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Why Airbus And Boeing Dominate The Sky

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14:46   |   Jan 30, 2019

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Why Airbus And Boeing Dominate The Sky
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  • If you're one of the four billion people who flew last year
  • chances are you flew on either an Airbus or Boeing aircraft.
  • The Airbus-Boeing duopoly dominates the already under competitive
  • aircraft manufacturing industry by producing more than 99% of
  • its large airplane orders globally. It's become one of the most
  • efficient duopolies ever in the history of manufacturing
  • Are smaller competitors finally giving them a run for their
  • money? Or are they just getting scooped up? Will China step into
  • the market and make waves? What about the future of flying? Will
  • Supersonic planes challenge Airbus and Boeing's dominance?
  • Before we answer those questions let's start with how we got to
  • a place where just two companies own the air
  • Boeing has always been a big player in the aviation field for
  • over 100 years. The Boeing Company was created in 1916. William
  • Boeing founded the Aero Products Company and developed a single
  • engine seaplane and the business was renamed the Boeing Company
  • and sold its planes to the Navy during the First World War
  • Boeing continued to sell its aircraft during the 1920s and 1930s
  • to the U.S. military. During this time Boeing also expanded into
  • airmail services.
  • In 1919 Eddie Hubbard and I took a
  • flight up to Vancouver B.C. This was the first ever
  • international mail ever carried by planes into the United
  • States.
  • The Boeing Airplane and Transportation Corporation was formed and
  • it covered both the manufacturing and airline operations but the
  • Air Mail Act of 1934 split aircraft manufacturers from air
  • transport. So the conglomerate of the day was dissolved in the
  • company went back to being called "Boeing." With the development
  • of turbo jets, the Boeing 707 was introduced to the public in
  • 1958 on Pan American's trans Atlantic route and the public loved
  • it With smoother rides and a shorter flight time Boeing paved
  • the way for the future of commercial flight. Boeing may
  • encapsulate Americana via the golden age of flying but the much
  • younger Airbus had a rough road to success. It started as a
  • group effort in Europe to take on American manufacturers.
  • In 1967 Germany, France, and Britain came to the agreement that a
  • cooperation of aviation field would promote technology and
  • economic growth in Europe. They drew up plans for a short haul
  • European Airbus that would accommodate the public's desire to
  • fly more for less. Plans were made to construct the A300. In
  • October of 1972 the A300 completed its first flight. But Airbus
  • leaders had an uphill battle ahead of them convincing the world
  • they created the most innovative aircraft. By 1984 Airbus
  • received 411 orders and had 282 aircraft in active service. The
  • persistence paid off the long run because in 2018 Airbus
  • delivered 800 planes. 11% growth from the year before. And
  • Boeing's business is thriving as well. In 2018 the company set
  • the record for the most airplane deliveries with 806 commercial
  • jets, 5.6% growth from 2017. And the stocks have reflected the
  • company's dominance. Both Airbus and Boeing stocks have
  • significantly outperformed the S&P 500 over the last 10 years.
  • How can you tell these planes apart? Boeing and Airbus have
  • subtle differences. For instance the cockpit of a Boeing 737 has
  • a yoke control whereas an Airbus A320 does not. That's just one
  • of the many ways these companies diverge in their manufacturing.
  • Most are only felt by the crew and travelers with a keen eye.
  • How do airlines decide which company to buy from? Think of it
  • like going to a car dealership and choosing between a Chevy and
  • a Ford. Both are supposed to get you to your destination but
  • which one has a better deal? And what does the existing fleet
  • look like? For example, Spirit and Frontier operate only
  • Airbus, while Southwest is an all Boeing fleet. It's hard for
  • low cost operations like these to switch. The legacy airlines
  • usually have a mix of both.
  • So what does it take for companies like Airbus and Boeing to
  • control the airline industry? Well, building these airplanes
  • isn't cheap. To be a real competitor aviation companies must
  • have the money to spend.
  • The barriers to entry in this business are huge in terms of
  • capital requirements, in terms of technology experience,
  • customer support, customer finance, all of these things.
  • A single plane can run up millions of dollars in construction
  • fees. Boeing is currently working on a new series of airplanes
  • called the 777X. A single 777-9 has a list price of
