What would you advice Boeing to do

What would you advice Boeing to do?

Defend your point of view when you first present it and against other point of views. IAIRBUS AND BOEING: SUPERJUMBO DECISIONS

By the summer of 1999, Boeing was considering how to respond to
Airbus’s decision to announce by year’s end whether or not it
planned to proceed with a risky and costly project to develop the
world’s first commercial superjumbo jet. Airbus had been
considering investing in such a project since the early 1990s. Its
goal was to challenge the Boeing 747’s 30-year monopoly on the
very-large-aircraft (VLA) market—the market for passenger jets
with more than 400 seats. The proposed project, if launched by
Airbus, would lead to deliveries of the world’s first superjumbo jet
—the 550-seat A3XX—which was even larger than the Boeing
747. The superjumbo segment represented those planes that would
carry more than 500 passengers in their standard configuration.1
Airbus’s development effort was expected to cost $10 billion and
take five years to complete.
Boeing had all but ruled out a new, full-scale development effort
for its next-generation VLA.2 In the late 1990s, it had “lost control
of its factories, upset its customers with late deliveries, and
plunged into its first loss in 50 years.”3 Instead, Boeing was
considering a more modest development effort to “stretch” its
current 416-seat 747-400 plane into a new 440-to-520- seat “747X” plane,4 which would take an estimated five years and cost $7.5
billion. How Boeing reacted to Airbus’s announcement could
affect its position in the VLA market for years. After all, Boeing
had delivered 1,189 jumbo jets since the 1969 inception of the 747
jumbo jet.5
Recent History
At the beginning of 1998, Boeing chairman and CEO Phil Condit
and its president and COO, Harry Stonecipher, issued the
following statement in their 1997 annual report’s “Message to
Shareholders”:

Our financial results for 1997 were very disappointing...We
recorded a net loss of $178 million. This was due to $3 billion-plus
in pretax charges—more than half of which were due to production
problems in our commercial aircraft business. Our shareholders
have every right to expect better. So do our airline customers, who
have faced the problem of late deliveries of aircraft.
Despite record sales of $56 billion and expenditures of $1.9 billion
on R&D, problems continued for Boeing in 1998. In early 1999,
Condit and Stonecipher issued the following statements in their
1998 annual report’s “Message to Shareholders”:
As 1998 began, the problems confronting us were largely of our
own making. In the midst of a boom market, we tried to do too
much too soon in terms of raising production rates and coping with
the variability involved in building several new models at one time
and in limited quantities for new customers.
Toward the end of the year, we confronted another kind of
problem, which was serious deterioration in the order book due to
the Asian economic crisis. This hit us especially hard on the 747
program—our largest, and one of our most profitable airplanes. As
a result, we are prepared to reduce production of the 747 from five
per month at present to two per month in late 1999 and
subsequently to one per month in early 2000, if market conditions
fail to improve.
While Boeing was having financial difficulty and reducing
production, Airbus was flying high. It was poised to overtake
Boeing in orders booked for the first time in 10 years. In 1998,
even though Airbus delivered only 229 planes to Boeing’s 564, it
booked orders of 556 to Boeing’s 606. Moreover, it now had a
commanding 51% productivity advantage: Airbus employed 143
workers per aircraft produced, whereas Boeing employed 216
workers per aircraft produced.6

Divergent Forecasts of Demand
Each year at the Paris Air Show, Airbus and Boeing issued
forecasts of commercial- aircraft demand for the next 20 years.
They were issued in detailed, widely available reports. At the show
in June 1999, Airbus issued its 80-page Global Market Forecast,
and Boeing issued its 50-page Current Market Outlook. At the
time, the forward-looking views of Airbus and Boeing were
particularly divergent. On the one hand, Airbus foresaw a total
market, including cargo, for 1,500 VLA. On the other hand,
Boeing saw “demand for 933 planes with more than 400 seats over
the next two decades, out of which...360 planes [would have] more
than 500 seats,” according to Randy Baseler, vice president for
marketing in Boeing’s commercial-airplane group.7
The difference of opinion grew out of the views each company had
about how the airline- carrier business would evolve. Boeing saw a
sharp increase in the lower-density point-to-point flights between
secondary airports, while Airbus still saw strength in the traditional
high-density flights between hub airports.
An aerospace analyst at Goldman First Boston (GFB) had
collected the viewpoints of the two parties (Exhibit 1), which
converted the forecasts into mean estimates of annual jumbo- and
superjumbo-plane deliveries. He also produced a report and
spreadsheet of his calculations (Exhibits 2 and 3).
The GFB report also projected that annual jumbo deliveries in the
next five years would range from 10 to 30, with a most likely
estimate of 25 planes, based on information gathered from Boeing.
Airbus likely shared this view of the VLA market, at least over the
same time period. If no superjumbos were introduced by Airbus,
Boeing would enjoy all the VLA sales. The GFB report projected
that, in Boeing’s view, VLA annual deliveries for the jumbo market
(for years 6–40) would range between 21.15 and 51.15, with a
most likely number of 36.15. The analyst saw that, for the most

