Boeing Case Analysis On December 1996, the Boeing Company purchased McDonnell Douglas for a premium of 21% over the price of its stock. This move gave Boeing the opportunity to increase its value by transferring its knowledge across business units, both commercial and defense aircraft. But in the two years after the merger, Boeing’s stock lost one third of its value due to increased inefficiencies and costs associated with the merger. Would this merger really add value to Boeing or would the costs outweigh the benefits gained.
The Aerospace Industry
Commercial Aircraft
The commercial aircraft industry had experienced a significant change during the deregulation of domestic airlines in 1978. The deregulation resulted in an
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· General Agreement on Tariffs and Trade: Limited the amount of government subsidies available to both Boeing and Airbus.
· Airbus Industrie: A consortium of four countries pooling their resources together. Boeing/McDD and Airbus created a duopoly in the industry, characterized by intense competition to increase or protect market share.
Defense and Space
The US government was by far the largest single customer for non-commercial aerospace products and services. This meant that all sales were strongly determined by political considerations. Foreign military sales were determined by foreign policy, while domestic sales were determined by Congress’ debates on the budget. This created a favorable environment because there were neither excessive risks nor volatile changes in market demand. Contracts with the military spanned many years and were paid under a “cost reimbursement” plan starting in the early 1990’s.
On the other hand, the shrinking defense budget led to large-scale mergers and acquisitions among defense contractors and a growing consolidation in the industry. This left only four remaining defense conglomerates, Lockheed Martin, Boeing-McDD, Raytheon and Northrop Grumman. The defense budget stabilized in 1997 at about $250 billion and was expected to increase moderately between 1998 and 2003.
Because contracts for the military and NASA were extremely technically demanding
Before the Deregulation Act of 1978, the airline industry was federally regulated in regards to
The United States aerospace and defense industry is the largest of its type in the world.
Airbus was planning to introduce the A380 in direct competition to Boeing 747 to compete in the large aircraft sector. The rivalry between Airbus and Boeing was already intense. Boeing’s market share reduced from 70% in 1974 to 45% in 1990 while Airbus’s market share had increased from 1% to 34% during the same time (Exhibit 5). Encouraged by this increase in market share, Airbus was contemplating the introduction of A380. Development of new product line is extremely expensive in the Aircraft sector. Following is a quantitative analysis of the project to calculate the risks involved in introducing a new line of Aircrafts.
Air Canada has been in the business of air transport for an extended period of time. Due to the experience and the exposure of the carrier in the field, it has made a commendable progress through many strategies as well as customer proximity. One of the approaches taken by the airline involves the identification as well as an implementation of cost reduction initiatives in a bid to increase revenue from its operations (Air Canada, 2016). It is also attempting to connect with the existing carriers across the world to connect the current customers to the international world. This approach has been adopted to increase its competitive advantage over other existing airlines.
During the 1950’s we see an economic boom in America. A large amount of this growth has to do with the money made by Corporations with Military Contracts making goods and supplies for the United States Military. With the Cold War beginning the push for new invention in aviation, rocket propulsion, energy, and even automobiles was at the forefront of national defense. Industrial giants like Boeing, General Dynamics, and Raytheon received 60% if their income from the Defense Department. Ten percent of the domestic (GDP) was from military spending. With fears of falling behind the Soviet Union, gaining any edge in innovation was important. The government even funneled millions of dollars into American Universities for scholarships and research
Following World War II, President Eisenhower coined the term "military-industrial complex" to describe the relationship between private arms manufacturers, the armed forces and the government. This coalition collaborated to bloat the American military budget in order to make money for the companies. Corruption in the government contributed to allowing this. The
1. How would you describe Boeing’s approach to project management? What are its strengths and weaknesses?
The domestic US airline industry has been intensely competitive since it was deregulated in 1978. In a regulated environment, most of the cost increases were passed along to consumers under a fixed rate-of-return based pricing scheme. This allowed labor unions to acquire a lot of power and workers at the major incumbent carriers were overpaid. After deregulation, the incumbent carriers felt the most pain, and the floodgates had opened for newer more nimble carriers with lower cost structures to compete head-on with the established airlines. There were several bankruptcies followed by a wave of consolidation with the fittest carriers surviving and the rest being
A key factor in determining a project's viability is its cost of capital [WACC]. The estimation of Boeing's WACC must be consistent with the overall valuation approach and the definition of cash flows to be discounted. Note that this process is a forward looking focus and is laden with uncertainty. It is how the assumptions are modeled that many costly mistakes can be made. While finding a rate of return for an individual project, it is important to remember that WACC is only appropriate for an individual project.
Dominating the commercial aircraft market for decades, Boeing is considered to be the most highly competitive U.S aerospace industry. “U.S. firms manufacture a wide variety of products for civil and defense purposes and, in 2010, the value of aerospace industry shipments was estimated at $171 billion, of which civil aircraft and aircraft parts accounted for over half of all U.S. aerospace shipments. The U.S. aerospace industry exported nearly $78 billion in products in 2010, of which $67 billion (or 86% of total exports) were civil aircraft, engines, equipment, and parts” (Harrison, 2011). However, its position of influence has lessened in recent years. This is due to its main competitor, Airbus, who in recent years has made significant
Threats The defense budget of the United States has been declining. Since the end of the Cold War, the United States has revised its military strategies. The Soviet Union's dissolution in 1991 rendered
This report discussed the components of internal analysis, competitive advantage, and strategic competitiveness of Boeing Company. This is done by analyzing the tangible & intangible resources, capabilities, and core competencies in order to clarify Boeing’s strengths and weaknesses.
Nevertheless, MD was in financial disarray in 1990, as a consequence of the strong competition and rapidly dropping demand for its products; the strong emergence of Airbus squeezed MD's market share. This was the main reason for which the company in the future decides to make a joint venture with other companies in order to avoid its financial problems.
The Boeing corporation had been a very successful company in the mid-1990s. At the time, it dominanted the market in commercial aviation with an additional thriving sideline in the military and space contracts market. Boeing faced and then overcame a huge number of challenges but also took advantage of many opportunities that were offered up by the aerospace market in the late 1990s. The company faced a number of challenges. In wake of he the first Gulf War, the incumbent economic slowdown severely decreased the market demand. Also, the Boeing encountered stiff competition from the company Airbus which many experts have attributed to heavy subsidies by European government that gave the company an unfair advantage market advantage. For instance, in 1999, Airbus outsold Boeing for the first time in the company's history and delivered to the market more airplanes than the Boeing company did in
The Boeing Company was formed in 1916 by William E. Boeing in Seattle, Washington. The following year they had a twenty eight person payroll which included pilots, carpenters, boat builders and seamstresses. The lowest wage was fourteen cents an hour, while the company's top pilots made two to three hundred dollars a month. When the company was short on money, William Boeing used his own financial resources to guarantee a loan to cover all wages, which was a total of about seven hundred a week. ("Boeing History," n.d)