THE RISE AND RISE OF AIRBUS, 1970-2005

Case Objectives

The case is intended to teach students strategy formulation and implementation. Owing to its scale, visibility and complexity, the aircraft manufacturing industry is well suited for teaching strategic choices. Students should realize that strategic choices in aircraft manufacturing are based on a longer forecast, that any new aircraft project is a gamble. An additional objective of the case is to have students evaluate Airbus’s growth strategy both in the short run and the long run. The division between the industry two product segments – commercial aircraft /defense and space – highlights the importance of product differentiation and sharpens the focus of the case. The sustainability of the Airbus industry is clearly visible due to the support they are getting from the Government / US sponsored programmes / defence deals. The US Military was one of the major players for business of Airbus and in this case study it can be clearly seen that due to the few number of players in the field Airbus got the order for change over / production of the fuel tankers. EADS was Airbus’s parent company and benefited from combining the commercial and military sales as well. The Aircraft industry could not be solely dependend on the commercial sales but has to depend on the Defence and related services as well.

Case Synopsis

In 2003-2004, for the first time in the history of commercial aircraft manufacturing, Airbus delivered a larger number of planes than Boeing, and since 2000 Airbus managed to obtain a larger number of aircraft orders than Boeing.

The case looks at Airbus’s competitive position relative to Boeing, first in the commercial aircraft industry, and second, in the military aircraft industry where EADS – Airbus’s parent company – has become a formidable rival to Boeing and other defense contractors. In analyzing Airbus’s competitive advantage, the case distinguishes between four strategic elements: technological leadership, cost control, product development, and families of planes. The case moves on to explore the challenges Airbus faces and its vulnerability to a likely Boeing comeback. All in all, the case provides an analytical and thorough examination of Airbus’s performance from the day it sold its first plane until.

The advantage of Airbus has been the easy adaptability of the technology and also the various measures accepted for the cost reduction which in turn leads to increase in margin of profit.

Background:

The French, German and British aircraft companies lobbied with their Governments for financial assistance to support the Airbus-A300 project. In 1967 the government officials representing these three European countries signed an agreement approving the joint development and production of an airbus for the purpose of strengthening European cooperation in the field of aviation technology. Even though the project was approved and conceptualized in 1967, there was no taker for the product in 1967,68 nor 1869. The British Government withdrew from the agreement. In 1970 the German and French partners went ahead and formed their alliance. In 1971, the Spanish aircraft manufacturer also joined Airbus Industries as a junior partner with a 4.2% share.

The development of a new model of Aircraft involves huge initial investment and the rate of failure is very in this industry. The gestation period / recovering the initial investments would be spread over a longer period than any other commercial product. The pricing of the aircraft basically involved the material and the labor cost. The expertise of labor could be improved only by assembly process. The more number of aircrafts are built the more expert the labor force becomes and the reduction in labor cost.

Airbus is a leading aircraft manufacturer whose customer focus, commercial know-how, technological leadership and manufacturing efficiency have propelled it to the forefront of the industry.

Airbus’ modern and comprehensive product line comprises highly successful families of aircraft ranging from 107 to 525 seats: the single-aisle A 320 Family, the wide-body long-range A 330 / A 340 and the all-new next generation A 350 X WB Family, and the ultra long-range, double-decker A 380 Family. The company also continues to broaden its scope and product range by applying its expertise to the military market. It is as well extending its portfolio of freighter aircraft that will set new standards in the general and express freight market sectors.

Across all its fly-by-wire aircraft families Airbus’ unique approach ensures that aircraft share the highest possible degree of commonality in airframes, on-board systems,

cockpits and handling characteristics, which reduces significantly operating costs for airlines.

Dedicated to helping airlines enhance the profitability of their fleets, Airbus also delivers a wide range of customer services in all areas of support, tailored to the needs of individual operators all over the world.

Headquartered in Toulouse, Airbus is owned by EADS, a global leader in aerospace, defence and related services. This group – which is comprised of Astrium, Cassidian and Eurocopter, in addition to Airbus – has a presence on every continent, and employs a total workforce of more than 119,000. 

