Boeing Versus Airbus: Trade Disputes

4776 Words Mar 18th, 2008 20 Pages
For years the commercial aircraft industry has been an American success story. Until 1980, U.S. manufacturers held a virtual monopoly. Despite the rise of the European-based Airbus Industrie, this persisted through the mid-1990s, when two U.S. firms, Boeing and McDonnell Douglas, accounted for over two-thirds of world market share. In late 1996, many analysts thought that U.S. dominance in this industry would be further strengthened when Boeing announced a decision to acquire Mc-Donnell Douglas for $13.3 billion, creating an aerospace behemoth nearly twice the size of its nearest competitor.
The industry is routinely the largest net contributor to the U.S. balance of trade, and Boeing is the largest U.S. exporter. In
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Perhaps fore-most among these is that the costs of developing a new airliner are enormous. Boeing spent a reported $5 billion developing and tooling up to produce the 777 wide-bodied jetliner that it introduced in 1994. The development costs for Airbus’s new aircraft, the 555-seat A380 “super-jumbo,” are estimated to be anywhere between $10 billion and $15 billion. (The A380 is Airbus’s direct competitor to Boeing’s profitable 747 model line.)
Given such enormous development costs, a company must capture a significant share of world demand to break even. In the case of the 777, for example, Boeing needed to sell more than 200 aircraft to break even, a figure that represented about 15 percent of predicted industry sales for this class of aircraft between 1994 and 2004. Given the volume of sales required to break even, it can take up to 10 to 14 years of production for an air-craft model to turn a profit, and this is on top of the 5 to 6 years of negative cash flows during development.
On the manufacturing side, a significant experience curve exists in aircraft production. Due to learning effects, on average, unit cost falls by about 20 percent with each doubling of accumulated output. A company that fails to move along the experience curve faces a significant unit-cost disadvantage. A company that achieves only half of the market share required to break even will suffer a 20 percent

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