An Introduction of The European Aerospace Industry

Introduction

The European aerospace industry is thriving. It is considered one of the EU’s key, high-tech sectors with a turnover of approximately 128 billion euros per year (Analysis). Since the creation of Airbus in the 1960s, Europe has emerged as a main contender in the global market for commercial planes by going head-to-head with the previous global power Boeing and eventually surpassing them in orders. Airbus and other European aviation companies have enjoyed success both due to globalization and booming home markets. Aerospace products produced in Europe are exported all over the world, resulting in an industry trade surplus for the EU (Analysis). In addition to selling abroad, Europe has a substantial market for commercial aircraft with about 5,000 planes moving 1 billion people every year through the European air transport system (FWC).

The aerospace industry in Europe is largely concentrated within a few specific countries, namely the United Kingdom, France, Germany, Italy, Spain, Poland, and Sweden (Analysis). These countries each focus on contributing certain major components (Analysis). For example, France specializes in cockpit technologies and assembly of wide-body aircraft while Germany focuses on supplying avionics, fuselages, and complex cabin equipment. This specialization allows countries to focus on core competencies (Analysis).

While there are several industry players, Airbus is widely considered Europe’s pride and joy within the industry (Analysis). Similar to how the US’s industry has consolidated to become dominated by a select few players, Europe’s industry has done the same (FWC). Since the 1980s, numerous mergers and acquisitions have narrowed Europe’s count of major aerospace companies from twenty-one to four (FWC). The four remaining include BAE systems, Finmeccanica, Thales, and a company previously named EADS (FWC).

EADS stands for European Aeronautic Defense & Space Co. and is the previous name of the parent company of Airbus (Michaels). The parent company has recently discarded the EADS name and rebranded itself as Airbus Group NV (Michaels). Airbus is a Dutch-registered French-German-British-Spanish multinational that has enjoyed a growing market share in recent years (Michaels).

As Airbus is revered as an extremely important European company, its success is celebrated by the industry. Although Boeing’s 2014 orders are outperforming Airbus, the two global powers have been battling it out for most of the last decade with Airbus pulling slightly ahead (Trefis). Airbus’ 2013 orders for commercial airplanes totaled 1,503 with Boeing’s behind at 1,355 orders (Trefis).

In addition to orders, innovation is another competition with Airbus recently overtaking Boeing as the manufacturer of the world’s largest civil aircraft due to the release of their A380 (Analysis). Airbus’ A380 has been the key to overcoming Boeing’s monopoly and has allowed Europe to ascend to its role as leader of the market for very large civil aircraft (Analysis).

Boeing predicts demand for wide-body commercial airplanes will reach 8,000 over the next two decades (Trefis). This presents a huge sales opportunity worth $2.3 trillion, meaning the two companies will continue going to head-to-head with Boeing’s 777 and 787 Dreamliner models and Airbus’ A330 and A350 models (Trefis).

Beyond Airbus fighting for dominance in the large civil aircraft market, few regional aircraft manufacturers in Europe have been able to compete against emerging powers including Brazil’s Embraer and Canada’s Bombardier (Analysis). The main exception is the French/Italian company ATR which holds the title of world’s largest manufacturer of regional aircraft (Analysis). Furthermore, European companies fail to play a large role in the business and general aviation market for small aircraft with that market being largely dominated by American companies (Analysis). The main exception for this market is the French company Dassault, which has sold over 8,000 aircraft since 1945 (Vision). Outside of manufacturing complete aircrafts, many European companies serve as first-tier suppliers for the main manufacturing companies (Analysis). For example, the UK’s Rolls Royce and France’s Snemca produce 40% of the world’s engines (Analysis).

With Airbus leading the market for large planes, select companies operating in the markets for smaller planes, and numerous companies supplying parts to aircraft manufacturers, Europe is certainly holding its own in the global aerospace industry.

Emerging Markets

The aerospace industry in Europe is about to experience a downslide in market dynamics during the next couple of decades due to emerging economies in China, Russia, and India. For decades, French company Airbus has had the majority of the market share in the industry alongside American market leader Boeing. These combined share roughly 80% of total market share (Commission). With other emerging supplier markets in low-cost countries, Airbus faces an issue of increased future competition. This section will describe the current emerging market trends in the aerospace industry, and how these emerging markets in China, Russia, and India will become global market competitors by 2020.