Airbus itself is a truly global enterprise of about 54,000 employees, with fully-owned subsidiaries in the United States, China, Japan and in the Middle East, spare parts centres in Hamburg, Frankfurt, Washington, Beijing and Singapore, training centres in Toulouse, Miami, Hamburg and Beijing and more than 150 field service offices around the world.

Airbus also relies on industrial co-operation and partnerships with major companies all over the world, and a network of some 1,500 suppliers in 30 countries.

Airbus today consistently captures about half of all commercial airliner orders. The A300 became the world’s first twin-engine widebody jet, entering airline service in 1974. This was followed in the early 1980s by Airbus’ shorter-fuselage A310 derivative, and was joined later that decade by the single-aisle A320 – which developed into one of the most successful aircraft families in history with the A318, A319, A320 and A321. 

The 1990s saw Airbus introduce its long range A330/A340 jetliner Family, and a new era of airline travel started in 2007 when the 525-seat A380 began commercial operation. Looking to the future, deliveries of Airbus’ long-range twin-engine A350 XWB are expected to commence in 2013, while its military product line is expanding to include the A330 Multi-role Tanker Transport and the A400M.

Warnings of a new economic downturn in the aviation industry had been sounded by Airbus as early as 2000, even after four years of record orders and deliveries. Being able to forecast trends in the market was essential to the Airbus philosophy of developing new aircraft and new technologies only to meet the needs of its customers.

No one, however, could have predicted the tragic events of 11 September, 2001, when hijacked passenger jets were deliberately crashed into the twin towers of New York’s World Trade Center. Inevitably in the aftermath of such an attack business confidence, already shaky in the face of a creeping recession, collapsed further. The number of people wanting to fly dropped immediately and cancellations of bookings for the following months flooded in. As companies everywhere cut costs many business travellers opted for economy seats. Most airlines, like many industries affected by the fall-out from 9/11, had to dramatically revise their growth forecasts. The slump, similar to that which

followed the first Gulf War in 1991, was to lead to several major airlines going bankrupt before the industry began to recover.

Ironically the downturn coincided with the rapid growth of low-cost airlines, especially in Europe. Companies like easyJet found the A320-Family and in particular the A319 - ideal for their short-haul routes, which paired cities previously not directly linked by air. For Airbus it meant its strategy of producing a family of fly-by-wire aircraft which shared commonality and provided airlines with the greatest flexibility possible had, once again, paid off. Low-cost airlines found the economy, reliability and quality of Airbus A320 Family aircraft perfectly suited to the new market. In 2002, in the midst of the downturn, A319s accounted for 148 of the 300 firm orders won by Airbus, with the A320 securing 78.

But Airbus was sensitive to the plight of operators struggling to cope with the fall in business. With the number of parked in-service aircraft building up, the profitability of customers had to be protected – without customers, Airbus would have no market. So the company devised an array of finance schemes and rearranged terms where possible to help its customers to continue to buy Airbus aircraft. It was a typically long-sighted solution to an immediate crisis in the industry.

As it had done with the earlier downturn, Airbus pressed ahead aggressively in the knowledge that better times must return. The first A340-600 was delivered in July, 2002, the same month in which Airbus celebrated its 3,000th aircraft delivery. The first deliveries of the ultra long-range A340-500 and the short-range A318 followed in 2003, the year in which manufacture of the major components of the A380 began.

Indeed, 2003 was a landmark year for Airbus: defying the effects of the downturn, it overtook its rival in deliveries of aircraft for the first time. Its total of 305 represented 52 per cent of the world’s aircraft delivered. After setting out in 1970 as a challenger. Airbus could now call itself the world’s leading aircraft manufacturer. The success of Airbus had always been driven by the spirit and passion of its leaders and employees.

In July, 2004, Airbus launched a major reorganisation of the company by setting up a series of centres of excellence based around its manufacturing sites and the major components of its aircraft. This streamlined and simplified the company to improve efficiency and quality, equipping Airbus for a significant ramp-up in production in the following years as it acted to maintain its lead in the industry.

