The  Impact  of  the  Commercial  
Aircraft  Corporation  of  China  
(COMAC)  in  the  Aircraft  
Manufacturer  Industry.  
 
 
 
 
 
Thesis  submitted  to  Utrecht  University  
for  the  award  of  the  degree  of    
 
Master’s  in  International  Economics  and  Business  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Juan  Manuel  Valle  Moreno  
School  of  Economics  

5678951  
 
Supervisors:  Luigi  Pinna  MSC  
                                                 Dr.  Hein  Roelfsema  
 

 
 
  
 
Table  of  contents  
 
Abstract  ....................................................................................................................................  3  
1.  Introduction  .......................................................................................................................  4  
2.  Conceptual  background  and  related  literature  ......................................................  5  
2.1  The  micro-­‐economics  of  duopoly  ........................................................................................  5  
2.2  History  of  duopoly  .....................................................................................................................  6  
2.3  Economic  literature  ...................................................................................................................  7  
2.3.1  Theoretical  research  .........................................................................................................  7  
2.3.2  Empirical  research  ............................................................................................................  8  
2.3.3  Experimental  research  ....................................................................................................  9  
2.4  Entry  Barriers  in  Duopoly  .......................................................................................................  9  
2.4.1  Concept  ...................................................................................................................................  9  
2.4.2  New  classification  ...........................................................................................................  10  
2.4.3  Types  of  entry  barriers:  structural  and  strategic  ..............................................  11  
2.4.4  Most  common  barriers  to  entry  in  duopoly  ........................................................  12  
2.5  Industry  dynamics  in  duopoly  ...........................................................................................  13  
2.6  Market  failure  due  to  Oligopoly  ........................................................................................  14  
2.7  Successful  Industries  with  Two  Main  Provider  Firms  ............................................  15  
2.7.1  The  carbonated  soft  drinks  industry  ......................................................................  15  
2.7.2  The  mainframe  aircraft  manufacturers  industry  ..............................................  16  
3.  Aircraft  manufacturer  industry  analysis  ...............................................................  16  
3.1  Porter’s  Five-­‐Force  model  ...................................................................................................  16  
3.2  PESTEL  analysis  .......................................................................................................................  19  
3.3  SWOT  analysis  ..........................................................................................................................  21  
4.  Organization  strategy  ..................................................................................................  23  
5.  The  global  duopoly  of  Airbus  and  Boeing  .............................................................  30  
5.1  Reasons  for  duopoly  ...............................................................................................................  30  
5.2  Reasons  against  duopoly  ......................................................................................................  34  
5.3  COMAC:  A  third  player  in  the  duopoly?  .........................................................................  36  
6.  Conclusion  ........................................................................................................................  41  
Bibliography  ........................................................................................................................  44  
 
 
 
 
 
 
 
 
 
 
 
 

  2  
  
 
 
 
Abstract  
The   aircraft   manufacturer   industry   is   a   global   duopoly   with   two   key  
players.  This  trend  has  been  consolidated  over  many  years.  Recently,  
there   has   been   an   emergence   of   manufacturers   from   emerging  
countries   that   have   either   entered   a   specific   niche   or   are   developing   a  
strategy   to   be   a   player   on   a   global   scale.   The   Chinese   state-­‐owned  
COMAC   is   one   of   those   new   entrants.   This   paper   evaluates   the  
environment   of   this   industry,   the   economic   opportunities   of   a   new  
entrant  and  the  strategy  being  pursued  by  this  company.  The  analysis  
shows   that   this   is   a   highly   specialised   market,   which   the   most   likely  
will   continue   to   be   dominated   by   certain   parties   although   if   one  
considers   that   the   new   entrant   can   specialise   as   well   as   receive   the  
benefits   of   substantial   government   subsidies   could   cost   some  
disruption  in  the  normal  operation  of  the  aerospace  industry.  
 
 
Keywords:   aircraft   manufacturer   industry,   new   entrants,   COMAC,  
specialise,  government  subsidies.  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

  3  
1.  Introduction  
The   current   strong   growth   in   commercial   aircraft   demand   portends   well   for   the  
aviation  industry.  In  fact,  it  appears  the  aerospace  sector  is  experiencing  a  second  
golden   age   (PwC,   2013).   Although   Airbus   and   Boeing   have   welcomed   this   global  
increase  of  orders,  they  are  cautious  and  wonder  if  the  duopoly  where  they  have  
operated   for   decades   is   now   at   risk.   Emergent   aeroplane   manufacturing   industries  
want  to  get  involved  in  this  profitable  market  and  they  intend  to  add  new  entrants  
to   the   regional   jet   and   narrow-­‐body   or   single-­‐aisle   segments.   The   Brazilian  
Embraer,   the   Canadian   Bombardier   and   the   Japanese   Mitsubishi   Aircraft  
Corporation  (MAC)  along  with  the  government-­‐funded  United  Aircraft  Corporation  
of   Russia   (UAC)   and   the   Commercial   Aircraft   Corporation   of   China   (COMAC)   are  
using   their   domestic   markets   to   develop   the   required   capabilities   and   technical  
skills  to  become  global  players.  Whether  these  emerging  competitors  will  succeed  
is  a  question  that  still  has  to  be  answered.    

This  thesis  focuses  on  whether  the  newly  established  COMAC  will  be  successful  in  
the  large  commercial  aeroplane  segment  and,  as  a  result,  will  end  with  the  global  
duopoly  of  Airbus  and  Boeing.  Despite  the  height  of  barriers  to  entry  in  the  aircraft  
manufacturer  industry,  current  dynamics  in  the  market  predict  the  emergence  of  
new  entrants  that  will  face  the  incumbents.  Therefore,  the  research  motivation  is  
to   examine   if   the   arrival   of   the   state-­‐owned   COMAC   supposes   a   potential   serious  
competitor   to   Airbus   and   Boeing   and   a   threat   that   could   break   the   dominance   of  
the  two  leader  firms  in  such  industry.  

Forecasts   indicate   that   the   current   world   mapping   of   commercial   aircraft   industry  
will   radically   change   over   the   next   twenty   years   in   terms   of   level   of   air   traffic,  
location   of   the   new   hubs   and   last   but   not   least   important   the   number   of  
manufacturers  to  satisfy  the  growing  demand.  

  4  
  
Figure  1.  Regional  aircraft  demand  by  2032.  
 
Certainly,  the  commercial  aviation  industry  is  booming  with  predictions  foreseeing  
a   continuous   growth   rate   for   the   next   two   decades.   This   is   clearly   a   great  
opportunity  for  aeroplane  maker  companies  but  also  a  challenge.  
 
2.  Conceptual  background  and  related  literature  
2.1  The  micro-­‐economics  of  duopoly  
Identifying  the  number  of  producers  in  concentrated  markets  is  one  of  the  keys  to  
measure   the   effects   of   entry.   However,   this   number   is   a   dynamic   variable   that  
changes  with  fluctuations  in  demand  and  variation  in  market  competition.    

Bresnahan   and   Reiss   (1991)   suggest   that   competitive   conduct   changes   quickly  
when  the  number  of  companies  increases.  In  fact,  markets  with  no  more  than  five  
firms  show  that  practically  all  variation  in  competitive  conduct  happens  with  the  
entry   of   the   second   or   third   player   whereas   the   following   entrants   have   slight  
effect  on  competitive  conduct.    

A  duopoly  is  a  situation  in  which  two  companies  own  all  or  nearly  all  of  the  market  
for   a   given   product   or   service.   Essentially,   it   is   the   most   basic   form   of   oligopoly,  
that  is  a  market  dominated  by  a  small  number  of  companies.    

Regarding   its   impact   on   the   market,   it   is   significant   that   a   duopoly   can   have   a  
similar  effect  to  a  monopoly  if  the  two  players  involved  collude  on  prices  or  output.  
Consequently,   consumers   pay   higher   prices   than   they   would   in   a   truly   competitive  

  5  
market.  This  practice  is  considered  illegal  under  the  U.S.  antitrust  law  and  the  EU  
competition   law.   Both   regulations   prohibit   agreements   between   two   or   more  
independent   market   operators   which   restrict   competition   and   forbid   firms   that  
hold  a  dominant  position  in  a  particular  sector  or  industry  to  abuse  that  position,  
for   example   by   charging   unfair   prices,   by   limiting   production,   or   by   refusing   to  
innovate  to  the  prejudice  of  consumers.  

2.2  History  of  duopoly  

The   study   of   oligopoly   started   in   the   nineteenth   century   when   Cournot   (1838)  
published   his   research   about   this   field   and   Bertrand   (1883)   subsequently  
reviewed  it.  Both  authors  particularly  focused  on  duopoly  and  based  their  studies  
on   Nash   equilibrium.   While   companies   compete   in   output   under   Cournot   model  
since  it  focuses  on  markets  whose  companies  produce  homogeneous  commodities,  
firms  compete  in  price  under  Bertrand  model.    
More   recently,   Kreps   and   Scheinkman   (1983)   claim   that   the   decision   of   competing  
in  output  or  price  is  eventually  an  empirical  issue  within  firms.  Other  authors  have  
commenced   to   consider   a   new   scenario   in   which   firms   do   not   have   to   compete  
following   the   same   model,   that   is,   one   firm   could   choose   competing   in   output  
whereas  the  other  could  conversely  select  to  compete  in  price.  This  particular  case  
is   known   as   the   mixed   Cournot-­‐Bertrand   model.   In   the   theoretical   literature,   Vives  
(1984)   examines   a   duopoly   model   where   firms   own   private   information   about   the  
uncertain   demand   and   shows   that   if   companies   decide   to   share   their   own  
knowledge   about   the   market   with   others,   there   will   be   consequences   in   their  
wealth,  which  depends  not  only  on  the  type  of  competition  described  by  Cournot  
and  Bertrand  but  also  on  the  nature  of  the  products  (substitutes  or  complements)  
and   the   degree   of   differentiation.   Finally,   he   concludes   that   “if   the   goods   are  
substitutes   (not)   to   share   information   is   a   dominant   strategy   for   each   firm   in  
Bertrand   (Cournot)   competition.   If   the   goods   are   complements   the   result   is  
reversed”.     In   addition,   the   paper   of   Singh   and   Vives   (1984)   explores   the   three  
different   types   of   duopoly   taking   into   account   the   theory   of   entry   barriers  
suggested   by   Dixit   (1979).   They   also   demonstrate   that   if   companies   are   only  
allowed   to   sign   two   types   of   contract   with   clients:   quantity   contracts   and   price  
contracts,   choosing   the   price   option   is   the   prevailing   strategy   when   firms   sell  

  6  
complement   goods.   In   contrast,   the   dominant   strategy   would   be   a   quantitative  
contract  if  firms  sold  substitutes  goods.  Nevertheless,  Häckner  (2000),  Zanchettin  
(2006)  and  Arya  et  al.  (2008)  argue  that  asymmetry  in  technology,  institutions  and  
demand   may   make   Bertrand   or   mixed   Cournot–Bertrand   models   be   the   optimal  
choice.   Nowadays,   these   three   behaviour   models   can   be   observed   since   the   best  
choice  depends  on  the  market  conditions.  

