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Boeing's Competitive Advantage Based On Economics

Wed May 23, 2007 11:50 pm

Disclaimer
As many of you have written papers for middle school, high school or college/university on aviation, I have done the same. Here is my paper for my economics degree analyzing the market diversity that Boeing enjoys and how it can give them a competitive advantage. I'd appreciate any construtive criticism about it. To the best of my knowledge, this is exclusively based on truth or economic theory. I do warn you though that it is rather long. This is based on economic argument, and not just opinions on any of the specific companies involved. Please do not treat this as a Boeing versus McDonnell Douglas/Lockheed Martin/Airbus case because it is not. If people treat this topic with respect, then I don't feel it is breaking any of the rules. Enjoy the read and I hope you learn something! I learned a lot while researching and writing it. I'd love feedback.


Economy of Scope’s Affecting Commercial Class Jet Aircraft Manufacturing
A Case Study Evaluating the Conglomeration Effecting in the Commercial Aircraft Market


ABSTRACT
The large commercial transport industry is a dichotomy between two large players. Airbus and Boeing control the industry for passenger aircraft with more than 120 seats. The two companies are very different. Apart from their geographic differences, one company is a partly government operated enterprise, while the other is a diverse corporation specializing in commercial, military and space applications. Boeing is a conglomerate that benefits from economy of scope while Airbus is a relatively independent company.

Boeing has shown that there is an advantage towards manufacturing both commercial and military aviation. The effect is that an independent company is competing in an unstable manner with a conglomerate. This paper reviews the many reasons why Boeing has a competitive advantage over Airbus based on how economy of scope can lower the costs of a conglomeration.



TABLE OF CONTENTS

TABLE OF CONTENTS
1. INTRODUCTION
1.1 Economy of Scope
1.2 Conglomeration
1.2.1 Full Conglomeration
1.2.2 Partial Conglomeration
1.2.3 Independent Firms
1.3 Evidence of Economy of Scope at Boeing
1.3.1 Development of Boeing and Early Evidence of Economies of Scope
1.3.2 Boeing’s in the Jet Age
1.3.3 Boeing’s Early Military Jets
1.3.4 Boeing’s Other Markets
1.3.5 Effect of Outsourcing at Boeing
1.4 Economy of Scope and the Effect of Conglomerates at Boeing Today
2. ANALYSIS
2.1 McDonnell Douglas Acquisition
2.2 Lockheed Martin Pullout
2.3 Airbus’ Relationship with Boeing
2.3.1 Airbus’ Background
2.3.2 Economy of Scope at Airbus
2.3.3 Market Size Analysis
2.3.4 Conglomeration Effect
3. CONCLUSION
4. WORK CITED


1. INTRODUCTION

Boeing is the only large commercial jet manufacturer in the United States (Boeing, 2007). The company competes with Airbus today. Boeing is a diversified company with interests in military aircraft including modern fighters and aerial bombers in addition to many various space applications from rockets to components for the International Space Station. The company is worth over 70 Billion Dollars (yahoo finance, 2007). Boeing’s importance is based on it being the largest exporter in the United States (Isidore, 2004).

One potential reason for why Boeing has become the single biggest exporter and the only large commercial jet manufacturer in the United States is the idea of economy of scope. Economy of scope is a relatively new idea in economics that simply relates how one firm can produce two separate goods in two different markets at a lower cost than two separate firms. Boeing produces military and commercial aircraft, which sell on completely different markets. Boeing’s main competitor does not have this same dichotomy of business. The idea of economy of scope is particularly poignant in commercial class aircraft manufacturing since the idea of economy of scale may not be as applicable since the size of the worldwide aircraft market is limited.

Boeing has formed into a conglomeration with its multiple businesses through growth, mergers and acquisitions. A number of corporations on the United States have produced large commercial jet aircraft including McDonnell Douglas, Convair and Lockheed Martin, but only Boeing has survived in the market. Boeing acquired its competitor McDonnell Douglas in 1997. McDonnell Douglas was a diversified company that offered both commercial and military aircraft. Lockheed Martin offered a large passenger jet in the 1970s, but pulled out of commercial aviation in the 1980s. Conversely, Airbus is a commercial aviation arm of the European Consortium known as EADS and is the only competitor to most of Boeing’s products.

1.1 Economy of Scope
Economy of scope is an economic idea that explains a situation that arises when the cost of performing multiple business functions together is less than performing each business function separately. Diversification in different areas benefits a company by not only reducing the effects of a shock on a specific industry, but also by lowering the overall costs when there may be high fixed costs associated with research and development or manufacturing start up. The premise for economy of scope (as outlined by Bailey and Friedlander (1982)) is that the cost of producing multiple products for a single company is lower than for separate companies to produce them.

Economy of scope often arises in multi product industries. A car manufacture could begin manufacturing trucks, and would probably see lower costs in manufacturing the two together than separate companies manufacturing them separately could attain. There are multiple reasons for this: economy of scale, lower development cost, less manufacturing start up cost, cross subsidization, diversification, risk reduction, and brand recognition.

Economy of scale is a fundamental concept in economics that relates a decrease in cost with and increase in production. Economy of scope can be related to economy of scale when products in different markets can be produced together using the same resources. Higher volume sales help lower the up front design cost per unit sold. Multiple product lines can use excess capacity that may exist. Also larger sales volumes help reduce the overhead costs per item sold. A company that sells more products in multiple industries has the ability to produce each unit at a lower cost than a smaller company could.

Many industries use assembly line production methods. Assembly lines are an efficient production method when there is a single product being produced in large quantities. But efficiencies can still be realized if multiple items can be produced on a single assembly line with increased flexibility, which results in increased volume, which can lower the cost per unit. For example, different types of airplanes can be produced at the same facility. The resources necessary for production can be divided into multiple product lines. The economy of scope concept can be partly explained by the lower costs seen when the infrastructure costs are lower.

Networking is a way for companies to benefit from resources. A company can combine different components together and benefit from economy of scale. The same item can be produced that may go into many different products. By relating similar components together, networking is an example of economy of scope. Furthermore, input items can be reused by other products without being redesigned. Reusing technology from multiple products can decrease the time to market of new designs and decrease development costs. These therefore benefit a company by lowering its costs per unit.

In addition to the direct benefits in production, there are other benefits that the idea of economy of scope is derived from. One of these ideas is the existence of cross subsidizing. If one product is selling well, money can be transferred to development work on other products. Cross subsidizing is an important component of economy of scope for items that have large up front developmental costs. The cost of entering the aviation industry for example is very high. Cross subsidizing allows a company to use the resources from other business lines to fund research and development. It also allows companies to break into new markets by offering products that might not be profitable alone, but could generate customers for other products. Cross subsidizing can also be useful to deter new entrants to a market. A product that may face competition in a certain market may be subsidized to lower its cost and prevent the competitor from getting established. The Justice Department and Congress over the past decade have passed regulatory legislature against this, but it may be still present.

Diversification allows for sharing of intangible assets and reducing shocks. Offering products in multiple industries can reduce the shocks that a company experiences when a specific industry has a downturn. Wages are not perfectly flexible and there are very high costs associated with training technical workers, so it useful to be able to transfer employees between different business units. When one industry is down, then production may decrease. This lowers the need for workers, which could result in mass layoffs. But since it may be hard to attract employees back, companies prefer to move employees around to different projects. A company benefits from transferring employees between similar projects.

