Internal Pricing Performance

Question: Write an essay on Internal Pricing and Performance? Answer: The global aviation industry has witnessed so many remarkable milestones in the last decade. Various players tried their hand in the industry but two of them have gained much importance and went on to dominate the global market. These two are Boeing (which is an American company) and Airbus (the aircraft manufacturing division of the Airbus Group, situated in France). Boeing was the market leader for a very long period until 2002, when Airbus took over them for the first time. However, both of them have created a duopoly situation in the market. A series of mergers globally by both the companies has made these two companies the market leaders and arch rivals. As a result of the mergers various competitors such as the Lockheed Martin, Convair and Fairchild Aircreaft of the US and a few companies from Europe were completely eliminated from the competition and the market. History of competition between Boeing and Airbus William E. Boeing was the founder of the Boeing Airplane Company which mainly manufactured sport and military airplanes. It grew and touched heights during World War II. Its most striking and successful product was the B-29 bomber which helped the company gain supremacy in the industry. Airbus was founded in the 1970s. Its first leap of success was the manufacture of A320, which was much more economical than its competitor the Boeing 737. During the years, Airbus revolutionized its model which offered much more ease and economical advantages to the company. Ultimately the introduction of the A380 gave them the position of the market leader. Current position of the competition The rivalry between Airbus and Boeing has being going on for a long period of time. But the recent years has witnessed it to be intensified to a great extent. Presently, there is a neck to neck competition between the two companies. Airbus is the leader in narrow body aircraft category while Boeing leads in the wide body category. But aircrafts such as the A330/340 has been very much effective in the wide body market. As stated earlier, both these major corporations have created a nature of duopoly in the aircraft manufacturing market. The different modes of competition can be evaluated on the following points which reflect a true picture of the nature of competition between the two: Currency: Boeing being based in the US deals with UD dollars as compared to Airbus which being a European company uses Euro. Due to fluctuations in the UD dollar value, the cost of production of a Boeing aircraft increases with a decrease in the value of US dollar. Airbus on the other hand has an upper hand in this case and has priced its products in various markets in various currencies. Outsourcing: As a common practice, procurement of aircrafts by different countries is mainly a political decision which is taken according to the political criteria of the concerned country. Both Airbus and Boeing tend to exploit this situation by subcontracting the manufacturing of component parts to companies of the buying countries. This gives them a competitive edge. Thus, both the companies are in a constant vigil to exploit the market conditions of the buying country. Technology: Airbus introduced the extensive use of composite material in its model A330 which was a break through point for the company. Further it automated the flight engineers functions which revolutionized the aircraft industry. Both the companies compete with each other on technological advancements. Presently their main focus is on weight reduction and fuel efficiency of their products. Engine Choices: The choice of engine in an aircraft has a considerable amount of influence on the competition scenario. Both Airbus and Boeing direct their constant efforts to procure a single source engine which is most advanced in the market. General Electric, Rolls-Royce and Pratt Whitney are the leading manufacturers and suppliers of aircraft engines in the market. All the above factors determine the nature of the competition prevailing in the market. But there are new players in the market too, which are giving a tough competition to the leaders. The market share of the global aircraft manufacturing can be represented by the following charts: The above figure represents the global market share of aircraft manufacturers. Market Situation as on 2014 The recent trends in the manufacturing show that there is an approximate increase of 8.7% in the narrow body segment of Airbus. On the other hand the numbers for Boeing increased by 10% but was set off against a decline in the manufacture of 737s by a steep percentage of 6.4%. in the wide body segment Boeings increase in the 777 fleet is about 8.5% which gave them the dominant position in the market. The new entrants are flourishing gradually. One of the notable one is the Brazilian Embraer. Embraer is developing at a constant rate year after year at an approximate rate of 8.2%. Embraers E-Jet series crossed the 1000 mark in the year 2014. Another rival in the field is Bombardier. It had a hike of 7.5% in its CRJ series which was unfortunately set off by a decline of 11% in its 50 seat products. Another regional player is the ATR which enjoyed a growth of 14.6% in its fleet strength. Other companies such as the Beechcraft 1900 and the de Havilland Canada Twin Otter tried tough to maintain their position in the top list. The position of the Russian manufacturers continued to decline. Thus, it is clear that the market is hugely dominated by Airbus and Boeing. The following figure shows the overall global ranking of the aircraft manufacturers. The status of deliveries of Boeing (Boeing.com, 2015) and Airbus (airbus, 2015) can be represented by the following figure: Both Airbus and Boeing are in a constant race to gain market share and occupy a dominant position. This has a severe