Ã¢Â€ÂœAirbus vs. Boeing in Super Jumbos: A Case of Failed PreemptionÃ¢Â€Â

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impact of the Asian crisis on demand for new aircraft cannot be overlooked since Boeingand Airbus continued, even after the crisis had bottomed out, to predict that the regionwould register the world’s highest growth rates over the next 20 years. 49 But it is hard,specifically, to rationalize Boeing’s announcements about the stretch jumbo—discussedin more detail in the next section—as having been driven by shifts in perceptions of themarket due to the Asian crisis. Note that the stretch jumbo was cancelled for the firsttime before the Asian crisis first broke out in Thailand in spring 1997, and that in itssecond coming, from announcement to cancellation, lasted from September 1999 toMarch 2001. Boeing’s second initiative with the stretch jumbo therefore started andended after the region’s economies were generally perceived to have bottomed out.Returning to the magnitude of the divergence between Airbus’ and Boeing’sforecasts, it is made even more surprising by their collaborative efforts in the early andmid 1990s, a process that involved detailed discussion of different market forecastingtechniques. That current forecasts nevertheless diverge so much is suggestive of the verylarge ambiguities inherent in coming up with long-run demand forecasts for productssuch as the VLA. Also interesting is the direction of the difference: Boeing’s forecastsare lower than Airbus’, not the other way around.Although Boeing’s lower forecasts may simply reflect its best estimates of futuredemand, a longer-term perspective raises questions about that interpretation. ConsiderBoeing’s demand forecasts for large aircraft: the 747 plus the stretch/superjumbo pluslarge cargo aircraft. Between 1990 and 1994, Boeing’s 20-year forecast for planes of thistype nearly doubled from 1692 to 3,268. After stagnating in 1995, however, forecastdemand tumbled by more than 70% through 1999, to just 933 planes in the latter year, orbarely half the level the company had forecast in 1990, before the big run-up in the earlypart of the decade. The decline in Boeing’s 20-year forecast between 1995 and 1996alone amounted to more than 50%. As an Airbus executive put it, “It’s difficult not tonotice the discontinuity following the termination of the collaborative VLCT exercise andAirbus’ announcement of the formation of a Large Aircraft Division to pursue the A3XXstudy.” 50 Deliberate understatement of demand might have been intended to deterAirbus’ entry. Or the intent might simply have been to delay entry, since delay couldsignificantly increase the value of Boeing’s 747 franchise, as calculated earlier. Sharp29
cutbacks in Boeing’s demand forecasts might, for instance, force Airbus back into markettesting for another year. Similarly, the run-up in demand forecasts earlier on, whenBoeing was collaborating with Airbus, can be rationalized as increasing the credibility ofBoeing’s push for a very large aircraft that would not compete with the 747 as opposed toa superjumbo-sized plane that would. Again, any delay would have been valuable. As aresult, the possibility of strategic manipulation of forecasts merits mention, even thoughthe statistical power with which it can be tested on its own (as opposed to in conjunctionwith other pieces of evidence of preemptive intent) is limited. We now proceed to look atsome additional evidence.VI. Capital Market EvidenceCapital market evidence receives much less attention in IO research than productmarket evidence, to an extent that is probably suboptimal. When levels of diversificationare relatively low and key commitments hang in the balance, capital market reactions toannouncements about them embody considerable information that is worth pressing intoservice. That is the tack taken in this section. It mostly focuses on news about Boeingand implications for Boeing’s stock price because news about Airbus’ intentions in VLAlargely appears to have trickled out more gradually over time and because prior to theirrecent regrouping into EADS (plus British Aerospace), Airbus’ operations wereembedded in several much larger corporations.VI(i) Reactions to the Stretch JumboThe key prediction from the three-location model is that if the incumbent(Boeing) does attempt to introduce an intermediate product to counter an entry threat(Airbus’ superjumbo), announcement of that intent will decrease the incumbent’s marketvaluation to the extent that it is “news,” is taken seriously and is expected to lead tolosses that are irreversible. 51 Conversely, retraction of the intent to pursue an investmentstrategy that does not maximize value should, under similar auxiliary conditions, increasethe incumbent’s market valuation.30
Page 1 and 2: Harvard Business SchoolStrategy Wor
Page 3 and 4: AbstractThis paper looks at competi
Page 6 and 7: commercial aircraft industry, the t
Page 8 and 9: jumbo jet to compete with Boeing’
Page 10 and 11: stretch jumbo at a cost of $4 billi
Page 12 and 13: and, more recently, work that uses
Page 14 and 15: described below). If one were to vi
Page 16 and 17: Given that at most one superjumbo w
Page 18 and 19: more year of a discounted future ca
Page 20 and 21: Let the net benefits of a customer
Page 22 and 23: The relevant argument involves more
Page 24 and 25: By definition,p 0 + tx 2 = p r + t(
Page 26 and 27: implications, it is better to simpl
Page 28 and 29: section, the approach adopted has b
Page 30 and 31: of 1-2%, perhaps exceeding the high
Page 34 and 35: It is worth pointing out that these
Page 36 and 37: To put the sandbagging hypothesis i
Page 38 and 39: macro-organizational changes were n
Page 40 and 41: collocated in Seattle. 70 As CEO Ph
Page 42 and 43: questions remain worth asking and a
Page 44 and 45: Chan, S., Martin, J. and Kensinger,
Page 46 and 47: Industrial Organization (Elsevier S
Page 48 and 49: 5) Discount rate: The discount rate
Page 50 and 51: Appendix 2Valuation of Quasi-rents
Page 52 and 53: Table ISimplified Valuation Analysi
Page 54 and 55: Table II (continued)2011 2012 2013
Page 56 and 57: Table IIIEquilibrium in the Three L
Page 58 and 59: Table VCapital Market Reactions to
Page 60 and 61: Figure 4The Boeing Company's Free C
Page 62 and 63: 11 Cole, J., ‘Boeing-led Allince
Page 64 and 65: considered in the previous subsecti
Page 66 and 67: number of shares outstanding is 807

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Ã¢Â€ÂœAirbus vs. Boeing in Super Jumbos: A Case of Failed PreemptionÃ¢Â€Â