Any firm in any given industry would like to occupy a market leader position. Companies’ managers always try to obtain the greatest market share or the highest profitability margin in their sector, as this brings several benefits which are considered crucial for the long-term survival of the firm. Depending on the characteristics of the industry, leaders could have the power to dictate rules over followers, entering a virtuous cycle that could position them always one step beyond the others. Of course, to conserve such a place, firms must work hard and implement the right strategies, and it is here that managers’ capabilities make the real difference.
To study this phenomenon and its consequences a lot of literature has been written, models developed, and different sectors analysed, such as the aircraft industry. Since 1914, when the first public passenger flight flew, the airline industry has changed the way people conceive travelling, by narrowing distances. Nowadays, approximately 8 million people fly daily, and more than 3500 planes cross our skies contemporaneously. No matter if the reason is a holiday or a business meeting, catching a plane is considered the most efficient way of reaching whatever travel destination. But who is producing these aircraft?
The Two Players
The plane supply sector is among the biggest regarding money circulation with several billion dollar revenues shared by its participants. During the 1990s, it went through significant changes, caused by the many mergers and acquisitions of the time because of firms wanting to fully exploit economies of scale and new technologies discovered in that period. Today, two main firms are present in this market: the American Boeing and the European Airbus.
These two companies are currently the only major participants in the industry, accounting for more than 65 percent of total market share. Due to the broadness of this market, however, it would be wiser to divide it into parts, focusing only on its main one, which is, without any doubt, the single-aisle aircraft segment. The narrow-body plane brings to both companies most of their revenues and is the most common type aircraft in circulation (See Chart 1-2).
Until the late 90s, Boeing was considered the undisputed leader of the segment with most airlines using its Boeing 737 to operate short-to-medium haul flights. The American giant could have benefited from the first mover advantage to secure its leading position. According to Church & Ware (1962), this kind of advantage arises when, in a Stackelberg duopoly, characterised by a leader and a follower, the first mover, by committing to a clear strategy that takes into consideration the strategic interdependence with its rival, can acquire a significant part of the market share. However, due to a huge volume of technological discoveries, Boeing was not able to conserve its position and was overtaken by Airbus with its A320, currently considered the best single-aisle aircraft ever built.
Eventually, when describing this sector, one should not forget about the role played by local governments. As Brander and Spencer pointed out in 1985, it is beneficial for both governments not to grant domestic firms exaggerate subsidies. This is a crucial point because, with subsidies, a firm faces lower marginal cost, which in turn creates a competitive advantage over the rival putting the company into a leadership position. In fact, recently, the US government and the European Union Committee have signed an agreement with the World Trade Organization aimed at regulating their involvement in the aircraft’ industry. Nevertheless, as the model also points out, both would have an incentive not to honour that agreement. In fact, several disputes have arisen during various WTO’s meetings with both companies backed by their respective government accusing each other of unethical behaviour (Reuters, 2016).
How Do They Differentiate?
The leadership has changed a few times in this industry and to analyse the factors driving it; we should compare the two rivals’ products: The Airbus A320 and the Boeing 737. The European single-aisle airliner created in 1980 broke a 20-year continued leadership of the 737 (See Chart 3) for several reasons.
As pointed out by Michael Waterson (1985), differentiation, either vertical or horizontal, when implemented, can create advantages from which the firm will benefit.
In fact, as this case proves, Airbus successfully differentiated its product with respect to the Boeing 737. More in detail, the European-manufactured aircraft has a higher degree of customizability which makes it unique. It could be configured to accommodate either 150 passengers in the traditional carriers’ setup or 180 in the less comfortable one used by low-cost companies. This ability to switch from a 2-cabin configuration with economy and business classes to a single one is crucial, making it more desirable even on secondary markets.
In addition to this, going more on a vertical kind of differentiation, the A320 is considered of better quality because of the higher degree of technology present on board making it the only aircraft used for commercial purposes that could be run by just two people. Its controls are mostly wireless which eventually means improved safety for customers, a strongly valued characteristic by airline companies.
Finally, also on the technical side, Airbus is the leader. In fact, the European aircraft, when compared to the US’s, has a larger aisle, larger exit doors, and a larger cargo area. All of the aforementioned characteristics, not only increase passengers’ comfort but also reduce the turnaround time, so that airlines using Airbus aircraft can operate more flights during the day with a single plane, hence, generating more revenues. Combined with everything just said, the Airbus A320 is offered at a very competitive price at $83.3 million compared to the Boeing 737 at $72.5 million.