Emerging markets will represent a major source of demand for commercial aircraft over the next two decades, similar to how these same emerging markets currently represent a small portion of the aerospace industry’s sourcing needs (Bedier). Investments in emerging markets show short term benefits like low labor costs and looser regulation, but local governments have started to follow a set of strategies that will aid them in becoming leading companies in the future (Bedier). In order for these emerging markets to become global competitors, they must achieve the following goals:

• Make the aerospace industry a priority in government funding
• Have a single integrated player in each emerging market
• Develop a large pool of capital
• Create partnerships with original equipment manufacturers (OEMs) to create a global supply chain

Current industry globalization is minimal due to the complexity of the industry’s technology, differences in regulatory and safety requirements, and the importance of protecting intellectual property. This complexity pays off in the long term, showing a decrease in total expenses from investing in emerging markets to be 20-25% lower than using manufacturers in high-cost countries (Bedier). The European aerospace industry will need to strengthen its efforts to stay ahead and develop new and innovative products for the world markets.

Comparing the pros and cons of each of the three emerging markets, the Chinese and Russian markets prove to be top contenders by 2020. They now manufacture structural components to industry leaders Boeing and Airbus. The Aviation Industry of China (AVIC I) has started to not only partner with OEMs in the supply chain, but it has had enough government funding to develop a competitive regional jet, the ARJ21. In contrast, the Russian markets have yet to create a single integrated player in its local market.

In conclusion, as an increasing economy, China’s success will depend on its ability to understand global requirements, design a compelling and reliable aircraft, and develop program-management, supplier integration, and aftermarket support capabilities (Bedier). If this all holds, by 2020 China will become the leading first-tier supplier of aircraft components, and achieve leadership in the aerospace industry.

Government Involvement

The aerospace industry requires manufacturers to take on risk every time they invest in R&D without certainty that they will create a successful product and have enough buyers. Research has shown that a company needs to sell 500 units of an aircraft it builds in order to break even after all of the development and manufacturing costs it spends, but this rarely happens (Eberstadt). Therefore, in order to ensure that aircrafts are continually built and improved upon, national governments find ways to help European aerospace companies stay in business and stay competitive.

Government help starts from the very beginning, with the supplies that go into aircrafts. Aerospace companies mainly buy from American suppliers, but government support of European suppliers encourages competition throughout the global market (Eberstadt). Competition encourages lower prices, which keep costs down for the aerospace manufacturers buying the supplies and helps the European suppliers. Manufacturers are then able to maintain lower costs throughout the process and pass those on to buyers.

Although it is a costly process, aerospace manufacturers are encouraged to partake in research and development because governments help finance projects that might be harder to raise capital for in the private sector (Eberstadt). By being able to worry less about how to get a project started, aerospace manufacturers can act more responsively to the needs and opportunities of the market, and increase their competitive edge. This mindset allows aircraft manufacturers to continually improve their products and processes, and continue to stay successful.

European governments are involved not only in the aerospace industry, but also in the business of airlines, with many being identified as “national” airlines of European countries. Governments help ensure that aerospace manufacturers have buyers of their aircrafts by following the process a step further and influencing airline buying decisions (Eberstadt). This is an effective way to reduce the risk that aerospace manufacturers face when making developmental decisions.

Lastly, European governments have always felt a sense of identity and pride about their history of success in the aerospace industry (Eberstadt). Since World War II, manufacturers have provided many jobs for countries such as France, Germany, and the UK. The aerospace industry has become an integral part of these countries’ economies, and their success is so important to governments that it’s been said that French officials will approach Airbus asking, “How can we help?” instead of the company having to approach the government (Eberstadt).

Success for the aerospace industry in Europe can lead to more jobs, some of which are taken from the business of other countries and increase Europe’s competitiveness. The aerospace industry has always been important to the economies of Europe and its national governments will likely always find ways to support its success.

Environmental Pressures

In recent years there has been increasing pressure on the aerospace industry to become more aware of its impact on the environment. Various organizations such as the Federal Aviation Association, the Environmental Protection Agency, and the International Civil Aviation Organization are conceiving goals, proposing regulations, and assisting in the transition to more environmentally-friendly business practices. Examples of these initiatives include the Destination 2025 Strategic Plan, Single European Sky ATM Research, and the Emission Trading Scheme. These projects seek to create more sustainable operating processes without hindering the financial success of companies.

