whereas the forecast of Airbus is overly optimistic. Thus our forecast of the VLA market would be to average out the 2 forecasts = (600 + 1550) / 2 = 1075 Thereafter, we believe the that Airbus would be only able to attain 65% of the VLA markets demand, facing the strong pressures of competition as highlighted in the Five Forces Model, bringing us to a forecast estimate of (1 – 0.35) x 1075 ? 700 aircrafts for Airbus Industrie.