The Boeing Company, a well-known US-based manufacturer of commercial and military aircraft, faced a dilemma in 2004. Long a leader in the global airframe manufacturing industry, Boeing had been losing market share since the 1990s versus the company based in Europe. Airbus Industries, now incorporated as the European Aeronautics and Space Company (EADS). In December 2001, the EADS Board of Directors committed the corporation to a goal it had never achieved before: to wrest leadership of the commercial aviation industry from Boeing by building the world's largest commercial jet aircraft, the Airbus 380. The A380 carries 481 passengers in a typical multi-class seating configuration compared to 416 passengers carried by the Boeing 747-400 in a similar seating configuration. The A380 would not only fly 621 miles more than the 747, but would cost airlines 15-20% less per passenger to operate. With orders for 50 A380 aircraft available, the EADS board announced that the new aircraft would be ready for delivery during 2006. The proposed A380 program decimated sales of Boeing's jumbo jet. Since 2000, airlines had ordered only 10 passenger-configured Boeing747s. With orders for 50 A380 aircraft available, the EADS board announced that the new aircraft would be ready for delivery during 2006. The proposed A380 program decimated sales of Boeing's jumbo jet. Since 2000, airlines had ordered only 10 passenger-configured Boeing747s. With orders for 50 A380 aircraft available, the EADS board announced that the new aircraft would be ready for delivery during 2006. The proposed A380 program decimated sales of Boeing's jumbo jet. Since 2000, airlines had ordered only 10 passenger-configured Boeing747s.

Clearly, Boeing was a struggling company in 2004. Distracted by the McDonnell Douglas and Rockwell Aerospace acquisitions in 1996, Boeing's top management had spent the ensuing years strengthening the corporation's historically weak position in defense and aerospace and had allowed its traditional expertise in commercial aviation to deteriorate. Boeing, once the manufacturing marvel of the world, was now spending 10-20% more than EADS (Airbus) to build an aircraft. The prices he asked for his planes were thus also higher. As a result, Boeing's estimated market share of the commercial market fell from almost 70% in 1996 to less than half by the end of 2003. EADS claimed to have delivered 300 aircraft to Boeing's 285 and won 56% of the 396 airline orders placed in 2003 – a vast improvement on 1994, when EADS controlled only one fifth of the market! This was quite an achievement, given that the A380 was so large that the modifications required to accommodate it at airports would cost between $80 million and $100 million.

Although defense sales now accounted for more than half of the company's revenue, Boeing's CEO realized he needed to act quickly to regain Boeing's lead in the business side of the industry. In December 2003, the board approved a strategic decision to promote a new commercial aircraft, the Boeing 787, for sale to airlines. The 787 was a mid-range jet, not a jumbo jet like the A380. The 787 would carry between 220 and 250 passengers, but it would consume 20% less fuel and be 10% cheaper to operate than its competitor, EADS' current mid-range aircraft, the smaller A330-200 widebody. It was to be made of a graphite/epoxy resin instead of aluminum. It was designed to fly faster, higher, farther, cleaner, quieter and more efficiently than any other midsize jet. This marked the first time since the approval of the 777 jet in 1990 that the company launched an entirely new aircraft program. Development costs were estimated at $8 billion over five years. Depending on the results of these sales efforts, the board would decide sometime during 2004 to start or cancel the 787 construction program. If approved, the planes could be delivered in 2008, two years after the A380 was delivered.

The Boeing 787 decision was based on a completely different set of assumptions than those used by the EADS board to approve the A380. EADS top management believed that the commercial market wanted even larger jumbo jets to travel long international routes. Airports in Asia, the Middle East and Europe were heavily congested. In these places, the “hub-and-spoke” method of creating the main hubs of the airlines flourished. The use of larger planes was one way to deal with that congestion by flying more passengers out of these hubs. EADS management believed that over the next 20 years, airlines and cargo carriers would need a minimum of 1,500 more aircraft at least as large as the B747. EADS management had concluded that the key to controlling the future commercial market was to use larger and more expensive aircraft. . The A380 was a very big bet in that future scenario. The A380 program would cost EADS nearly $13 million before the first aircraft was delivered.

By contrast, Boeing's management believed in a very different future scenario. Noting the success of South West and JetBlue, among other airlines in North America, he concluded that no more than 320 extra-large jets would be sold in the future as the airline industry moved away from hub-and-spoke networks toward more direct flights between smaller airports. The fragmentation of the airline industry, with its emphasis on competing through lower costs, was the main reason for Boeing's fuel-efficient 787. A secondary reason was to deal with increasing passenger complaints about reduced legroom and seat room on today's planes operated by cost-conscious airlines. The 787 was designed with windows, seats, toilets and larger overhead compartments. The aircraft was being designed in short-range and long-range versions. Boeing management forecast a market of 2,000 to 3,000 such aircraft. Additional support for the mid-range aircraft came from some industry analysts who predicted that the massive A380 would give new meaning to the term "cattle class". To achieve the necessary economies of scale, the A380 would likely devote a large portion of its two decks to economy class, seating three to four passengers, the same configuration as most of Boeing's 747s. Boeing's strategy to regain industry leadership with its proposed 787 jet meant that the company would have to increase its manufacturing efficiencies to keep the price down. To significantly reduce costs, management would be forced to implement a series of new programs:_ Outsource approximately 70% of manufacturing. Could you find suppliers who could consistently make the high-quality parts that Boeing needs?

Cut final assembly time to three days (compared to 20 for your 737) by having suppliers build entire sections of the plane. Could so many suppliers meet Boeing's demanding deadlines?

Use new, lightweight composite materials instead of aluminum to reduce inspection time. Would the plane be as reliable and maintainable as Boeing's aluminum planes?

Resolve bad union relations caused by downsizing and outsourcing. The machinists' union should have more of a say in specifying manufacturing procedures. Would Boeing's middle managers be willing to share power with an adversarial union?

Which vision of the future was correct? The long-term fortunes of both Boeing and EADS depended on two contrasting strategic decisions, based on two very different assessments of the market. If EADS were right, the market would continue to demand larger and larger aircraft. If Boeing was right, the current wave of jumbo jets had peaked, and would soon be replaced by a new wave of fuel-efficient midrange jets.

Question: Which business strategy had the best chance of success?

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Answer Analyzing the business strategies of both Boeing and EADS Airbus and determining which one had the best chance of success requires careful consideration of the market dynamics industry trends a... View the full answer