Applied Project: Boeing ECO Summer II 8/06/2015. John Deans, Joseph Oliver, John Pritchett

Transcription

1 Applied Project: Boeing ECO Summer II 8/06/2015 John Deans, Joseph Oliver, John Pritchett

2 Boeing: The Boeing Company is the subject of our Applied Project. The Boeing Company has many smaller offices all over the world, but for the sake of punctuality only the larger offices will be listed. Their primary corporate offices are located in Chicago, Illinois. Their commercial airline, shared service, and capital offices are located in Seattle, Washington. Their defense, space and security office is located in St. Louis, Missouri. Their phantom works office is located in Seal Beach, California. (1) The Primary Industry Boeing is classified under the Aerospace/Defense Products & Services Industry. Thus, meaning the firm is involved in manufacturing and developing aircraft and spacecraft for the commercial sectors while manufacturing "military aircraft, spacecraft, missiles, tanks, and other products" for defense programs (6). The specific Aircraft Manufacturing description is given by the Census, This U.S. industry comprises establishments primarily engaged in one or more of the following: 1) manufacturing or assembling complete aircraft; 2) developing and making aircraft prototypes; 3) aircraft conversion (i.e., major modifications to systems); and 4) complete aircraft overhaul and rebuilding (i.e., periodic restoration of aircraft to

3 original design specifications (9). Boeing is under the NAICS code: (9). Boeing, within the United States, is the largest manufacturer of these said products. But, in the International Market Boeing is in a duopoly with Airbus as the major two contributions to the Aerospace/Defense market. Boeing began as a "Pacific Aero Products Co" in July Later in July 1934, the firm was incorporated into the "Boeing " we know today. They manufactured aircraft for the first World War. Once the war was over Boeing contracted with the US government to be a carrier for mail services around the nation. Once World War II began Boeing began to manufacture bombers and other aircraft for the war. During the 1950's Boeing developed shortrange missiles and also developed the first commercial United States jetliner, the "707". In the upcoming years Boeing would diversify their fleet of aircrafts tailored to certain needs and geographical locations. Later, Boeing began to expand in the space program where they provide launch systems, Global positioning systems, and the ISS (International Space Station.) The Customers Boeing's customer base is comprised into several departments. First off, the largest part of Boeing's market is commercial aircraft. The vast fleets of commercial aircrafts are comprised in specialization by size, purpose, and whom the planes are made for. There are commercial jetliners, cargo carriers, and private business planes that make up most of the planes that Boeing has functional in the air. The commercial aircraft sector makes up 66% of Boeing's revenue. Secondly, the

4 Defense, Space, and Security sector comprises of 33% of Boeing's revenue. This sector is made up of Military Aircraft at 15%, which entails anything from bombers, helicopters, unmanned aircraft, ospreys, to fighter jets. Space and Network at 8% where GPS, satellites, and The I.S.S. are incorporated into that cost. Global services which is the support and employs that are within the 150 countries Boeing works with is at 10% of the revenue. The other 1% is made up of capital and unallocated items. The total amount of revenue produced within a year is billion dollars. The graph below provides the illustration of distribution of revenue for Boeing (7,10). Boeing 2014 Revenue Distribution Commercial Aircraft Military Aircraft Space & Network Global Servives Capital Unallocated items, etc. Demand Analysis As we have mentioned, Boeing s primary source of revenue, totaling 66%, is attributed to sales in the commercial airline industry. There are several factors that

5 must be taken into account when determining the demand for commercial aircraft. The primary factor that must be taken into consideration is that commercial airline companies, those that sell seats on their planes to passengers for domestic and international flights, are Boeing s primary customers. This means that individuals who travel domestically and internationally for business, for vacation, and for other reasons are the primary customers that the commercial airline companies must attract in order for their businesses to be successful. For Boeing to be able to sell their very expensive commercial jets to these companies, consumer demand must be high enough that an airline company would be willing to spend the high price necessary to acquire one of these jets. If people are not travelling enough for the airline to cover the large fixed cost required to purchase a jet, then there is no demand for Boeing s product from these commercial airline companies. To understand what creates demand for Boeing s products, we must understand what creates demand for the individuals who come to the commercial airline companies who are purchasing Boeing planes. One factor that can effect demand for commercial jets is consumer confidence in commercial airline companies. For instance, according to the US Census Bureau, after the terrorist attacks that occurred in the United States on September 11, 2001 it took almost three years for air passenger travel to reach its pre September 11 peaks (12). According to Boeing s 2001 Annual Report, the events of September 11 sharply reduced near term demand for new airplanes (13). Clearly, if passengers do not have confidence that commercial airline companies will get them to their destinations safely, they will not buy plane tickets. If they do not