2.3  Economic  literature  

There  is  a  large  economic  literature  focusing  on  the  relationship  between  market  
structure,   conduct,   and   performance.   Unfortunately,   it   is   generally   inconclusive  
and   lacks   of   any   guidance   for   policymakers,   who   determine   in   which   situations  
governments  should  restrict  factors  of  market  conduct.  

2.3.1  Theoretical  research  

Several   experts   underline   that   their   models   are   not   planned   to   become   public  
policy   instruments.   For   example,   the   American   economist   and   Professor   of  
Economics   at   the   JFK   School   of   Government   at   Harvard   University   Frederic  
Michael  Scherer  (1970)  wrote  in  his  textbook  Industrial  organization:    
“Economists   have   developed   literally   dozens   of   oligopoly   pricing  
theories—some   simple,   some   marvels   of   mathematical   complexity.  
This  proliferation  of  theories  is  mirrored  by  an  equally  rich  array  of  
behavioural   patterns   actually   observed   under   oligopoly.   Casual  
observation  suggests  that  virtually  anything  can  happen.”  
Likewise,  the  Professor  of  Business  Strategy  at  the  Haas  School  of  Business  at  the  
University  of  California,  Berkeley,  Carl  Shapiro  (1989)  states:    
“Before   embarking   on   the   analysis,   it   is   best   to   provide   the   reader  
with  a  word  of  warning...  there  is  no  single  theory  of  oligopoly...  I  do  
not   expect   oligopoly   theory...   to   give   tight   inter-­‐industry   predictions  
regarding  the  extent  of  competition  or  collusion.”  
George   Stigler   (1964),   another   economist   from   the   U.S.,   who   won   the   Nobel  
Memorial  Prize  in  Economic  Sciences  in  1982,  concluded:    
“No   one   has   the   right,   few   the   ability,   to   lure   economists   into   reading  
another  article  on  oligopoly  theory  without  some  advance  indication  
of  its  alleged  contribution.”  

  7  
2.3.2  Empirical  research  
Attempts   to   connect   market   structure   with   market   conduct   and   performance  
regarding   issues   associated   with   prices   and   the   price-­‐setting   process   have  
remained   considerably   unsuccessful.   In   words   of   the   economist   and   Professor   of  
Economics   at   the   University   of   Oxford   Donald   Hay   and   the   academic   and   Oriel  
College  provost  Derek  Morris  (1991):  
"The  relationship  between  industrial  structure  and  price  setting  over  
time  remains  very  unclear...  It  is  difficult  to  avoid  concluding  that,  if  
any  such  links  do  exist,  they  are  far  from  obvious  and  unlikely  to  be  
powerful...   Industrial   structure   may   have   an   important   influence   on  
price   procedures...   but   it   does   not   seem   to   play   a   central   role   in   the  
pattern  of  price  changes  that  develops  through  time."  
Similarly,   efforts   to   determine   the   relationship   between   market   structure   and  
profits   have   also   been   unsuccessful.   Initial   studies   of   structure   and   performance  
relationships   detected   connections   between   concentration   and   profitability.  
Succeeding   analyses   have   aimed   to   prove   the   real   value   of   those   studies.   They  
argue  that  concentration  is  not  the  only  variable  involved  but  many  other  factors  
such   as   entry   conditions,   capital   intensity,   degree   of   regulation   or   growth   rates  
also   have   an   effect   on   profits   and,   therefore,   need   to   be   taken   into   account.   In  
addition,   they   hold   the   absence   of   a   consistent   one-­‐to-­‐one   link   between  
concentration   and   profit.   Furthermore,   there   is   no   theoretical   or   observational  
evidence   to   support   the   causal   effects   between   market   structure   and   profits.  
Hence,  causation  between  these  two  variables  cannot  be  accepted.  

Apparently,   there   is   a   generally   accepted   agreement   on   the   potential  

characteristics  of  competitive  oligopolies.  According  to  Howard  Shelanski  (2007),  
economist  and  Professor  of  Law  at  Georgetown  University:    
"The   comparative   performance   benefits   of   oligopoly   over   monopoly  
for   technological   innovation   also   have   empirical   support.   It   is   well  
established  in  the  economic  and  competition  policy  literature  that  the  
link   between   market   structure   and   innovation   is   much   less  
predictable...   But   there   is   reasonably   good   evidence   that   neither  
monopoly   nor   perfect   competition   is   particularly   beneficial   for  
investment   in   research   and   development   or   deployment   of   new  
technology."  

  8  
2.3.3  Experimental  research  
Christoph   Engel   (2006),   a   Max   Planck   Institute   for   Research   on   Collective   Goods  
scholar   and   Chair   of   the   Advisory   Board,   Amsterdam   Centre,   for   Law   and  
Economics  finds  more  than  150  articles  approaching  diverse  experiments  thought  
to   check   the   performance   of   market   behaviour   in   terms   of   quantity   under   a  
voluminous   and   wide   range   of   conditions.   The   results   obtained   from   this  
exhaustive   literature   review   indicate   that   duopoly   behaviour   depends   on   the  
circumstances   and   the   level   of   performance   varies   in   unpredictable   ways.   It   is   also  
shown   that   indeterminate   outcomes   were   observed   in   a   large   number   of  
experiments  whereas  the  results  of  many  others  were  not  statistically  significant.    

2.4  Entry  Barriers  in  Duopoly  

There   is   a   detailed   literature   about   entry   barriers   but   authors   have   different  
interpretations  of  the  costs  involved.    

2.4.1  Concept  
The  economic  literature  provides  several  definitions  of  entry  barriers,  which  have  
evolved   over   time.   Some   authors   and   their   different   points   of   view   about   this  
concept  are  presented  below.  

Joe   S.   Bain   was   the   first   economist   who   exhaustively   studied   entry   barriers.   His  
book  Barriers  to  new  competition  contains  a  definition  of  this  concept,  which  states  
that   “A   barrier   to   entry   is   an   advantage   of   established   sellers   in   an   industry   over  
potential  entrant  sellers,  which  is  reflected  in  the  extent  to  which  established  sellers  
can   persistently   raise   their   prices   above   competitive   levels   without   attracting   new  
firms  to  enter  the  industry”   (Bain,   1956).   The   main   weakness   of   this   definition   is  
that  it  is  merely  based  on  its  consequences.  

Second,   George   J.   Stigler   describes   a   barrier   to   entry   as   “a   cost   of   producing   (at  

some   or   every   rate   of   output)   that   must   be   borne   by   firms   seeking   to   enter   an  
industry   but   is   not   borne   by   firms   already   in   the   industry”   (Stigler,   1968).   Stigler  
focuses   on   the   difference   in   costs   between   the   companies   who   are   already   in   an  
industry  and  the  new  entrants.  He  considers  as  a  barrier  to  entry  those  costs  which  
were   previously   borne   by   the   incumbents   and   now   have   to   be   endured   by  
potential  contenders.  

  9  
Third,   according   to   James   M.   Ferguson   an   entry   barrier   is   “a   factor   that   makes  
entry   unprofitable   while   permitting   established   firms   to   set   prices   above   marginal  
cost,  and  to  persistently  earn  monopoly  return”  (Ferguson,  1974).  This  explanation  
follows   Bain’s   approach   and   includes   an   extra   condition:   incumbents   necessarily  
make  monopoly  profits.  

Fourth,   Franklin   M.   Fisher   summarises   this   concept   as   “anything   that   prevents  

entry  when  entry  is  socially  beneficial”  (Fisher,  1979).  This  is  a  combination  of  Bain  
and   Ferguson’s   approaches   whose   main   inconvenience   is   that   it   is   normative  
instead  of  positive.    

Fifth,   Carl   Christian   von   Weizsäcker   defines   a   barrier   to   entry   as   “a   cost   of  

producing   that   must   be   borne   by   a   firm   seeking   to   enter   an   industry   but   is   not   borne  
by   firms   already   in   the   industry,   and   that   implies   a   distortion   in   the   allocation   of  
resources   from   the   social   point   of   view”   (von   Weizsäcker,   1980).   Similarly,   this  
definition  is  normative  but  it  is  based  on  Stigler’s  approach.  

Later,  Richard  Gilbert  understood  that  an  entry  barrier  was  “a   rent   that   is   derived  
from  incumbency”   (Gilbert,   1989).   The   emphasis   of   this   definition   is   on   advantages  
of  the  incumbents  instead  of  on  the  disadvantages  of  the  newcomers.  

Finally,   Dennis   Carlton   and   Jeffrey   Perloff   conclude   that   “a   barrier   to   entry   is  
anything   that   prevents   an   entrepreneur   from   instantaneously   creating   a   new   firm   in  
a  market.  A  long-­‐run  barrier  to  entry  is  a  cost  necessarily  incurred  by  a  new  entrant  
that  incumbents  do  not  (or  have  not  had  to)  bear”  (Carlton  and  Perloff,  1994).  They  
successfully   suggest   a   time   dimension   as   an   additional   cost   of   entering   but   then  
they  minimise  its  impact  by  taking  into  account  entry  barriers  in  a  long  temporal  
horizon.  

2.4.2  New  classification    

More   recently,   new   and   more   updated   definitions   have   been   presented   in   order   to  
clarify  the  confusion  related  to  this  particular  topic.    

Economically,  an  entry  barrier  is  the  cost  that  a  new  entrant  has  to  bear  to  access  
to  a  given  market.  This  cost  may  be  exclusive  for  newcomers  or  may  have  already  
been  incurred  by  the  incumbents.  

  10  
In  terms  of  antitrust  regulation,  a  barrier  to  entry  is  a  cost  that  causes  a  permanent  
or   a   late   access   to   the   market   for   new   entrants.   Basically,   a   barrier   to   entry  
protects   incumbents   from   potential   rivals   through   impediments   that   hinder   an  
increase   in   competition   in   order   to   prevent   from   a   reduction   in   price.   Although  
competition  authorities  are  interested  in  making  price  reach  the  competitive  level  
by   allowing   potential   rivals   to   get   access   to   the   market,   the   key   point   is   to  
determine  how  long  this  procedure  will  take.  

While   economic   barriers   can   be   considered   as   antitrust   barriers,   most   of   the  

latters   cannot   be   interpreted   as   economic   barriers.   In   addition,   the   existence   of  
antitrust   entry   barriers   does   not   automatically   imply   an   obstacle   for   mergers.   In  
fact,  the  real  message  derived  from  antitrust  barriers  is  that  the  benefit  to  society  
would  be  higher  if  they  did  not  exist.  

