Planely Different

Dec. 21, 2004
Fierce competitors Airbus and Boeing fly separate courses.

If ever there has been a time for aerospace executives to be sleepless in Seattle and Toulouse, it is now. Seattle-based Boeing Co. and Toulouse, France-headquartered Airbus Industrie, the two remaining makers of large commercial aircraft, are competing fiercely for dominance in a high-stakes global market that, calculates Airbus, will consume about 1,500 new large jets by the year 2018. Each, for example, will be pressing its competitive advantages on customers at the commercially important Paris Air Show, which begins June 16. Three months ago, Airbus was flying very high. The European aircraft consortium had logged 62 firm orders for its newly launched 555-seat, double-decker A380 passenger jet that can, among other amenities, include business centers and sleeper cabins. Meanwhile, the A340-600, the highest capacity aircraft Airbus had ever built, was taxiing toward its first test flight. And Airbus was making the vital competitive transition from being a loose job-creating marketing consortium to being a disciplined world-class manufacturer. Then archrival Boeing, at least temporarily, stole Airbus' show. Between Mar. 21 and Mar. 29 of this year, Boeing stunned the aero-space industry with a series of strategic announcements. The $51.3 billion company, long identified with the Puget Sound area, said it would relocate its corporate headquarters from Seattle to Chicago, Dallas/Fort Worth, or Denver. (Last month Boeing said that as of Sept. 4 its home address will be Chicago.) It announced that production of its 757 narrow-body passenger jet would be transferred to Wichita from Renton, Wash. Boeing also announced it was putting on hold its plans for a superstretch 747 to compete with the A380. Instead, said Boeing, it would develop the futuristic Sonic Cruiser, a 250-passenger, double-delta-winged jet designed to travel at 95% the speed of sound. Significantly, with their newest airplanes, the A380 and the Sonic Cruiser, the two manufacturers are placing different strategic bets on how the commercial aircraft market will continue to develop. Airbus is gambling that bigger is an even better way to connect the world's major "hub" airports, says Peter Morrell, head of the air transport group at Cranfield University's College of Aeronautics in England, while Boeing believes there will be demand "for sort of hub-bypass services," and that smaller and faster is the way to go. Such competing business models have several precedents, notes G. Logan Jordan, assistant dean at Purdue University's Krannert Graduate School of Management in West Lafayette, Ind. In manufacturing he cites mini-mills vs large integrated producers in the steel industry, the Beta and VHS formats for video-cassette recorders, and mainframe computers vs client servers. Boeing, speculates Jordan, may be trying to change the game in the long-haul aircraft market -- and not just trying to beat Airbus on seats or operating costs. Meanwhile, he says, Airbus wants to take market share from Boeing, probably from the 747 market, and the issue for Airbus is whether the A380 will do that. Airbus' strategic focus, says a spokesman, is "to maintain an average of 50% of the world market share" for commercial aircraft seating more than 100 passengers. Airbus is committing $10.7 billion to its A380 super-jumbo, which is slated to make its first flight in December 2004 and enter revenue service in March 2006 with Singapore Airlines. Boeing isn't talking publicly about its development costs. But one analyst suggests Boeing will spend about $11 billion on its Sonic Cruiser, which is likely to make its passenger-service debut in 2006 or 2007. "The A380 is a relatively safe bet. There will always be huge amounts of tourist traffic," says Peter Berghammer, vice president of marketing at Avolo LLC, Seattle, an Internet provider of aerospace procurement services. "I don't see the A380 panning out with showers, bowling alleys, McDonald's, and all that kind of stuff, but I do see them crammed full of seats -- 660 people to a destination at $400 apiece." Boeing, he believes, is taking the larger gamble, particularly with its radical aircraft design, which features a dramatically swept wing, large horizontal stabilizers called canards high and forward, and two wing-mounted jet engines in the rear. "The development costs are going to be enormous, and [Boeing is] going to have to accelerate deployment times to come to market in a quick way," claims Berghammer. What's more, "for the average airline consumer, it's a bit of a stretch to get into a plane like that. [People are] so used to everything from DC-2s up to 747s with wings in the middle and engines right there." But aircraft designs and perceptions of the market aren't the only things that differentiate Airbus and Boeing. Equally important are the differences in company structure, particularly because of what they say about the organizations' overall business strategies. Airbus is very much an airplane design, production, and marketing firm, owned by the Amsterdam-based European Aeronautic Defence & Space Co. NV (EADS) and of Farnborough, England-based BAE Systems. In contrast, Boeing is a full-fledged corporation, and commercial airplanes are only one of its seven major lines of business. The six others are business jets; air-traffic management; military