Will the Duopoly Continue?
Of course, as history has already shown, things can quickly change, and the European company should pay attention to future market outlook to create suitable business strategies. On the one hand, in fact, the two planes cannot be considered perfect substitutes, because of the use of different operating systems to which cabin crew are used to, spending valuable time attending intensive courses and experiencing simulators. Because of this, it could be very costly for a carrier to switch from an Airbus aircraft to a Boeing one and vice versa. This imperfect substitutability gives Airbus an advantage in retaining its customers but also posing a limit on the ability to acquire new ones.
In such a fast-paced technological sector, without significant investments in R&D, Airbus cannot consider its leader position safe. It must be able to adapt to its customers’ changing preferences. Another important point to analyse is that to retain the leadership in this segment of the aircraft market; it is crucial for Airbus to focus also on the larger body aircraft segment. In fact, except for low-cost businesses that quite always operate with single-aisle planes; all the traditional carriers order both narrow and large-body aircraft usually from a single supplier. Hence, if Airbus’ wide-body aircraft do not satisfy carriers’ standards, then companies could start cancelling orders also on single-aisle aircraft, moving their demand elsewhere. Eventually, despite the fact the high degree of regulations and the crucial role played by economies of scale, which dramatically increase entry barriers; new rivals are arising for both Boeing and Airbus.
In fact, over the last few years, three companies have performed really well: Embraer and Bombardier which have gained a good reputation in their regional markets (Brazil and Canada respectively) but also the Chinese Comac, which is strongly backed by the local government (See Chart 4). The last two are putting the duopoly at risk after they announced a possible cooperation, with Bombardier providing its engineering excellence while Comac using its government aids.
In conclusion, it can be argued that although every firm would prefer leadership, from a consumer point of view, a market with strong but fair competition with no leading firm is preferred. Each company is incentivised to do its best to steal some market share from its rivals. Eventually, this would bring innovation and technological advancement which, in turn, improve standards. The aircraft industry, as we have seen, has no consolidated leadership and participants are constantly trying to innovate their products. With the start of the third millennium, social awareness has risen, and problems like climate change have gained attention, with firms starting to work to find eco-solutions. Hence, when will we see a zero-impact aircraft across our skies? Nobody knows, but with the competition that is currently characterising the market, we have indeed taken the right path.
Tencent Extends Facebook Lead
Tencent has shot past Facebook to become the world’s most valuable social network.
Editor’s Remarks: Although Tencent briefly overtook Facebook in terms of market cap in November, the recent selloff of Facebook shares prompted the Chinese tech titan to regain the lead. Facebook investors responded negatively to news that Mark Zuckerberg’s plans to highlight family and friend-based content on the newsfeed would reduce the amount of time people spent on the site. Shares in Facebook have fallen 5% since that announcement, enabling Tencent to gain a $19bn lead over the US company. Tencent’s growth has been spurred on by its diversification away from its flagship messaging app, WeChat, and into video games.
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Apple Returns Overseas Cash
Apple has agreed to invest $30bn in the US and pay $38bn in tax to the government.
Editor’s Remarks: The tech giant announced that it will repatriate hundreds of billions of dollars that it currently holds in various offshore accounts. A total of $38bn in tax will be paid by the company on the sum, with a further $30bn pledged towards domestic jobs, manufacturing and data centres. The capital expenditures will be rolled out over the next five years and are estimated to create around 20,000 jobs. On the news, Apple’s share price rose 1.7% as it was widely perceived that the move would reduce the flak the company has recently been receiving for its tax avoidance schemes.
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Saved: Emirates Places Order for Airbus A380
The Dubai-based airline, Emirates, has announced an order for 36 A380s worth $16bn, saving the superjumbo after Airbus threatened to stop production. The deal places a firm order for 20 planes with the option of ordering another 16. Deliveries are scheduled for 2020.
The two-decked superjumbo has faced declining sales as more airlines opt for smaller, cheaper aircraft.deal is said to be worth $1.6bn. Emirates is by far Airbus’ largest customer, with Thursday’s order taking their commitment to 178 aircraft.
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