It   is   also   significant   the   distinction   between   direct   and   reinforcing   barriers.   The  
formers  are  implicit  costs  and  represent  entry  barriers  by  themselves  whereas  the  
latters   do   not   represent   any   barrier   to   entry   on   their   own,   but   support   others  
(McAfee  et  al.,  2004).  

2.4.3  Types  of  entry  barriers:  structural  and  strategic  

The  nature  of  entry  barriers  depends  on  the  circumstances  under  which  they  are  
created.   While   structural   entry   barriers   are   intrinsic   to   a   particular   industry,  
strategic   entry   barriers   are   associated   with   tactical   behaviours   adopted   by  
established  companies.  

Structural   barriers   are   based   on   industry   conditions   and   factors   such   as   cost,  
economies  of  scale  or  network  possessions  may  be  especially  important.  When  the  
price   of   a   required   component   or   an   efficient   factory   construction   is   identified  
beforehand,  it  is  doable  to  measure  and  obtain  the  exact  value  of  these  barriers.  

Conversely,   strategic   barriers   are   made   on   purpose   by   firms   who   are   already  
working   in   a   market   with   the   aim   of   delaying   the   entrance   of   potential  
competitors.  Trade  agreements  between  the  incumbent  firms  are  a  typical  example  
of   this   type   of   entry   barrier.   Quantifying   the   impediments   derived   from   such  
actions  to  prevent  new  entrants  from  getting  access  to  the  market  is  significantly  
more   difficult   in   this   case.   Additionally,   it   is   not   an   easy   task   to   foresee   how  

  11  
strategic   conduct   will   be   understood.   Sometimes   it   is   deemed   as   way   to   encourage  
competition   whereas   in   other   cases   it   is   assumed   as   a   method   to   constrain   it.  
Competition   authorities   suggest   that   in   some   cases   strategic   actions   are   taken   in  
order  to  hinder  competition  and  consequently  the  incumbent  companies  can  keep  
their   market   shares   by   imposing   entry   barriers.   However,   in   other   situations  
barriers   to   entry   are   raised   to   protect   the   efficiency   of   a   market.   Therefore,   the  
mission   of   competition   agencies   is   to   decide   when   strategic   conduct   is   designed   to  
foster  or  block  competition.  

For  instance,  exclusivity  is  a  clear  example  of  how  a  market  characteristic  can  have  
completely   different   consequences   for   the   new   entrants   depending   on   the  
distribution.  An  excess  of  exclusivity  in  established  firms  would  be  considered  an  
entry   barrier   for   future   competitors   if   they   were   left   with   a   limited   number   of  
retailers  to  efficiently  distribute  and  be  able  to  compete.  Nevertheless,  a  right  dose  
of  exclusivity  would  increase  competition  by  promoting  stores  to  provide  a  better  
service  and  customers  would  definitely  benefit  from  it.  

Finally,  regulatory  barriers  can  be  either  structural  or  strategic  depending  on  the  
level   of   influence   that   incumbent   firms   have   under   governments   in   order   to  
convince  them  to  establish  certain  types  of  impediments  to  new  entrants.  

2.4.4  Most  common  barriers  to  entry  in  duopoly  

Economies   of   scale   are   a   persuasive   instrument   to   prevent   from   potential  
competition   in   many   cases.   In   fact,   they   may   oblige   entrants   to   provide   goods   or  
services   to   a   huge   portion   of   an   industry   in   order   to   be   able   to   compete   with  
established  firms.  Possible  competitors  might  see  the  large  amount  of  investment  
required  to  be  competitive  in  terms  of  costs  as  a  non-­‐profitable  sector  even  when  
the  established  companies  are  earning  money.  Hence,  the  entry  barrier  is  not  only  
a   result   of   economies   of   scale   but   also   of   capital   commitments   (von   Weizsäcker,  
1980).  

Another   frequent   entry   barrier   is   product   differentiation,   which   is   based   on  

consumers'   perception   about   a   specific   product.   Many   factors   such   as   past  
experiences,   expert   opinions   or   celebrity   endorsements   determine   the   quality  
associated   to   such   product.   It   is   especially   important   in   industries   whose  

  12  
consumers   struggle   to   correctly   identify   the   quality   of   a   product   when   they   have  
not  previously  used  it.  

The   need   of   paying   sunk  costs   as   a   compulsory   requirement   to   entry   to   a   market  

usually   provokes   a   loss   of   interest   in   such   industries   by   potential   entrants.   In  
addition,   if   a   company   decided   to   entry,   it   would   still   incur   high   fixed   costs  
annually.   This   circumstance   encourages   potential   entrants   to   change   their   mind  
and  consider  this  kind  of  markets  as  non-­‐profitable  in  many  cases.  

Fiona   M.   Scott   Morton   (2000)   analyses   the   effects   of   brand   advertising   in   new  
entrants.  Historically,  advertising  has  been  seen  as  a  way  to  expand  the  market  for  
a   product.   However,   it   can   also   be   a   method   of   entry   deterrence   in   profitable  
markets  (Spence,  1977).  For  example,  Coca-­‐Cola  invest  huge  amounts  of  money  in  
marketing  campaigns,  which  persuade  potential  competitors  to  not  enter  the  soft  
drinks  industry  by  reducing  their  profit  expectations.  

When  entry  is  inevitable,  the  incumbent  business  adopt  some  measures  before  the  
entrance   takes   place.   Threatening   newcomers   with   a   voracious   output   increase  
has   been   proven   as   a   very   effective   action.   However,   the   success   of   this   tactic  
depends  on  the  credibility  of  the  threat,  which  it  is  crucial  to  make  entry  look  less  
attractive.    

2.5  Industry  dynamics  in  duopoly  

There  are  some  patterns  in  duopoly  that  allow  firms  to  better  know  whether  entry  
to   a   market   is   a   right   choice   or   not   (Abbring   and   Campbell,   2007).   In   terms   of  
company  age,  firms  can  make  entry  or  exit  decisions  based  on  the  last-­‐in  first-­‐out  
(LIFO)  assumption.  The  rationale  of  this  approach  suggests  that  it  is  not  possible  to  
produce  after  the  exit  of  a  more  mature  and  elder  participant.  It  simply  exemplifies  
that  the  likelihood  in  young  firms  exit  is  higher  than  in  older  competitors.  

Another   pattern   is   observed   when   the   entrant’s   sunk   costs   are   raised,   which  
substantially  decrease  the  degree  of  entry  and  exit  activity  in  a  given  market,  and  
eventually  contribute  to  reach  stability  in  the  industry  structure.    

With   respect   to   the   level   of   competition   in   a   given   market,   Bresnahan   and   Reiss  
(1991)   demonstrate   that   it   is   possible   to   make   conclusions   about   the   effects   of  

  13  
entry   without   focusing   on   prices   or   costs   of   a   particular   firm.   In   fact,   their  
econometric  study  shows  that  the  higher  the  number  of  incumbent  companies,  the  
lower  the  post-­‐entry  competition.  Therefore,  the  greatest  increase  in  competition  
takes  place  when  a  second  or  third  rival  entry  to  the  market.  This  fact  came  as  a  
surprise   to   them   since   they   assumed   that   entry   effects   would   increase   more  
gradually.  

Last  but  not  least  important  is  the  demand  shocks  consistency.  If  the  demand  lacks  
of   factors   such   as   constancy,   reliability   or   regularity,   the   sector   becomes   less  
appealing   and,   consequently,   the   number   of   companies   in   the   industry   decreases  
considerably.  The  absence  of  those  characteristics  is  called  the  entry-­‐discouraging  
effect.     Regardless,   Luis   Cabral   (2012)   states   oligopoly   dynamics   is   a   field   in   which  
a  lot  of  work  still  has  to  be  done.    

2.6  Market  failure  due  to  Oligopoly  

The   market   failure   in   oligopolies   can   be   ascribed   to   different   causes   such   as  
inefficiency,  instability  and  indeterminacy,  which  might  be  the  origin  of  a  market  
fall.   A   firm’s   dominance   is   reached   through   a   process   in   which   its   capacity   is  
consolidated   over   time   since   competition   is   not   based   on   pricing   factors   but   on  
artificial   entry   barriers.   For   instance   the   carbonated   soft   drinks   industry   is  
characterised   by   large   amounts   of   money   invested   on   heavy   advertising  
campaigns.   Consequently,   prices   are   much   higher   than   cost   and   price  
discrimination  triumphs.  Sometimes,  incumbent  firms  are  committed  to  establish  
self-­‐regulation  to  protect  the  profitability  of  a  market  and  ultimately  their  market  
shares   from   potential   entrants   (Grewal   and   Kumnick,   2006).   This   favourable  
position  allows  companies  to  freely  set  the  price  of  their  products,  which  differ  to  a  
large   extent   from   what   society   is   willing   to   pay.   In   addition,   these   big   firms  
overwhelm   consumers   with   misleading   commercials,   which   make   them   buy  
products   that   they   do   not   need   or   want.   Certainly,   they   take   advantage   of   their  
power  in  order  to  influence  consumer’s  mind  acting  like  what  Adam  Smith  called  
“an  invisible  hand”  (Smith,  1776).  

In   conclusion,   while   in   a   market   with   perfect   competition   firms   are   oriented   to  

maximise  consumer  welfare  and  resources  are  allocated  efficiently,  in  duopoly  this  
allocation  is  not  generally  well  done  with  companies  trying  to  adjust  prices  to  their  

  14  
own   benefit.     Although   oligopoly   can   provoke   a   market   crash,   some   economists  
argue  that  it  has  also  substantially  contributed  to  the  economic  growth  in  wealthy  
countries   by   raising   the   level   of   incomes   on   overall   over   the   last   twenty   years  
(Baumol  and  Blinder,  2009).  

2.7  Successful  Industries  with  Two  Main  Provider  Firms    

Even   though   frowned   upon   by   economic   theory,   nowadays,   finding   a   duopoly   is  
easier   than   someone   can   expect.   In   fact,   local   businesses   usually   become  
monopolies   or   duopolies   in   very   small   markets   since   spatial   and   geographical  
aspects   condition   competition.   Mostly,   this   is   observed   in   markets   whose  
populations   are   small   in   terms   of   size.   For   instance,   the   number   of   suppliers   is  
generally  not  higher  than  two  in  rural  areas.  Not  only  in  municipal  levels  duopoly  
can  be  found  but  also  in  regional  and  national  levels.    