6 buy plane tickets, the commercial airline companies will struggle to profit, and if these companies are not profiting, they will not be purchasing new airplanes. If this is the case demand for Boeing products declines. Another factor that can affect individual demand for Boeing s products in commercial airline industry would be the price of a barrel of oil. The logic behind this is that if airline companies are purchasing large quantities of jet fuel, which is a crude oil product, to fuel their jets, then to cover costs and maximize profits they will change the prices of their tickets or the specific products that they demand as the price of a barrel of oil changes. According to Aviation Week the meteoric rise of jet fuel prices changed the equation of airline business models and caused unprecedented demand for more efficient aircraft (14). This example shows how fuel prices shifted demand for the different products that a jet producer, like Boeing, produces. With really high fuel prices, demand for fuel efficient jets increases since airline companies can cut their costs this way. If fuel costs are eating into the profit margins of an airline company, then that company will adapt by adjusting their demand. This is just one example of how an airline company might alter its strategy to compensate for higher fuel prices, but this is not the only strategy. This example does, however, clearly illustrate how the demand for commercial jets is tied to the price of jet fuel. A third factor that is worth looking into is the value of a country s currency relative to that of others. For example, the value of the US Dollar has surged recently. On August 6, Euro exchanged for USD. Today the exchange rate has dropped to USD for 1 Euro (15). This makes good and services

7 produced in the Eurozone cheaper for Americans. Travelers looking to take advantage of the opportunity for cheaper travel will certainly be buying plane tickets. If the price of the dollar remains relatively cheap, and if more people are traveling, this will certainly increase demand that American commercial airline companies have for commercial jets. This is one example of how the price of a country s currency can affect the demand in the commercial airline industry. A fourth factor that can affect demand for commercial jets is a country s global economic and political involvement. For example, Iran has been negotiating with 6 world powers to have economic sanctions lifted from their country in exchange for curbs in their nuclear programs (16). This has led to an announcement by the caretaker director of Iran s Civil Aviation Organization, Mohammad Khodakarami, that Iran will buy planes per year from both Boeing and Airbus if the sanctions are lifted (17). This example shows that the more countries that are involved in global economic trade, the more demand there is for foreign goods. In this case, the US based Boeing provides a product that Iranian airliners desperately need due to the high quality of the product and the fact that they cannot get this product under their current sanctions. This shows that political and economic involvement at the world stage affects demand for planes. Product Elasticity Now we will look at the elasticity of the commercial jet, Boeing s primary source of revenue. We know that elasticity of a product depends on the availability

8 of substitutes, the time period of adjustment, the expenditure share of the consumer s budget, and the durability of the product. We have mentioned earlier that Boeing and Airbus form an international duopoly in the market for commercial airline providers. This would indicate that the availability is low. In fact, the top four firms in the Aerospace/Defense Products and Services Industry htat Boeing belongs to share 81.3% of the market (18). This leaves very few other avenues for airline companies to seek when looking to purchase jets. Airline companies main expense is jet fuel. According to Reuters, the international age of a fleet of planes is around 11 years old (17). This means that, in an average year, the amount of expenditures on actual new planes will be relatively low. This also means that the products that Boeing is selling are relatively durable. All of this adds up to the commercial jets that Boeing produces being inelastic. The Market Structure The market structure of the Air Industry within the United States is a monopoly where the next closest aircraft manufacturing firm, Lockheed Martin, generates 65.8 billion (8). But, Boeing is in a duopoly with Airbus in the international market. These two firms nearly share 60% percent of the aircraft manufacturing market. The products produced by these two companies have some similarities. They both produce commercial jetliners, cargo carriers, and some military aircraft. Both also seem to produce Defense Programs and Services. So overall, their products in a broad spectrum of the market are similar. The two firms have contracts with

9 governments, commercial transport firms and logistic based companies. So, it will be difficult for another firm to join the market. Also, Boeing and Airbus fleets are so vast that it would take a tremendous amount of money to start a fleet that would be able to compete at a reasonable cost against the already established fleets. The 4 largest companies in the Aircraft Manufacturing industry comprise of 81.3% of the market (11). Boeing s Financials: Boeing s financials for years 2012, 2013, 2014 (2) Boeing Sales 90,762 86,623 81,698 Profits 5,446 4,585 3,900 *all numbers are in billions of USD Boeing s previous annual sales increased billion dollars from year 2013 to year This sales growth rate is 4.56%. Boeing s three year sales increased billion dollars from year 2012 to year This three year sales growth rate is roughly 9.99%. Boeing s previous annual profits increased 861 million dollars from year 2013 to year This profit growth rate is 15.81%. Boeing s three year profits increased billion dollars from year 2012 to year This three year profit growth rate is roughly 28.39%.

10 Boeing s closest competitor would be Airbus. Airbus s financials for year 2012, 2013, 2014 (3) Airbus Sales 60,713 59,256 56,480 Profits 2,343 1,465 1,228 *all numbers are in billions of USD Airbus s previous annual sales increased billion dollars from year 2013 to year This sales growth rate is 3%. Airbus s three year sales increased billion dollars from year 2012 to year This three year sales growth rate is roughly 6.97%. Airbus s previous annual profits increased 878 million dollars from year 2013 to year This profit growth rate is 37.47%. Airbus s three year profits increased billion dollars from year 2012 to year This three year profit growth rate is roughly 47.59%. Boeings second closest competitor would be United Technologies Corp (4). UTX s financials for year 2012, 2013, 2014 (4) UTX Sales 65,100 62,626 57,708 Profits 6,200 5,721 5,130 *all numbers are in billions of USD UTX s previous annual sales increased billion dollars from year 2013 to year This sales growth rate is 3.8%.

