Market Trend Prediction, Product Development, and Risk Hedging – Airbus Vs Boeing

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The competition between aircraft makers Boeing Corporation of the United States and Airbus Industrie, the European consortium, is a very interesting textbook case study in market trend prediction, product development and risk hedging. It clearly shows how businesses try to predict the future and commit enormous resources into their positions. It can be payback massively one way or the other.

Airbus has over the years argued along the following lines:

  • Airports are expensive to build and therefore operators would rather expand the capacity of existing ones than build new ones,
  • Airlines can reduce passenger-mile costs if they can move large numbers of passengers on large and efficient aircraft from one ‘hub’ to another (rather than move the same number of passengers on smaller aircrafts directly to their destinations),
  • As regulators are working to enforce reductions on emissions, airlines will need to reduce the number of flights (per capita) from and in between major hubs.

Credit: quora.com

Given the arguments above, Airbus committed to developing a large aircraft that can move, depending on the configuration, up to 700 passengers from one hub to another. This led to the development, production and certification of the A380 ‘Super Jumbo’.

The upper deck of the A380 extends along the entire length of its fuselage. It features extremely efficient and silent quadruple engines. The A380-800 version has a design rage of about 15,700 km and a cruising speed of 900 km/hr. Its service ceiling is 43,000 ft and a unit will set you back about USD430 million.

The A380 made its first flight on 27 April 2005 and entered commercial service on 25 October 2007.

 

 

 

 

 

Boeing on the other hand, predicted that:

  • Travellers will prefer to move directly from one point to their destination, rather than via a hub,
  • Based on the above, airlines will need smaller but highly efficient aircrafts with large range.

On the basis of the argument above, Boeing developed the Boeing 787 ‘Dreamliner’. It can haul about 242 to 335 passengers over a range of about 13,000km. It is a twin-engine mid-size wide-body plane. It is the first airliner made primarily of composite materials in the construction of its airframe. It can cruise at 903km/hr and has a service ceiling of 43,000ft.

The first 787 was unveiled in a roll-out ceremony on July 8, 2007 at Boeing’s factory. Due to various delays, the airliner’s maiden flight took place on December 15, 2009, as against the earlier scheduled date of May 2008. Flight testing was completed in mid-2011. It is reported that Boeing has spent $32 billion on the 787 program. A unit of Boeing 787 Dreamliner will cost you about USD270 million.

Airbus forecasted that by 2030, there would be about 1,300 A380s flying. Unfortunately, after reducing the annual production rate of the A380 from 27 in 2015 to just 12 in 2018, Airbus is again reducing that to 8 by 2019! On the other hand, the orders for the Dreamliner are increasing. These are not good signs for Airbus.

Both companies are big, strong, resilient, and political considerations can come in to support one or the other if ‘push comes to shove’. It will therefore still take some time before the market establishes itself entire one way or the other. Besides, Airbus could play its A350 ‘card’ to do some damage control if it loses out on the A380 program. Similarly, Boeing could also use its 747-8 series to try and cover any gap that Airbus could create ahead of it.

No matter what happens though this is an interesting case for businessmen and entrepreneurs. The points to note are that:

  • You have to make an assessment and predict your market trend into the future,
  • Based on your prediction, you have to take a position and create a model that enhances your chances of success,
  • Without relenting on the position you take, you should hedge your position against unwanted outcomes.

About Me

My name is Musbahu El Yakub. I am an entrepreneur, a consultant and an author. I desire to help, guide and support start-up and growing entrepreneurs. I try to do this by providing them with information, tools and guidance..

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