1.2 Conglomeration
As explained by Oliva and Rivera-Batiz (1997), there are three fundamental markets that involve either conglomeration firms or individual firms. The three situations are not horizontal or vertical consolidation, but rather a “congeneric” integration. The companies are related based on economy of scope and not due to attempts at diversification or attempts to integrate firms for financial purposes. Boeing’s different business avenues are connected based on technology synergies and process design, which is a better representation of a conglomerate.

Boeing does share resources through different business sectors. First of all (as outlined by Benkard (2000)), there is a dynamic cycle of learning in aviation. The design costs are extremely high in commercial aviation transports. The high costs are similar to those in the electronics industry. This leads to high up front expenditures. The variable costs directly affect the quantity of labor that a manufacturer needs. The planes produced in the first year require up to six times the employees than those produced in the fifth year according to paperwork that Lockheed Martin revealed after the cessation of production for its L1011. A difficulty imposed on companies is how to retain trained employees when there are such changes in work? In the case of Lockheed, they were able to transfer employees from the commercial L1011 to other products that were related to military aircraft production. The effect of losing employees during industry downturns can be called the forgetting effect. This effect can plague companies that are involved in industries with cyclical demand.

1.2.1 Full Conglomeration
The first market with conglomerations is where there are multiple diversified companies competing against each other. Individual firms merge to combine research and development costs. The variable cost can be reduced by overlapping the costs between firms. The individual profit functions added together are less than the combined profit function.

This relationship holds true if the cost C 1&2 is less than the combined costs for the two companies together. The way for this to hold true in aviation is for research and development costs to decrease since the variable costs per plane are not likely to decrease with additional production lines of different aircraft.

Firms have the incentive to merge to form conglomerations when expenditures in research and development are high. Oliva and Rivera-Batiz (1997) explain that having two conglomerations competing with each other is an efficient way to keep development costs down and profits up. It is an efficient point for the market to operate.

1.2.2 Partial Conglomeration
A less efficient point in the market is for a conglomerate to compete with individual firms. Competitions among conglomerates can displace independent firms. The gains and losses derived from mergers and acquisitions generate conglomerates that benefit from economies of scope. They can reduce expenditure by sharing technology and labor among different business units. Independent firms lack this capability. Oliva and Rivera-Batiz (1997) state that this can cause a synergy trap. A single conglomerate always gains while independent firms competing against a conglomerate always lose.

1.2.3 Independent Firms
There are cases where independent firms benefit from not merging. First off, the merger and acquisition costs can be too great. Second off, there can be regulations preventing firms from merging or acquiring other businesses. Regulations can prevent a company from vertical or horizontal consolidation. Furthermore, companies can be prevented from benefiting from economy of scale because mergers are precluded because they can result in monopolies, which are often prevented due to regulations.

A decrease in combined profits is known as a synergy trap. It is possible for a separate company to be able to undercut the costs associated with production. The lower price can decrease profits to the point where profit does not go up when companies are combined. The fixed or variable costs of the merger are too high for the profit to increase from economy of scope. Such markets exist where there may not be a significant economy of scope benefit.

Remaining independent may be more common in industries where the research and development costs are low. In aircraft production, there are very high research and development costs compared to manufacturing. Over 250 products may have to be sold before a profit is returned (Love and Sandholtz, 2000). Sharing technology will have a huge benefit, and therefore in markets with economy of scope where research and development expenditures are high, independent firms are likely to not exist.

In certain markets, firms may be more efficient if they operate independently. If there is little benefit from economy of scope, then there are not likely to be pressure encouraging mergers and acquisitions.

1.3 Evidence of Economy of Scope at Boeing

1.3.1 Development of Boeing and Early Evidence of Economies of Scope
According to Rumerman (2003) military orders are what initially made Boeing a viable company in WWI. Navy orders helped the company grow during the war. In the years after the war, there was a slump, but eventually Boeing began to increase sales by continuously replacing outdated military aircraft. The company that started in 1916 produced its first commercial plane in 1927. The company realized that in order to prosper, they needed to produce and sell their own commercial airplanes.

The early mail planes were an example of economies of scope. Boeing sold civilian planes between military contracts. It used the technology developed from its military aviation business to produce planes that were going to move mail and eventually passengers too. Military and civilian planes in that era were very similar, which allowed Boeing to sell its aircraft to a diverse consumer base. It is pretty clear that the cost of producing a civilian plane when similar sized military planes are already being produced is less than the cost of producing exclusively civilian planes.

With the commercial subsidiary turning a small profit in the 1930s, Boeing started making larger commercial passenger planes. Boeing purchased many different aviation companies as it diversified its business. It acquired engine manufacturer Pratt & Whitney, propeller maker Hamilton Standard, and multiple airlines. Boeing was becoming a heavyweight in the aviation industry with vertical consolidation. They did everything from manufacture all the components of the airplanes to operating them as passenger and mail carriers. The company was reserving its newest and best planes for its own airline. However in 1934, the Air Mail Act caused the federal government to break apart the company. The Boeing name continued as an aircraft manufacturing company. It designed the flying boats and other large airplanes that brought new service throughout the world. Boeing was no longer able to exploit vertical consolidation, so it was left to exploit gains through economy of scope.

WWII then caused a big change. Boeing’s commercial division changed to produce military aircraft. The company’s experience building large and heavy airplanes was put to good use as it designed the B-17. Its facilities were turning out B-17 flying fortresses and B-29 super fortresses at the rate of 350 per month (Ramaran, 2003). Boeing was a leader in bomber technology. The commercial division was nonexistent at this time, but soon would return to the commercial industry.

After WWII, Boeing found limited success in converting its bomber designs into long range passenger aircraft. Shortly after the war, Boeing was producing large passenger propeller driven airplanes that could traverse the Atlantic Ocean. Again, economies of scope came into play. These aircraft were essentially already designed. Normally hundreds of aircraft may have to be produced in order for the plane to turn a profit and recover the design costs. However when a plane is already designed as a bomber and just has the interior features changed, the design costs are low. Boeing was able to keep its business going despite the massive cuts to its military production following the war. Economies of scope are clearly evident when you can sell a product in a completely different market almost interchangeably.

The jet age changed the market again. And with the jet age, military and commercial aircraft evolved to become more different. It is during this time period that it is less clear if there is a benefit from economies of scope in the aircraft market. Military and commercial airplanes were no longer produced on the same assembly line.

1.3.2 Boeing’s in the Jet Age
According to Rumeran (2003), Boeing entered the jet age with the first successful commercial jet in the 1950s. The Boeing 707 was a four engined jetliner in response to the doomed British Comet that faced problems with metal fatigue that led to multiple fatal crashes. Boeing beet its commercial rivals of Douglas, Lockheed and Convair. Lockheed was producing highly efficient propeller driven aircraft, and Douglas was behind developing jets. 1010 707s were built in total.

It can be argued that Boeing was at an advantage during the 1950s because it was not developing new propeller aircraft like Douglas and Lockheed. Boeing was a main supplier of large bombers and converted these into easy commercial sales. Meanwhile, Douglas was producing state of the art DC-6s which was a brand new design. Lockheed was developing the Constellation during this time period too. All of these planes were larger than any passenger planes before and had more range. Economies of scope gave Boeing an advantage over Lockheed and Douglas and allowed the company to be the first success in the jet age since it could focus its developmental resources on incorporating jet technology rather than trying to figure out how to design a large aircraft.

