Airline Industry Analysis

Airline Industry Analysis

Introduction

The aerospace industry is probably one of the most established and dynamic industry in the world. Although the industry has been characterized by two main players (Boeing and Airbus) for a long time, pressure has been increasing on the “Big Two” from Small Business and Private Aircraft segment. This work analyzes the strategic position of two airline manufacturers; Boeing and Textron. Given that the two companies come from two segments, main airliners and Small Business and private Aircraft respectively, this essay shall focus on sustainability of the companies’ business models. The essay shall also delve into the industry dynamics from which the two companies operate.

Sustainability

Boeing Company is a global designer and manufacturer of commercial jetliners and other aircraft products. Due to increasing competition from its peer –Airbus- and other Small Business airliners, Boeing must utilize its internal strengths to wade through the murky industry.

Sustainability factors

Boeing is currently the world’s largest aerospace company and commands a credible market share. Therefore, the ability of the company to maintain the existing market and expand into new markets will determine whether it will sustain its profitable operations in the next five years.

The second factor that will determine the company’s sustained growth and development is its financial muscle (boeing.com). Boeing is well-endowed with finances due to its industry dominance and efficient operating model. Despite the many downturns that the commercial aviation industry has experienced over the past decade, Boeing has managed to stay atop its peers. With a long-term demand forecast of 35,280 new airplanes with a net value of $4.8 trillion, the financial strength of the company is expected to be sustained over the next five years (boeing.com).

Textron Inc. is a global aircraft, aircraft, industrial and finance services provider based in the US. The company manufactures defense and Business and Small Passenger (Cessna) aircrafts among other defense and security equipment (Borenstein and Rose 11). Just like the Boeing, Textron also has a strong financial muscle relative to its operating industry. This is a factor that has enable the company to continue innovating in its product and thus avail newer technologies at a lower price to her customers (Hsu and Liou 42). However, the manner in which the company markets its innovative technologies to new market segments will affect its success in the next five years.

Textron has experienced strong inorganic growth over the past few years especially in its production of Cessna crafts. Currently, Cessna represents over 42% of the company’s total revenues and the tremendous growth of this segment is expected to increase the revenue to over one half in the next three years (Dillow 1). Although the company is operating in the Business and Personal Aircraft segment, it has increased the production of highly diversified aircraft that attracts market from small passenger carriers. This is expected to increase the market share of the company and even offer stiffer competition to giants like Boeing.

 

Industry Dynamics

The Airline industry is expected to grow at an average rate of 5% per annum in the next 20 years (Borenstein and Rose 7). Although the industry has adversely been affected by high oil prices, security issues, instability in the Middle East and the financial crisis, the long-term prognosis is strong especially in passenger traffic growth. The increased air traffic pronounces demand for passenger aircraft and thus a boom for manufacturers.

The increasing demand for low-cost regional airlines will detect the profitability of the industry in the next few years (Borenstein and Rose 7). Recently, airlines have increased their low-budget passenger and cargo flights, which has increased pressure for larger airlines airplanes from companies such as Boeing. However, this has been a blessing for Business and Passenger plane manufacturers such as Textron Inc. However, Boeing 747 has also been on diminishing demand as attention is being shifted towards budget airlines such as Ryanair and Southwest airlines (Hsu and Liou 42). This means that the industry is warming for fuel-efficient airlines that demand lower maintenance costs, while moving away from premium services such as the 747 and Dreamliner. This implies that Boeing has to reconsider its strategy and focus in meeting the needs of the market or else risk being locked out of it.

In the recent past, militaries around the globe have been shifting from high-tech sophisticated defense crafts towards more economic yet effective combat jets (Dillow 1). However, the US Defense budget spending remains the highest in the world. The country’s military boasts of sophisticated and supersonic fighters like that F-22 Raptor which is crucial for penetrating enemy airspace (Dillow 1). However, these crafts are associated with high purchase and maintenance costs, which cannot be an alternative for military in middle-and-low-income nations. This opens market opportunities for defense aircraft and associated products. The emphasis on economy jet aircrafts for military will tilt the scale in favor of players such as Cessna. Cessna has focused on the immediate needs of air forces around the world and thus has been involved in the manufacture of less expensive jet aircraft for cash-strapped militaries.

Economic Performance of the Industry

The report by IATA (2013) indicated that the airline industry generated an average of 4.1% Return on Invested capital over the 2004 – 2011 business cycle (centerforaviation.com). According to the report, this was the lowest levels of Returns on Invested Capital compared to any other industry since the ROIC was less than the Weighted Average Cost of Capital. Since the organization (IATA) computes the economic profit as the amount of profit earned by the industry over and above the needed to pay weighted average cost of capital (WACC), the entire aviation supply chain made economic losses in excess of USD 18 billion every year for the 2004 – 2011 period (centerforaviation.com). This implies that the aviation industry made more than USD 18 billion less profit than investors required to adequately reward them for their capital.

Work Cited

Borenstein, Severin, and Nancy L. Rose. “How airline markets work… or do they? Regulatory reform in the airline industry.” Economic Regulation and Its Reform: What Have We Learned? University of Chicago Press, 2013. 1-92. Print.

CAPA, “Airline profitability: airlines can no longer afford to be the poor relations of aviation” Center for Aviation. 2013. Web. http://centreforaviation.com/analysis/airline-profitability-airlines-can-no-longer-afford-to-be-the-poor-relations-of-aviation-117521

Dillow, Clay, Textron is working on a tactical light attack aircraft for budget-conscious militaries.” 2013. Web. http://tech.fortune.cnn.com/tag/cessna/

Hsu, Chao-Che, and James JH Liou. “An outsourcing provider decision model for the airline industry.” Journal of Air Transport Management, (2013). 40-46. Print.

www.boeing .com “Long Term Market: Current Market Outlook”. Web. http://www.boeing.com/boeing/commercial/cmo/

 

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