Porter's Five Forces analysis of competition in airplane manufacturing

Airbus and Boeing Porters 5 Forces

The airframe manufacturing industry is a highly competitive environment that has come to be dominated by two firms: Boeing and Airbus. Airbus is a European joint venture between EADS and BAE Systems headquartered in Toulouse, France and originally founded in 1970 (Mayer, 2007). Boeing, on the other hand, is an American firm founded in 1916 in Seattle, Washington, and now headquartered in Chicago, Illinois (Mayer, 2007). As airframe manufacturing firms, Airbus and Boeing hold 86% of the total market share, thus creating a duopoly. Through an analysis of Porter's Five Forces of the two firms, as a duopoly and as individual firms, one can better understand how influential these firms are to each other and to other firms within the industry.

The first of five forces to be analyzed is the threat of new entrants. Within the airframe manufacturing industry, the threat of new entrants is relatively low due to a high barrier of entry and a high barrier to exit (Sinha, Purnendu, Saini, Jain, Raj, n.d., p. 7). These high barriers are applicable both to the Airbus/Boeing duopoly and the airframe manufacturing industry as a whole. Entry into the market, especially to be in direct competition with the duopoly, is complicated as the two firms share 86% of the total airframe manufacturing market (Mayer, 2007). Other major airframe/airplane manufacturers include Bombardier Aerospace, Cessna Aircraft Company, Dassault Falcon, Embraer-Empresa Basileira DR Aeurnautica, Gulfstream Aerospace, Hawker Beechcraft Corp., Piaggio America, Inc., and Pilatus Business Aircraft, Ltd. (Huber, 2009).

The second force analyzed is the threat of substitution. Between Airbus and Boeing, the threat of substitution is high. To combat substitution, Airbus and Boeing have adapted strategies to differentiate themselves from each other and from other firms within the industry. Airbus has stated that it aims to create "the best and safest aircraft" and that it also aims to "meet the needs of airlines and operators by producing the most modern and comprehensive aircraft family on the market, complemented by the highest standard of product support" (Mayer, 2007). Furthermore, Airbus's has set objectives to "further internalization, focusing on key geographic markets, expanding its customer services offering and restoring its competitive edge by focusing on flexibility and efficiency" (Mayer, 2007). On the other hand, Boeing states that it is a firm about "People working together as a global enterprise for aeroplane leadership" and its objectives are "customer knowledge and focus, large scale systems integration on a global level by outsourcing and a lean enterprise" (Mayer, 2007). However, Airbus's reputation as an innovation leader that uses new technologies to reduce operating costs, fuel burn, noise and emissions, and simultaneously reducing range exerts pressure on other airframe manufacturers within the industry who must keep up with Airbus's strides to be successful (Mayer, 2007).

A third force is the bargaining power of customers. Within the airframe/airline manufacturing industry, the bargaining power of customers is high. Despite airlines having pricing power in duopoly markets, customers are price sensitive and therefore have the ability to influence pricing by opting to choose the firm that offers them the best deal (Sinha et al., n.d., p. 7). Within the airframe manufacturing industry, a secondary buyer also emerges, the airline; "major airlines and the largest leasing companies often place orders for dozens of planes at a time. One company's order can make up approximately 15% of all of Boeing's or Airbus's commercial airframe orders in a single year" (Chapter 12: Industry Analysis, n.d.).

A fourth force is the bargaining power of suppliers. Within the airframe manufacturing industry, the oil industry has a major impact on the manufacture and use of airframes as all airframe firms must accept and adapt to changes in fuel pricing (Sinha et al., n.d., p. 8). Increasing airfares to compensate for the continued rise in fuel prices often results in decreased air traffic. While no airframe manufacturer can control fuel prices they can take steps to develop and maintain relationships with their suppliers. Furthermore, Boeing and Airbus have limited control over their suppliers since "most parts suppliers do more business selling replacement parts to airlines than selling original equipment to Boeing and Airbus" (Chapter 12: Industry Analysis, n.d., p.343).