Case analysis

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 worlds 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. Embraer and Bombardier, however, have to date focused primarily on the regional jet market, building planes of less than 100 seats. The market for aircraft with more than 100 seats has been totally dominated by Boeing and Airbus. The overall market is large and growing. In 2011, Boeing delivered 477 aircraft valued at $33 billion, and Airbus delivered 534 aircraft valued at $32 billion. 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 worlds emerging economies take to the air for business and pleasure trips. Given the anticipated growth in demand, Boeing believes the worlds airlines will need 34,000 new aircraft between 2012 and 2031 with a market value of $4.5 trillion dollars in todays prices. Clearly, the scale of future demand creates an enormous profit opportunity for the two main incumbents, Boeing and Airbus. Given this, many observers wonder if the industry will see new entries. Historically, it has been assumed that the high development cost associated with bringing new commercial jet aircraft to market, and the need to realize substantial economies of scale to cover those costs, has worked as a very effective deterrent to new entries. For example, estimates suggest that it cost Boeing some $18 to $20 billion to develop its latest aircraft, the Boeing 787, and that the company will have to sell 1,100 787s to break even, which will take 10 years. Given the costs, risks, and long time horizon here, it has been argued that only Boeing and Airbus can afford to develop new large commercial jet aircraft. However, in the last few years, three new entrants have appeared. All three are building narrow-bodied jets with a seat capacity between 100 and 190. Boeings 737 and the Airbus A320 currently dominate the narrow- bodied segment. The Commercial Aircraft Corporation of China (Comac) is building a 170- to 190-seat narrow-bodied jet, scheduled for introduction in 2016. To date, Comac has 380 firm orders for the aircraft, mostly from Chinese domestic airlines. Bombardier is developing a 100- to 150-seat plane that will bring it into direct competition with Boeing and Airbus for the first time. Scheduled for introduction in late 2014, Bombardier has 352 orders and commitments for these aircraft. Embraer too, is developing a 108- to 125-seat plane to compete in the narrow-bodied segment. The new entry is occurring because all three producers believe that the market for narrow-bodied aircraft is now large enough to support more than Boeing and Airbus. Bombardier and Embraer can leverage the knowhow they developed manufacturing regional jets to help them move upmarket. For its part, Comac can count on orders from Chinese airlines and the tacit support of the Chinese government to help it get off the ground. In response to these competitive threats, Boeing and Airbus are developing new, more fuel-efficient versions of their own narrow-bodied planes, the 737 and A320. Although they hope their new offerings will keep entrants in check, one thing seems clear: 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.