2.7.1  The  carbonated  soft  drinks  industry  

It   is   widely   known   the   duopoly   Coca-­‐Cola/PepsiCo   in   the   soft   drink   industry,  
where   they   share   approximately   75   per   cent   of   the   market.   The   level   of  
concentration   is   so   high   that   both   companies   have   to   compete   in   different   ways.  
The  rivalry  between  Coca  Cola  and  PepsiCo  is  not  based  on  the  price  of  the  product  
but   they   fiercely   launch   advertising   campaigns,   compete   for   product   location   in  
stores   and   sign   agreement   with   celebrities   to   strengthen   their   brand   image.   This  
rivalry   is   also   very   intense   when   the   two   firms   fight   to   become   exclusive   suppliers  
to   restaurants,   pubs   or   even   universities.   Additionally,   the   introduction   of   new  
varieties   of   soft   drinks   and   promotions   either   to   supermarkets   or   directly   to  
consumers  is  another  practice  commonly  used  by  the  two  firms.  

With   respect   to   price   competition,   an   analysis   of   the   price   impacts   of   a  

hypothetical   merger   between   Coca-­‐Cola   and   PepsiCo   concludes   that   the   merging  
firm   would   raise   the   price   (Tremblay,   2007).   Nowadays,   Pepsi   will   not   follow  
increases  in  price  made  by  Coca  Cola  and  vice  versa,  allowing  consumers  to  switch  
brands   giving   preference   to   that   with   lower   price.   Therefore,   this   study   suggests  
that   duopoly   brings   advantages   for   consumers   in   the   carbonated   soft   drink  
industry.  

  15  
2.7.2  The  mainframe  aircraft  manufacturers  industry  
The   American   corporation   Boeing   Co.   and   its   European   counterpart   Airbus   form  
another   duopoly   within   the   mainframe   aircraft   manufacturing   industry.   Despite  
the   entry   barriers,   both   companies   are   highly   competitive.   Outsiders   face   many  
difficulties   in   order   to   access   to   this   particular   sector   where   learning-­‐by-­‐doing  
economics  plays  an  important  role.  

Due  to  the  fact  that  the  demand  of  airline  orders  is  large  but  in  non-­‐regular  basis,  
the   rivalry   between   the   two   firms   is   vigorous   aiming   to   sign   the   contracts.   In  
addition,   loyalty   plays   an   important   role   since   airlines   usually   prefer   to   use   the  
same  plane.  This  strategy  lets  them  be  more  efficient  by  saving  costs  in  activities  
such  as  maintenance  and  repair  of  aircrafts  and  training  of  crews.  

Innovation  is  also  essential  in  this  duopoly,  whose  firms  are  constantly  competing  
to   develop   new   and   improved   aeroplanes.   For   example,   on   the   one   hand,   Airbus  
was  pioneer  in  the  use  composite  materials  and  introduced  the  revolutionary  “fly  
by  wire”  census,  a  system  that  replaced  the  conventional  manual  flight  controls  of  
an   aircraft   with   an   electronic   interface.   On   the   other   hand,   Boeing   enhanced   its  
commercial   fleet   with   composite   wings   and   fuselage.   Indeed,   this   is   a   reference  
duopoly  in  terms  of  engagement  in  research  and  development  practices  by  the  two  
companies   involved   since   Boeing   and   Airbus   spend   considerable   percentages   of  
their  revenues  in  R&D.      

3.  Aircraft  manufacturer  industry  analysis  

Three  different  methods  have  been  used  to  examine  the  aeroplane  maker  industry:  
Porter’s  Five-­‐Force  model,  PESTEL  analysis  and  SWOT  analysis.  

3.1  Porter’s  Five-­‐Force  model  

Porter's  Five-­‐Force  analysis  provides  a  model  that  explains  the  reasons  why  some  
industries   are   more   able   to   maintain   their   levels   of   profitability   than   others.   It  
claims   that   "the   nature   and   degree   of   competition   in   an   industry   hinge   on   five  
forces:   the   threat   of   new   entrants,   the   bargaining   power   of   consumers,   the  
bargaining  power  of  suppliers,  the  threat  of  substitute  products  or  services  (where  
applicable),  and  the  jockeying  among  current  constants"  (Porter,  1979).    

  16  
Figure   2   illustrates   Porter's   Five-­‐Force   framework   applied   to   the   aircraft  
manufacturer  industry.  

 
Figure  2.  Porter’s  Five-­‐Force  framework  in  the  commercial  aircraft  industry.  
 
1.  Threat  of  New  Entrants  
The   threat   of   new   entrants   in   the   aircraft   manufacturer   industry   is   low   due   to  
tremendously   high   initial   costs,   particularly   at   the   aeroplane   and   engine   maker  
level  since  they  require  huge  investments  whose  return  takes  many  years.  In  fact,  
firms   might   need   government   financial   support   such   as   subsidies   or   military  
contracts   in   order   to   get   access   to   this   market.   For   example,   Europe   provided  
approximately   $10   billion   government   funding   to   Airbus   before   it   became   a  
consolidated  player.  

While   entry   barriers   are   extremely   high   at   the   engine   and   aircraft   manufacturer  
level,   they   are   lower   at   component   manufacturer   level.   However,   they   are   high  
compared   to   other   industries   though.   The   fact   that   engine   manufacturers   have  

  17  
considerably   reduced   their   number   of   suppliers   over   the   past   ten   years   has  
supposed  an  increase  in  the  difficulty  of  entering  to  the  industry.  

2.  Bargaining  Power  of  Suppliers  

It  is  not  too  strong  in  the  aviation  industry  since  aircraft  manufacturers  can  usually  
choose   from   several   suppliers.   Consequently,   a   high   level   of   competition   is  
expected   in   the   market   because   they   are   obliged   to   fight   against   each   other.  
However,  there  are  some  exceptions,  especially  when  a  supplier  offers  an  essential  
technology  that  cannot  be  provided  by  any  other  competitor.  

3.  Bargaining  Power  of  Buyers  

It   is   relatively   high   because   airlines   stimulate   ruthless   competition   between   the  
two  major  aeroplane  providers,  Airbus  and  Boeing,  since  their  orders  represent  an  
important   percentage   of   aircraft   manufacturer   companies’   total   sales.   Flight  
operators   are   aware   of   it   and   request   discounts   in   price   making   use   of   their  
position  in  the  market.  

4.  Threat  of  Substitute  Products/Services  

There  are  two  factors  that  make  the  threat  of  substitute  product  and/or  services  
not  applicable  to  engine  and  commercial  aircraft  manufacturers.  First,  travelling  by  
plane   is   the   fastest   mean   of   transport   and,   second,   it   is   the   only   way   to   travel   over  
water.  Aeroplanes  will  only  face  some  threat  in  case  of  short  distances  over  land,  
where  they  might  occasionally  compete  against  trains  and  cars.  

However,  the  threat  of  substitute  products/services  is  fairly  high  at  the  component  
level.  New  materials  and  more  advanced  technologies  are  continuously  developed  
due  to  the  high  investments  in  R&D  present  in  the  aerospace  industry.  

5.  Intensity  of  Rivalry  among  Competitors  

Airbus  and  Boeing  fiercely  fight  to  ensure  airlines’  orders,  which  would  allow  them  
to  recuperate  the  high  fixed  costs  incurred  and  the  large  amounts  invested  in  R&D.  
The   intensity   of   competition   is   also   increased   by   the   standardization   of   the  
aeroplanes,  since  aircraft  have  a  very  low  degree  of  differentiation.    

  18  
3.2  PESTEL  analysis  
The   acronym   PESTEL   stands   for   Political,   Economic,   Social,   Technological,  
Environmental   and   Legal.   The   analysis   of   these   six   external   factors   in   relation   to  
the   aircraft   manufacturer   industry   helps   to   understand   how   they   affect   the  
aeronautical  sector  in  the  long-­‐term.  

Political  factors  
Government   policies   may   significantly   influence   aircraft   demand   and   the   way   they  
are   used.   For   example,   when   Europe   and   the   U.S.   signed   the   transatlantic  
agreement,   traffic   air   increased   with   new   flight   destinations   in   both   continents  
and,   consequently,   there   was   an   increase   in   aircraft   demand.   In   short,   political  
factors   are   all   about   how   and   to   what   extent   a   government   intervenes   in   the  
economy.    

Economic  factors  
Aircraft  manufacturing  firms  rely  on  subsidies.  While  Airbus  receives  fully  support  
from   the   European   government,   Boeing   is   equally   supported   by   the   U.S.  
authorities.  Currently,  many  countries  are  still  suffering  the  effects  of  the  economic  
crisis,   which   had   a   negative   impact   in   the   flight   operators.   Due   to   the   economic  
recession,   the   number   of   passengers   decreased   and   airlines   reduced   their   flights  
and  demand  of  new  aircraft.  

However,  the  economic  situation  is  completely  different  in  countries  such  as  China  
or   India   where   the   passenger   demand   is   rapidly   growing.   Certainly,   the   focus   is  
now   in   Asia   and   particularly   in   the   Pacific   region,   where   the   new   hubs   will   be  
located.  

Social  factors  
People  travel  for  different  reasons.  Whereas  business  trip  demand  is  quite  steady,  
the  demand  for  holidays  and  religious  trips  is  more  seasonal.  Christmas  and  Easter  
are  the  most  common  periods  of  the  year  when  passengers  fly  because  they  want  
to   celebrate   these   festivities   with   their   families.   As   a   result,   airlines   place   orders  
for   more   aircraft   in   order   to   satisfy   the   increasing   demand   and   manufacturers  
need  to  increase  their  production  pace.  

  19  
Regarding   trips   based   on   religious   beliefs,   Saudi   Arabia   and   more   precisely   the  
airports   of   Jeddah   and   Makkah   experience   a   huge   increase   of   travellers   from   the  
Islamic  community  once  a  year  since  they  wish  to  visit  the  holy  places  during  the  
pilgrimage   season.   In   addition,   Muslims   have   in   general   different   priorities   in  
terms   of   aeroplanes   compared   to   the   rest   of   the   world.   Therefore,   Middle-­‐East  
airlines   also   have   to   increase   their   fleet   due   to   the   increasing   demand   and   place  
orders  of  the  most  luxurious  aircraft  to  fulfil  passengers’  expectations.  

Technological  factors  
The  main  driving  forces  of  Airbus  and  Boeing  are  now  more  fuel-­‐efficient  aircraft,  
which   enable   airlines   to   save   cost   in   terms   of   fuel   and   aeroplanes   can   also   fly  
longer   distances   without   refuelling.   Another   technological   advancement   is   the  
introduction   of   supersonic   aircraft   with   higher   speed   in   order   to   satisfy  
passengers’  demand  of  reaching  destinations  in  a  shorter  period  of  time.  

