Boeing/airbus Case Study

Memorandum

To: The Boeing Company, Board of Directors

From: Consultant

Date: October 3, 2005

Re: Options and Recommendations in Response to Airbus

We have recently discussed Airbus’s effective effort in capturing market share in the past few years. We have also agreed that I will conduct an analysis of the underlying circumstances concerning the situation, address the challenges facing Boeing, provide options available to Boeing, and recommend actions to be taken. I will provide an analysis of the Aerospace industry, an analysis of the firms involved, and an analysis of the international implications concerning the situation.

Background

The aerospace industry is dominated by three major companies: Boeing, Airbus, and McDonnell Douglas. Boeing has long been the dominant market share leader. However, due to the recent downfall of McDonnell Douglas, Airbus has gained significant market share and is threatening Boeing’s position as the market leader.

The Nature of the Aerospace Industry

The aerospace industry is a long-term engagement. It is typical for the development of a new plane to take an average of five years before the model even begins production. Thus, the research and development costs are extremely high and have been estimated at a cost of up to $20 million per seat. Manufacturers usually do not even break even until 400 units have been produced, which can take up to 12-14 years after research and development begins. Therefore it is very difficult for new companies to enter this market. It would take a huge capital investment for a company to even get started, with no guarantee of any type of success.

Boeing funds its own research and development costs

The nature of the funding of research and development costs is very influential in this industry. Boeing has long been a leader in developing new technology in aerospace. The research and development costs