aircraft and missile systems; space and communications, which made the Destiny module for the International Space Station; Boeing capital, a finance unit; and Connexion by Boeing, a provider of wireless in-flight passenger services. As a result, Airbus and Boeing are being thrust into the strategic debate over whether success for world-class manufacturers depends on focusing on core competencies or on exploiting all sorts of links on the value chain. Chris Zook, who is keen on companies that look after their core businesses, likens Airbus' and Boeing's separate courses to what, he contends, are the markedly different strategies of Dell Computer Corp. and Compaq Computer Corp., the personal computer industry's two top players. Boeing doesn't fare well in the analogy. Dell, explains Zook, the Boston-based director of Bain & Co.'s worldwide strategy practice, deliberately grows step-by-step, "always" reducing cycle time, cutting inventory, and incrementally advancing to the next product line. In contrast, he says, "Compaq made a major foray into services, has had real difficulty in integrating the acquisition, and has not closed the operating-cost gap with Dell." Zook's bottom line: Boeing would be better off focusing on the "most-important" and "highest-growth" airplanes before doing other things. Boeing, however, doesn't come off badly if you buy into Harlan Irvine's notion that making large commercial aircraft is a relatively mature business and by itself doesn't offer a lot of growth opportunities. "The growth rates and margins are limited in the aircraft-manufacturing portion of the value chain," explains Los Angeles-based Irvine, a principal in the manufacturing, aerospace, and defense practice of Deloitte Consulting. "And so large aircraft manufacturers are looking for new ways to grow their business and grow their profitability." Those ways include fleet planning, operations, financing, in-flight entertainment, maintenance planning, and, says Irvine, "probably also taking some responsibility for fixing the mess that is our air-traffic control system." Says Philip M. Condit, Boeing's chairman and CEO, "Simply put, we intend to run Boeing as a business that has the flexibility to move capital and talent to the opportunities that maximize shareholder value." Indeed, Irvine contends that all big manufacturers, including automakers and builders of industrial process equipment, are shifting to the right on the value chain. By that he means that companies are looking beyond production to the integration of production and services into what some manufacturers, such as Honeywell International Inc., call a solutions approach. "More and more, as manufacturing companies are pressured to grow and to enhance their profitability, they recognize that there's only so much you can do with the product that they manufacture. In order to improve their financial performance they have to get into those associated services that up to now have been left to others," stresses Irvine. Although he believes too much is made of a Airbus and Boeing being on opposite sides of a strategic divide, Avolo's Berghammer acknowledges "a tremendous drive" among such manufacturers as Boeing, General Electric Co., and Pratt & Whitney, the aircraft-engine building unit of United Technologies Corp., to tap into all aspects of their value chains. However, he suggests that at least in Boeing's case the motivation may be more mercenary than advertised. "On the one hand, Boeing wants to bring complete value to the purchase of an aircraft," notes Berghammer. "But on the other side of the coin, especially when you get down to the maintenance and repair operations around the world, I think you find a lot of them saying that Boeing is just trying to drive up its own profits." Strategic differences between Airbus and Boeing can be overdrawn. For example, if, as Berghammer and Jordan suggest, Airbus is viewed in the larger context of EADS and BAE Systems, it looks a lot less like a commercial-aircraft pure play and becomes more of a Boeing-like value chain. And when it comes to suppliers, Airbus and Boeing seem to be pursuing much the same strategy. For reasons that include spreading financial risk and gaining foreign-market access, their supply chains are global -- and extensive. Airbus CEO Nol Forgeard figures, for example, that the A380 program will generate 22,000 aerospace jobs at American companies, such as Goodrich Corp., which will build the landing gear for the super-jumbo jet. Worldwide some 1,500 companies in 30 countries supply Airbus with items ranging from avionics and engines to auxiliary power units and landing gear. Boeing has yet to detail who'll build what for its Sonic Cruiser and says that up-to-date figures on suppliers won't be released until later this month. But certainly one of the most intriguing vendor stories belongs to Paradigm Learning Inc., a Tampa-based training products and services company, from whom Boeing has bought e-Velocity board games. The board games are being used by Boeing at its corporate training center in St. Louis to help employees understand e-business. Among other learning objectives, the game is designed to give employees fluency in the basic terms of e-business and identify ways they can use new digital technology to drive strategy and build speed and flexibility in their businesses.

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