The benefits of economy of scope become less visible as the jet age proceeded. The low design costs on Boeing’s first commercial planes after the war allowed them to have the resources available to develop successful jets, but the military jet bombers developed by Boeing were no longer useful in the commercial market.

Boeing competed heavily with Douglas in the 60s. Boeing entered the shorthaul market with the three-engined 727. 1832 727s were delivered between 1963 and 1984. It was the first jetliner to sell 1000 frames. The 737 was developed to establish Boeing in the 100 seat market with its first flight in 1967. It has been expanded and updated nine times and has become the best selling jetliner in history. Total orders are 6831 and deliveries are 5319. It was most recently updated in response to the Airbus A320 with a new wing design and advanced systems. In the 1960s, Boeing was competing at this time with Douglas’ second jet, the DC-9. There was heavy competition among these companies as they had similar product lines. There were other companies searching for parts of the market, so it wasn’t just an oligopoly. In the jet market, Convair competed in the large long haul market, and DeHaviland and Aerospatiale competed on the regional short haul market.

The economies of scope argument are less evident in this time period because Boeing’s commercial aircraft varied greatly from its military aircraft. It was no longer selling a similar product in different markets, but vastly different products that shared limited technology. It is worth mentioning that the 707 did sell well to the military under the designation KC-135. The KC-135 was an aerial tanker. It was used for inflight refueling and other missions. These were simple refits of an existing design, but the tanker made up only a small part of the demand from the US military for aircraft.

In 1969, Boeing unveiled the 400 passenger long haul 747. It was the largest passenger plane at the time and has become a mainstay of international fleets for many of the largest airlines in the world. It has seen large sale numbers in Europe and Asia. The plane has been updated four times and Boeing is currently working on the most recent development which should see production in 2008. Orders stand at 1500 and total frames delivered are 1382.

The 757 and 767 replaced the 707 and 727 and have seen extensive success among the large US airlines. The 757 is a narrowbody jetliner produced from 1982 to 2004 and sold 1049 frames. The 767 which is nearing the end of its production cycle has sold 1011 frames with 949 produced. These planes competed with the A321 and A330. The 777 first flew in 1994 to compete with the A340 from Airbus. It is a two-engined design, but seats approximately 300 passengers and has similar range. Although it debuted 3 years later, the 777 has outsold the A340 with total sales of 918 with only 614 delivered.

In the future, the 787 is the new airliner in the 200-250 passenger medium to long haul market. Boeing has sold 446 planes so far (airliners) and the first flight is scheduled for the summer of 2007. Additionally Boeing is working on an update of the 747. For a complete summary of orders and delivery of Boeing jets, see table 1 in the appendix.

1.3.3 Boeing’s Early Military Jets
After WWII, there was a major slump among aircraft manufacturers. Boeing fired much of its work force. It produced its last propeller driven plane in the C-97, which became an aerial refueler, which was eventually supplanted by the KC-135. As it invested in new technology, the company began its missile and rocket business.

Boeing produced the B-47 stratojet bomber. It was the first jet engine bomber, but more importantly it was the first plane that featured a swept wing in a large aircraft (Boeing, 2007). This technology definitely spilled over into commercial advancements since every large jet since then has had a swept wing. Economies of scope are evident as Boeing transferred knowledge that they developed with their military business into a successful commercial project. Boeing continued with its jet technology as it developed the B-52 bomber. Although the plane was initially conceived as a straight wing propeller aircraft, the air force told Boeing to switch to a jet design instead. Again Boeing was getting federal money for its design projects. It used this money to improve its technologies and capabilities, which of course were transferred into commercial endeavors. At the beginning of the jet age, Boeing was benefiting from both military and commercial businesses.
1.3.4 Boeing’s Other Markets
In the 1960s, Boeing developed missile technology while building the Ground to Air Pilotless Aircraft. It built some of the first Intercontinental Ballistic Missiles in the United States. Boeing had up to 39,700 people working on the missile systems in the 1960s (Ramaran, 2003). Additionally, Boeing was selected as the contractor to build the first stage of the Saturn V launch vehicle that was so important in the Apollo missions. Although this technology did not transfer into commercial aerospace, the money did. Boeing in the 1960s began development of its most expensive commercial product to date. The 747 required vast resources, and the consistent funding and profitability of the missile and space systems, helped Boeing maintain adequate resources. Without the supplemental business endeavors that Boeing was engaged in, the company may not have been able to leverage enough funding for the complete development of the 747. The missile, space and defense systems were not making it cheaper for Boeing to develop commercial planes, but it was giving the company the financial backing to attract investors for commercial development.

Boeing gained experience tying projects together with its role in the Apollo program. Boeing built many components from the lunar orbiter to the lunar excursion vehicle. The most profound component however was not a tangible piece. NASA relied on Boeing to integrate all of the technical aspects of the Apollo program. These experiences would later become useful in commercial projects. Boeing was gaining intangible assets. The engineering and management expertise could be used in the commercial aviation business. Boeing would be able to lower its fixed and variable costs associated commercial aircraft manufacturing.

During the 1970s when the company faced hard times with the end of the Vietnam War, end of the Apollo program and upfront expenditures on the design of the 747. The company continued to diversify in order to make money. Boeing entered into projects that were not related to aerospace, such as irrigation project in Oregon, housing projects, plant construction, wind turbine construction and finally light-rail vehicle production. Of course the space and military components of the company did still produce a steady supply of income, but they were not necessarily generating profit.

After the 1970s, Boeing’s commercial business was earning steady revenue with new developments, but the reliability of the space and military projects were useful to the company.

1.3.5 Effect of Outsourcing at Boeing
In the aircraft production market, outsourcing has become more than commonplace. Boeing serves the role of a designer, supervisor and final assembler rather a manufacturer. Outsourcing has been established as a cheaper alternative to manufacturing items in house. Boeing outsources much of the design and technical work to companies that specialize in specific subsystems. Only about 1/3rd of the parts in Boeing’s new 787 are manufactured in house (Boeing, 2007). Table 1 in the appendix shows the companies playing a large role in the manufacturing of Boeing’s 787.

Outsourcing lets specific companies benefit from economies of scale. For example, Honeywell and Rockwell-Collins are the leaders in avionics systems as they produce the avionics systems for the vast majority of jet aircraft. The two companies produce systems for both Airbus and Boeing in addition to companies making smaller jets such as Bombardier, Embraer and Gulfstream. Rockwell-Collins and Honeywell have produced high quality systems based on vast research and development and therefore can sell their product at a lower cost than a different company could. Boeing benefits from the lower costs and the aviation industry benefits since pilots will be familiar with this system regardless of the plane that they fly.

But where does economy of scope come into play? Well at each of these specific companies, economy of scope may exist. For example, Hamilton Sundstrand won the contract for the complete power generation. The company is expanding into new areas of power systems with this plane. They are responsible for integrating their system into the airplane, which is something that they have not done before. Hamilton Sundstrand should be able to be able to integrate the power system at a lower cost than Boeing or a separate company could (Hamilton Sundstrand, 2007). Since the company has the experience with the individual components, and are familiar with the design of each component, it is best prepared to work at the system level. The generator control units can be produced at a lower cost by Hamilton Sundstrand, so the company benefits from economy of scope. This idea is present among other specific companies. The lower costs at the contractor level allows them to be able to make lower bids for contracts, which in turn lowers the variable cost for Boeing.