Orders were steadily building up for the new double-decker, with publicity boosted by media stories of how it would be fitted out like a flying cruise ship with casinos and gyms on board. At its launch Airbus had spoken of how the A380 was “a truly global programme” involving some 1,000 companies worldwide, 800 of them in the U.S., Russia and Asia. Airbus had entered into industrial partnerships with a number of its biggest suppliers. It was confirmation of the evolution of Airbus from European consortium into a global enterprise, employing tens of thousands of people directly and supporting hundreds of thousands of jobs worldwide.

Airbus’ order volume increased in September with new bookings for 23 aircraft ranging from its A318 to the A330, while the company delivered 40 aircraft – including three of the A380 flagship jetliners.

Leading the month’s new business was Singapore Airlines’ order for 15 A330-300s, which are to join its existing fleet of 19 A330-300s that are flown from Singapore to destinations across the Asia-Pacific region and to the Middle East.  Singapore Airlines is a key Airbus customer, with a fleet that also includes A340s and A380s – and the A350 XWB also on order.

Another A330 Family booking during September was Avianca’s order for four A330-200F freighter aircraft, which are to be utilised by the carrier’s cargo subsidiary, Tampa.  Avianca is part of the AviancaTaca Holdings airline group, and this order will make Avianca the first operator in Latin America to receive the new A330-200F.  AviancaTaca and its subsidiaries already operate seven A330-200 passenger airliners, along with 81 A320 Family aircraft.

The A330-200F is Airbus’ new-generation cargo aircraft that meets operators’ needs in the mid-size long-haul segment, and Avianca becomes the 10th customer for this aircraft type.

Completing the orders in September were Air Tibet’s acquisition of two A319s, as well as the purchase of two corporate jets – one ACJ318 and an ACJ319 – booked by separate new private customers for Airbus.

With the September transactions, Airbus’ 2011 net orders through 30 September totaled 1,038, bringing the company’s current commercial jetliner backlog to 4,216 aircraft.

Airbus deliveries in September, 2011 were paced by the 32 A320 Family aircraft provided to international customers.  This takes overall A320 Family deliveries past the 4,800 mark, with the combined total reaching 4,822 at month-end.

Among the five A330s delivered during September was the first A330-200F for MASkargo, the freight subsidiary of Malaysia Airlines.  MASkargo joins Etihad Airways, Hong Kong Airlines and Turkish Airlines as operators of the A330-200F. The month also was busy for the A380 programme, with two additional jetliners provided to Singapore Airlines and another received by Korean Air.

The development a new model of the aircraft has now been sifted to the designing the engine of the aircraft rather than the body first and engine later. The construction of the engine is highly technology driven and is being done by specialized firms like GE, Rolls Royce, Pratt and Whitney etc. (Outsourcing) The concept with which a new aircraft is developed is used for not only that aircraft but for a family of aircraft with improvisation. The infatuation of the airlines earlier for acquisition of new airplanes was technology

driven whereas now the rationale for purchasing a new plane is cost saving and profitability.

The de-regulation in the airlines industry resulted in increase in the air travel, thereby leading to competition in the rates as well as the facilities/ services. Smaller aircrafts were used as feeder system created a demand for small / medium range aircraft.

Business Level Strategies are driven by Functional Strategies. Be it differentiation or Low Costs, the inherent ‘drivers’ are ‘functional strategies’

Achieving Efficiency• Efficiency is a multi-dimensional phenomenon• ‘Efficiency’ is affected by many factors • Efficiency by economies of scale. - The key issue is: Ability to spread fixed costs over a large volume. This is

reflected in trivializing incremental or marginal costs per unit and hold it before diseconomies set in.

- Another way to reap the benefit of economies of scales is greater division of labour and focused specialization: splitting assembly into shorter repetitive tasks.

It may be seen that the Airbus took off with the initial consortium of three partners, namely French, German and the English. However, England after watching for three years that the project is not taking up as expected, withdraw from the consortium. However, the other two partners went ahead with the Spanish firm also joining them with a small share and the project took off. As the sales took off, England subsequently joined it and took a share of 20%. The number of orders the Airbus got increased the production achieving economies of scale and thereby reduced the cost of production, increased the labour efficiency and thereby increased the margin.