Environmental  factors  
Generally   speaking,   consumers   have   an   increasing   concern   about   business  
environmental   practices.   The   International   Air   Transport   Association   (IATA)   is  
aware   of   it   and   is   encouraging   manufacturing   firms   to   reduce   the   emissions   of  
their   aeroplanes.   As   mentioned   above,   one   of   the   characteristics   of   the   new  
generation  of  aircraft  is  fuel-­‐efficiency.  

Regulation   in   this   respect   already   exists   being   the   Carbon   Disclosure   Project   and  
the  European  Emission  Trading  Scheme  in  charge  of  setting  the  limits  for  airlines  
emissions.   The   use   of   environmentally   friendly   materials   is   another   measure   to  
combat  climate  change.  

Legal  factors  
Government  subsidies  may  alter  the  real  competition  between  the  two  big  players.  
In   fact,   the   World   Trade   Organization   had   to   intervene   to   resolve   an   issue   of  
Boeing  against  Airbus  for  getting  illegal  subsidies.  

 
 

  20  
  
Figure  3.  PESTEL  analysis  for  the  commercial  aircraft  industry.  
 
3.3  SWOT  analysis  
The   SWOT   analysis   scans   the   internal   and   external   environment   and   provides  
information   that   helps   firms   match   their   resources   and   capabilities   to   the  
competitive  market  where  they  are  or  intend  to  enter.  Therefore,  this  business  tool  
is  very  beneficial  for  COMAC  when  formulating  and  selecting  strategies  to  enter  the  
aerospace  industry.    
Environmental   factors   that   are   internal   to   the   company   can   be   classified   as  
strengths   (S)   and   weaknesses   (W)   whereas   those   that   are   external   can   be  
opportunities  (O)  or  threats  (T).    
Strengths  
All  internal  factors  such  as  resources  and  capabilities  that  contribute  to  develop  or  
maintain   a   competitive   advantage   are   included   in   this   section.   For   example,   the  
aircraft  manufacturer  industry  has  been  characterised  by  a  continuous  increasing  
demand   of   aeroplanes   due   to   the   passengers’   propensity   to   fly.   In   fact,   when  

  21  
forecasts   started   to   predict   a   possible   stabilization   in   the   North   American   and  
European  markets,  the  Asian  market  emerged  placing  many  new  orders.  

The  safety  record  of  this  mean  of  transport  and  the  high  qualification  of  all  the  staff  
involved   in   the   aeronautical   industry   from   a   mechanic   to   the   pilot   are   also   key  
internal  factors.  

Weaknesses  
The   absence   of   certain   strengths   compared   to   other   industries   may   show   some  
weaknesses.   In   addition,   a   weakness   may   be   the   flip   side   of   strength   in   this  
particular  case.  Whereas  a  huge  amount  of  manufacturing  capacity  might  be  seen  
as  a  strength,  the  massive  investment  required  might  become  weakness  if  it  is  an  
obstacle  to  quickly  react  to  changes  in  the  environment.  

Another   weakness   may   be   the   difficulty   to   manage   the   complex   process   of  

assembling  aircraft,  whose  components  are  made  all  over  the  world.  

Opportunities  
The  arrival  of  new  technologies  and  a  continuous  contact  with  customers  to  know  
if   they   have   any   unfulfilled   need   or   what   they   yearn   for   may   reveal   some  
opportunities.  

The   aircraft   manufacturer   industry   offers   continual   expansion   opportunities   for  

both   divisions   military   and   civil,   which   can   also   be   divided   into   leisure   and  
business.    

The  latest  trend  in  the  new  demand  of  aircraft  is  the  use  of  fuel-­‐efficient  engines.  
This   technology   advance   satisfies   the   desires   of   the   costumers   and   brings   cost  
savings   at   the   same   time.   Furthermore,   it   is   directly   related   to   eco-­‐friendly  
practices   that   are   positively   valued   by   end   consumers,   adding   extra   value   to   the  
product.  

Threats  
Any   change   in   the   external   environment   with   negative   consequences   for   the  
industry  is  included  here.  

  22  
An   economic   recession   is   always   a   threat   for   any   industry   but   it   is   especially  
harmful   for   the   aviation   industry   because   the   first   thing   people   stop   spending  
money   on   is   leisure   and   ultimately   travels   when   the   economy   is   not   prosperous.  
Despite   high   level   of   safety,   terrorist   attacks   can   also   affect   negatively   air   traffic  
and  consequently  aircraft  demand.  

The  matrix  below  illustrates  all  these  factors  within  the  aviation  industry.  

 
Figure  4.  SWOT  matrix.  
 
4.  Organization  strategy  
A   penetration   strategy   to   the   aircraft   manufacturer   industry   is   determined   by   a  
primary  choice  through  which  new  entrants  decide  the  segment  where  they  want  
to  compete.  The  aviation  industry  is  comprised  of  business  jets,  regional  jets,  small  

  23  
commercial  aircraft,  large  commercial  aircraft  and  helicopters.  The  demand  of  the  
first  segment  collapsed  in  2008  due  to  the  financial  crisis  and,  consequently,  more  
than  800  orders  were  cancelled.  The  General  Aviation  Manufacturers  Association  
(GAMA)  reports  that  business  jet  demand  will  improve  gradually  but  there  will  be  
a  substantial  reduction  in  prices  (Bouvet  et  al.,  2011).  

Originally,   there   were   only   two   segments   (regarding   only   fixed-­‐wing   aircraft):  
small   and   large   commercial   aircraft,   but   the   Canadian   Bombardier   and   the  
Brazilian   Embraer   found   a   niche   of   commercial   aeroplanes   with   less   than   100  
seats  and  filled  the  gap  with  their  CSeries  and  ERJ  families,  respectively.  Nowadays,  
the  regional  jets  segment  is  still  controlled  by  these  two  manufacturing  firms  and  
Airbus  and  Boeing  seem  to  be  abandoning  from  this  market  (Wilson,  2015).  

Nevertheless,   both   the   small   and   large   commercial   aircraft   segments   are  
dominated   by   the   market   leaders   Airbus   and   Boeing.   While   the   former   sector  
produces  narrow-­‐body  or  single-­‐aisle  aeroplanes  with  no  more  than  230  seats,  the  
latter   provides   three   different   versions   of   wide-­‐body   aeroplanes   (small,   medium  
and  large)  with  a  number  of  seats  that  goes  from  200  to  more  than  400.  

 
Figure  5.  Types  of  aircraft  orders  by  2032.    
 
Certainly,   big   profits   are   in   big   aeroplanes   since   the   regional   jet   segment   is   the  
market   with   the   lowest   estimated   deliveries.   This   explains   the   success   of  
Bombardier  and  Embraer  in  the  regional  jets  segment.  Airbus  and  Boeing  were  too  
busy   competing   with   each   other   for   a   bigger   market   share   that   they   did   not   notice  
there  was  a  demand  of  aircraft  with  less  than  100  seats.    

  24  
In  addition,  the  problem  of  the  regional  jet  segment  is  that  it  is  becoming  smaller  
because   Airbus   and   Boeing   press   customers   to   bigger   aeroplanes.   Currently,   this  
segment  is  “no  man’s  land”  since  it  is  too  large  for  the  U.S.  regional  airlines  but  not  
big  enough  for  the  major  airlines  (Wilson,  2015).  

The   newcomer   COMAC   is   aware   of   these   circumstances   and   in   contrast   to   the  

Canada-­‐   and   Brazil-­‐based   companies,   it   wants   to   enter   the   single-­‐aisle   segment,  
whose  expected  demand  is  70  per  cent  of  the  whole  aviation  industry  over  the  next  
twenty   years.   As   shown   in   Figure   6   and   Figure   7,   delivery   forecast   encourages  
them  to  do  so.  

 
Figure  6.  Aeroplanes  in  service  &  Demand  by  size.  
 

 
Figure  7.  Forecast  aircraft  demand  by  segment.  
 
Although  forecasts  for  the  next  20  years  are  very  appealing,  there  is  no  guarantee  
that   a   move   to   the   aircraft   manufacturer   industry   and   particularly   to   the   single-­‐
aisle  segment  will  be  a  success.  Therefore,  the  research  question  is  “Is  there  room  

  25  
for   a   new   entrant   in   a   global   duopoly?”   and   it   is   represented   in   the   flowchart  
below.  

 
Figure  8.  Research  question  flowchart.  
 
The   only   way   for   COMAC   to   entry   the   market   and   survive   the   fierce   competition   it  
will  face  against  Airbus  and  Boeing  is  to  lower  the  price.  Even  so,  the  EU  would  still  
buy  Airbus  aircraft  whilst  the  U.S.  would  do  the  same  with  Boeing.  This  situation  
may   move   China’s   interest   to   Africa   if   the   West   does   not   let   it   sell   its   aeroplanes   in  
Europe  and  North  America.  
 

  26  
The  Commercial  Aircraft  Corporation  of  China  COMAC’s  strategy  
China  is  interested  in  building  a  successful  commercial  aeroplane  to  demonstrate  
that   it   can   equal   the   United   States   and   the   European   Union,   and   develop   a   national  
economy  with  high-­‐tech  industries.  

After   an   unsuccessful   move   to   the   regional   jet   segment   with   the   ARJ21,   COMAC’s  
primary  objective  now  is  to  build  a  larger  passenger  aircraft  in  order  to  become  an  
independent  innovative  country  and  improve  its  competitiveness.    

While   some   manufacturers   such   Bombardier   and   Embraer   fight   against   each   other  
in   the   regional   jet   segment   and   are   slowly   entering   the   single   aisle   market   by  
introducing  aircraft  with  less  than  150  seats,  COMAC  intends  to  compete  head-­‐to-­‐
head  with  the  Airbus  A320neo  and  Boeing  737-­‐8  Max  in  the  single  aisle  segment  
with   the   launch   of   the   C919   and   become   a   consolidated   third   player   in   this  
particular  market.    

 
Figure  9.  New  competitive  scenario  70-­‐180  seats.  
 
It  does  not  seem  there  is  any  new  niche  in  the  market.  Therefore,  the  strategy  of  
the   new   entrants   is   based   on   product   differentiation,   offering   more   fuel-­‐efficient  
engines,  which  is  now  a  requirement  sine  qua  non  to  enter  the  market.  In  fact,  the  
emergence  of  potential  contenders  with  fuel  burn  improvements  has  made  Airbus  

  27  
and  Boeing  re-­‐engine  their  aircraft.  Figure  10  exhibits  the  cost  per  seat  and  the  cost  
per  trip  of  all  aircraft  operating  in  the  regional  jet  and  narrow-­‐body  segments.  

 
Figure  10.  Cash  Operating  Cost  comparison.  
 
Indeed,   COMAC’s   strategy   is   a   very   ambitious   move   since   the   state-­‐owned   firm  
attempts  to  transform  the  aircraft  manufacturer  industry  structure.    

