“Airbus vs. Boeing in Super Jumbos: A Case of Failed Preemption”

I. IntroductionIn December 2000, Airbus formally committed to spend $11.9 billion to developand launch a 555-seat superjumbo plane known as the A380. Prior to Airbus’ formalcommitment, Boeing had started an initiative to develop a “stretch jumbo” with capacityin between its existing jumbo (the 747) and Airbus’ planned superjumbo, had stopped theeffort, and then had restarted it. After Airbus’ formal commitment, Boeing cancelled thestretch jumbo for the second (and apparently final) time.It is worth digging deeper into this case, for at least two sets of reasons. First, thesuperjumbo is a strategic commitment of more than average interest because of its sheersize, irreversibility and potential impact on industry structure. The superjumborepresents one of the largest product launch decisions in corporate history given Airbus’projected launch cost of $11.9 billion (a figure that also represented 26% of total industryrevenues—$45.6 billion—and more than 70% of Airbus’ total revenues—$17.2 billion—in 2000). 1 The riskiness of expenditures of this magnitude is magnified by the fact thatAirbus has to spend essentially the entire amount before it makes its first delivery, in anindustry in which many firms—e.g., Glenn Martin, General Dynamics, and, morerecently, Lockheed—failed as a result of bet-the-company product development efforts.If, however, the launch succeeds, Airbus is expected to dislodge Boeing as the marketleader in commercial aircraft after more than 40 years of market dominance by the latter.The incidence of “sporty bets,” to use a term popularized by John Newhouse (1982) inhis book on the industry in general and the launch of the Boeing 747 in particular,suggests that the commercial aircraft industry may, more than most, be one in whichoutcomes are largely determined by a few strategic commitments.Second, the case of the stretch/superjumbo happens to share some key structuralfeatures with stylized game-theoretic models of preemption. There were only twocompetitors in the market for large aircraft and therefore two potential entrants,realistically, into the emerging niche for very large aircraft (or VLA, defined as aircraftseating more than 400 passengers in the standard configuration). 2 Competitors’ moveswere clearly delineated by technological lumpiness, and exhibited strategicinterdependence: thus, it seemed clear that if each competitor developed a brand new1