With the economy of scope effect taking place at the level of the supplier, Boeing loses any cost advantages that may be seen between making subsystems for military and commercial aircraft. Boeing has experience integrating systems, but the actual design and manufacturing processes are done by different companies. The effect of outsourcing is that there is not an easily noticeable benefit from economy of scope for Boeing. However it may be beneficial for Boeing to gain experience working with a supplier while working on a military contract. Boeing could then use its relationship with the supplier to get a better price for a commercial contract or to understand the quality of specific suppliers better. But it is hard to put a value on this experience. If Boeing is sufficiently large to have experience working with all of its subcontractors on other aircraft within a specific business unit, then this effect is negligible.

1.4 Economy of Scope and the Effect of Conglomerates at Boeing Today
What is the current effect of economy of scope at Boeing today? Are the joint military and commercial productions of aircraft at the company giving it a competitive advantage over its main competitor Airbus? And finally what is the effect of conglomeration?

To answer this question, an examination of various actions that relate to economy of scope could show that Boeing does benefit by being a conglomerate. First off, Boeing merged with McDonnell Douglas. This merger may show that there is a benefit to combining military and commercial aviation conglomerates. However in controversy with the first point is that Lockheed Martin pulled out of the commercial jet manufacturing sector. This leads to the belief that there may not be a significant benefit to combing these sectors. And finally, a comparison between Boeing and Airbus’ market positions will show the effect of conglomerates in the aviation industry.

2. ANALYSIS

2.1 McDonnell Douglas Acquisition

Boeing announced a $13.3 Billion merger with McDonnell Douglas on December 15, 1996 (Boeing, 2007). The CEO of Boeing at the time, Phil Condit stated: “Today’s announcement brings together two strong aerospace companies with complementary capabilities. The merger enhances our position as the number one aerospace company in the world and truly among the world’s premier industrial firms.” The CEO of McDonnell Douglas, Harry Stonecipher stated: “This transaction puts together a focused, broad-based aerospace company with extraordinary capabilities in commercial and military aircraft, and defense and space systems. The combined companies will offer an outstanding balance of current production programs and those scheduled for production in the years ahead, in addition to manned space programs and space transportation programs” (Boeing, 2007).

The two companies combined very similar businesses together as stated by their CEOs at the time. They were both conglomerations that produced both military and commercial aviation products. After the merger, Boeing eventually shut down all of McDonnell Douglas’ commercial production. It carried out orders on the MD-90 and MD-11 aircraft and attempted to brand the MD-95 as the Boeing 717 before it eventually ceased production with only 156 units delivered (Airliners, 2007).

The effective shutting down of McDonnell Douglas’ commercial division leads to speculation that there were not benefits from economies of scope derived from the merger. Each company already was benefiting from economy of scope with their separate businesses. The fixed conglomeration cost plus total synergy costs could have exceeded the total synergy benefits as outlined in equation 4. The cost of a merger would have been so high and integration would be so difficult for these companies producing similar products that the synergy costs were not lowered by the merger. In this case, conglomeration was not necessarily based on economies of scope, but rather as a strategic device to eliminate competition.

By eliminating the competition, Boeing could lower its variable costs associated with research and development. Firms have the incentives to spend on innovative new designs to earn a competitive advantage. However excessive technology development entails high research costs and leads to higher prices which drives output down. Technology competition can reduce a company’s profits. In this case, Boeing could increase its profits by eliminating part of its competition. The increased profit from this potentially outweighed the costs of diseconomies of scope.

The idea of Boeing merging with McDonnell Douglas being a function of diseconomy of scope and being a move to decrease technology competition is even more evident by the fact that Boeing has not unveiled a single completely new design since the merger. Boeing’s development waned after the merger. Sales continued strong throughout the 1990s as Boeing had a long backlog of deliveries for its updated 737 series aircraft (Boeing, 2007). The company offered updated versions of all five of its in house designs, but did not produce any new designs. The slump in development allowed Airbus to take the lead in aircraft deliveries shortly after the year 2000 (Sandholtz and Love, 2001). This gives rise to the idea that the fixed cost of merger and acquisition C M&A and the synergy variable costs 2cx 2 are higher than the cost of each company producing its own products âxq. Boeing likely merged with McDonnell Douglas in part so that it could reduce its own research and development costs and protect itself from facing another conglomerate company.

At this point it is of note, that there are arguments present that Boeing merged with McDonnell Douglas as an attempt to break further into the military aviation market. McDonnell Douglas’ commercial division struggled to gain new customers after a series of delays plagued the MD-11 in the early 1990s. The poor financial performance of the company as a result may have lowered its value so that the company could merge with Boeing and create a conglomerate that combined the military aviation of McDonnell Douglas with the military aviation of Boeing and left Boeing’s commercial products to stand on their own against the strengthening competitor Airbus. Boeing may have wanted to eliminate commercial competition and strengthen its military business since it has maintained much of McDonnell Douglas’ military production facilities.

2.2 Lockheed Martin Pullout
Lockheed Martin is the second largest producer of aircraft in the United States (Lockheed, 2007). The company has a long history of producing both military and commercial aircraft. The company rivaled Boeing and Douglas after WWII by offering some of the most sophisticated propeller driven aircraft of the day. Lockheed did have problems in the commercial sector though after the war. The propeller driven L-188 Electra in the 1950s had numerous crashes that were eventually traced to a problem with resonance in the mounting techniques between the engines and wing (Airliners, 2007). The numerous crashes tarnished the Lockheed name. However, Lockheed eventually entered the large commercial jet aircraft market with its state of the art L1011 Tristar when if first flew on November 16 1970 (Airliners, 2007). However, after selling 250 aircraft, Lockheed stopped production of the aircraft in 1983.

While Boeing benefits from being a conglomeration with both commercial and military aviation, Lockheed Martin currently focuses exclusively on military, space and information technology projects. So if Boeing benefits from economies of scope by jointly producing military and commercial aircraft, then why did Lockheed Martin pull out of commercial production?

Lockheed produced a very advanced aircraft with the L1011. It featured Rolls-Royce engines and many technical advances for its day. However there were some initial problems with the design that pushed back its entry into service, which had long term consequences as the plane lost orders (Benkard, 2000). McDonnell Douglas had a very similar aircraft at the time competing against the L1011, but was able to deliver its first aircraft more than a year before Lockheed (Airliners, 2007). Lockheed had very high up front development costs associated with the exclusive engine supplier, Rolls Royce, filing bankruptcy and further delaying the development. The end result was a plane with relatively few orders. Lockheed stated that it needed 500 orders to break even, but it only received 250 (Benkard, 2000). Lockheed cancelled the L1011 and exited the commercial aviation market after the losses that it sustained.

Although economy of scope and the idea of conglomeration would imply that it would be advantageous for Lockheed to remain in the commercial aviation market, the company abandoned the market amid losses. The company’s last two civilian aircraft failed to return a profit. The company struggled with design delays and problems. Although it introduced new technology into commercial aviation, its lack of ability to compete effectively with Boeing and McDonnell Douglas resulted in its move to focus exclusively on military aircraft for its aviation division. This move was not a result of economy of scope not being present, but rather a sign of the company having greater design difficulties.

