Seeing What's Next by unknow

Author:unknow
Language: eng
Format: epub
ISBN: 9781591391852
Publisher: Harvard Business School Publishing Corp (Perseus)
Published: 2004-09-06T16:00:00+00:00

Regional Manufacturers Could Have the Edge in Competitive Battles

Bombardier and Embraer knew the rewards would be great if they could increase the size and range of their jets. So they improved. In 1995, Embraer (the ERJ-145) and Bombardier (the CRJ-200) sold planes with capacities of about fifty seats for $15 million to $20 million. By 2001, Bombardier introduced its CRJ-700 with seating capacity of about seventy. Embraer planned to introduce its own seventy-eight-seat plane in early 2004. Both companies’ next-generation planes (the CRJ-900 and the ERJ-190/195) will seat more than one hundred people. These planes will list for about $30 million.6

Each improvement has inched regional jet manufacturers closer to established aircraft markets. Regional airlines could begin to displace traditional airlines on highly traveled routes (as we discuss later in this chapter). Next-generation planes could be good enough for traditional airlines to use for short routes.

If traditional customers begin migrating to smaller airplanes, Boeing and Airbus could be in big trouble. They would have to fight against their own skills and motivation to win this battle. Regional jet manufacturers make money on lower-priced planes. Regional jets largely exist within a freestanding value network, with almost no points of interaction with incumbent manufacturers. Regional jet manufacturers have developed the unique ability to build small and midrange planes profitably. Boeing’s and Airbus’s cost structures and capabilities support building large, sophisticated planes. Embraer’s earnings per share increased about 30 percent annually between 1998 and 2003, while Boeing’s earnings per share shrank at about a 5.5 percent annual clip over the same period.7

Can Boeing and Airbus respond to the onslaught of regional jet manufacturers such as Bombardier and Embraer? The theories of innovation suggest that Boeing and Airbus will continue to miss much of the industry’s real growth and face increasing pressure unless they take proactive corrective action to adapt to the disruptive forces.

For instance, Boeing’s hopes of staving off disruptive incursion would seem to rest on blocking advances from below through its 717. The 717 is a modified version of McDonnell Douglas’s MD-95 that seats about one hundred passengers. Not only will the 717 be more expensive than next-generation regional jets, but it also weighs significantly more, forcing operators to use more fuel. Because Boeing continues to base the plane on McDonnell Douglas’s design, pilots have to receive specialized training to fly the 717. Even worse, it is too expensive for the lowest end of the market. Most analysts consider the 717 the worst plane in Boeing’s lineup, making it an unlikely candidate for serious investment.

So what could Boeing do? The first option might be to set up an internal group to develop a small plane. Success would require overcoming two critical problems. First, Boeing might find it difficult to attract the right people to the project team. In addition, Boeing would have to fight its own cost structure lest it develop a “big little” plane—a small plane weighed down by Boeing’s overhead and development process.8 Unless Boeing manages the process incredibly well, the outcome seems clear.

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