effect on the market price of their products. Their prices vary with the quantum of demand. Further, often there is a huge difference between the listed price and the market price of the products. Though recently, the price of Airbus products have increased a little, but both the companies offer huge discounts to the buyers and the lessee in order to boost their sales. They tend to focus on short term goals. Thus, the price game plays an important role in determining the market situation (airbus, 2015). An approximate appropriation of total costs involved in the manufacture of an airplane can be illustrated by the following figure: As discussed earlier, the nature of competition exerts immense influence on the pricing of an airplane. In the above case, the main competition is between Airbus and Boeing. Duopolies always tend to reduce the market price. Both the companies constantly review their pricing policies to boost their sales and capture the market. Globalization of the market gave rise to opportunities for competition to grow which in turn diminished the prices of aircrafts even if there is an increase in the overall cost of production. In such a condition it is impossible for an aircraft manufacturer to charge a high price. Both the companies are constantly re-engineering the pricing policies to gain a competitive advantage over the other. Cost advantages enable them to offer a product at a cheaper rate than the competition. The table below will illustrate factors determining costs of aircrafts (Doganis 2010) Air-travel has increased many folds. This is due to the fact that the airline companies are in a constant vigil to offer more and more facilities to the customers. The target group has also expanded as they are able to avail these services at a much lower cost nowadays. Airline companies have started new routes at lower prices. This is the most influencing factor for new passengers to go for air travel. This opening up of the market has resulted in the increase in demand for commercial aircrafts. The factors influencing the demand for commercial aircrafts can be roughly summed up as follows: Increased volume of passengers: an increase in the air traffic has made the airliners to start new routes to various destinations. This has in turn increase in the demand of the commercial aircrafts. Constant efforts of airlines to gain market dominance: tough competition the dynamic market scenario has increased competition. This has led for the airliners to provide better and unique services to its customers. Technological advancements in the aviation industry: airplanes tend to become obsolete and there is a constant demand for newer and better aircrafts which are technologically advanced. Increase in business relations among different nations beyond geographical boundaries: globalization of the world economy and liberalization of the international regulations has encouraged the aircraft industry to explore new destinations. This is an important factor which has increased the demand for commercial aircrafts. Economic factors: business growth has prompted the airline industry to gain economies of scale by increasing their operations. Increased business operations gave rise to the demand. Economies of Cost: increased operations have resulted in an increase in sales. Increased sales tend to bring down the cost of production which helps the companies to employ the excess funds in the acquisition of additional capital assets. Thus, the induction of low cost carriers and various other factors have brought a boom in the aviation industry. Aircraft manufacturers forecast this demand to grow in the future at a constant rate. As a result, manufacturing is being undertaken at a large scale to cope up with the demand. Though the aviation manufacturing industry is dominated by Airbus and Boeing, new entrants to the industry are also giving a tough competition to the market leaders (Boeing delivers first 787 Dreamliner, 2011). Bombardier, Embraer and Chinas Comac are the most notable ones. Among these three new entrants Canadas Bombardier (Bombardier CSeries aircraft takes shape, 2011) is the most promising with its C series, CRJ series and Q series of commercial aircrafts and is all set to give a tough competition to Airbus and Boeing (Global commercial aviation industry looks to MEA for effective and environment-friendly aircraft, 2009). The company forecast of their demands can be compares as follows: Airbus Boeing Bombardier 32,600 by 2034 36,770 by 2033 15,000 by 2034 Airbus forecasts the global oil price to be low which will increase the passenger traffic. It assumes the demand will be for approximately 31,800 passenger and 800 freight aircrafts. Apart from that 13,100 passenger aircrafts will be required to be replaced. It assumes that the demand for single-aisle will be 70% while wide bodies will represent 55% of the total value. Boeing forecasts the GDP growth at 3.2% which will increase the passenger traffic to 5% annually. Its forecast of 36,770 aircrafts will worth $5.2 trillion. Among this 42% of planes will replace the existing ones, and the remaining will serve the purpose of increasing fleet strength. Single aisle requirement will be of 25, 680 aircrafts and wide body fleet will comprise of 8,600 new aircrafts. Bombardier expects the fleet strength of 60-150 seats to be 6,900 by 2034 and that of 100-150 seats to be 8,100 aircrafts. It also estimates that the revenue of 60-150 seat aircrafts to be $48 billion (Bombardier.com, 2015). In such a situation, where the industry is dominated by two major players, new entrants have to price their products carefully. As the leaders already have the capacity to eliminate them from the competition, new players must attract the customers with much economic prices along with impeccable after sales services. Usage of improved technology and faster disposal of customer grievances will