2.3 Airbus’ Relationship with Boeing

2.3.1 Airbus’ Background
Airbus is a relatively new company in the large commercial jet market. “Airbus was established in 1970 as a European consortium of French, German and later, Spanish and U.K companies, as it became clear that only by co-operating would European aircraft manufacturers be able to compete effectively with the U.S. giants” (Airbus, 2007). Although it was only formed in the 1970s, Airbus has vast experience building jetliners. It formed from companies that were pioneers in aviation. Aerospatiale from France had experience building the Concorde, which was the only western supersonic commercial aircraft ever built. The French company pioneered jet technology with the Sud Aviation Caravelle, which was the first short haul jetliner. The British conglomerate BAE Aviation joined the Airbus Consortium with experience building smaller jets and was a leader in wing design. Additionally Germany was the original innovator of the jet engine in World War II and had the remains of a once powerful aviation industry. Airbus was formed using the technology of multiple companies so it could compete with the established American companies of McDonnell Douglas and Boeing. For a summary of Airbus aircraft orders and delivery, see table 2 in the appendix.

Airbus is the only partly government owned commercial jet manufacturer. Smaller companies like Bombardier and Embraer have been privatized, but Airbus remains partly a government entity. Airbus is a division of EADS. EADS’ shareholders include, 34% publicly traded, 30% Daimler Chrysler, 30% France, and 6% Spain. Airbus receives direct government support. Commercial jet manufacturing is in France and Germany, but there are divisions across many countries in Europe and suppliers throughout the world.

2.3.2 Economy of Scope at Airbus
Although it is not an entirely independent company in the context of conglomerates, Airbus does not have the same level of diversification that Boeing has. Airbus does not have the military background or knowledge that Boeing has. There is an attempt by EADS to turn Airbus into a joint military and commercial aircraft producer. In 1999, Airbus established Airbus Military S.A.S (Airbus, 2007) to undertake the development of a tactical military turboprop aircraft known as the A400M. There is hope that economy of scope will play a bigger role at Airbus. The company has no experience building turboprops, so it is able to use military funding for research and development. Furthermore, the company hopes to negate the cyclical downturn in the civil aviation market by offering a military product.

2.3.3 Market Size Analysis
There is no national or regional market large enough in the world to sustain a profitable aircraft industry (Love & Sandholtz, 2001). The local markets can be useful, but a commercial class aircraft company must have a worldwide customer base. For example, Airbus could count on orders from French and German airlines when they first started. However the large growing markets in Asia and the Middle East are far more difficult to enter, but are the largest source of orders among airlines currently (Love & Sandholtz, 2001).

The reason for the need to diversify into many markets is the fact that the development costs of commercial airplanes are very high. In 1985, the research and development costs consisted of approximately 17.5% of the sales price per plane. This percentage is only surpassed by the electronics industry (Sandholtz & Love, 2001). However it is very hard to give an exact figure for the percentage of sales associated with development costs because the quantity of aircraft sold can vary greatly. Furthermore price is quite variable with large launch orders from large airlines (orders early on in the development of an airplane that usually allows the launching airline to help customize the design) often having deep discounts. It may be 10 years into the cycle of a model until profits are finally realized. Derivatives of existing models continue to drive up research and development costs, but it allows models to have production lives of approximately 20 years (Sandholtz & Love, 2001). To help alleviate the start up costs, Airbus does benefit of subsidies. Airbus received subsidies between $25-26 Billion in its first 20 years of operation. Boeing on the other hand lost money over the first twenty years of its operation (Sandholtz & Love, 2001) and was able to strengthen itself as a leader in aerospace because of the high volume of production during the Second World War. The US government helps support the operation of Boeing by offsetting its costs by having spillovers from military defense projects. The reliability of those contracts, which have set delivery dates and quantities helps establish prices that can guarantee profit.

2.3.4 Conglomeration Effect
Airbus remains a relatively independent company when compared to the conglomerates of Boeing and formerly McDonnell Douglas. Airbus is an independent company based on the classification of Oliva and Rivera-Batiz because it sells all of its planes on basically the same market. They differ in size, but the same customer is buying airliners from the same company for a similar purpose. It is being negated that larger aircraft serve different long haul routes from smaller aircraft. This idea is valid because aircraft production and development does not differ greatly between different sized commercial planes. Increasing the number of models is more representative of economies of scale.

Boeing is a conglomerate in aviation. They have three different avenues of business and share technology, knowledge and worker output between them. The commercial aviation market consisting of Airbus and Boeing is an example of a partial conglomeration. Airbus will inherently be at a disadvantage because they do not offer a wider range of products in multiple industries. Economy of scope is not as present at Airbus between commercial and military aviation since the sole Airbus military plane has yet to be delivered to a single customer (Airbus, 2007). Under the assumptions presented by Oliva and Rivera-Batiz, Airbus is forced to either cut its production costs or cut its research and development since it cannot share its research and development costs among different business units. But the company has neither reduced costs below Boeing for manufacturing nor reduced research and development. Instead, Airbus has benefited from direct government support. Its original aircraft development was funded by a consortium held in part by governments. It must acquire funds from alternate sources if it is to compete against a conglomeration.

Airbus cannot easily merge with a company as Boeing has done over the past 80 years to benefit from economy of scope. The worldwide jetliner market is too small to be able to support many companies from a single region. Airbus is partly government owned, so it must answer to its stakeholders. It cannot combine with a company such as Lockheed Martin to combine military and commercial aviation businesses. Furthermore there is not enough demand in Europe to sustain a large scale military production company. The United States government is a large customer of military aircraft. It will only buy from US companies as it protects its technology from entering foreign fleets. The inability for Airbus to become a conglomerate through mergers and acquisitions forces it to not be able to benefit from economy of scope in the same way that Boeing does.

3. CONCLUSION

Boeing is a diversified company that benefits from Economy of Scope. It uses its power as a conglomerate to give itself a competitive advantage over Airbus. The diversity at Boeing has allowed it to become the largest aviation company in the world (Boeing, 2007). It can lower its costs by sharing technology, employees and research between its businesses.

The aviation market has been volatile. Lockheed’s pullout from commercial aviation is an example of how technically demanding the industry can be on a company. It highlights how the extreme costs and risk need to be mediated if a company is to produce a profit. Economy of scope is an important idea in the industry, but it isn’t the only reason for a company to offer multiple products. Lockheed was losing too much money on its commercial programs for the benefit from economy of scope to help its increase its profits.

There have been many companies involved in aviation. There have been many mergers and acquisitions. All of Europe’s commercial aircraft manufacturers have either failed, pulled out of commercial aviation, or have been merged into Airbus. Airbus’ ability to survive depends partly on its support from governments and large corporations. Its stakeholders have realized though that if it is to continue to compete with Boeing, it will have to benefit from economy of scope. The number of mergers in the aviation industry gives credence to the idea of the significance of the conglomeration effect. It can do so with military aviation. It can also benefit to a lesser extent from other programs such as space exploration.

