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

25 By way of comparison, Lehman Brothers (12/6/99, p. 20) uses a WACC of 13.4% in itsanalysis, which implies an even higher asset cost of capital. In more recent analysis,CSFB (3/14/01, p. 236) uses a WACC of 9.1% for EADS.26 Holmes, S., ‘Boeing turnaround shows up in results’, The Seattle Times, 10/15/99, p.E1. Robinson, P., ‘Boeing orders could Boost Earnings’, Seattle Post-Intelligencer,8/5/99, p. C1.27 In recent years, Airbus has earned operating margins of 3.9% to 8.5% and is projectedto earn margins of 4.9% to 8.5% through 2005, according to CS First Boston (reports onEADS, 3/14/01). Boeing, on the other hand, earns an operating margin of 8-10% in atypical year in its commercial airplane division (Boeing Annual Reports). Boeing’shigher margin is, in part, due to the high margins on its jumbo.28 While product comparisons in this industry often focus on two distinct majorcharacteristics—capacity and range—the two tend are highly collinear. As seen inFigure 1, capacity and range are significantly, positively related. Also, range is arguablybecoming less of a factor as the proposed large aircraft come closer to being able to flyhalf-way around the world nonstop.29 Linear transportation costs tend to yield similar results, but are more prone todiscontinuities in payoff functions and the consequent problems with the existence ofequilibria in pure pricing strategies.30 Note that coverage of the market with interfirm competition is necessary but notsufficient to guarantee coverage without interfirm competition. While this is a source ofadditional complexity, it does not affect the basic logic of the argument developed in thissubsection.31 Consult, for instance, Gilbert and Newbery (1982) and (1984); and Reinganum (1983)and (1985).32 Ghemawat (1991) analyzes similar issues in the context of product innovation in PBXswith a model in which innovation is permitted to be stochastic but the demand structure ismore constraining.33 Such predictions are possible for symmetric cases, subject to several auxiliaryqualifications elaborated by Cabral and Villas-Boas (2001). Thus, extend the model60