also boost the image of the new entrants. There are generally four elements of a marketing matrix. These are known as the four Ps pf marketing which constitute the marketing mix. The four Ps are as follows: Product: the product decisions are the first and the foremost decisions which are to be taken by a company. In the aviation industry aircrafts are the products. Product decisions will contain determining the nature of the aircraft according to the present demand and requirement of the industry. It should be technologically advances to cater to the needs of the customers. Aircrafts are segmented as narrow body, wide body, single aisle, etc. the needs and demands of various segments are to be fulfilled by the manufacturer. Price: the second element is the pricing of the aircraft. Various pricing policies are adopted by the manufacturer according to the market situation. The pricing has to be such that there is a constant and increasing demand for the product. This will generate revenues and ensure long term sustainability of the company. Place: place means the place where the product is to be introduced. It basically comprises the target customers and market. An ideal place is a market here the manufactured product is most appropriate. Promotion: promotional strategies and policies have to be drawn to promote the product in the target market to sell the product. Promotional plans are to be drawn carefully and executed keeping in mind the market sensitivity. Thus, in the aviation industry, there has to be a constant effort for research and development of the product. As technological developments render one product to be obsolete, it is very important to keep pace in the development process. Next comes the pricing decisions. There exists a duopoly in the market with the two greatest manufacturers competing to outgrow each other. Thus, pricing has to be competition sensitive. The one, who offers a technologically advanced aircraft at a cheaper price, will obviously gain market dominance. Thus, there has to be a constant effort to bring down the cost of production. The next element is the place or the target market. With globalization and opening up of the economy, the whole world has become a playground for the business concerns. Both the companies are in a constant effort to tap into new markets and increase their market share. The last element is the promotional strategy. The main promotional strategy used by both the companies is the offering of huge discounts to the buyers. As mentioned earlier, the buying decision is mostly political and the companies offer various discounts to the sellers in order to boost their sales figures. Thus, the whole marketing mix should be carefully designed (Gent, 2014). The following figure depicts the market reach of Airbus and Boeing. The projected financial performance of Airbus, Boeing and Bombardier, based on their projected sales figures are as follows: Airbus Projected Financial Performance (refer to Appendix 1) 2015 2016 2017 2018 2019 2020 Revenues 63599 66980 71233 84472 99110 102200 Gross Margin 11178 12450 12033 21172 32330 31279 Profit before tax and finance costs 6073 6633 5303 13643 23761 21490 Total Finance Costs 853 1338 1889 2875 4147 5439 Income Taxes 1088 1856 2688 3766 5117 6254 Profit 4132 3439 726 7002 14497 9797 Boeing Projected Financial Performance (refer to Appendix 2) 2015 2016 2017 2018 2019 2020 Revenues 61250 65880 71224 78678 84887 98326 Gross Margin 9268 12652 12986 13948 17133 22436 Profit before tax and finance costs 6094 9191 8884 9306 10852 15492 Total Finance Costs 631 1129 1482 2451 3304 4616 Income Taxes 1587 1866 2788 3866 4837 6434 Profit 3876 6196 4614 2989 2711 4442 Bombardier Projected Financial Performance (refer to Appendix 3) 2015 2016 2017 2018 2019 2020 Revenues 14759 17365 20536 26666 32558 35568 Gross Margin 5823 6978 7660 11341 12860 14268 Profit before tax and finance costs 3537 3988 3941 6602 6162 6559 Total Finance Costs 408 819 1223 1646 2074 2825 Income Taxes 1022 1158 1355 1765 2537 3234 Profit 2107 2011 1363 3191 1551 500 The following figure illustrates the total production rates of Airbus and Boeing by 2020: It is evident from the above figures that though Bombardier is projecting the lowest figure in sales over the next two decades, its revenue projection is the highest among the three. It has a cutting edge advantage of the most advanced aircraft in the form of the C series, which is anticipated to fetch maximum market share for them in the near future. On the other hand, an increase in the demand of wide body aircrafts will increase the sales volume of Boeing aircrafts. Single aisle aircrafts are meant to do the trick for Airbus it projects a 70% increase in that segment. Thus, the projected financial gains of these companies show a healthy growth of the aviation industry (Iata.org, 2015). References Airbus, (2015).Global Market Forecast 2015-2034| Airbus, a leading aircraft manufacturer. [online] Available at: https://www.airbus.com/company/market/forecast/ [Accessed 28 Jun. 2015]. Boeing delivers first 787 Dreamliner. (2011).Reinforced Plastics, 55(6), p.4. Boeing.com, (2015).Boeing: Commercial. [online] Available at: https://www.boeing.com/commercial/ [Accessed 28 Jun. 2015]. Bombardier CSeries aircraft takes shape. (2011).Reinforced Plastics, 55(4), p.14. Bombardier.com, (2015).Commercial Aircraft - C series, CRJ Series and Q Series - Bombardier. [online] Available at: https://www.bombardier.com/en/aerospace/commercial-aircraft.html [Accessed 28 Jun. 2015]. Gent, E. (2014). News: Airbus unveils budget rival to Dreamliner.Engineering Technology, 9(8), pp.10-11. Global commercial aviation industry looks to MEA for effective and environment-friendly aircraft. (2009).Aircraft Engineering and Aerospace Technology, 81(2). Iata.org, (2015).IATA. [online] Available at: https://www.iata.org/Pages/default.aspx [Accessed 28 Jun. 2015].