Wednesday, October 29, 2008

Update Airline Case Study

Case Study Update:
Airliner Wars: Boeing vs. Airbus

Changing Businesses - 2005:

The market for commercial jetliners continued to increase in the midst of global prosperity, but the success of the two companies is not on even. Airbus continues to have problems with delivery of their all new A380 super jumbo. Production delays had pushed the project out another seven months (Clarke, 2008). Another bane for the struggling Airbus is the excellent customer support of Boeing's newest offering 7E7 Widebody now known as the 787 Dreamliner. These strong orders forces Airbus to talk about a “plan B”. Since the A380 required an all or nothing, bet the company, mindset they were financially in very deep. Many believed that the Governments who had stake in the conglomerate would not allow it to fail. However, they were now starting to discuss their competition to Boeing's 787, the A350. It would be smaller and based on the A330, but would utilize composites and polymer materials to increase efficiency. The only problem is that it was based on an older platform that was already out of date.
This is the same strategy that Boeing was working for the 787. “[T]he 787 is the result of over a decade of focus groups and scientific studies to gain a better understanding of passenger comfort and how the design of airplane interiors can make flying a more pleasant experience. If Airbus made comparable efforts, we are hard-pressed to find the evidence.” (Babej & Pollak, 2006) This proved to be the biggest mistake Airbus could have made; not listening to customers and assuming customer preferences would remain the same in the future as they were in 2005. Boeing was slow about moving to the next product, but in that slowness it had discovered the real needs of the end customer and provided a solution for the airlines to meet those needs.

Boeing’s Triumph – 2006
The jetliner industry is booming for a second year in a row. Both companies set records with orders booked in 2006, but for the first time since 2000 Boeing was on top, by more than 250 planes (Reuters, 2007). The delays for the A380 had caused the airlines to be concerned for the delivery of any plane ordered from Airbus. Airbus had placed all of their bets on the new super-jumbo A380 and was beginning to see that they very much needed to mitigate their risks with a plan B. Finally, in December Airbus was given the OK to proceed with the A350, a design targeted to compete with the 787, a year and a half after the need was identified. This lag was due in part to the huge amount of financing needed to design a jetliner. Almost every avenue for financing had been tapped by the A380 over the last several years. Then on top of that, the joint governance of Airbus slows down every decision. Much attention was now going into how to streamline the decision processes within Airbus, but they would not see significant changes until the following year.
By this time the 787 was a harrowing success. Customers were ordering them in record numbers while Airbus was struggling to log enough orders to break even with their super-jumbo A380. Airbus saw a significant increase in smaller aircraft, when compared with the historic patterns but overall sales were down (Reuters, 2007). The realization that Boeing had made the right bet was just beginning to set in. They were too far down the road to abandon the A380 but they were seeing the freight industry had a sparked interest. Maybe they could reach the break-even point (250+ planes) with a combination of passenger and freight super-jumbos.
Boeing was enjoying the success of having excellent orders because of reading the market correctly, but it was not about to commit the same mistakes it made in 1997. Ramping up quickly for an increase in orders cost them $3.0 Billion in 1997 (Colvin, 2007), so they were much more pragmatic and willing to have a backlog of orders. The backlog can help by smoothing out the cyclical swings of the market. Boeing had become successful in its diversity which now included military and space contracts. Once the restructurings were tamed, Boeing began to see the benefits that drew them to acquire the military and space units many years before. Now nearly all divisions of Boeing were profitable and the increased efficiencies were coming to light.
Airbus looks strikingly like their competitor, Boeing, of 1997. In fact, the proposed way out of the mess is even similar to the plans Boeing used to come out of their crisis as a stronger and healthier company (Gates, 2006). The new CEO of Airbus had rolled out plans to outsource components and reduce labor forces. Some plans call for closing 7 of 16 manufacturing plants. This was highly unlikely to happen with the speed needed, since any closure would have caused economic problems. Any of the four nations who had a hand in the operations of the conglomerate would fight to keep their plants open.