 
Figure  11.  Hypothetical  transformation  in  the  single-­‐aisle  segment.  
 
The   first   C919   is   expected   to   be   delivered   in   2019,   if   sceptics   are   correct.   It   arrival  
will   take   place   a   few   years   later   than   the   A320neo   and   Boeing   737   Max   but   its  
price  will  be  lower.  The  aeroplane  is  estimated  to  be  much  cheaper  than  its  rivals.  
There   is   no   official   price   for   the   aircraft   yet   but   a   report   published   by   China  
National   Radio   suggested   an   estimated   cost   of   $50   million   a   year   ago.   This   amount  
is   considerably   lower   than   Boeing   737   and   the   Airbus   A320   families,   whose  
average  list  prices  is  $75  million  and  $97  million,  respectively.  

  28  
However,   the   European   and   American   firms   offer   lower   maintenance   costs,   fuel-­‐
efficient   engines   and   consequently   lower   operating   costs.   "The   C919   will   not   be   as  
technologically   advanced   as   the   A320   and   737,   but   that   is   not   China's   aim   for   now.  
It   wants   to   learn   how   to   build   a   viable   and   safe   aircraft,   and   become   more  
competitive  in  the  long-­‐term.  It  is  learning  from  what  Airbus  did  to  Boeing  in  the  
1970s,"  said  a  Western  supplier  who  has  regular  meetings  with  COMAC  directors  
(Govindasamy  and  Yan,  2013).  

Figure  12  shows  that  the  A320,  the  787-­‐800  and  the  C919  are  very  similar  in  terms  
of  dimensions  (length  and  wingspan),  capacity  and  range.    

Figure  12.  Aircraft  single-­‐aisle  segment.  

 

  29  
5.  The  global  duopoly  of  Airbus  and  Boeing  
Tom  Enders  and  Dennis  Muilenburg,  CEOs  of  Airbus  and  Boeing  respectively,  agree  
that   the   duopoly   over   the   narrow   body   segment   is   close   to   its   end.   Although,   some  
studies   have   assessed   this   challenge,   there   is   no   consensus   about   the   best  
structure  for  the  aircraft  mainframe  manufacturer  industry.  

5.1  Reasons  for  duopoly  

There   are   several   reasons   that   support   duopoly   as   the   optimal   structure   for   the  
commercial   aircraft   manufacturer   industry.   First,   the   historical   evolution   of   the  
aeronautical   sector   shows   that   this   market   tends   to   increase   concentration   over  
time.  In  fact,  it  started  as  a  large  group  of  small  companies  and  has  got  more  and  
more  consolidated  until  it  has  become  the  current  duopoly.  

Second,  the  two  remaining  firms  are  considered  national  treasures.  While  Boeing  
has  fully  support  from  the  United  States,  the  European  government  backs  its  main  
competitor  Airbus.  Mostly,  this  is  due  to  the  fact  that  the  aerospace  sector  is  one  of  
the   world’s   largest   manufacturing   industries   with   respect   to   the   number   of  
employed  workers  and  value  of  product.  The  level  of  commitment  between  those  
governments  is  so  high  that  this  matter  has  become  a  controversial  issue  in  terms  
of  financing.  For  example,  Fred  Hochberg,  the  President  of  the  U.S.  Export-­‐Import  
Bank,   said   to   the   Reuters   Aerospace   and   Defence   Summit   in   Washington   “We   have  
no  national  treasure  but  every  firm  is  a  national  treasure”  in  reference  to  Airbus.  
“We   are   all   about   U.S.   jobs”   he   emphasised,   and   announced   that   his   bank,   which  
provides  loans  for  exporting  producer  companies  settled  in  the  United  States,  will  
give  credit  support  to  the  European  giant  for  those  aeroplanes  that  are  made  in  the  
country  (Scott  and  Hepher,  2014).  

Third,   although   there   are   many   studies   about   the   relationship   between  
competition   and   innovation,   there   is   no   consensus   regarding   this   topic.   While  
some   authors   conclude   that   competition   stimulates   innovation,   others   claim   that  
duopoly   motivates   innovation.   Schumpeter   (1942)   was   pioneer   in   this   respect   and  
proposed   an   innovation   theory,   which   states   that   monopoly   encourages  
innovation.  Later,  Arrow  (1962)  affirmed  that  innovation  is  a  result  of  competition.  
The   debate   about   this   particular   relationship   has   not   finished   yet.   There   are  
authors   who   support   Schumpeter’s   opinion   such   as   Demsetz   (1969),   Gilbert   &  

  30  
Newbery  (1982)  or  Yi  (1999),  others  who  share  Arrow’s  perspective,  e.g.  Holmes,  
Levine   and   Schmitz   (2012),   and   Vives   (2008)   and   others   such   as   Aghion   et   al.  
(2005)   and   Sacco   and   Schmutzer   (2011)   who   have   their   own   view.   The   lack   of   a  
global   agreement   concerning   this   issue   oblige   to   examine   every   industry,   sector   or  
market  individually  in  order  to  make  a  conclusion.  

More  recently,  Chen  and  Nie  (2012)  argue  that  complementary  and  substitutability  
play   an   important   role   on   the   relationship   between   innovation   and   competition.  
They   claim   that   bargaining   power   and   investment   in   R&D   are   negatively  
correlated.   Furthermore,   they   conclude   that   the   higher   the   market   power  
(substitutability),   the   lower   consumer   (social)   wealth.   Nonetheless,   this   is   not  
applicable   to   the   commercial   aircraft   manufacturer   industry   where   both   Airbus  
and  Boeing  have  spent  large  amounts  of  money  in  R&D  compared  to  many  other  
sectors.   Consequently,   the   capacity   of   a   potential   rival   to   reach   the   required  
technological  advancements  in  the  short-­‐term  is  very  unlikely  taking  into  account  
the   extraordinary   R&D   investment   needed.   Even   though   outsourcing   may   be   an  
alternative   option,   the   fact   that   it   implies   a   high   level   of   dependence   on   others’  
ability  and  the  difficulty  to  find  a  partnership  make  it  non-­‐recommendable.  

With   respect   to   barriers   to   entry,   the   aerospace   manufacturing   industry   is   a  

capital-­‐intensive   business   process   where   newcomers   need   to   invest   huge   amounts  
of   financial   resources   to   become   competitive.   Porter   claims   that,   "the   need   to  
invest   large   financial   resources   in   order   to   compete   can   deter   new   entrants.  
Capital  may  be  necessary  not  only  for  fixed  facilities  but  also  to  extend  customer  
credit,  build  inventories,  and  fund  start-­‐up  losses.  The  barrier  is  particularly  great  
if   the   capital   is   required   for   unrecoverable   and   therefore   harder-­‐to-­‐finance  
expenditures,  such  as  up-­‐front  advertising  or  research  and  development"  (Porter,  
2008).  Certainly,  this  is  the  case  of  the  aviation  industry.    

The  learning  curve  is  another  aspect  that  needs  to  be  taken  into  consideration.  It  
essentially   means   that   when   workers   do   the   same   task   multiple   times,   they  
increase   the   speed   of   their   performance   and   as   a   result   they   reduce   the   cost   of  
such   task.   According   to   Eriksson   and   Steenhuis   (2016),   the   learning   curve   is   a  
continuous  decrease  for  every  doubling  or  repetition  in  production.    

  31  
  
Figure  13.  The  learning  cost  curve.  
Figure  13  illustrates  an  80  per  cent  learning  curve  where  producing  the  first  unit  of  
any   given   product   takes   20   per   cent   longer   than   the   second   one   and   so  
successively.  For  example,  if  the  fabrication  of  the  first  item  takes  100  hours,  the  
second  item  will  take  80  hours  (100  per  cent  minus  20  per  cent  times  100  hours).  
Doubling  again,  the  item  number  4  will  take  an  extra  20  per  cent  reduction,  i.e.  100  
per  cent  minus  20  per  cent  times  80  hours  resulting  64  hours.  In  short,  the  higher  
the   production,   the   lower   the   cost   of   the   following   products   and,   therefore,   the  
lower  the  cost  per  item  on  overall.  

The   scope   and   sophistication   of   a   task   along   with   the   level   of   repetition   determine  
the  learning  degree  of  the  working  staff.  Figure  13  illustrates  how  the  learning  cost  
decreases  over  time  until  it  achieves  the  stabilization  point  from  where  it  remains  
steady.   This   point   indicates   the   end   of   the   learning   process   and,   thus,   no   more  
substantial  cost  cut  is  applicable.  

The   aircraft   mainframe   manufacturer   industry   has   historically   reached   the  

stabilization  point  at  one  hundred  or  two  hundred  units.  These  figures  shows  that  
the  learning  curve  has  a  significant  impact  in  this  industry,  especially  in  the  early  
stages   when   it   is   not   possible   to   charge   clients   a   price   in   terms   of   the   present  
manufacturing  cost  for  their  aircraft  orders.  In  other  words,  this  means  that  if  the  
aeroplane   production   outlay   were   originally   extremely   high,   there   would   not   be  
possible   to   sell   it.   That   is   the   reason   why   manufacturing   firms   need   to   take   into  
account  the  learning  curve  to  effectively  identify  the  estimate  cost  and  be  able  to  

  32  
plan   their   programmes.   In   fact,   Airbus   and   Boeing   have   a   long   experience   in   this  
field  that  allows  them  to  create  their  learning  curves  based  on  past  performance.    

Therefore,   new   entrants   in   the   aircraft   manufacturer   industry   will   face  

competition   from   two   very   experienced   firms   whose   learning   curves   are   much  
more   progressive   than   theirs.   This   fact   makes   tremendously   difficult   to   become  
competitive   in   this   particular   sector   since   Airbus   and   Boeing   will   reach   the  
stabilization  point  earlier  than  any  other  potential  competitor.  

Concerning  the  motives  to  order  new  planes,  it  is  observed  that  they  are  based  on  
growth  or  replacement  (obsolescence)  strategies.  In  this  respect,  the  action  camera  
industry   is   a   good   example   of   how   low   levels   of   replacement   may   become   a  
problem.  GoPro,  the  world  leader  provider  in  this  particular  market,  is  struggling  
to   keep   their   profits   since   it   is   not   a   priority   for   its   customers   to   replace   their  
cameras  for  new  versions.  Similarly,  aeroplanes  last  a  lot  and  replacement  orders  
are   placed   only   occasionally.   Additionally,   those   aircraft   that   are   going   to   be  
replaced   sometimes   are   converted   to   freighters   increasing   even   more   their   lives.  
Figure   14   shows   that   5,510   out   of   21,600   aeroplanes   that   were   operating   as  
commercial  aircraft  in  2014  will  be  still  in  use  as  freighters  by  2034.    