part, Airbus shared this view. He assumed Airbus’s forecast was
0.04 planes fewer than Boeing’s for the jumbo market in years 6–
40.
In his previous studies of the introduction of new airplanes, the
analyst had found it helpful to do a separate forecast of the number
of initial orders taken from announcement to delivery of the first
plane. He had seen that the Boeing 747 had had 178 total orders
before its first delivery, on December 12, 1969, and the company
went on to sell an average of 40 planes per year (an annual
deliveries-to-initial-orders ratio of 22.5%). A similarly successful
plane, the Boeing 777, had 137 total orders before its first delivery,
on May 15, 1995. It went on to sell an average of 56 planes per
year through mid-1999 (a ratio of 40.9%).
The GFB report projected that actual superjumbo market deliveries
would be a multiple of total initial orders. On the basis of Boeing’s
public statements and his own expert judgment, the analyst
surmised that Boeing’s forecast of initial superjumbo orders would
be in the range of 10 to 200 planes, with the most likely being 23.5
planes (the average was 77.83). On the basis of Airbus’s public
statements and the analyst’s expert judgment, he concluded that
Airbus’s forecast of initial superjumbo orders would be in the
range of 71.45 to 261.45 planes, with the most likely being 84.95
planes (the average was 139.28). This amounted to adding 61.45 to
Boeing’s forecast so that each company’s forecast matched the
mean estimates in Exhibit 1.
His approach to forecasting annual superjumbo deliveries was to
place a range and uncertainty on the ratio of annual superjumbo
deliveries to initial orders. Using his experience and judgment, he
projected that the minimum ratio of annual superjumbo deliveries
(in years 6– 40 of the product life cycle) to initial orders would be
10%; the maximum, 50%; and the most likely, 30%. Therefore, the
average annual superjumbo deliveries (e.g., 30% of 139.28 is

41.79) matched the analyst’s mean estimates derived from Airbus’s
20-year forecasts in Exhibit 1.
The analyst then added jumbo deliveries to the product of
superjumbo initial orders and the annual superjumbo annual
deliveries-to-orders ratio. This combined projection of the annual
VLA market deliveries (for years 6–40) gave an average annual
delivery of 77.9 (for the Airbus perspective) and 59.5 (for the
Boeing perspective), matching the point forecasts issued by Airbus
and Boeing in their 1999 forecasts.
The attractiveness of the superjumbo depended on how the
companies would share the VLA market segments. Because
Boeing was already in the jumbo market, the GFB report stated
that it would keep the entire jumbo market. If Airbus was the only
company to introduce a superjumbo, it would receive the entire
superjumbo segment. Because Airbus was likely to have a better
offering with a larger, newer design, if both companies offered a
superjumbo, Boeing would earn a 40% share of that segment,
leaving 60% for Airbus.
The Decisions
Was Airbus or Boeing right about the number of superjumbo
aircraft that would be sold? And should either company bet
significant shareholder value on it? These were huge questions.
Boeing had to decide whether to develop the superjumbo stretch
747-X to compete with Airbus’s potential new offering. On the one
hand, if Boeing chose to put off developing the 747-X, it risked
seeing Airbus take the entire superjumbo market. On the other
hand, Boeing’s hesitancy could pay off if Airbus’s newly offered
superjumbo received few orders, indicating that it might be
unsuccessful in the market.
In rough terms, the present value of profit per plane, based on how
sales would be spread over a 40-year product lifetime, was about

$25 million. All other dollar amounts in the GFB model were in
present-value terms.