Wharton Aerospace & Defense Report

New Rivals Chip Away at Boeing and Airbus DuopolyNovember 05, 2010

The commercial skies, once dominated by planes built by Boeing and Airbus, are now seeing a new flock of manufacturers that are likely to chip away at the long-held duopoly.

One boost for these emerging companies from Canada, Brazil—and soon from Russia, China and Japan—is an old-standing rule commonly known as the home market rule that Boeing and Airbus agreed to almost three decades ago, according to an article in The New York Times.

The rule requires that neither Boeing nor Airbus will seek government financing to sell planes in each others’ home markets. For example, under the agreement, U.S.-based Boeing agrees it will not sell its planes to a French, British, German or Spanish airline company using government-backed export subsidies because the Airbus manufacturers in those countries receive no subsidies. Selling American subsidized products there would present unfair competition. Airbus, meanwhile, agrees not to sell its planes with government export financing in the U.S. market, where Boeing would be at a disadvantage.

Airline companies in these "home" markets have had to bear the collateral damage from this rule. For example, Ryanair, based in Dublin and now one of Europe's largest low-cost carriers, used export-credit financing to buy most of its fleet of Boeing planes. But EasyJet, its rival based in London, cannot cut similar deals, according to the article.

The objections are even more contentious when it comes to the advantages that Asian and Middle-Eastern airlines get from the home market rule, according to European and American companies. Emirates Airlines, based in Dubai, has been buying an entire new fleet over the past few years, and recently placed two huge orders to buy 32 Airbus A380 jets and 30 Boeing 777s, according to the Times.

Because a home market rule does not affect smaller plane makers (they are governed by a different set of financing standards), Canada-based Bombardier and Brazil's Embraer have not been seen as a direct threat to Boeing or Airbus. But the interlopers are about to break into Boeing and Airbus markets. Bombardier, for example, has a new generation of single-aisle planes that for the first time will compete directly with Boeing's 737 and Airbus's A320. At that point, the home market rule will come into play.

But a financing advantage is not the only thing helping this new breed of jet makers, says Morris A. Cohen, a professor of operations and information management at Wharton. They have focused their world-class facilities to help them compete.

"If you visit Embraer in Brazil or Bombardier in Montreal, which I have done, you will see they have developed enormous capacity and they have designed state-of-the-art aircraft," says Cohen. "They are at the regional jet level and that is just the niche that they have gone after. But the technology that they are using and the quality of those products are world class."