Monday, May 28, 2012

Airline Manufacturing: A Slew of New Entrants

Given the recent discussion of Porter’s five forces as they apply to the airline industry, I found an article in the Economist that directly addressed the issue of supplier power. As mentioned in class, the two biggest suppliers for airline jets are Boeing and Airbus, but as the title of the article suggests (Duelling Duopolies), their stronghold is being challenged. Recently, countries like China, Japan, and Russia are all vying to enter the market for both regional and full-sized jets. However, their success remains circumspect, as mentioned at the very beginning; “New entrants to the world jetliner market struggle to take off.”

In terms of supply for regional jets, the market “is dominated by Embraer of Brazil and Bombardier of Canada,” but Russia’s Superjet and China’s ARJ21 are looking to capture some of their market share. Using Porter’s five forces, it is easy to see why China and Brazil are attracted to entering a market where there has been little competition, few entrants, and low buyer power. But they have been facing all sorts of problems, from technical glitches to delays in governmental certification.

Russia’s Superjet has been approved by the EU air safety agency but it has been plagued by maintenance issues; “the first four planes delivered to Aeroflot of Russia have suffered repeatedly from breakdowns, leading to flight cancellations.” Even the recent crash in Indonesia on what was supposed to be a demonstration flight does not bode well for the new entrant. On the other hand, China’s ARJ21 is still awaiting certification from American and Chinese Authorities, even though it “had its maiden flight in 2008.”

As per the competition with Boeing and Airbus, China and Russia both have planes in the works; “Russia’s MC-21 and China’s C919, also under development, are potential competitors to Boeing’s 737 and Airbus’s A320.” But being late entrants, they are behind on the learning curve. In fact, Boeing and Airbus have both introduced “re-engined versions of the 737 and A320.”

Another interesting trend noted in the article is that of forward integration. Mitsubishi, which manufactures airline parts recently introduced plans to make its own regional jet, the MRJ. But even Mitsubishi has suffered from delays in the date of MRJ’s maiden flight and a failure to “get a critical mass of orders.”

It looks like the airline manufacturing industry could slowly become more competitive. Yet initial signs do not look promising. The Economist is “betting on the Chinese,” because of their resources and determination. So should Boeing and Airbus or Embraer and Bombardier be worried by Comac, the Chinese manufacturer? Perhaps so, but the they do have a learning curve advantage and the switching costs would be high for current airlines.  

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