  • $388.7 million dollars. That's because there are hundreds of
  • thousands of components to an airplane. A Boeing 747 alone is
  • made up of six million parts. But materials aren't the only
  • thing that costs aviation companies big. Safety comes with a
  • hefty price tag.
  • It's definitely a well-regulated industry. I don't think there's
  • any question about that. I actually view much, not
  • all, but I view much of that
  • regulation has a historical partnership that has actually served
  • the industry quite well. If you consider that the airlines today
  • aviation globally carries three billion passengers a
  • year and most years kill fewer than 500 of them. Some years
  • none. That's a pretty extraordinary record. And reaching that
  • level of safety requires a great expense And these massive
  • companies have plenty of money
  • And at least for Boeing a lot of it comes from the government. It
  • was the second largest government contractor in 2017 behind only
  • Lockheed Martin bringing in more than 23 billion dollars. It
  • also spends big to keep its close relationship with Washington.
  • The company spent more on lobbying than any other company in the
  • United States other than General Electric from 1998 to 2018
  • according to Open Secrets 270 million dollars. The acting
  • Secretary of Defense at the beginning of 2019 is a former Boeing
  • executive that led the 787 Dreamliner program. And the acting
  • administrator of the Federal Aviation Administration or the FAA
  • used to work for an airline manufacturing industry group
  • Responding to a question about its lobbying power. Boeing told
  • CNBC this "as the nation's largest exporter and a leading
  • producer of both commercial and defense aerospace
  • products, there are a number of significant policy issues at the
  • federal state and local levels with the potential to impact our
  • business our diverse workforce and our supply chain. Our team is
  • focused on telling Boeing"s story and supporting policies that
  • advance the aviation industry and U.S. manufacturing in the
  • communities where we live and work." The company's entrenched
  • position has a real world impact. When Delta ordered planes from
  • the Canadian company Bombardier in 2016, the company fought hard
  • arguing the smaller competitor could only sell them at such a
  • low price to the Canadian subsidies. The Trump administration
  • originally sided with Boeing putting tariffs on the planes but
  • Boeing ended up losing the battle when the U.S. International
  • Trade Commission ruled in Bombardier's is favor at the beginning
  • of 2018. The battle showed how hard it has become for smaller
  • companies to break into the market. Which brings us exactly to
  • that where is the competition?
  • Airbus and Boeing may command domestic and international airspace
  • but for regional flights the Canadian company Bombardier and the
  • Brazilian company Embraer control the market or at least they
  • used to. The overhead for the aviation manufacturing business
  • can be crushing and regional aircraft manufacturers like
  • Bombardier a couldn't shoulder the costs. Bombardier of
  • Canada had the
  • The best hope of getting in they simply ran out of cash. And this
  • year their jetliner was basically absorbed by Airbus.
  • Now the Airbus A220 rather than the Bombardier C-Series. In 2017
  • Airbus announced it would acquire a majority stake in
  • Bombardier's C-Series. Airbus rebranded the series as a new a
  • 220 and sold 120 former C-Series jets to U.S. airline companies
  • in 2018. Airbus will begin building the aircraft later this
  • month. And let's not forget about Brazilian aircraft company
  • Embraer the other regional jet manufacturer. Boeing just bought
  • 80% of Embraer commercial aviation business for a whopping $4.2
  • billion dollars. The Brazilian government approved the deal in
  • January and both companies announced that they expect to get all
  • the remaining approvals before 2020. The reality was that these
  • smaller companies weren't really competing anyway.
  • In 2016 regional aircraft deliveries were less than 7% of the
  • airplane market by value. Other countries like Russia and China
  • have also been trying to become prominent players in the
  • aircraft manufacturing industry. But so far both countries have
  • been unable to make a dent in the private sector.
  • They could flip a switch and they'd be great at it. The
  • frustrating thing about China is that the only possible thing
  • they could do wrong is exactly what they're doing. They've got
  • the biggest market in the world. They've got limited talent on
  • limited resources. They should be great in this. But the
  • strategy they're pursuing is basically digging a giant hole.
  • They're running it as a government operation and very simply
  • government owned industries to not do a good job beating
  • commercial market needs. Next thing they're doing is rather than