2007 – Same Story, Different Plane
It was now Boeing’s turn to have delays, problems with suppliers caused the 787 to be held up several times. Despite the delays Boeing once again beats out Airbus in orders booked. Airbus, however, actually delivered more planes than Boeing, by 19 (Clarke, 2007). Globally, sales are still at record levels but they are not expected to last into 2008. Both companies have booked orders to last about six years so the downturn should not be devastating, especially since both companies have controlled their growth. In the case of Airbus, reorganization was the name of the game.
Development is underway for the A350 but the initial design has gone under the knife twice because critical customer requirements were missed. Most of these problems were concerning efficiency and technology used to improve customer satisfaction (Gates, 2006). The A380 continues experiencing delays of almost 2 years and finally, customers are canceling orders and turning to Boeing to meet their needs. FedEx canceled an order for A380’s which is causing other companies to reconsider their orders as well. The problem has moved from delivery delays to the cost of maintaining the behemoth if there are very few in service. When so few planes of one kind are flying, the availability of parts is low which causes the cost of those parts to increase astronomically, this has other soon to be super-jumbo owners worried. Airbus is able to hold most of its passenger plane customers at bay by offering “huge incentives to keep them from dropping orders” (Hamilton, 2007). These incentives are believed to make the A380 the cheapest Widebody to operate on a per seat basis.
Meanwhile, both companies had record breaking orders in 2007. Airbus recorded 1,341 orders compared to 1,413 marked up at Boeing. Both companies beat previous records by hundreds of planes and had growth into the double digits. However, the outlook for 2008 was weak and as it neared, analysts continued to decrease projected earnings. The worry came from the rapidly rising cost of oil; from $75 estimates early on to projections of up to $100 a barrel. Then there was the credit crunch in the US that had many concerned about the profits that American airlines would be able to make in an economy that was headed south (Wallace, 2007). Both airframe makers were less concerned about the second scenario because their strong growth had mainly come from the Middle East, Asia and India. In fact Boeing had been focused strongly on the markets of India and China because planes remove some of the urgency for creating the widespread infrastructure that these two huge countries needed (Colvin, 2007). In essence it is easier to build an airport than several thousand miles worth of roads to connect large cities.

A Year of Surprises – 2008
2008 brought many surprises to the world, one of which was the $146 a barrel price of oil. This cost increase was will likely prove to be a benefit for Boeing because the 787 Dreamliner which was built for efficiency. Many of the major carriers have increased their fees for transporting extra luggage and charging “fuel surcharges” to recapture some of the lost profits. The price of oil has since slid back down to a more reasonable level, but not without changing the psychology of business worldwide. Consumers and business alike are hooked on the efficiency of fuel consumption as well as “Green” initiatives. Boeing, and farther out, Airbus, are positioning themselves to capture some part of the efficient energy wave. The first 787’s are due for delivery in 2009 (Boeing, 2008), while Airbus will deliver its first A350’s in 2013 (Lander, 2008).
Finally the decision came down on the long disputed Air Force mid-air refueling tankers, when Airbus was awarded the $35-40 billion contract. This contract could expand to $100 billion if the need arose (Lander, 2008). This contract had been in debate since 2003 and the selection of Airbus was such a surprise that there was a victory party going on at Boeing headquarters when they got the news that they had lost (Wayne, 2008). Government officials and Americans in general were angry that a foreign company had won the contract. Truth be told they will be build in the US at Northrop-Grumman plants and contain mostly US components, it is just the money, in the form of profits, that will go to another country.
The last surprise was the collapse of the global credit market. First, it was the US financial institutions, then it was discovered that banks and insurers the world over had invested in baseless securities. Suddenly, the governments of nearly every nation were throwing money at their banking institutions to keep them from going belly up. The U.S. government saved several banks before supplying $700 billion to the financial industry to keep it from disaster. How does this affect the likes of Boeing and Airbus? Simple, their products must be financed. There are very few airlines that have several billion dollars laying around ready to invest in jetliners. Boeing has suggested that 2009 will bring a more direct interaction with customer financing, they will supply the loans (Johnson, 2008).
Amid problems with delivery for the 787 Dreamliner Boeing is having problems with its stakeholders, namely the unions in its US plants. At the writing of this update the strike had been ongoing for 49 days (Wallace, 2008). It was the third longest strike in Boeing history and it was reportedly costing $100 million each day.