11 UTX s three year sales increased billion dollars from year 2012 to year This three year sales growth rate is roughly 11.35%. UTX s previous annual profits increased 499 million dollars from year 2013 to year This profit growth rate is 8.02%. UTX s three year profits increased 1.09 billion dollars from year 2012 to year This three year profit growth rate is roughly 17.52%. The following graph shows all three company s annual profit growth, three year profit growth, both profit growth rate, annual sales growth, three year sales growth, and both sales growth rates. Annual Annual Three Three Annual Annual Three Three Sales Sales Year Year Profit Profit Year Year Sales Sales Profit Profit Rate Rate Rate Rate Boeing 4, % 9, % % 1, % Airbus 1,457 3% 4, % % 1, % UTX 2, % 7, % % 1, % *all numbers are in billions of USD As you can see Boeing s annual sales growth is much larger than its competitors. The annual growth rate for Boeing is also much higher than its competitors. In the three year sales growth Boeing leads the pack in sheer numbers, but falls into second when viewing the three year sales growth rate. Boeing s annual

12 profit growth is very close to Airbus, but in terms of percent value it is much lower than Airbus. Boeing s three year profit growth is much higher than its competitors, but in terms of percent value Airbus leads the way. Airbus is still a much larger company than its rivals and its growth rate for both profit and sales is still very much competitive to its growing competitors. Antitrust Concerns The Department of Justice reports in October 2014 that The Boeing Company was forced to pay $23 million for false labor charges. The Boeing Company paid $23 million to resolve allegations that it submitted false claims for labor charges on maintenance contracts with the U.S. Air Force for the C 17 Globemaster aircraft. Defense contractors are required to obey strict accounting standards when submitting billing for work performed on government contracts, said U.S. Attorney Robert Pitman for the Western District of Texas. The pursuit and favorable settlement of this civil litigation was the result of effective teamwork between the Justice Department and the investigative agencies. (5) The Federal Trade Commission has no recent actions regarding Boeing.

13 Bibliography Deans 1) "Boeing." : Contact Us. N.p., n.d. Web. 02 Aug ) "BA Boeing Co XNYS:BA Stock Quote Price News." BA Boeing Co XNYS:BA Stock Quote Price News. N.p., n.d. Web. 02 Aug ) "EADSF Airbus Group SE PINX:EADSF Stock Quote Price News." EADSF Airbus Group SE PINX:EADSF Stock Quote Price News. N.p., n.d. Web. 02 Aug ) "UTX United Technologies Corp XNYS:UTX Stock Quote Price News." UTX United Technologies Corp XNYS:UTX Stock Quote Price News. N.p., n.d. Web. 02 Aug ) "Justice News." Boeing Pays $23 Million to Resolve False Claims Act Allegations. N.p., n.d. Web. 02 Aug ) Industry Overview: Aerospace and Defense Wetfeet.com. Wetfeet, N.p. n.d. Web. 05 Aug ) The Road Ahead. Leading Good Schools to Greatness: Mastering What Great Principals Do Well (2010): Web. 8) BA Competitiors Boeing Co. (The) Stock Yahoo! Finance. BA Competitiors Boeing Co. (The) Stock Yahoo! Finance. N.p. n.d. Web. 05 Aug ) United States Census Bureau. NAICS Search. N.p. n.d. Web. 05 Aug ) Boeing. The Company. N.p. n.d. Web. 05 Aug ) Your Geography Selections. American FactFinder. N.p. n.d. Web. 05 Aug ) Airline Travel Since 9/11 Bureau of Transporation Statistics. Airline Travel Since 9/11 Bureau of Transportation Statistics. N.p. n.d. Web. 05 Aug ) Report, 2001 Annual, and the Boeing Company. The Boeing Company Vision 2016: People Working (n.d.): 19. Web. 14) Drop in Oil Prices Means an Airline Profitability Boost Now, But Drop in Oil Prices Means and Airline Profitability Boost Now, But N.p. n.d. Web. 05 Aug ) EUR to USD Exchange Rate. Bloomberg.com. Bloomberg. N.d. Web. 05 Aug

14 16) Obama Defends Iran Nuclear Deal as U.S. Diplomacy over War. Reuters. Thomson Reuters, 05 Aug Web. 05 Aug ) Iran Plans to Buy Boeing, Airbus Planes a Year, Post Sanctions. Reuters, Thomson Reuters, 02 Aug Web. 05 Aug ) Your Geography Selections. American FactFinder. N.p. n.d. Web. 05 Aug