Boeing’s earnings release this morning recorded huge growth at the Chicago aerospace company. Net income more than doubled, and airplane manufacturing slots are filled for the next three years. In addition to the strength of its defense department, Boeing is riding on the growth of its commercial aircraft division and the introduction of the new Boeing 787 Dreamliner. It only helps that their only competitor, Airbus, has pushed back the introduction of their competing A380 due to production problems.
Wait… there’s been a huge boom in aerospace, but Boeing only has one competitor? What about zero economic profits? The commercial aircraft industry is one of the few examples where, because of a combination of sunk R&D costs and economies of scale, the market is structured with only two major players. If the lack of competition is alarming, throw in the role of government and you’ve got an industry that is at times highly controversial.
The two companies, both in their infancy and even now, receive hefty support from governments to finance their projects. Ideally, the subsidies and loans they receive should only balance out prohibitively costly barriers to ensure that the industry continues to exist. Rules policing the role of government support are outlined in a 1992 bilateral trade agreement and WTO regulations. In recent years, Boeing has accused Airbus (a European consortium) of receiving illegal subsidies from European governments. Airbus countered that US government contracts and tax breaks violate the previous trade agreements.
Although this conflict has yet to be resolved, both companies are benefiting from a huge boom in aircraft orders that will last through the end of the decade.
Post by: Holly Bui, Daniel Mendelson, Kevin Turner
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It is an interesting debate about how much these companies benefit from outside support. For example, neither company really faces a major threat of failure. Boeing has sold massive amounts of the 787 despite the fact that it hasn't even been finished yet. Airbus too, can act uncompetitively in some of its projects. The companies buying from Boeing and Airbus know that the firm will not go bankrupt and out of business. However, the start-up costs are so incredibley high that it is probably good that there is this protection, because with only one firm the industry would probably not function as well.
Joe Saunders, Risto Keravuori, Cheryl Kong
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