  • saying to their engineers, "hey you can go shopping for the best
  • components and technology around the globe..." They're saying
  • you have to buy stuff made in China and that means only stuff
  • that involves Western companies coming to China and surrendering
  • their intellectual property.
  • Boeing and Airbus aren't shying away from potential competition.
  • Boeing highlighted its partnership with COMAC on a completion of
  • a facility in Zhoushan. The company also told us, "China's
  • commercial aviation sector represents a major customer an
  • important partner in a potent competitor. China is on track to
  • become the largest commercial airplane market in the world over
  • the next few years. Getting the right balance between
  • collaborating and competing requires work in constant
  • evaluation." When we asked Airbus about Chinese competition
  • they told CNBC this "the Boeing Airbus to Oxley isn't likely to
  • last forever. In general we see China as the next major
  • competitor though in some 10 to 20 years from now. The Chinese
  • market is large enough for more than two competitors in every
  • market we welcome competition. Airbus was born competition,
  • thrives in it, and believes it is good for the development of
  • our industry.
  • So what's next for the aviation industry? Will it be the return
  • of supersonic travel? The aptly named Colorado-based company
  • Boom Supersonic announced it has received millions in funding
  • from investors. Boom is looking to make supersonic travel
  • mainstream. Marketing their aircraft is being able to get
  • passengers to and from their destinations two times faster than
  • business class flights today. Commercial supersonic travel isn't
  • new. In 1976 the first Concorde flights took off from London and
  • just outside Paris. But the Concorde days were short lived.
  • Noise pollution, mounting expenses, combined with a fatal air
  • crash caused the Concorde to be retired in 2003. But there are
  • many barriers sitting in the way of creating supersonic
  • commercial travel. The first being
  • it's illegal. They would have to demonstrate that these are
  • usable over land. At present it's not legal to operate
  • supersonically over landmasses at least in the U.S. NASA been
  • testing so called "quiet boom" aircraft
  • in fact they're testing them right now in the Gulf of
  • Mexico, the people of Galveston Texas are the dummies I guess to
  • see whether they notice the booms. It remains to be seen whether
  • those theoretical designs can be put into practice.
  • But the big question is can supersonic travel be economically
  • feasible?
  • Will they be willing to pay five times as much for the aircraft
  • and their operating costs in order to go twice as fast because
  • the fuel bill basically piles up. We're now flying slower than
  • we did in 1970s and 80s
  • but on the other hand there's this economic reason for that.
  • It's not just civilian companies developing supersonic travel.
  • Lockheed Martin announced plans to build supersonic aircraft
  • that could change commercial travel. Lockheed Martin is
  • partnering with NASA to develop the X59 QueSST. This aircraft is
  • designed to have a cruising altitude of 55,000 feet and a
  • terminal speed of 940 miles per hour. And forget that super
  • alarming sonic boom. According to the Lockheed Martin Skunkworks
  • team the plane would create a sound no louder than the slamming
  • of a car door. But the development is still in its beta stages.
  • As for Boeing and Airbus both companies told us supersonic and
  • hypersonic travel is on their radars and that they are committed
  • to pursuing multiple innovative technologies moving forward.
  • The future of the aviation manufacturing business remains
  • unclear.
  • But one thing is clear the multi-billion dollar industry will
  • continue to grow as millions of more people around the world
  • enter the middle class. The International Air Transport
  • Association expects the number of air travelers to double to 8.2
  • billion by 2037 and Airbus and Boeing are poised to take a
  • vantage of those soaring trends.

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Airbus and Boeing dominate an already under competitive airline manufacturing industry. The duopoly owns the sky by making up 99% of global large aircraft orders and those large plane orders make up more than 90% of the total plane market according to the Teal Group, an aerospace market analysis company (regional jet manufacturers only account for 7% of the airplane market by value).

The duopoly doesn’t have many competitors, but overseas competition is brewing. China’s state-run company, COMAC, is poised to make waves in the aviation manufacturing industry, but some say not for a couple decades.

This is how Airbus and Boeing took over airplane manufacturing.

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Why Airbus And Boeing Dominate The Sky