Boeing and Airbus

Just two companies, Boeing and Airbus, have long dominated the market for large commercial jet aircraft. In early 2012, Boeing planes accounted for 50% of the world’s fleet of commercial jet aircraft, and Airbus planes accounted for 31%. The reminder of the global market was split between several smaller players, including Embraer of Brazil and Bombardier of Canada, both of which had a 7% share. The overall market is large and growing.

Demand for new aircraft is driven primarily by demand for air travel, which has grown at 5% per annum compounded since 1980. Looking forward, Boeing predicts that between 2011 and 2031 the world economy will grow at 3.2% per annum, and airline traffic will continue to grow at 5% per annum as more and more people from the world’s emerging economies take to the air for business and pleasure trips. Clearly, the scale of future demand creates an enormous profit opportunity for the two main incumbents, Boeing and Airbus. With five producers rather than two in the market, it seems likely that competition will become more intense in the narrow-bodied segment of the industry, which could well drive prices and profits down for the big two incumbent producers.

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Required:

a) Explain why the wide-bodied segment of the large commercial jet aircraft industry can only profitably support two players at present. What are the implications of your answer for barriers to entry into this segment? (4 marks)

b) Are entry barriers into the narrow-bodied segment the same as those into the wide-bodied segment? Explain your answer. (4 marks)

c) If you were a new entrant into the bottom part of the narrow-bodied industry, as are Comac and Bombardier, what would be your long-term development strategy? (4 marks)

d) What can Boeing and Airbus do to deter further entry into this industry, and/or keep new entrants boxed into the bottom end of the market (that is, smaller, narrow-bodied jets)? (4 marks)