Need help with the questions for this case! CLOSING CAS E The Market for Large C

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Need help with the questions for this case!

CLOSING CAS E The Market for Large Commercial Aircraft Two companies, Boeing and Airbus, have long domi driven primarily by demand for air travel, which has nated the market for large commercialjet aircraft. To- grown at 5% per annum compounded since 1980 day Boeing planes account for 50% of the world's fleet Looking forward, Boeing predicts that over the of commercial jet aircraft, and Airbus planes account next 20 years the world economy will grow at 3.2% for 31%. The reminder of the global market is split per annum, and airline traffic will continue to grow between several smaller players, including Embraer at 5% per annum as more and more people from of Brazil and Bombardier of Canada, both of which the world's emerging economies take to the air for have a 7% share. Embraer and Bombardier, however, business and pleasure trips. Given the anticipated have to date focused primarily on the regional jet growth in demand, Boeing believes the world's market, building planes of less than 100 seats. The airlines will need 37,000 new aircraft between market for aircraft with more than 100 seats has been 2013 and 2033 with a market value of $5.2 trillion totally dominated by Boeing and Airbus. dollars in today's prices. The overall market is large and growing. In 2014, Boeing delivered 723 aircraft and Airbus delivered 620 aircraft. Demand for new aircraft is Clearly, the scale of future demand creates an enormous profit opportunity for the two main in- cumbents, Boeing and Airbus. Given this, many

Explanation / Answer

1) The wide bodied segment of the industry is highly capital intensive and requires large number of orders for the companies to break even, which also takes up substantial amount of time. Given the amount of time and costs involved along with risks in investment, only the incumbent members can afford to take risks of this magnitude and hope to remain profitable and as such new entrants cannot make headway into the segment. With the barriers to entry so high and stringent, it is likely that only incumbents will continue to remain in this segment with high amount of profitability and prices.

2) The entry barriers to the narrow bodied segments are much lesser as evident by the entry of three new players in this segment. The three players Comac of China, Bombardier and Embraer have firm orders from customers and they also believe that the segment is large enough to support more than two players.

3) The industry growth is expected to be about 5% with new demand to be expected to be around 37000 new aircrafts. The wide bodied segment will continue to be more profitable with less competition and higher prices. The narrow bodied segment will see larger competition with entry of 3 new players in addition to the incumbents. In this sector, the volume growth may not see corresponding revenue and profitability growth because of higher competition and lower prices.

4) As a new entrant the long term development strategy would be to be a cost leader and also gradually introduce additional features to the customer. Being a cost leader would be a necessity to ward off competitive threat by incumbents in case of a price war by the existing players. It is also necessary to differentiate product features gradually to become more profitable and gain market share in the long run.

5) Boeing and Airbus can engage in tacit collusion to lower prices to ensure that the new entrants don’t find the industry profitable to enter and set up their businesses. If the prices are kept low for sufficient time, then the investments won’t payoff for the newer entrants and they have to leave the market and then the existing players can recover the prices to regain their earlier profitability.

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