Who Can We Blame for Boeing’s Troubles? - Update
The problems for Boeing were numerous, there were internal and external issues that caused the huge problems in the late 1990’s. The internal problems had stemmed from complacency and arrogance. Even a former CEO admitted that there were many decisions based on arrogance and the feeling that the status quo was good enough. After the troubles hit, Boeing had some serious strategy rework to accomplish. Supply chains were restructured, and manufacturing processes were dismantled and to be replaced by the revolutionary Lean process. After these changes were made and the company was able to gather its wits, they emerged stronger than ever. Every area within the company was focused on efficiency and the sharing of best practices. Their production processes were now much more efficient and standardized. All of these changes made Boeing more able to compete on price, which was the name of the game for jetliners.
The elements that were less evident at the time of the original case study is the extent of the customer research that Boeing had completed in an effort to design the customers plane. Airbus was focused on the same old model of hub and spoke transportation, while Boeing had discovered the true desire of air-travelers; get to where they need to go as quickly as possible. The time included in the customers mind was beginning at home through all stages of transport until they arrived in their hotel room. So by eliminating the layovers and long loading and unloading times of a large plane and at the same timer opening the smaller airports, closer to people’s homes, they could deliver with the super efficient 787 Dreamliner.
By understanding the voice of the customer, Boeing has proven to be the leader in the industry once again. It was not an immediate turn around, but after a company-wide restructuring, coming back to first place in an industry like jetliners is incredible.

What Can be Learned?
Synergy of M&A is Suspect: - Update
Although the information within this section is still accurate, I think it would be beneficial to change the tone from negative to the positive. Boeing is who they are today because of the acquisitions of McDonnell Douglas and Rockwell. They were struggling to show value early on after the merger, but since then, they have become a single operating unit and share information readily in every aspect of their business. Today the complimentary products even out the ebb and flow of the commercial airlines. The diversity has provided a broader knowledge base for each department to draw on and in many cases has lead to innovation that has enabled Boeing to rise to number one once again.

Stakeholder Care:
Stakeholders are an important part of any organization and they can take on several different personae. The companies stakeholders that immediate come to mind are the stock holders, the “owners” of a firm. But the most important stakeholders are the ones that operate the company and serve its customers; the employees. Employees need to be chosen based on the goals of the company, then they must be “well trained, well motivated and well respected” (Kolter, 2004). When Employees are respected with simple explanations behind corporate decisions or mandates, they can make their own opinions and then move on. When there is a lack of respect for employees, it is often evident in the lack of communication and ultimately can cause union formation and strikes. Boeing is in the midst of a huge strike that is costing them $100 Million every day. This is not the first time the Machinist Union has gone on strike against them; in fact it is the fourth such strike in 20 years (Wallace, 2008). This strike has forced Boeing to deliver 35 less planes than planned for the third quarter of 2008.
Unfortunately, the strike is not the only symptom of bad stakeholder relations. Since the supply chain changes that took place almost ten years ago, there has been increased problems with parts shortages. Suppliers were hurt by the cyclic tendencies of the airline market, but as global sourcing increased there were delivery issues and transportation problems, that have been almost unavoidable.
The problems with these key stakeholders have caused problems for stockholders, because they have seen the share price drop. The press has reported that “the strike lowered earnings by $0.35 per share, the supplier problems by $0.25” (Klass, 2008).

Integration Considerations
Looking at the low point for Boeing we can get an idea where they went foul. First off they were deep in competition mode with Airbus and were trying to get as many orders booked as possible. However, Boeing was not accurately portraying the lead time for the delivery of its product to customers. Surely there were some politics involved with making the false promises, with pressure from executives and even the marketing folk’s coercion of the production staff to give better time estimates than were realistic. There may have been some hope to deliver jetliners on time at least early on, but it had to have become evident within a short time that the reported delivery dates were off by as much as 2 yrs.
With these promises in jeopardy of being broken the company did anything and everything in its power to get the parts and planes delivered. According to Hartley (2006, p54) there were executives spending weekends finding parts and other parts being rushed in by taxicab. Many other issues caused this problem to snowball into huge financial losses as well as the loss of customer confidence. If customers could not believe that Boeing would deliver product on time, they could just as easily get similar products from Airbus and many did.
Not only is a loss of customer confidence in product delivery an immediate problem, to remove that doubt, customers must take a larger perceived risk to allow the failed supplier another opportunity. Only after they take the risk of giving you another order, can you prove your reliability. To entice customers back a company may need to give significant incentives and lose out on profit.
Now to look at the ethical considerations of false promises from a Christian perspective. We should be bound by more than the loss of customers to rethink our practices. Matthew 5:37 commands us to stick to our word; “let your message be ‘yes’ for ‘yes’ and ‘no’, ‘no’. Anything more than that is from the evil one”. If we make a commitment we had first better know that we can meet it then be able to make it happen in the midst of problems. It is not only our ethical obligation, but a protection of our witness to unbelievers, which is our highest calling.













