Case Study No. 9

Boeing finishes assembly of wide-bodied commercial aircraft in several sizes at the rate of about one per day. Customers first pay a deposit of up to one-third of $113 million for a 737, $191 million for a 767, $360 million for a 777, $298 million for a 787 Dreamliner, and $368 million for a 747. The second third is due after final assembly when the aircraft is painted, and the final third is due at delivery. Final assembly requires 15-25 days, the entire production schedule is 11 months long, and of course, design modifications add months to the front end of each project. The largest of the Boeing planes (the 747-400) carries 432 passengers; by comparison, the largest Airbus plane (the A380) carries 550 passengers.

As early as 1993, Boeing and Airbus entered into discussions to jointly develop a very large commercial transport (VLCT) with perhaps 1,000 seats. If each firm proceeded independently, the market for VLCTs is so small relative to the massive R&D costs that sizeable losses were assured. Either firm had superior profit available if it proceeded alone. Analyze this simultaneous play noncooperative product development game and predict what Boeing and Airbus would do why.

In fact, both competitors decided to enter into a strategic alliance with the option to develop a superjumbo or withdraw and maintain a wide-bodied aircraft focus. Analyze Boeing's decision in light of its $45 million contribution margin on each 747 produced and sold. Net operating profit is about $15 million.

Figure 13.9 Wide-Bodied Aircraft Deliveries by Year

Enter Strategic Alliance but Enter Strategic Alliance Don't Agree Boeing\\Airbus and Jointly Develop VLCT to Develop VLCT Reduced development Loss from alliance Enter Strategic risk costs Alliance and Jointly Cannibalize Max default Develop VLCT wide-bodied risk, possibly business net profit Max default risk, Loss from alliance Enter Strategic possibly a net profit costs Alliance but Don't Loss from Ongoing Agree to Develop alliance costs but net profit of VLCT preserve wide-bodied $15mm per business wide-bodied plane