The Microeconomics of the Boeing 787

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Taking into account this information regarding costs, list price and actual sales price, we could expect the 787’s current supply and demand curve to look something like that depicted in figure 1. Though the current situation looks hopeless for Boeing to make a profit on the 787, Boeing’s outlook on the future remains optimistic. It’s forecasting the growth of long haul aircraft to reach 28 % of new airplane deliveries. The company has orders for 1,031 787’s and expects to sell several more (Ausick, 2014b). Especially as operators begin to realize cost savings in the form of fuel cost savings as well as maintenance costs. In other words, they’re taking a long run position.

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Because Boeing does not disclose actual costs and prices, it is difficult to accurately illustrate its supply and demand curve graph for the long run. Based on the information so far we could predict that it would look something like figure 2. This suggests that manufacturing of the Dreamliner is becoming more efficient and that average total costs are dropping. According to Ostrower, Boeing is producing 10 aircraft per month but will increase that number to 16 per month by the end of the decade. Boeing expects this increase in production to finally dig the program out of the hole. This statement suggests that as they increase production, their marginal costs will decrease as well as the average total cost. However, to achieve this Boeing will have to increase the price of the 787 which should be possible if the costs of operation remain low for operators. In addition, they will need to renegotiate contracts with suppliers and the labor unions. But the main key is whether they can effectively differentiate the 787 from its main competitor, the Airbus A330neo.

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The Boeing 787 was designed to save operators in fuel and maintenance costs. Boeing’s approach was that by making the aircraft more attractive to operators, that it would be able to create more demand and thus, increase profits. Unfortunately, due to unanticipated delays in manufacturing and issues that have arisen during initial operation, Boeings costs have skyrocketed. As a result, profits have not yet been what Boeing anticipated. But eventually, it will be able to earn positive economic profits.

The market structure of the 787 is an oligopoly. There are only two sellers of products that are similar but have differences. Airbus plans to grab market share by offering its A330neo at a lower price than the 787. If Boeing and Airbus could agree to a cartel, then both would fare better in the market. But since each are acting in their best interests, it results in a prisoner’s dilemma and both will suffer.

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