The end result is that commercial class aviation production for large aircraft is not an example of a stable market as outlined by Oliva and Rivera-Batiz (1997). The main reason is that the market is just too small. The current point in the market is not stable, so this leads to speculation that in the future, there will be change. Airbus cannot effectively compete against Boeing, so it may have to expand of find a partner to merge with. Alternatively, other companies such as Bombardier and Embraer, which are already starting to compete at the small aircraft level with Boeing and Airbus may enter the market. In 50 years it is unlikely that the current Boeing and Airbus duopoly will still exist.

4. WORK CITED

Airbus. (Accessed on Apr 1, 2007).

Anonymous. “Aircraft Data and History” Accessed on: May 16,
2007.

Bailey, Elizabeth and Friedlaender, Ann. “Market Structure and Multiproduct Industries”.
Journal of Economic Literature, Vol. 20, No. 3 (Sep., 1982), pp. 1024-1048.

Benkard, C Lanier. Learning and Forgetting: The Dynamics of Aircraft Production. The
American Economic Review Vol. 90, No. 4 Sep. 2000, pp 1034-1054.

Boeing Company. (Accessed on Apr 1, 2007).
Carrol, Sidney. Profits in the Airframe Industry. The Quarterly Journal of Economics.
Vol. 86, No. 4 Nov 1972, pp 545-562.
Golich Vicki L. From Competition to Collaboration: the challenge of commercial-class
aircraft manufacturing International Organization > Vol. 46, No. 4 (Autumn, 1992),
pp. 899-934.

Hamilton Sundstrand Corporation. http://www.hamiltonsundstrandcorp.com
(Accessed on May 17, 2007)

Lockheed Martin. http://www.lockheedmartin.com (Accessed on May 17, 2007).

Oliva, M. Angels, Rivera-Batiz, Luis. A Model of Conglomeration and Synergy Traps.
Department of Economics and Business, Universitat Pompeu Fabra.
http://www.econ.upf.edu/docs/papers/downloads/232.pdf . (Accessed on May 16, 2007).

Rumerman, Judy. Boeing's Post-War Military and Space Activities. US. Centennial Flight
Commission. /Aero22.htm>. Accessed on Apr 16, 2007.

Sandholtz, W & Love, W. Dogfight over Asia: Airbus vs. Boeing. Business and
Politics Vol 3, IS 2 2001.
If you have never designed an airplane part before, let the real designers do the work!
 
dtwclipper
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RE: Boeing's Competitive Advantage Based On Economics

Wed May 23, 2007 11:58 pm

Quoting RoseFlyer (Thread starter):
Boeing beet its commercial rivals

Did you turn it in yet? I just found this one, so I would proof it again.


 Big grin  Big grin
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Poitin
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RE: Boeing's Competitive Advantage Based On Econom

Thu May 24, 2007 12:14 am

Quoting Dtwclipper (Reply 1):
Quoting RoseFlyer (Thread starter):
Boeing beet its commercial rivals

Did you turn it in yet? I just found this one, so I would proof it again.


Just goes to show you about technology. What you really need to do is have it read aloud. I do a good deal of editing and know how easy it is to miss stuff like that. Get yourself a copy of TextAloud

http://www.nextup.com/TextAloud/index.html

and LISTEN to it read your paper back as you read it on the screen. Stuff like "beet" for "beat" might get by it, but you will be surprised what it does catch.
Now so, have ye time fer a pint?
 
airfrnt
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RE: Boeing's Competitive Advantage Based On Economics

Thu May 24, 2007 12:16 am

Quoting RoseFlyer (Thread starter):

The idea of Boeing merging with McDonnell Douglas being a function of diseconomy of scope and being a move to decrease technology competition is even more evident by the fact that Boeing has not unveiled a single completely new design since the merger.

Ummm? Boeing's unveiled two cleansheet designs since then. One of which failed to catch on (Sonic Cruiser) and was done during the merger, and one has become the 787.
 
airfrnt
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RE: Boeing's Competitive Advantage Based On Economics

Thu May 24, 2007 12:27 am

Quoting RoseFlyer (Thread starter):

After WWII, Boeing found limited success in converting its bomber designs into long range passenger aircraft. Shortly after the war, Boeing was producing large passenger propeller driven airplanes that could traverse the Atlantic Ocean. Again, economies of scope came into play. These aircraft were essentially already designed. Normally hundreds of aircraft may have to be produced in order for the plane to turn a profit and recover the design costs. However when a plane is already designed as a bomber and just has the interior features changed, the design costs are low. Boeing was able to keep its business going despite the massive cuts to its military production following the war. Economies of scope are clearly evident when you can sell a product in a completely different market almost interchangeably.

The problem with your argument here is that Boeing didn't realy find success at all with the pre-707 models. According to a number of works (Skygods being the most prominent one), Boeing never turned a profit on a commercial aviation venture before the 707.

Quoting RoseFlyer (Thread starter):
It can be argued that Boeing was at an advantage during the 1950s because it was not developing new propeller aircraft like Douglas and Lockheed. Boeing was a main supplier of large bombers and converted these into easy commercial sales.

You can argue it, but it would be wrong. Boeing benefited from the fact that they were not competitive earlier. Douglass and Lockheed made a fortune with the Connie and DC-6. Boeing's planes never caught on. If WWII had not have happened, I suspect that Boeing would have done better simply because Pan Am would have used more of their flying boats.

Also bear in mind that the 707 was really much more defined by Juan Trippe at Pan Am, then even by Boeing. What he wanted, he got. He did that by little tricks like purchasing DC-8s the same time as 707s to force Boeing to make the fuselage wider.

Quoting RoseFlyer (Thread starter):
2.3.4 Conglomeration Effect
Airbus remains a relatively independent company when compared to the conglomerates of Boeing and formerly McDonnell Douglas. Airbus is an independent company based on the classification of Oliva and Rivera-Batiz because it sells all of its planes on basically the same market. They differ in size, but the same customer is buying airliners from the same company for a similar purpose. It is being negated that larger aircraft serve different long haul routes from smaller aircraft. This idea is valid because aircraft production and development does not differ greatly between different sized commercial planes. Increasing the number of models is more representative of economies of scale.

You underplay EADS military history here as well.
 
deltadc9
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RE: Boeing's Competitive Advantage Based On Economics

Thu May 24, 2007 12:31 am

Quoting AirFrnt (Reply 3):
Quoting RoseFlyer (Thread starter):

The idea of Boeing merging with McDonnell Douglas being a function of diseconomy of scope and being a move to decrease technology competition is even more evident by the fact that Boeing has not unveiled a single completely new design since the merger.

Ummm? Boeing's unveiled two cleansheet designs since then. One of which failed to catch on (Sonic Cruiser) and was done during the merger, and one has become the 787.

Also, they had just completed a massive new project, the 777 and the 737NG is not exactly an upgrade.
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roseflyer
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RE: Boeing's Competitive Advantage Based On Economics

Thu May 24, 2007 3:20 am

Quoting Dtwclipper (Reply 1):
Did you turn it in yet? I just found this one, so I would proof it again.

No I didn't, but thanks for the advice. I know there are probably a few grammar errors.

Quoting AirFrnt (Reply 3):
Ummm? Boeing's unveiled two cleansheet designs since then. One of which failed to catch on (Sonic Cruiser) and was done during the merger, and one has become the 787.

Good point. I don't think the paper is being entirely objective there. But it was a time period of reduced development.