References:

Babej, M. and Pollak, T. (2006). Boeing vs. Airbus. Forbes. Retrieved October 20, 2008 from: http://www.forbes.com/2006/05/23/unsolicited-advice-advertising-cx_meb_0524boeing.html

BBC. Airbus poised to overtake Boeing. Retrieved May 24, 2008 from: http://news.bbc.co.uk/2/hi/business/2656205.stm

Business Week. Airbus subsidies don’t fly. Retrieved May 24, 2008 from: http://www.businessweek.com/debateroom/archives/2007/10/airbus_subsidie.html

Colvin, G. (2007). Boeing prepares for takeoff. Fortune. Retrieved October 20, 2008 from: http://money.cnn.com/magazines/fortune/fortune_archive/2007/06/11/100082882/index.htm

Clarke, N. (2008). Airbus orders trailed Boeing in 2007. New York Times. Retrieved October 20, 2008 from: http://www.nytimes.com/2008/01/16/business/16cnd-airbus.html?_r=1&oref=slogin

Fox News. McCain denies lobbyists on campaign influenced inquiries into air force contract. Retrieved May 23, 2008 from: http://elections.foxnews.com/2008/03/11/mccain-campaign-advisers-lobbied-on-behalf-of-boeing-rival-in-air-force-tanker-deal/

Gates, D. (2006). Airbus' crisis looks like Boeing's in 1997. Seattle Times. Retrieved October 20, 2008 from: http://seattletimes.nwsource.com/html/businesstechnology/2003293167_airbus07.html

Hill, C. (2008). International Business: competing in the global marketplace, e7. New York: McGraw-Hill Irwin.

Johnson, J. (2008). Boeing ready to be lender. Chicago Tribune. Retrieved October 24, 2008 from: http://www.chicagotribune.com/business/chi-thu-earnings-boeing-oct23,0,5246662.story

Klass, T. (2008). Union votes Saturday on strike settlement. Associated Press. Retrieved October 29, 2008 from: http://www.mlive.com/newsflash/business/index.ssf?/base/business-87/122524014926750.xml&storylist=business
Kolter, P. (2004). Ten deadly marketing sins: Signs and solutions. John Wiley & Sons, Inc. ,Hoboken, NJ.

Lander, M. (2008). Ruling near on Boeing-Airbus dispute. New York Times. Retrieved October 20, 2008 from: http://www.nytimes.com/2008/05/29/business/worldbusiness/29trade.html?_r=1&adxnnl=1&oref=slogin&adxnnlx=1225152006-7qdrNkGWhkxa1EOyHahyiQ

New York Times (2003). Boeing 777 first flight. Retrieved May 24, 2008 from: http://query.nytimes.com/gst/fullpage.html?res=9C0DE0DE1E3AF930A25755C0A962958260

Reuters (2007). Airbus says 2006 orders trailing Boeing. MSNBC. Retrieved October 20, 2008 from: http://www.msnbc.msn.com/id/16667842

Wallace, J. (2007). Airline industry facing downturn—Boeing and Airbus orders likely to fall. Seattle Post Intelligencer. Retrieved October 20, 2008 from: http://blog.seattlepi.nwsource.com/aerospace/archives/127614.asp

Wallace, J. (2008). 787 plant faces closure due to strike. Seattle Post Intelligencer. Retrieved October 24, 2008 from: http://seattlepi.nwsource.com/business/384926_dreamliner25.html

Wayne, L. (2008). Airbus parent beats Boeing for big US Air Force contract. International Harald Tribune. Retrieved October 20, 2008 from: http://www.iht.com/articles/2008/03/01/business/eads.php

Wilber, D. (2006). Airbus bust, Boeing boost. Washington Post. Retrieved October 20, 2008 from: http://www.washingtonpost.com/wp-dyn/content/article/2006/11/07/AR2006110701506_2.html