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THE PRESENT ENVIRONMENT 54 focus on commercial development and design is regarded as essential. Foreign Perception of Future Markets A British perspective on world competition in commercial aircraft is that Boeing will continue to dominate the long-haul, wide-bodied aircraft market.10 The medium-and short-haul market is viewed as "up for grabs." Airbus is being encouraged by its British partner to develop, over the long term, a family of equipment to enter this market. The commuter market is projected to be chaotic, with many players from both developed and developing countries and with a requirement to deal with fleet operators who are shaky financially and who will need significant operational support. Consequently, the commuter market segment is regarded with caution. In summary, the two broad segments of civil aircraft manufacture face different circumstances regarding the changing nature of international competition. Large transports face a competitor, backed by the resources of several European governments, that has succeeded in achieving market acceptance. Despite penetration in some important markets, the long-term success of Airbus is not easily predicted. Its ability to affect aircraft pricing and profitability adversely is a more likely possibility. Even with the availability of government funds, the projected financial performance of the aircraft will, in the long run, influence government decision makers. The experience of the Concorde and the A300 has loomed in the background in discussions on funding the A320. Governments do not have unlimited funds. With conflicting demands for resources, continuing drains on treasuries will eventually receive careful scrutiny. Unfortunately, that eventuality is small solace to the private firms trying to compete. Meanwhile, the Japanese loom as a potentially powerful but largely unknown factor in the competitive arena. In the other arena, especially with helicopters, commuters, and executive aircraft, the threat is more immediate. The aircraft fit better with the resources of individual countries and companies. The U.S. market is large, open, and attractive. U.S. technology and U.S. components are readily available. Significant market penetration has already been achieved. GROWING IMPORTANCE OF INTERNATIONAL MARKETS As mentioned previously, the size and dynamism of the U.S. air transport market during the 1950s and 1960s played a power
THE PRESENT ENVIRONMENT 55 ful role in establishing leadership for U.S. aircraft. The requirements and size of the U.S market helped define the aircraft needed and, with effective attention to foreign needs and markets, provided economies of scale that helped establish world cost leadership. In 1971 U.S. air travel represented 57.5 percent of the world's passenger-miles flown outside of the USSR, its allied countries, and the People's Republic of China. During the period 1950 to 1970, U.S. airline operators bought 67 percent of the aircraft produced by U.S. manufacturers. This situation began to change in the 1970s. Growth of the more mature U.S. air travel market was the slowest of the seven major world regions (about 5 percent a year versus an average of about 9 percent elsewhere), and U.S. traffic dropped to a 40 percent share of the passenger-miles flown. Since the early 1970s, the world market for large transports has reflected the slower rate of growth of air travel in the U.S. The 40 to 60 percent split in new equipment orders favoring the higher growth rates in foreign markets is a reversal of market splits in earlier years. Current market projections through the mid-1990s indicate a continued gradual diminution of the U.S. share of world passenger traffic (Figure 2-8). The traffic projections show the U.S. share dropping from 40 percent in 1981 to some 36 percent by the mid-1990s. Nevertheless, in absolute terms the U.S. market is still the largest market, and it is projected to show significant future growth. Note: Excludes U.S.S.R. and non-ICAO nations, but includes Taiwan Figure 2-8 World Revenue Passenger Miles, All Services Source: Presentation before U.S. Civil Aviation Manufacturing Industry Panel, July 7, 1983, by H.C. Munson, Boeing Company, Seattle, Washington.
THE PRESENT ENVIRONMENT 56 TABLE 2-7 Projected Growth in Air Travel Share of Traffic (percent) 1970 1982 1995 U.S. 55 40 36 Europe and Canada 29 31 31 Rest of World 16 29 33 100 100 100 Revenue-Passenger Miles (billions) 288 678 1,413 SOURCE: Presentation before U.S. Civil Aviation Manufacturing Industry Panel, July 7, 1983, by H. C. Munson, Boeing Company, Seattle, Washington. The less developed countries are estimated to have the most rapid passenger growth. The Middle Eastern, Latin American, Pacific Region, and Asian market segments are projected to increase from 29 percent in 1982 to 33 percent of total passenger service in 1995 (Table 2-7). The success of a U.S. civil aircraft or engine program has always been heavily dependent on winning a large share of the international as well as the U.S. domestic market. The U.S. manufacturers have excelled in interpreting and satisfying the product requirements of international markets. But with the increased future importance of foreign airlines, the process of launching new aircraft or engines by U.S. industry will require even greater understanding of and responsiveness to the economic needs and political environment of foreign airlines and governments. These needs are well understood by our foreign competitors and have been exploited with great success by Airbus Industrie and Rolls Royce in opening markets for their current products. Most foreign manufacturing competitors are backed by governments whose goals are full employment, technology development, and generation of foreign currency in addition to commercial gains. Consequently, these competitors are likely to stay in a selected market, even if large expenditures are required to sustain extended product development and production operations during periods of very slow salesâwitness the experience with the A300 discussed earlier. While such actions would be both unsound and impossible for a private manufacturing company, they can make long-term social and economic sense for individual countries. Hence, this difference constitutes a formidable competition for privately financed U.S. companies. Although the airlines around the world are experiencing problems similar to those of the U.S. airlines with respect to traffic, overcapacity, and yield, their general business situation is
THE PRESENT ENVIRONMENT 57 not as serious as that of the U.S. domestic airlines. The economic recovery outside of the United States generally lags behind the recovery in the United States, but traffic growth in many parts of the world has been more vibrant than in the United States even during the recessionary period largely because air transport is a less mature industry in the rest of the world. Fare competition for foreign operators, although more prevalent than in the past, is not as severe as for U.S. domestic operators. This is mainly due to foreign government regulation of fares, pooling of revenues, and control of capacity on routes between certain countries. On most domestic routes in other countries there is usually only one carrier, and any competition that exists is generally tightly controlled. Most non-U.S. carriers are either government-owned or government- supported in some way. In developed countries there is a modest trend toward having the carriers stand on their own without subsidy or government-guaranteed financing, but not in developing countries. With few exceptions, such as Swissair, foreign carriers are largely instruments of their governments. Consequently, support is generally provided when it is truly necessary. Thus, when traffic makes the acquisition of new aircraft necessary, access to capital through government support is usually available irrespective of the financial performance of the airline. For much of the international market, export financing is very important. Private sector banks are able and willing to lend or lease at reasonable terms funds for procuring aircraft by foreign airlines whose governments guarantee support for such transactions. In the case of developing countries, the financial condition of the airlines is usually weak, and the situation with regard to capital availability for purchasing aircraft is bleak. This group of carriers, while protected by bilateral agreements, often does not have adequate traffic to operate profitably on international routes. In addition, many of these carriers do not have a profitable domestic system. Even though they are government-owned, carriers of developing countries have difficulty borrowing from the private sector to purchase aircraft even if the government guarantees the debt, because the country itself is in a weak credit position. Since the availability of capital for this group is uncertain, pressures are on the aircraft manufacturers to support these aircraft sales with help in financing. The availability of export financing is critical to this group of customers, but clearly there are increased risks in such transactions. At a time when U.S. aircraft manufacturers face increased competition from foreign manufacturers, they also face a changing market. With the U.S. air transport system maturing, international markets will represent an increasing portion of the total.