 
Figure  14.  New  aeroplanes  demand  by  2034.  

Reputation  is  another  hurdle  for  potential  newcomers  in  this  industry.  It  especially  
affects   the   eagerness   of   airlines   to   keep   working   with   those   firms   with   who   they  
have   previous   successful   experiences.   After-­‐sales   services   are   equally   important  
for  airlines  and  the  consolidation  of  a  reliable  relationship  between  the  two  parts  

  33  
involved   takes   years   of   solid   support.   This   is   reflected   with   high   switching   costs  
between  airlines  and  aircraft  manufacturers  and  it  appears  to  be  very  improbable  
that  a  flight  operator  will  place  an  order  with  a  different  manufacturer  to  Airbus  or  
Boeing.  

5.2  Reasons  against  duopoly  

Generally  speaking,  the  lower  the  number  of  incumbents,  the  higher  the  bargaining  
power  and,  therefore,  the  higher  the  ability  to  set  prices.  This  self-­‐determination  to  
establish   the   output   value   may   be   a   threat   to   consumer   wealth.   A   few   reasons   of  
why   an   industry   with   a   higher   number   of   firms   would   be   more   beneficial   are  
presented  below.  

In   reference   to   the   level   of   competition,   Bresnahan   and   Reiss   (1991)   conclude   that  
a   market   suffers   the   highest   increase   in   competition   with   the   arrival   of   the   second  
or   third   contender   to   the   market.   Thus,   a   new   player   in   the   aerospace   industry  
would  make  it  even  more  competitive.  

Recently,   the   International   Trade   Administration   (ITA)   announced   that   “more   jobs  
in  the  United  States  were  supported  by  exports  of  U.S.  aerospace  products  than  of  
any  other  manufacturing  or  service  industry”  (ITA,  2011).  Countries  such  as  Brazil,  
Canada   or   China   are   aware   of   the   benefits   of   developing   a   national   aviation  
industry   for   their   economies.   In   addition,   having   an   aircraft   manufacturing   and  
service   industry   is   very   prestigious   for   a   country   and   very   well   regarded  
internationally.   It   is   certainly   seen   as   a   sign   of   economical   and   political  
development.  

COMAC   is   run   under   socialist   principles,   which   ensures   its   dominance   in   the  
Chinese  market  where  domestic  flight  operators  will  buy  its  aircraft  even  if  there  
are  superior  alternatives.  This  scenario  is  possible  thanks  to  the  fact  that  both  the  
aircraft   manufacturing   industry   and   airlines   are   under   the   Chinese   government  
control   and,   hence,   it   can   force   national   airlines   to   buy   those   aeroplanes   produced  
in   the   country.   Such   policy   is   very   favourable   for   COMAC’s   interests   since   it  
provides   a   consistent   demand   of   its   product   and   protects   it   from   other  
manufacturers  at  the  same  time.  All  these  circumstances  may  convert  China  into  a  

  34  
kind  of  incubator  in  which  COMAC  can  get  the  experience  of  building  the  C919,  its  
narrow-­‐body  aircraft.  

Figure   15   indicates   that   the   target   destination   for   aircraft   manufacturers   in   the  
coming  future  is  Asia,  and  more  precisely  the  Asia  Pacific  region.    

Figure  15.  Aircraft  demand  by  region,  2013-­‐2032.  

Forecasts   predict   that   more   than   30   per   cent   of   the   new   orders   will   be   placed   in  
this  area  during  the  next  two  decades.  This  percentage  is  below  the  total  number  
of   orders   combining   Europe   and   North   America,   which   is   almost   50   per   cent.  
However,   this   area   has   a   fleet   growth   rate   (5.6%,   6.2%   counting   China)   much  
higher   than   Europe   and   North   America,   which   are   2.3%   and   1.6%   respectively.  
Definitely,   the   emphasis   of   the   aircraft   manufacturing   industry   is   now   in   fast  
growing   markets   and   COMAC’s   location   may   become   an   advantage   that   could  
increase  its  possibilities  of  success.  

The   weak   protection   of   patents   and   intellectual   properties   in   China   may   make  
well-­‐established   firms   more   vulnerable   and   reduce   the   learning   process   of   COMAC  
by   imitation.   Nevertheless,   the   Chinese   government   is   open   to   negotiate   with  
Airbus   and   Boeing   in   this   respect.   It   would   guarantee   their   intellectual   property  

  35  
rights   in   return   to   joint   ventures   with   the   state-­‐owned   company   COMAC.   This  
proposition  is  unlikely  to  be  accepted  by  the  two  market  leaders  since  the  offer  has  
been  interpreted  as  the  dilemma  ‘now  a  partner,  then  a  rival’.  

5.3  COMAC:  A  third  player  in  the  duopoly?  

Some  experts  have  anticipated  the  beginning  of  a  new  era.  In  fact,  they  suggest  that  
there   is   a   group   of   newcomers   that   are   poised   to   compete   with   the   two   leader  
firms,   Airbus   and   Boeing,   for   a   substantial   market   share   of   the   smaller   commercial  
jets  segment.  Even  though  the  jets  Boeing  737  and  Airbus  A320  have  control  over  
this   segment   now,   the   former   Chief   Executive   Officer   of   Boeing   James   McNerney  
said:  
“At   Boeing   Commercial   Aeroplanes,   we   must   prepare   now   for  
increasing   global   competition.   Aircraft   manufacturers   in   several  
countries  are  ready  to  challenge  us  for  a  share  of  the  market  where  
we  have  been  competing  solely  against  EADS/Airbus.  These  emerging  
competitors   see   the   same   massive   economic   opportunity   in  
commercial  aeroplanes  and  related  services  that  we  do  over  the  next  
20  to  30  years”  (Harrison,  2011).  
Jim   Albaugh,   another   former   CEO   of   Boeing,   in   this   case   of   the   Commercial  
Aeroplanes  business  unit,  supported  McNerney’s  view  by  stating  that  “the  days  of  
the  duopoly  with  Airbus  are  over”  (Harrison,   2011).   He   announced   the   emergence  
of   new   entrants   and   the   probable   end   of   the   supremacy   that   Airbus   and   Boeing  
have   historically   maintained   over   the   commercial   jets   segment.   Russell   Solomon,   a  
Moody's  senior  vice-­‐president,  totally  agrees  with  Albaugh.  "The  beginning  of  the  
end   of   the   long-­‐running   Boeing/Airbus   duopoly   is   upon   us",   he   claims   (Owram,  
2016).  
Additionally,   the   current   CEO   of   Airbus   Tom   Enders,   who   shares   the   previous  
opinions   to   some   extent,   believes   that   “the   duopoly   is   over   in   the   100   to   150   seat  
aircraft   segment   because   that   is   where   the   new   entrants   want   to   be   –   so   that   does  
not   mean   the   duopoly   is   over   in   the   entire   range   of   products”   (Harrison,   2011).  
Although  he  is  not  sure  about  the  number  of  competitors  that  the  market  can  hold,  
he  expects  that  “sooner  or  later  there  will  be  some  consolidation”.  

Several  questions  arise  after  the  increase  in  competition  in  the  small  commercial  
jet   segment.   Mostly,   there   is   a   concern   about   if   it   will   occur   the   same   in   other  
segments.   Certainly,   entry   barriers   will   condition   the   success   or   exit   of   the  

  36  
newcomers.   For   example,   the   degree   of   sophistication   and  the   know-­‐how   required  
by  potential  competitors  to  assemble  aircraft  may  be  crucial  in  order  to  survive  in  
such  competitive  industry.  Nevertheless,  this  may  not  be  the  case  for  state-­‐owned  
firm   COMAC   since   it   is   financed   by   the   Chinese   government,   and   the   commercial  
perspective   might   be   secondary   while   it   is   developing   its   aeronautical  
programmes.  

Some   experts   firmly   believe   that   COMAC   will   challenge   the   dominance   of   Airbus  
and  Boeing,  will  become  a  worldwide  competitor  and  ultimately  will  contribute  to  
finish   with   the   current   duopoly   in   the   aerospace   industry.   Their   view   of   why   the  
Chinese   government-­‐funded   firm   will   be   successful   in   this   particular   market   is  
based  on  five  reasons.    

First,   the   C919   (COMAC’s   narrow-­‐body   aircraft)   will   compete   in   the   single-­‐aisle  
sector,   a   segment   with   a   forecasted   demand   of   24,570   new   aeroplanes   valued   at  
US$2,290  billion  over  the  next  twenty  years.    

 
Figure  16.  Aircraft  demand  by  size,  2013-­‐2032.  

Second,   China   is   the   fastest-­‐increasing   market   in   the   world   in   terms   of   extra  

passengers  per  year  over  the  next  twenty  years  with  758  million  new  passengers  
for  a  total  of  1.196  billion  (IATA,  2015).  In  addition,  Figure  17  shows  that  China  is  
the   world’s   second   air   travel   market   in   terms   of   growth   just   behind   India   with   a  
demand  of  6,300  new  aeroplanes  during  the  same  period,  that  is,  25  per  cent  of  the  

  37  
global   demand   (Yan   and   Miller,   2015).   It   is   also   remarkable   how   fast   the   Asia  
Pacific   region   is   growing,   particularly   Indonesia,   whose   estimate   growth   will   be  
higher  than  countries  such  as  Japan,  Brazil,  Germany,  Spain  or  France  by  2034.  

 
Figure  17.  Top  ten  passenger  markets.  

Third,   in   spite   of   uncertainties,   COMAC   states   it   has   received   517   orders   for   the  
C919.   These   commitments   have   been   generally   signed   with   Chinese   airlines  
because   of   the   political   pressure   they   face   to   buy   in   the   domestic   market   even   if  
there  are  higher-­‐quality  and  lower-­‐price  products  in  foreign  markets.  Specifically,  
among  the  twenty-­‐one  signed  contracts  there  are  seven  domestic  flight  operators,  
two  foreign  transportation  companies  and  twelve  aircraft  leasing  companies  such  
as  CMB  Financial  Leasing  Co.,  a  business  of  China  Merchants  Bank  or  the  finance-­‐
leasing   arm   of   China’s   Industrial   Bank   (Chiu,   2014).   Among   the   foreign   customers,  
Thailand’s   City   Airways   has   placed   an   order   of   ten   C919s,   GE   Capital   Aviation  
Services  has  ordered  twenty  and  PuRen  Airlines,  a  start-­‐up  settles  in  Germany  and  
financed   with   Chinese   funds,   has   announced   its   firm   intention   to   buy   seven  
airplanes  (Meszaros,  2015).    

