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Why did Airbus and Boeing react to the moves made by the three smaller companies entering the market for narrow‐bodied commercial jet aircraft?

Boeing, Airbus and the Market for Large Commercial Aircraft (in 2015) Two companies, Boeing and Airbus, have long dominated the market for large commercial jet aircraft. Today, Boeing planes account for 50% of the world’s fleet of commercial jet aircraft and Airbus planes account for 31%. The remainder of the global market is split between several smaller players, including Embraer of Brazil and Bombardier of Canada, both of which have 7% share. Embraer and Bombardier, however, have to date focused primarily on the regional jet market, building planes of less than 100 seats. The market for aircraft with more than 100 seats has been totally dominated by Boeing and Airbus. The overall market is large and growing. In 2014, Boeing delivered 723 aircraft and Airbus delivered 620 aircraft. Demand for new aircraft is driven primarily by demand for air travel, which has grown at 5% per annum compounded since 1980. Looking forward, Boeing predicts over the next 20 years the world economy will grow at 3.2% per annum, and airline traffic will continue to grow at 5% per annum as more and more people from the world’s emerging economies take to the air for business and pleasure trips. Given the anticipated growth in demand, Boeing believes the world’s airlines will need 37,000 new aircraft between 2013 and 2033 with a market value of $5.2 trillion in today’s prices.   Clearly, the scale of future demand creates an enormous profit opportunity for the two main incumbents, Boeing and Airbus. Given this, observers wonder if the industry will see new entries. Historically, it has been assumed that the high development cost associated with bringing new commercial jet aircraft to market, and the need to realise substantial economies of scale to cover those costs, has worked as a very effective deterrent to new entries. For example, estimates suggest that it cost Boeing some $18 to $20 billion to develop its latest aircraft, the wide‐bodied Boeing 787, and that the company will have to sell 1,100 787s to break even, which will take 10 years. Given the costs, risks, and long time horizon here, it has been argued that only Boeing and Airbus can afford to develop new large commercial jet aircraft. However, in the last few years, three new entrants have appeared. All three are building are building smaller‐narrow‐bodied jets with a seat capacity of between 100 and 190. Airbus A320 Boeing 7372 Boeing’s 737 and the Airbus A320 currently dominate the narrow‐bodied segment. The Commercial Aircraft Corporate of China (Comac) is building a 170‐to‐190 seat narrow‐bodied jet, scheduled for introduction in 2018. To date, Comac has 430 firm orders for the aircraft, mostly from Chinese domestic airlines. Bombardier is developing a 100‐to‐150 seat plane that bring it into direct competition with Boeing and Airbus for the first time. Scheduled for introduction in late 2015, Bombardier has 243 firm orders and another 100 commitments for these aircraft. Embraer too has developed a 108‐to‐125 seat plane to compete in the narrow‐bodied segment, the E‐190‐195. It has taken orders for 720 of these aircraft, 640 of which had been delivered by late 2014. The new entry is occurring because all three producers believe that the market for narrow‐bodied aircraft is now large enough to support more than Boeing and Airbus. Bombardiers and Embraer can leverage know‐how they developed manufacturing regional jets to help them move upmarket. For its part, Comac can count on orders from Chinese airlines and the tacit support of the Chinese government to help get it off the ground. In response to these competitive threats, Boeing and Airbus are developing new, more fuel efficient versions of their own narrow‐bodied planes, the 737 and A320. Although they hope their new offerings will keep entrants in check, one thing seems clear: with potentially five producers rather than two in the market, it seems likely that competition will become more intense in the narrow‐bodied segment of the industry, which could well drive prices and profits down for the big two incumbent producers. Source: Charles W.L. Hill, Melissa A. Schilling and Gareth R. Jones Strategic Management: An Integrated Approach, 12e, 2017, Boston: Cengage * * * * *  

Why did Airbus and Boeing react to the moves made by the three smaller companies entering the market for narrow‐bodied commercial jet aircraft?

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