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

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number of shares outstanding is 807.2 million as of March 2001. Note the results changeslightly depending on the stock exchange (Paris, Madrid, or Frankfurt) and the length ofthe estimation window (80 to 160 days).57 ‘EADS Takes Off as Boeing Scraps Superjumbo Plans’, Reuters News, 3/30/01.58 Joseph Campbell, an aerospace analyst at Lehman Brothers, commented, “Wewouldn’t think that the new Sonic Cruiser would enter service earlier than 2008timeframe. We wouldn’t normally expect quite this much planned publicity on a planewhose launch is certainly 3-4 years into the future, and whose entry into service is 8 to 10years out.” (Lehman Brothers, Equity Research report, 3/30/01, p. 2.)59 Morgan Stanley Dean Witter Equity Research Report, ‘Boeing Company’, March 20,2001, p. 2.60 Consult, for instance, the abbreviated “competitor analyses” in Porter and Spence’s[1982] case study of corn wet milling.61 It is also worth discussing another kind of macro-organizational change--the corporatespin-off of a division or subdivision charged with innovation--that might, in theory,resolve such incentive problems (Baldwin, 1983). In the present case, the creation ofincentives to develop a VLA (assuming that it could be expected to be profitable instandalone terms, without accounting for losses from cannibalizing the 747) would haverequired hiving off the VLA project from the rest of the commercial aircraft group, whichwould appear to have been infeasible for both technical and marketing-related reasons.And even if such a spin-off had been feasible, effecting it after the competitive threatfrom Airbus had materialized would have led to a net destruction of shareholder valuesince the value of the portion of the company being spun-off would have been more thanoffset by the value impairment suffered by the rest of the company.62 John Newhouse coined this term in his book, The Sporty Game (1982), to refer to thehigh-risk nature of commercial plane development. He writes (p. 3), “But what reallysets the commercial airplane business apart is the enormity of the risks as well as thecosts that must be accepted; they create an array of obstacles to profitability, henceviability, which discourages all but the bold and committed.”63 Jerry Useem, ‘Boeing vs. Boeing’, Fortune, 10/2/00, pp. 148-160.63
64 Jenkins, H.W., Jr., ‘Haven’t shareholders had enough chicken’, The Wall StreetJournal, 4/4/01, p. A21.65 Free cash flow for the commercial airplanes division is defined as earnings fromoperations less taxes at 34% (EBIAT), plus depreciation, minus capital expenditures. Inits annual reports, Boeing breaks out these accounting entries on a division level, but doesnot allocate working capital by division. Thus, the calculation does not include changesin net working capital. Also note that the downturns in 1997 and 1998 reflectedproduction problems following the acquisition and integration of McDonnell Douglas’soperations.66 Although the McDonnell Douglas acquisition did bring in some commercial aircraftbusiness, it, like the other acquisitions, was focused on other businesses.67 Bridges, A., ‘California Boeing to Focus on Space and Communications, Not Aircraft,’Los Angeles Times, 10/12/2001, p. C-2.68 Stepankowsky, P.A., ‘Boeing CFO: Co. Focused on Plane Delivery, New Initiatives’,Dow Jones News Service, 3/23/00.69 The Boeing Company, Proxy Statement, 3/11/00, pp. 29-30.70 Jenkins, H.W., Jr., ‘Haven’t shareholders had enough chicken’, The Wall StreetJournal, 4/4/01, p. A21. Also, Schafer, S., ‘Boeing Picks Chicago for Headquarters; FirmWanted Base Centrally Placed, Away From Units’, The Washington Post, 5/11/01, p. E3.71 ‘Interview: Phil Condit’, Financial Times, 1/3/02, p. 22.64
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Harvard Business SchoolStrategy Wor
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AbstractThis paper looks at competi
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commercial aircraft industry, the t
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jumbo jet to compete with Boeing’
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stretch jumbo at a cost of $4 billi
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and, more recently, work that uses
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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 32 and 33: impact of the Asian crisis on deman
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
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