The Destination 2025 Strategic Plan, conceived by the Federal Aviation Association, has set goals revolving around renewable fuels and the industry’s effect on the health of citizens across the globe. Destination 2025 hopes to discover replacement fuels for leaded aviation gasoline and to utilize one billion gallons of these fuels by 2018 (Destination). In addition to this, the plan is working to reduce the contribution of aviation emissions to significant health impacts by 50% (Destination). Single European Sky ATM Research on the other hand is aimed towards optimizing aircraft trajectories, which would in turn lead to overall higher fuel efficiency (Environment). SESAR intends to reduce aircraft emissions, while also helping airspace users to enjoy lower fuel related expenses. The Emission Trading Scheme contributes to these efforts by working on the implementation of a cap-and-trade system within the European Union. By assigning emission “allowances”, the ETS is expected to result in a 43% reduction between 2005 and 2030 (Emissions).

In order to meet so many ambitious goals and to continue seeing statistics comparable to these, companies are devoting research and development funds to the cause and are also finding assistance from sources like the International Civil Aviation Organization. The ICAO consists of 191 member states and works with firms to ease the transition from traditional to alternative fuels by cooperating with financial institutions to help fuel projects aimed toward creating a more sustainable industry (Vision & Mission). Within the organization is the Committee on Aviation Environmental Protection, dedicated to analyzing future trends and exploring options that utilize or combat opportunities and potential roadblocks (Vision & Mission). As a result of these initiatives, total observed carbon monoxide emissions since 1970 have decreased by nearly 64%, sulfur dioxide by 83%, and Volatile Organic Compounds by 48% (NEI).

Many of these emission decreases can be attributed to innovative thinking and more advanced technology. Companies including Boeing and Airbus are going head-to-head in the creation of new energy efficient prototypes for use in the near future. Airbus devotes an estimated 90% of their research and development budget to environmental research (Eco-efficiency). This investment can be seen through their development of planes such as the A320neo. The A320neo utilizes only a quarter of the fuel being burned by the current generation aircraft (Sustainable). Boeing’s current project is a plan name the “phantom eye”. This plane is a hydrogen-powered prototype predicted to use one-third of the energy of an engine running on conventional fuels (Future). Boeing is making strides in the present day as well with a reported 9% decrease in carbon dioxide emissions between 2007 and 2012, while increasing profits by an observed 23% (Summary).

It can be argued either way that the pressure to be innovative and sustainable is harmful or beneficial to the economy and companies individually. However, firms have made huge strides towards a healthier global atmosphere, and as time goes on their efforts will undoubtedly be worth their investments. Even with so many organizations and countries looking towards the aerospace industry to improve their carbon footprint, companies have prevailed, and in some cases even managed to make a profit while becoming more aware of their impacts on the environment.

Conclusion

The aerospace industry in Europe has remained as one of the largest and most competitive high-tech sectors for decades, and they look to continue this strong position in the decades to come. In order to do this they have to look in the future for emerging trends and possible changes in the global industry. Right now the direct competition the European aerospace industry faces, predominantly Airbus/EADS, is Boeing. Boeing and Airbus control the large aircraft industry as no other contenders have had the capital from government funding, a single integrated player, or partnerships with OEMS. This is no longer the case as China is establishing themselves as a possible competitor to Airbus and Boeing. Airbus and the European aerospace industry has to ensure that they account for this change and make decisions in regard to partnerships with China or establishing a presence in the Asian market before it is too late. It might also be in their interest to look into the smaller aircraft market, used more for short distance or domestic travel. Currently the big names in aerospace do not direct efforts towards these smaller planes, but this could be something for the European aerospace industry to take advantage of.

The second future trend Airbus and the European aerospace industry needs to account for is the constant change occurring in government involvement within the industry. Government funding is constantly in debate of what is and what isn’t allowed for the government to provide. The debates and changes are sure to continue on in the future, so the European aerospace industry needs to prepare for sudden adjustments to funding and not fully be dependent on government help. In addition, competition policies continue to change, which could have an adverse effect on Airbus, making it more difficult to expand to emerging markets and remaining in the established position they currently exist in. Right now there are only two major competitors globally, Airbus and Boeing, so it would not be surprising to see a more competitive market in the future. Governments, especially in Europe, are creating stricter environmental and emission policies. This leads into the importance of investment in environmental preservation research and development.

Currently Airbus has 90% of their budget allocated to environmental research and development, which shows they understand the importance of this future trend. However there is also the concern of oil prices, which if they remain low, could curb the push to a more environmental conscious aerospace future. It is importance they balance the two in order to remain competitive now and in the future.

Overall, Airbus and the European aerospace industry are in a comfortable position now, but because of the market, governmental, and environmental changes, the industry could change in numerous of ways. They have to be looking ahead to make sure they adapt to these changes as smoothly and quickly as possible to remain in the dominant position they are.