Quoting AirFrnt (Reply 4):
You can argue it, but it would be wrong. Boeing benefited from the fact that they were not competitive earlier. Douglass and Lockheed made a fortune with the Connie and DC-6. Boeing's planes never caught on. If WWII had not have happened, I suspect that Boeing would have done better simply because Pan Am would have used more of their flying boats.

I think it is wrong, but I found a source that said it, so I thought I would bring the idea that Boeing was at an advantage by not developing new prop designs after the war. You have definitely pointed out the weak spot in the research. I spent much more time with the economics side of things and getting those ideas explained. I should review this more.

Quoting AirFrnt (Reply 4):
According to a number of works (Skygods being the most prominent one), Boeing never turned a profit on a commercial aviation venture before the 707.

Is it at all possible that you could give me a direct source for that?
If you have never designed an airplane part before, let the real designers do the work!
 
airfrnt
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RE: Boeing's Competitive Advantage Based On Economics

Thu May 24, 2007 4:51 am

Quoting RoseFlyer (Reply 6):
Is it at all possible that you could give me a direct source for that?

Sure, l can look it up later.

Quoting RoseFlyer (Reply 6):

Good point. I don't think the paper is being entirely objective there. But it was a time period of reduced development.

Relative to what? Boeing is most famous because they have been able pull multiple clean sheets out at the same time, but every time they have done so, it's pretty much been bet the company moments. Boeing in particular tends to have extremly cyclic build cycles, with the 707 being designed by itself, then the 727/737/747 and SST all being designed at the same time, then a huge gap time wise, then the 757/767 and the first rebuilds of the 737, and then finally the 777 and the 737NG at roughly the same time. During the down peaks of the cycle, Boeing typically offers one off type variants.

I suspect we might eventually see Y1/Y3 occurring at the same time, especially if the maintainence advantages are as big as Boeing is suspecting, but the development "trough" in the late 90s was not primarily a function of the merger, just of the delivery cycle.
 
roseflyer
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RE: Boeing's Competitive Advantage Based On Economics

Thu May 24, 2007 6:19 am

Quoting AirFrnt (Reply 7):
During the down peaks of the cycle, Boeing typically offers one off type variants.

I agree that Boeing's production has been cyclical. However there are reasons for the cycles, and I proposed that one reason for no all new designs could be the McDonnell Douglas takeover. I could be very wrong, but I proposed the idea.
If you have never designed an airplane part before, let the real designers do the work!
 
David_itl
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RE: Boeing's Competitive Advantage Based On Economics

Thu May 24, 2007 6:46 am

Quoting RoseFlyer (Thread starter):
I'd appreciate any construtive criticism about it. To the best of my knowledge, this is exclusively based on truth or economic theory



Quoting RoseFlyer (Thread starter):
help alleviate the start up costs, Airbus does benefit of subsidies. Airbus received subsidies between $25-26 Billion in its first 20 years of operation

So if this is meant to be a "truth" piece, perhaps it might be quite illuminating also put in the "truth" about Airbus having to repay their loans (limited to 33% of development costs per the 1992 Accord). Unless thats the "truth" that dare not speak its name for an American?

Quoting RoseFlyer (Thread starter):
The US government helps support the operation of Boeing by offsetting its costs by having spillovers from military defense projects

Perhaps could be written thus: The US government subsidises Boeing.
 
roseflyer
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RE: Boeing's Competitive Advantage Based On Economics

Thu May 24, 2007 7:22 am

Quoting David_itl (Reply 9):
Perhaps could be written thus: The US government subsidises Boeing.

Point well taken. I think the idea of economy of scope is a form of subsidization, but it doesn't really violate any laws any antitrust laws as of now.

Quoting David_itl (Reply 9):
So if this is meant to be a "truth" piece, perhaps it might be quite illuminating also put in the "truth" about Airbus having to repay their loans (limited to 33% of development costs per the 1992 Accord). Unless thats the "truth" that dare not speak its name for an American?

Could you give me a source for that statement? Maybe I didn't research as hard, but the number I quoted was found in an economic journal as cited in the text. Apparently I missed the part where they were loans that had to be paid. I don't quite understand exactly how the subsidy/loan idea works when some of the stakeholders in the company are governments that provided the subsidies/loans to begin with. Did Airbus have to pay creditors, or were the profits turned from production used to pay back that debt? If so, it's really hard to explain the situation since the company is financing itself and it is hard to know what to call that. It might be an interesting topic to dive into. I have seen some articles discussing the subsidies in length, but I chose to avoid getting to detailed in the topic because it is a contentious issue that would take a lot of space to write and was beyond the scope of this paper. I do appreciate your criticism. I may review how I summarized that point since I may have given an opinion too biased towards a single article.

Lastly, I kindly request that you remain polite, otherwise this thread will disappear so please don't insult my opinion based on the flag that I have. I do understand that the slant of the paper is pro Boeing. The whole point of the paper was to find rationale to explain the competitive advantage that the company has.
If you have never designed an airplane part before, let the real designers do the work!
 
khobar
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RE: Boeing's Competitive Advantage Based On Economics

Thu May 24, 2007 7:24 am

Quoting David_itl (Reply 9):
So if this is meant to be a "truth" piece, perhaps it might be quite illuminating also put in the "truth" about Airbus having to repay their loans (limited to 33% of development costs per the 1992 Accord). Unless thats the "truth" that dare not speak its name for an American?

In just one instance, the German government forgave Airbus of about $4Billion in loans - that's loan money Airbus didn't have to repay - is that the truth about Airbus to which you referred?
 
2175301
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RE: Boeing's Competitive Advantage Based On Economics

Thu May 24, 2007 8:51 am

It's a good start.

I agree with your general point: Economies of Scope have helped Boeing more than Airbus in the recent decades (but not specifically at the moment - see below).

Despite the fact that I believe that Airbus has enjoyed a significant subsidization that Boeing has not - I think you need to have a more fuller and proper comparison of the types of Subsidies and various local subsidies involved. That would probably add another 1/4 to 1/3 to the paper - and perhaps you could do it as an attachment and only mention the conclusion with a reference to the attachment.

My gut feel is that the Airbus subsidy advantage is about 1/2 of what you have indicated, but I do understand where you got your numbers from.

I also do not like your description of Boeing being subsidized by "spillage." The correct concept is that at times governments will intentionally pay more than a normal profit on a contract to keep a specific company with specific expertise in business. It is done all the time all over the world by many governments and to many companies. In this case, Boeing was then able to use the extra profits to remain financially stable - which allowed them to continue work on civilian aircraft development during downturn moments (a true economy of scope example for Boeing).

Airbus - being independent of the European Military Project companies for the first several decades was not able to benefit from this kind of financial stability; but now does as part of EADS. In fact, it is the military project profits that are currently supporting Airbus due to the A380 wiring and weight issue delays and other issues (a true economy of scope example for Airbus).

However, in general I agree that Boeing currently enjoys the larger economy of scope benefits due to the breadth and size of its diversified business interest.
 
glacote
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RE: Boeing's Competitive Advantage Based On Economics

Thu May 24, 2007 1:02 pm

Quoting Khobar (Reply 11):
In just one instance, the German government forgave Airbus of about $4Billion in loans - that's loan money Airbus didn't have to repay - is that the truth about Airbus to which you referred?

