Debt and depreciation
However, the costs during this period were also high for both companies in proportion to their scope of operation. Cost increases are shown in such areas as research and development, debt, and depreciation. This cost increase does hint that the companies expected (or at least hoped for) an even greater demand for fleets in the future. In fact, costs demonstrated so great a part in the actions of McDonnell Douglas during that period that one of those three years found them with negative returns on equity.
The year 1989 was particular bad for McDonnell Douglas, whose return on equity plummets from 12. 1% to -1. 1%–a whopping 13 percentage points within only a one-year period (Vayle, 1993). This demonstrates that their perceived demand outstripped the demand they had previously had to the point that their current revenue could not cover the launching costs for their new fleet. Demand is also seen to be on the rise for Boeing, but their continuance in the green indicates that their current demand (at the time) was higher than McDonnell Douglas and therefore able to cover launching costs.
The data on market share demonstrates that the areas in which McDonnell Douglas was losing ground in the growing industry were being taken up by the newer aircraft company Airbus. The growth predicted in the market for aircraft demonstrates that at the beginning of the 1990’s, the aircraft industry had very high prospects. Not only was it time to begin replacing a large portion of the outdated fleets, but demand for altogether new craft was predicted even to outstrip demand for replacement. Therefore, growth was expected to increase doubly during the 1990’s.
Changes in the constitution of the fleets required were also a part of the nineties. While more aircraft belonging to the 120-170 passenger carriers were projected to be required during that decade, the most money would be spent on aircraft that carried more than 350 passengers. This suggests that while an increase in demand for such craft might have been possible, these craft costs were disproportionately higher. In the 1970’s Airbus began its development of the first aircraft that carried twin engines, a wide body, and the ability to travel close to 350 passengers up to 4,000 miles.
As a Boeing executive, this aircraft manufacturer’s pioneering efforts would have distinguished them as a force to be reckoned with. Furthermore, the fact that partnerships existed between the Aerospatiale, Deutsche Airbus, Aerospace, and CASA (representing the merging of efforts among four of Europe’s leading nations France, Germany, England and Spain) would have made Airbus’ move into this long-range, high-capacity niche even more formidable.
The options that exist in such an occasion is to also begin expansion into these high-capacity and long-range areas. It might be considered as crucial for Boeing to act in order to prevent Airbus from cornering the market on longer and fuller flights (Vayle, 1993). However, other options exist that involve merely catering to the smaller and newer airlines that would continue to require smaller planes in-so-doing focus on the greater demand that would be expected in that area.
However, it would have to be carefully noted precisely how the increase in demand for domestic flights (on the consumer end) compared with increase in demand for trans-continental flights. As it turned out, the demand for smaller planes did actually end up far above that of the demand for large planes. However, the revenue garnered from the larger planes was higher than that for the smaller ones. Therefore, cost-benefit analyses of manufacturing these two types of planes would need to be carried out before the decision is made in either direction.