Why Airbus And Boeing Dominate The Sky

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.

Channel: CNBC

Views: 1,569,066

Rating: 4.8140459 out of 5

Keywords: CNBC, business news, finance stock, stock market, news channel, news station, breaking news, us news, world news, cable, cable news, finance news, money, money tips, financial news, Stock market news, stocks, boeing 777, boeing 737, beoing flying car, boeing stock, airbus, boeing total access, airbus a380, airbus a320, a320, a380, boeing airbus, delta airbus, boeing 737 max crash, boeing safety, is boeing 737 max 8 safe

Id: 2zaUOUiNjJY

Length: 14min 46sec (886 seconds)

Published: Wed Jan 30 2019

Reddit Comments

[u/andrewkf]

Didn't realize how uncommon Embraer planes are. I've flown on them almost exclusively for a few years now.

[u/ACuteMonkeysUncle]

Who makes the other 1%?