The   fourth   reason   is   the   two   partnership   agreements   that   the   Chinese  
manufacturer   has   signed   with   Bombardier   and   Ryanair.   The   Canadian   firm   is  

  38  
helping   COMAC   to   improve   its   global   customer   support   and   its   deficient  
engineering   and   supply   chain   capability   in   order   to   receive   the   Federal   Aviation  
Administration   (FAA)   certification.   Furthermore,   Ryanair   is   interested   in  
developing   a   new   aircraft,   different   to   its   current   Boeing   737   fleet   and   made   by  
another   firm   to   end   with   the   dominance   of   Airbus   and   Boeing.   Thus,   the   Irish  
airline   and   COMAC   have   signed   a   design   agreement   of   cooperation   to   become  
development  associate.  

 
Figure  18.  Cabin  comparison.  

Although  Nick  Cunningham,  a  highly  regarded  expert  at  the  London-­‐based  analysis  
company   Agency   Partners,   reckons   that   COMAC   will   benefit   from   its   agreement  
with   Bombardier   in   terms   of   technical   knowledge,   he   considers   that   the   “major  
hurdle”   that   the   Chinese   firm   has   to   overcome   is   the   reliability   of   its   aeroplanes   to  
fly   safely.   “If   a   Western   airline   bought   Chinese   aeroplanes   and   they   proved   to   be  
unsafe   that   would   be   disastrous   for   the   airline   –   [possibly]   fatal”,   he   asserts  
(Parker,  2012).  

Finally,   the   last   reason   is   related   to   the   usage   of   technology   and   is   thought   to  
convince   those   sceptics   such   as   Mr   Cunningham.   The   C919   relies   on   prestigious  
Western   providers   to   keep   the   quality   standards   and   increase   its   international  
reputation   and   plausibility.   Although   the   C919   is   made   in   China,   many   key  
components  come  from  foreign  markets.  

  39  
  
Figure  19.  C919  aircraft  technology  providers.  

Innovative   technologies   and   smart   electronics   solutions   providers   in   the   aviation  

industry   such   as   Rockwell   Collins,   Honeywell,   CFM   International,   Liebherr   or  
Michellin  are  some  of  the  non-­‐domestic  suppliers.    

Moreover,   there   are   analysts   who   also   think   COMAC   is   the   best-­‐positioned  
contender   to   challenge   Airbus   and   Boeing.   For   instance,   Fabrice   Brégier,   president  
and   chief   executive   officer   of   Airbus,   recognised   the   risks   derived   from   the  
emergence   of   COMAC   and   admitted   that   the   state-­‐owned   company   is   a   potential  
threat  for  his  company  at  Farnborough  International  Airshow.  He  told  “We  know…  
this   market   of   over   100   seats   will   open   to   new   competitors,   so   we   need   to   be  
prepared   to   be   competitive…   We   take   the   C919   as   a   very   serious   development,  
managed  by  a  very  serious  company”.  Another  expert  present  in  the  event  claimed  
“Of  all  the  newcomers  [COMAC]  will  be  the  strongest  –  not  because  they  have  the  
best  skill  base  today,  but  because  they  have  more  financial  firepower  than  anybody  
else.   They   can   sink   billions   into   [aircraft]   projects   without   any   concern   for   [the]  
bottom  line”  (Parker,  2012).  

Another  factor  that  may  allow  COMAC  to  become  a  consolidated  competitor  is  the  
increasing   support   of   Chinese   banks   to   the   aerospace   industry.   John   Dowdy,  
director   at   McKinsey,   argues   “China’s   emergence   as   a   major   player   in   aircraft  
financing  increases  the  likelihood  that  the  C919  will  become  a  credible  alternative  
to  the  Airbus  A320  and  Boeing  737”  (Parker,  2012).  

Finally,   Jim   Albaugh   is   very   clear   in   this   respect   claiming   that   COMAC   owns   the  
required  resources  to  be  successful  and,  consequently,  he  would  not  put  money  at  
stake   against   the   Chinese   state-­‐owned   corporation   in   a   medium   to   long   time  

  40  
horizon.   He   stresses   “Whether   [the   C919   is]   a   good   aeroplane   I   don’t   know,   but  
eventually  they  will  get  it  right”  (Parker,  2012).  

6.  Conclusion  
The   European   firm   Airbus   and   its   American   rival   Boeing   are   the   dominant  
manufacturing   companies   in   the   aerospace   industry,   whose   new   aeroplane  
demand   has   an   estimate   value   over   the   next   two   decades   of   $4.84   trillion   (see  
Figure  16).  Though  this  duopoly  is  undoubtedly  facing  an  increase  in  competition  
in  the  small  commercial  jets,  it  is  not  clear  if  there  is  room  for  a  few  more  players  
in  the  civil  aircraft  segment.  

The   government-­‐funded   manufacturer   COMAC   believes   it   can   break   such  

supremacy.  In  fact,  it  revealed  its  C919  narrow-­‐body  last  November  and  is  hoped  
to  launch  it  into  service  in  2019.  This  single-­‐aisle  aeroplane  is  designed  to  compete  
with  the  Airbus  A320neo  and  the  Boeing  737-­‐8  Max.  

Chinese   government   policies   provide   a   protectionist   environment   to   its  

companies,  which  can  be  crucial  to  make  COMAC  the  leader  of  the  domestic  market  
and  become  a  potential  worldwide  competitor.  Nevertheless,  these  measures  along  
with  low  labour  cost  will  not  be  enough  to  challenge  the  international  market  since  
the  key  factors  that  airlines  take  into  account  when  placing  orders  are  technology  
and   performance.   Therefore,   China   needs   to   look   for   a   different   approach   to  
compensate  its  lack  in  these  two  fields.  

The   Asian   giant   is   aware   of   the   massive   size   of   its   market   and   its   increasing  
demand,   which   might   be   profitable   for   several   more   companies,   and   is   willing   to  
open  it  in  return  of  partnerships  with  competitors  in  order  to  learn  from  them.  It  
seems   China   is   on   the   right   track   in   this   respect   and   has   already   signed   an  
agreement  of  cooperation  with  Bombardier  "to  cross-­‐market  their  new,  separate,  
single-­‐aisle  narrow-­‐body  jets  in  emerging  and  mature  markets"  (Van  Hasselt  and  
Jelmayer,   2011).   A   previous  partnership  between   Bombardier   and   China   in   the   hi-­‐
speed   train   industry   encourages   the   parts   to   be   optimistic.   This   joint   venture  
started   in   1998   and   a   decade   later   China   was   autonomous   in   the   design   and  
development  of  its  trains  and  became  a  global  competitor.    

  41  
The   agreement   between   Bombardier   and   COMAC   is   remarkable   but   it   must   be  
taken   into   consideration   that   technology   advancements   and   innovation   rely   on  
suppliers   instead   of   manufacturing   firms   in   the   aviation   industry.   For   instance,  
only  one  manufacturer,  Embraer,  has  entered  the  market  after  the  Second  World  
War  and  its  success  was  based  on  a  global  survey  to  identify  the  best  suppliers  to  
work  with  whereas  just  a  few  tasks  were  made  in  Brazil  (Aboulafia,  2010).  

Time  is  another  factor  that  has  to  be  considered  since  delays  can  have  catastrophic  
consequences  for  a  company.  "There  is  the  very  serious  risk  that  by  the  time  the  
C919   enters   service,   Airbus   and   Boeing   product   offerings   would   make   the   plane  
look   obsolete.   In   that   case,   the   government   of   China   will   need   to   decide   whether   it  
wants   healthy   airlines   that   are   free   to   buy   what   is   on   the   world   market,   or   a  
healthy  national  jetliner  champion,  prospering  because  the  luckless  local  carriers  
are  forced  to  buy  an  inferior  jet",  Richard  Aboulafia  said.  

In  general,  aviation  analysts  are  doubtful  about  the  potential  impact  of  this  state-­‐
owned  company  in  the  aircraft  manufacturer  industry.  Although  they  have  added  
Western   technology   to   their   aeroplanes,   experts   predict   that   by   the   time   when  
their  aircraft  are  ready  to  fly,  they  will  be  a  step  behind  of  the  latest  versions  of  the  
A320neo  and  the  737-­‐8  Max.  

Jason  Gurksy,  an  analyst  at  Citigroup,  notes  that  COMAC  is  not  experienced  enough  
and  has  a  lack  of  practical  knowledge  in  managing  complex  assembly  systems  and  
supply  chains  required  to  achieve  the  very  high  standards  of  trustworthiness  and  
safety   demanded   by   flight   operators.   This   distance   with   respect   to   Airbus   and  
Boeing  in  terms  of  security  does  not  allow  them  to  become  a  threat  in  the  short-­‐
run.  

Even  the  leader  of  the  regional  jet  segment  Bombardier,  whose  aircraft  safety  has  
already   been   proven,   is   having   difficulties   to   get   access   to   this   profitable   market.  
Although  it  has  received  250  orders  of  its  CSeries  approximately,  this  figure  is  too  
far   from   the   number   of   orders   received   by   the   incumbent   Boeing,   who   has   already  
delivered   more   than   8,700   B737   and   airlines   have   placed   orders   for   4,200   more  
aircraft.    

  42  
Getting   a   completely   new   aeroplane   design   off   the   ground   is   not   an   easy   task   even  
for   incumbents.   In   fact,   any   unexpected   issue   could   substantially   increase   the  
estimate  cost  of  an  aircraft.  For  example,  the  R&D  investment  for  the  Boeing  787  
Dreamliner  reached  the  amount  of  $28  billion  because  of  some  problems  with  its  
supply   chain   and   electronics.   Airbus   also   found   difficulties   with   its   wide-­‐body  
A380,   whose   revenues   barely   cover   its   production   costs   regardless   the   capital  
spent   in   R&D.   Since   the   two   leader   companies   face   many   problems   to   launch   an  
aeroplane   design   in   the   sky,   it   is   not   surprising   that   the   majority   of   the   new  
entrants  give  up  in  their  attempt.    

The   success   of   COMAC   will   be   determined   for   the   know-­‐how   it   can   learn   from  
Bombardier.  Whether  this  partnership  is  positively  seen  by  global  airlines  and  they  
will   finally   place   orders   of   the   C919   is   a   question   that   has   still   to   be   answered.  
Therefore,   the   research   question   about   if   there   is   room   for   a   new   entrant   in   the  
global  duopoly  Airbus/Boeing  is  nowadays  inconclusive.  

Although   the   relationship   between   market   structure   and   market   conduct   has   been  
examined  through  a  diverse  array  of  research,  none  of  them  endorse  the  proposal  
that  duopoly,  per  se,  is  synonym  of  market  failure.  By  contrast,  the  results  of  such  
studies   basically   suggest   that   duopoly   is   not   always   undesirable.   In   short,   the  
duopoly   Airbus/Boeing   is   not   imperfect   but   it   is   the   nature   of   the   aerospace  
industry.  

  43  
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