McDonnell Douglas Company
The competition among the three most prominent manufacturers of aircraft differs in several important ways from competition in other industries. As a result, some controversy exists concerning whether such competition might be considered fair. It is demonstrated that the methods manufacturing provide us with a model in which (in principle) is similar to that of other industries. The aircraft manufactures tend to have their own suppliers and collaborate with other firms around the world in order to gain the best value for their investment.
Some firms, such as Boeing, even outsourced some of the stages in its manufacture of aircraft, giving some of its 777s’ airframes to a Japanese firm to create. These methods of competition represent the airline industry as a fair one in which to do business. However, other areas exist in which some amount of underhandedness might be detected in ways that would prompt some critics to consider the airline industry unfair in its competition. These come in the form of the financing packages that are given by aircraft manufacturers to the airline companies.
The methods of making price bargains have proven to promote misleading activities and even contract breaking between manufacturers and airlines. Another method is underbidding, in which an airline in order to get its “foot in the door” might cut deeply into the profits of (or even cause losses to) other businesses by agreeing to charge a much smaller price than reasonable for a given aircraft or fleet. One manufacturer, Airbus, was able in 1979 to offer a selling plan entitled the “Deferred Seat Plan” in which the number of seats was nominally reduced for the sake of the purchase.
In doing so, the buyer (Indian Airlines) was able to gain access to the aircraft in the present at a fraction of the actual cost. Though the payment for the remaining seats was due at a designated time in the future, this type of deal was allowed the airline to withdraw its backings from Boeing, to whom it had already promised its business. This Deferred Seat Plan might be seen as a means of sabotage that erodes the traditional efforts put into launching costs of aircraft manufacture (Vayle, 1993).
Collaboration poses a major problem as it regards healthy competition, as the effects of such collaboration might end up being similar to a cartel or oligopoly. When the airline companies work in conjunction with each other in their research and development, little or no compulsion will exist toward price competition. In other words, when all industry players use the same tools, suppliers, and other related resources to build these planes, then price fixing may actually be what occurs on the market.
In the absence of independent work on research design and implementation, it is likely that the aircraft will all take on a level of homogeneity that allows the buyers no real choice when settling on a certain model and a company to buy from. This is deemed unfair in that is offers little incentive for the aircraft manufacturers to produce a product that gives good value for money. These costs are also often passed on to the consumer, who has little of a say in process Government involvement in competition has also caused many to consider the airline industry unfair.
Though recently a ban has been placed upon government involvement, it was once the case that governments would adopt a certain company (usually the one located in its tax area) and seek to offer preferential treatment. They also would otherwise involve themselves in the business of the company—thereby creating a conflict of interests between the public and private sector. Such actions include government subsidies—in effect using tax payers’ money to bail out large corporations whose real value to the country has now become questionable.
The governments would begin interfering internationally in order to prevent the growth of other aircraft manufacturing companies. These actions arrest the natural development of competition and grant an unfair advantage to certain companies that may not deserve it. The evidence of the unfair aspect of this action can be seen in the squabbles between the given countries/regions that often stemmed from this. Between the two companies whose details appear in the Exhibits, Boeing and McDonnell Douglas, it is possible to see that between 1988 and 1993, the sales and revenue of aircraft manufacturing companies were on an increase.
The revenue for McDonnell Douglas’ total operations increases from $14, 435 million to $16,246 million over the two year period. This reflects and almost $2 billion increase, and hints at an increase in demand for its fleets. For Boeing, however, the increase was even more dramatic, from $17, 340 to $28,043. This reflects an almost $11 billion increase and does more to exemplify the fact that McDonnell Douglas was losing a lot of ground during that period (Vayle, 1993). Despite its modest increase in demand, the industry demand had apparently increased much more than was reflected on the balance sheets in the McDonnell Douglas Company.