I missed that one - when did this occur? Thank you.
 
airfrnt
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RE: Boeing's Competitive Advantage Based On Economics

Thu May 24, 2007 1:09 pm

Quoting RoseFlyer (Reply 8):
I agree that Boeing's production has been cyclical. However there are reasons for the cycles, and I proposed that one reason for no all new designs could be the McDonnell Douglas takeover. I could be very wrong, but I proposed the idea.

It's certainly a factor.

Quoting David_itl (Reply 9):
So if this is meant to be a "truth" piece, perhaps it might be quite illuminating also put in the "truth" about Airbus having to repay their loans (limited to 33% of development costs per the 1992 Accord). Unless thats the "truth" that dare not speak its name for an American?

David, The number he quoted was the widely quoted amount that Airbus had received prior to the 1992 Accord, and was well documented, not the least of which by Former President Clinton when he started the negotiations that let to the 1992 Accord.
 
Alessandro
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RE: Boeing's Competitive Advantage Based On Economics

Thu May 24, 2007 2:01 pm

There have been many companies involved in aviation. There have been many mergers and acquisitions. All of Europe’s commercial aircraft manufacturers have either failed, pulled out of commercial aviation, or have been merged into Airbus. Airbus’ ability to survive depends partly on its support from governments and large corporations. Its stakeholders have realized though that if it is to continue to compete with Boeing, it will have to benefit from economy of scope. The number of mergers in the aviation industry gives credence to the idea of the significance of the conglomeration effect. It can do so with military aviation. It can also benefit to a lesser extent from other programs such as space exploration.
[Quote]
Wrong, swap Europe with European Union then it´s correct. Europe stretches much further than just European Union.
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Alessandro
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RE: Boeing's Competitive Advantage Based On Economics

Thu May 24, 2007 2:03 pm

Conversely, Airbus is a commercial aviation arm of the European Consortium known as EADS and is the only competitor to most of Boeing’s products.
[Quote]
Wrong, Iljyusin, Tupolev and now recently Sukhoi produce aircrafts that compete with A and B.
Add Embraer as well.

[Edited 2007-05-24 07:04:44]
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Alessandro
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RE: Boeing's Competitive Advantage Based On Economics

Thu May 24, 2007 2:06 pm

Additionally Germany was the original innovator of the jet engine in World War II and had the remains of a once powerful aviation industry.
[Quote]
Together with UK, the Germans first flew the jet engine but it was due to lack of investment from people in charge in the UK.
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roseflyer
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RE: Boeing's Competitive Advantage Based On Economics

Thu May 24, 2007 7:36 pm

Quoting Alessandro (Reply 15):
Wrong, swap Europe with European Union then it´s correct. Europe stretches much further than just European Union.

I thought about it, but the European Union is only a couple decades old. All the other companies were located in Western Europe before the European Union. So I think I might add in that it was western Europe since the only countries that I saw much financial or aviation technical support were in Western Europe.

Quoting Alessandro (Reply 16):
Wrong, Iljyusin, Tupolev and now recently Sukhoi produce aircrafts that compete with A and B.
Add Embraer as well.

I addressed Embraer. I do not feel that Ilyushin, Tupolev or Sukhoi compete with Boeing. I chose to neglect the companies because their sales have almost exclusively been limited to countries that could not purchase Boeing aircraft. Now I know there are some places that have chosen Tupolev, such as TNT airlines, but I don't think it is even worth mentioning.
If you have never designed an airplane part before, let the real designers do the work!
 
n1786b
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RE: Boeing's Competitive Advantage Based On Economics

Thu May 24, 2007 8:05 pm

Quoting Glacote (Reply 13):
Airbus - being independent of the European Military Project companies for the first several decades was not able to benefit from this kind of financial stability; but now does as part of EADS.

I beg to differ. You are overlooking the fact that Airbus used to simply be a GIE. This structure simply meant that Airbus was a marketing office for the planes put together by the members of the loose consortium. Aerospatiale, BAE Systems, and DASA all had healthy defense revenues and were each more-or-less "nationalized" industries with a guaranteed taxpayer-backed financial security.

- n1786b
 
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autothrust
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RE: Boeing's Competitive Advantage Based On Economics

Thu May 24, 2007 11:09 pm

Quoting RoseFlyer (Thread starter):
There is an attempt by EADS to turn Airbus into a joint military and commercial aircraft producer. In 1999, Airbus established Airbus Military S.A.S (Airbus, 2007) to undertake the development of a tactical military turboprop aircraft known as the A400M. There is hope that economy of scope will play a bigger role at Airbus. The company has no experience building turboprops, so it is able to use military funding for research and development.

 no  Please tell me what is about EADS CASA and their 20 + years of experience building turboprops ? Or about ATR?

Interesting read, though i dont agree at a lot of points.
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roseflyer
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RE: Boeing's Competitive Advantage Based On Economics

Fri May 25, 2007 12:59 am

Quoting AutoThrust (Reply 20):
Please tell me what is about EADS CASA and their 20 + years of experience building turboprops ? Or about ATR?

Well ATR is not really in the scope of Airbus since it is an entirely different company with products competing against Bombaerdier and not Boeing. How do you think I should discuss large scale turboprops more? My knowledge is definitely lacking and I didn't find any good sources.
If you have never designed an airplane part before, let the real designers do the work!
 
khobar
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RE: Boeing's Competitive Advantage Based On Economics

Fri May 25, 2007 1:09 am

Quoting Glacote (Reply 13):
I missed that one - when did this occur? Thank you.

Hi Glacote. The example occurred between 1997 and 1998.
 
Wsp
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RE: Boeing's Competitive Advantage Based On Economics

Fri May 25, 2007 9:32 am

Why did you choose to compare with Airbus rather than EADS?
 
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autothrust
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RE: Boeing's Competitive Advantage Based On Econom

Fri May 25, 2007 3:15 pm

Quoting RoseFlyer (Reply 21):
Well ATR is not really in the scope of Airbus since it is an entirely different company with products competing against Bombaerdier and not Boeing.

ATR is a joint venture of former Aerospatiale now EADS and Alenia so why is that a diffrent company apart Alenia?
Of course they dont compete directly with Boeing but you said Airbus doesn't have experience in regards to the A400M which is not quite correct.

Quoting RoseFlyer (Reply 21):
How do you think I should discuss large scale turboprops more?

You are right there is no so much to discuss because Boeing doesn't offer anything in that category.
However as you said, EADS want become more independent from Airbus as biggest cash cow by increasing their Military Division which is becoming bigger with more products.

And thats where Boeing IMO has the competitive advantage their Military Division can secure lots of cash even Boeing Commercial Division wouldn't run good.
Flown on: DC-9, MD-80, Fokker 100, Bae 146 Avro, Boeing 737-300, 737-400, 747-200, 747-300,747-400, 787-9, Airbus A310, A319, A320, A321, A330-200,A330-300, A340-313, A380, Bombardier CSeries 100/300, CRJ700ER/CRJ900, Embraer 190.
 
Alessandro
Posts: 4961
Joined: Wed Sep 12, 2001 3:13 am

RE: Boeing's Competitive Advantage Based On Economics

Fri May 25, 2007 11:54 pm

Sure Tupolev, Illjyshin and Antonov compete with Boeing, Sukhoi is doing a joint-venture thing with Boeing.
As for European Union, the 50th birthday is this year.
From New Yorqatar to Califarbia...

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