The Competitive Status of the U.S. Civil Aviation Manufacturing Industry: A Study of the Influences of Technology in Determining International Industrial Competitive Advantage (1985)

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SUMMARY 3 communities is mixed—some have better service with better equipment, others have seen it deteriorate or disappear. It is clear that competition is creating constant pressure on fares and that strenuous efforts are being made to reduce costs and improve operating efficiency. Furthermore, the change in route strategy is altering the nature of the optimal fleet mix, with increased need for somewhat smaller aircraft. A large global supply of secondhand aircraft is making it easy for new entrants to lease equipment or buy it at bargain prices, and to some extent is acting as a barrier to the purchase of new aircraft. The change in competitive environment noted above, combined with a severe recession1, has had a dramatic effect on the financial performance of the airlines in operation at the time of regulation. Most have experienced severe losses, balance sheets have deteriorated, and perhaps most important, forecasting the future has become much more uncertain. This affects projection of future equipment needs, return on investment, and security of the return. Airlines are displaying great variability in their ability to respond. For example, American Airlines can place a large order for planes at the same time that Continental and Braniff are struggling with bankruptcy and Eastern and TWA face severe cost problems. These changes have, not surprisingly, reduced demand for new aircraft. They also affect the future capability of U.S. airlines to serve as launch customers for new aircraft. Thus, the importance of international markets may grow because large foreign carriers may play a more important role in launching new aircraft. One important effect of deregulation has been to stimulate the growth of regional airlines. This has in turn stimulated interest in specialized aircraft to serve these markets—aircraft that heretofore had not been attractive to U.S. manufacturers. Thus, demand for cost-effective, smaller transport aircraft represents a new opportunity. It is difficult to predict the eventual equilibrium after the transition to deregulation, but it is likely that a few strong national carriers will emerge. This panel believes it is important that evaluation of the results of deregulation include its effect on the aircraft manufacturers. Foreign Competition The European countries have tried repeatedly to create a viable air transport manufacturing industry. In 1970 efforts were rationalized by creating Airbus Industrie to draw on the resources of a number of countries and to develop a coordinated worldwide marketing approach. 

SUMMARY 4 The A300 that resulted from this endeavor is a technically proficient aircraft that has begun to achieve market penetration, reaching a peak of 50 percent of orders for wide-bodied transports in 1982. Airbus has made clear its intention to develop a family of aircraft that will cover generally all of the large commercial transport market. In the United States the situation regarding the manufacture of other classes of aircraft—rotorcraft, regional transports, executive and business aircraft—is perceived to be urgent. The requirements of these types of aircraft are more within the economic and technical capability of smaller countries. Consequently, for reasons of economic growth, improved foreign trade, and even prestige, they have been targeted for production by many countries—e.g., the United Kingdom, France, Italy, Spain, Japan, Brazil, Indonesia, and Israel. In rotorcraft, the U.S. industry product line is matched in all significant classes and sizes by competitive foreign helicopters. The long practice of developing civil derivatives of military vehicles is no longer Practical, due to the specialized demands for military use. U.S. civil helicopter manufacturing must use private capital to compete with financing granted or guaranteed by foreign governments. Imports of helicopters have grown from 14 percent in 1979 to 35 percent in 1982. Regional transports present a difficult situation for U.S. manufacturers. As noted above, until recently the U.S. commuter market did not attract the development of specialized aircraft to serve it. Other countries did have such requirements and had developed the needed vehicles. With deregulation leading to increased growth in domestic regional airlines, foreign manufacturers are moving to capitalize on this opportunity. U.S. manufacturers face a dilemma: their own product lines are not extensive; the U.S. market is relatively open to competitors while many foreign markets are closed; and foreign manufacturers —typically supported in some form by their governments—are active in the field and frequently have been for many years. A desire to avoid a U.S. monopoly worldwide has been an important driving force behind the persistent European effort. It is important to recognize that this increase in the strength of foreign competition is not without its benefits for the U.S. consumer. The demands for capital and for technology development are such that not even the United States can support many suppliers of large transports. It would not be in the interest of the U.S. consumer to have only one domestic supplier—a not improbable scenario. A factor of more immediate benefit to the U.S. economy is the large U.S. content in foreign-manufactured aircraft—even the A300. For example, engines, controls, and a wide variety of