Aircraft Industry 1991
The activities of the major airline manufacturers during the late 1980’s and the early 1990’s reflect the fruits of their labors that preceded during the previous decades. These actions also prove to be the authors of those occurrences of the decades following that time period. These issues reflect a characteristic that is true of all industries, but especially of the aircraft industry. The lengthy planning and investment periods highlight the necessity of the individual companies to do thorough strategic planning in order to properly position themselves for the future.
The activities of the industry members Boeing, McDonnell Douglas, and Airbus demonstrate how such strategic planning and thorough market and competitor analysis has proven to be instrumental in the continued health of the individual companies at and beyond that period (Vayle, 1993). The factors that drive competition in the airline industry are many and include such economic variables as costs, revenue, demand and supply. Costs within the airline industry tend to be drawn out over and extended investment period, in which little or no gain is perceived to be made on the continued investments.
These costs can further be broken down into development, tooling, and work or overhead costs. These enormous costs are generally inevitable and no market research could ever predict demand in such a way that the profitability of the investment can in any way be guaranteed. Some airlines for example spend so much on investment that it exceeds the current net worth of the company. For example, the construction costs for one seat could be approximately $20 million (Vayle, 1993).
Therefore, marginal cost for these aircraft becomes complicated, as uncertainty exists concerning the consumer market all the way up to the market for the aircraft itself. Revenue, known as “backings,” is the rewards that drive these companies—and these are received through orders for aircraft or financial support from the government. Therefore, the competition that one generally sees in the airline manufacturers is as a result of these companies fighting not to cut losses but for a chance to earn what has already been spent on research and development (1993).
One of the unique aspects of competition in the aircraft industry is the fact that all airlines, regardless of their national origin, receive their fleet of aircraft from only three aircraft manufacturers in the world. This is the method in which demand and supply (including future demand) affect this industry. The lucrative nature of the aircraft manufacturing business, plus the methods of procuring fleet sales, makes it a cut-throat business. The actual market for such aircraft is limited to the number of airlines and carriers that provide flights to different destinations.
This number falls on the lower end of sales, as one could think of the airlines as the middlemen that provide commercial flights to consumers. Since each airline generally takes the majority of its fleet from a given supplier, once decisions are made concerning this, it becomes increasingly possible for a manufacturer to be crowded out of the market. This differs from the regular consumer market in that the decision is not made by the consumer but by the airline itself.
The varieties of opinions that exist at the consumer level regarding the type of airline desirable do not come into play in the aircraft industry. These decisions are left to the whims or traditions of the airlines, and the odds are much riskier for the airline manufacturer in this type of industry (Vayle, 1993). Because of the major (often blind) investment that airline manufacturers make, the necessity to earn major returns on the sales of aircraft is very high. It has been found that sale of the average aircraft yields a profit about $45 million per unit sold (Vayle, 1993).
This represents major revenue for any company that engages in the manufacture of such craft, and this also reflects an important source of tax revenue for the country in which such craft are manufactured. Another unique aspect of competition in the aircraft industry is therefore the interest in the process the governments of countries in which these manufacturers operate. The level at which these companies (especially McDonnell-Douglas, Boeing, and Airbus) compete often brings animosity not just between owners of the company, but between countries and regions in which these manufacturers operate.