Learning Effects: Best in action when a technologically complex task is repeated and in the process, less through put time is recorded in performing a task with nearly zero failure rates. When economies of scale get petered out and diseconomies set in, with large volume, an organization tends to multiply managerial/supervisory networks give rise to dysfunctional political behavior and poor performance.

However, Airbus was able to manage this and was able to reduce the number of labours per unit of production drastically resulting in cost savings.

Trade- off between Costs and Product variety: A very traditional view but recently challenged due to rise of ‘flexible manufacturing technology’, ‘Lean production’.

Airbus was able to adopt the lean production system which reduced the cost of production and increase the profit margin. The various overheads and cost centres were cut to size / optimally utilized to achieve maximum benefits to the firm.

A new range of technologies designed to reduce set-up times for complex equipments, and increase use of individual machine by better scheduling. The employees at the Airbus were well trained and were handling the various tasks simultaneously in the production line where as the labours much more in numbers were seen engaged in the production of the rival aircraft firm, Boeing. This was one of the major causes for concern of Boeing.

Efficiency and Manufacturing Process- Flexible manufacturing allows a company to produce product variety at a cost that

could be possible for mass customized product. - Flexible manufacturing combines low costs and differentiation at the same time.

Airbus was abound with orders and was able to fulfill the orders timely due to the efficiency of labour and the lean production line. The inventory cost was reduced and the technology was incorporated for efficient handling of machinery. The time limits set for delivery of aircraft were met with which increased the customer relationship.

Marketing & Efficiency:

- Management of customer retention and minimizing customer defection. - There is an ‘acquisition cost’ attached to a customer.- The longer a customer stays, the less is the unit cost of acquisition. - When a customer stays for a short term, this leads to loss on investment made on

‘acquisition’ of customers. - The strategy should be to prolong the stay of the customer with the organization. - Longer a customer stay, the wide is the spread of ‘acquisition costs’ overtime.

Material Management & Efficiency: - JIT reduces inventory holding costs and free up investment for working capital.- JIT has obvious limitations. In case of disruption in supply, the company finds it

difficult to build a quick response. - Material and Inventory Management has now been recast in terms of an efficient

supply chain management, the task of managing the flow of inputs’ & components into the product process with high inventory turnover and minimum holding.

R&D and Efficiency :

- R&D dramatically decreased the through put time thereby lowering costs.

Efficiency & HR

The key lies in innovating hiring policy, compensation, training policy and retention policy. The Company adopted the policy of hiring locals for the various centres production was carried out. While operating in the US at the later stage, the company even incorporated maximum usage of local components in the product itself.

Two distinct generic hiring policies can be cited.

Positive attribute Self reliant Self managing teams Goal oriented

Excellent interpersonal skill

Efficiency and IT • ICT is playing as big role in creating superior operating efficiency• E-commerce & E-business have revolutionized business value chain altogether.

Efficiency and Infrastructure • An organization's structure, culture, strategy, management control and above all

leadership – all collectively build organization wide commitment to improving efficiency.

The Top decision makers were very much involved in the building up of the Airbus, brick by brick. The initial glitches were overcome by infusing finance and other subsidies by the various Government / agencies. The marketing and sales were concentrated and the market for this was targeted where there was ample scope – the Asian Region. In the second phase the Middle east and the Arab world was targeted where there was ample scope for expansion in the aviation industry. The third phase was to enter the European and well the American industry which also saw the diversification to the Defence aircraft manufacturing. Re-engineering Value Chain: Efficiency, the Campaign Strategy

Value Creation Function

Primary Roles

Infrastructure(leadership)

Provide companywide commitment to efficiency. Facilitate cooperation among functions.

Production Where appropriate, pursue economies of scale and learning economics. Implement flexible manufacturing systems.

Marketing Where appropriate, adopt aggressive marketing to ride down the experience curve. Limit customer defection rates by building brand loyalty.

Materials management

Implement JIT systemsImplement supply-chain coordination.

R&D Design products for ease of manufacture.Seek process innovations

Information systems Use information systems to automate processes. Use information systems to reduce costs of coordination.

Human resources Institute training programs to build skills. Implement self-managing teams. Implement pay for performance.

