Two companies, Boeing and Airbus, have long dominated the market for large commercial jet aircraft.
Today Boeing planes account for 50% of the world’s fleet of commercial jet aircraft, and Airbus planes account for 31%. The reminder of the global market is split between several smaller players, including Embraer of Brazil and Bombardier of Canada, both of which have a 7% share. Embraer and Bombardier, however, have to date focused primarily on the regional jet market, building planes of less than 100 seats. The market for aircraft with more than 100 seats has been totally dominated by Boeing and Airbus.
The overall market is large and growing. In 2017, Boeing delivered 763 aircraft and added 912 new orders, bringing its order backlog to 5,864 planes. Airbus delivered 718 aircraft and registered new orders. Demand for new aircraft is driven primarily by demand for air travel, which has grown at around 5% per annum compounded since 1980. Looking forward, in 2018 Boeing predicted that over the next 20 years the world economy would grow at 2.8% per annum, and airline traffic will grow at 4.7% per annum as more and more people from the world’s emerging economies take to the air for business and pleasure trips. Given the anticipated growth in demand, Boeing believes the world’s airlines will need 42,730 new aircraft between 2018 and 2037 with a market value of $6.3 trillion dollars in today’s prices.
Clearly, the scale of future demand creates an enormous profit opportunity for the two main incumbents, Boeing and Airbus. Given this, many observers wonder if the industry will see new entries. Historically, it has been assumed that the high development cost associated with bringing new commercial jet aircraft to market, and the need to realize substantial economies of scale to cover those costs, has worked as a very effective deterrent to new entries. For example, estimates suggest that it cost Boeing some $18 to $20 billion to develop its latest aircraft, the widebodied Boeing 787, and that the company will have to sell 1,100 787s to break even, which will take 10 years.
Given the costs, risks, and long-time horizon here, it has been argued that only Boeing and Airbus can afford to develop new large commercial jet aircraft.
However, in the last few years, three new entrants have appeared. All three are building smaller narrowbodied jets with a seat capacity between 100 and 190.
Boeing’s 737 and the Airbus A320 currently dominate the narrow-bodied segment. Development costs are typically lower for narrow bodied jets than widebodied jets, and the number of aircraft demanded is much larger. In 2017, there were 15,700 narrowbodied jets in service, and 4,290 wide-bodied jets. Demand for narrow-bodied jets is also predicted to grow faster than demand for wide-bodied jets over the next 20 years (however, wide-bodied jets have a significantly higher sales price).
The Commercial Aircraft Corporation of China (Comac) is building a 170- to 190-seat narrow-bodied jet, the C919. Comac has around 1,000 orders for the aircraft, mostly from Chinese domestic airlines and leasing companies. The C919 is expected to enter commercial service in 2021. Bombardier has developed a 100- to 160-seat plane, known as the C-Series, which brought it into direct competition with Boeing and Airbus for the first time. The first aircraft in the C-Series were delivered in 2016, 2 years later than anticipated and reportedly $2 billion over the forecasted development budget. Embraer too, has developed a 100–124 seat plane to compete in the narrow-bodied segment, the E-190/195. The E190/195, a stretched version of Embraer’s successful regional jet line, competes with the smaller Boeing and Airbus jets. The new entry is occurring because all three producers believe that the market for narrow-bodied aircraft is now large enough to support more than Boeing and Airbus. Bombardier and Embraer can leverage the knowhow they developed manufacturing regional jets to help them move upmarket. For its part, Comac can count on orders from Chinese airlines and the tacit support of the Chinese government to help it get off the ground.
In response to these competitive threats, Boeing and Airbus started development of new, more fuel-efficient versions of their own narrow-bodied planes, the 737 and A320. Although they hoped their new offerings will keep entrants in check, one thing seems clear: With potentially five producers rather than two in the market, it seemed likely that competition would become more intense in the narrow-bodied segment of the industry, which could drive prices and profits down for the big two incumbent producers.
Perhaps recognizing the risks here, in October 2017, Airbus entered into an agreement with Bombardier to purchase a 50.01% majority stake in the C-series program. At the time, Bombardier had 402 orders to the C-Series. The C-Series has now been renamed the Airbus A220. In exchange for control of the program, Airbus agreed to provide procurement, sales and marketing expertise to the C-Series Aircraft Limited Partnership, the entity that manufactures and sells the jet. On the heels of this deal, in mid-2018 Boeing announced that it had entered into an agreement with Embraer to establish a joint venture to develop, manufacture and market Embraer’s line of commercial passenger jets, including its regional jets and the larger E190/195 series. Boeing paid Embraer $3.8 billion for an 80% stake in the venture.

QUESTIONS
1. Explain why the wide-bodied segment of the large commercial jet aircraft industry can only profitably support two players at present. What are the implications of your answer for barriers to entry into this segment?
2. Are entry barriers into the narrow-bodied segment the same as those into the wide-bodied segment? Explain your answer?
3. Given future projections for demand, how do you think the industry as a whole will do over the next twenty years? How might your forecast differ for the wide-bodied and narrow-bodied segments?
4. If you were a new entrant into the bottom part of the narrow-bodied industry, what would be your long-term development strategy?
5. Why did Boeing and Airbus enter into partnerships with Embraer and Bombardier? What was the strategic thinking here? Why do you think Embraer and Bombardier agreed to these deals?
6. What can Boeing and Airbus do to deter further entry into this industry, and/or keep new entrants boxed into the bottom end of the market (that is, smaller, narrow-bodied jets)?