Achieving Superior Quality TQM popularized by Deming, Joseph Juran & Feigenbaum in USA but it is Japan

which embraced it in a big way.

Value Creation Template: Quality & Reliability

Value Creation Function

Primary Roles

Infrastructure (leadership)

1. Provide companywide commitment to quality . 2. Find ways to measure quality .3. Set goals, and create incentives.4. Solicit input from employees.5. Encourage cooperation among functions.

Production 1.Shorten production runs. 2.Trade defects back to source.

Marketing Focus on the customer. 2.Provide customers’ feedback on quality

Materials management

1.Rationalize suppliers 2.Help suppliers implement quality improvement methodologies.3.Trace defects back to suppliers.

R&D Design products that are easy to manufacture.Information systems Use information systems to monitor defect rates.Human resources Institute quality improvement training programs.

Identify and train “black belts.”Organize employees into quality teams.

Achieving Superior Innovation

Product Development Process

Achieving Superior Responsiveness to Customers

- Bring ‘customers’ at the Centre of strategy - Bring edge of the market at the Centre - Bring edge of the organization at the Centre.

Opportunity identification

Concept developme

nt

Product design

Process design

Sequential and Partly Parallel Development ProcessesSequential and Partly Parallel Development Processes

Superior Responsiveness to Customers

Value Creation Function Primary RolesInfrastructure (leadership) Through leadership by example, build a companywide

commitment to responsiveness to customers.

Production Achieve customization through implementation of flexible manufacturing.

Marketing Know the customer. Communicate customer feedback to appropriate functions.

Materials management Develop logistics systems capable of responding quickly to unanticipated customer demands (JIT)

R&D Bring customers into the product development process.

Information systems Use web-based information systems to increase responsiveness to customers.

Human resources Develop training programs that get employees to think like customers themselves.

Functional Strategic: Marketing

Expand sales into new chasses of customers

1. Geographic expansion2. Additional related products - line

extension3. Develop completely new products 4. New applications for same products 5. Develop customized products

Hold market share1. Copy, do not innovate

2.Emphasize larger product sizes or more durable products to keep current customers out of the marketplaceIncrease switching costs by offering special services to current customers

Increase penetration in market segments of existing customers 1. Develop competing products – product overlap2. Product customization3. Product system concept4. Find pricing and service mix to give competitive edge5. Seek promotional techniques to drown out competitive adwantges 6. Pinpoint markets by reducing variety of products and models. 

Functional Strategic: Finance

Borrow short term1. Credit line2. Bank notes3. Factor accounts receivable

Refinancing1. Refinance long term with short term2. Refinance short term with long term3. Purchase treasury stock4. Split shares5. Liquidate debt by selling shares

Borrow long term1. Secured debt of three to five years2. Bonds or debentures3. Commercial paper

Dividend policy1. Begin dividend payout2. Increase dividend payout 3. Reduce dividend payout4. Maintain present dividend payout5. Discontinue dividend payout

Equity funding1. Private placement2. Public placement3. Voting or nonvoting

Companies can often strengthen their business models to take on competitors more effectively. Airbus’s business model initially fell short because Boeing could reinvest profits from its 747, which enjoyed a monopoly in the very large commercial transport segment. In 2007, Airbus launched the A380 to compete in that segment-strengthening its virtuous cycle relative to Boeing’s.

With the September transactions, Airbus’ 2011 net orders through 30 September totaled 1,038, bringing the company’s current commercial jetliner backlog to 4,216 aircraft.

Airbus deliveries in September, 2011 were paced by the 32 A320 Family aircraft provided to international customers.  This takes overall A320 Family deliveries past the 4,800 mark, with the combined total reaching 4,822 at month-end.

Among the five A330s delivered during September was the first A330-200F for MASkargo, the freight subsidiary of Malaysia Airlines.  MASkargo joins Etihad Airways, Hong Kong Airlines and Turkish Airlines as operators of the A330-200F. The month also was busy for the A380 programme, with two additional jetliners provided to Singapore Airlines and another received by Korean Air.

The Airbus has created a Niche of its own in the Aircraft Industry and would certainly enjoy the fruits for many years to come.

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