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Medium Profitability Competitive Strategy Business Unit Analysis

Regional Jet Corporation

#Aerospace & Defense #Aircraft Manufacturing
ProHub Comment

This is a classic profitability analysis case where a candidate must diagnose why one business unit is unprofitable in a profitable market. The key insight is recognizing that the problem is not market structure or product competitiveness, but rather pricing power dynamics with aircraft lessors. The case teaches how to segment customers by profitability and use Porter's Five Forces to understand industry economics.

Estimated Time 22 minutes
Difficulty Medium
Source Harvard
50 / 100
Regional Jet Corporation is a U.S. manufacturer of regional airplanes—airplanes with 100 seats or less. Its business consists of two types of aircraft: (1) jet engine, 80 to 100-seat aircraft and (2) propeller, 20 to 30-seat aircraft. In fiscal year 1999, Regional Jet delivered 100 jet engine aircraft and 150 props. This represented a unit volume increase year-over-year of 10% and 5%, respectively, and revenues of $730 million and $225, million, respectively. Although overall profitability for Regional Jet in 1999 was a competitive 5% economic profit margin, profitability varied significantly by business. The prop business generated a stellar 30% profit margin, while the jet engine business was unprofitable with a margin of 3%. Over the past several years, Regional Jet has experienced eroding profitability in its jet engine aircraft business. Its prop business, despite being profitable, has been flat in most recent years. At a January 5th analyst conference (a meeting with the investor community) Regional Jet’s senior management team announced that the company was committed to managing for value. To this end, Regional Jet has hired you and a team of consultants to help the company develop and implement the value-maximizing strategies for its businesses. For our case discussion today, please focus on the jet engine aircraft business: How would you go about further analyzing this business? What recommendations would you like to make to senior management?

Clarifying Information

  1. Market Size: In 1999, the U.S. jet engine, 100 seat or less aircraft market was ~$5 billion.
  2. Competitors: There is no dominant competitor in the jet engine, 100 seat or less market. The market leader has 20% market share. There are 4 other competitors with market share from 12% to 18%. Regional Jet Corporation has ~16% share.
  3. Market Growth: The market has been growing ~5% (in units delivered) each year for the past 5 years and is expected to continue to grow 5% over the next decade. In 1999, a total of 625 jet engine regional aircraft were delivered to customers.
  4. Supplier Power: The supplier base for regional aircraft parts is highly fragmented and Regional Jet uses approximately 50% proprietary parts in its jet engine aircraft. Hence, supplier power is low.
  5. Intensity of Direct Competition: Fairly concentrated market with only 6 jet engine regional aircraft manufacturers. Hence, intensity of direct competition is low-to-moderate.
  6. Customer Power: In 1999, there were 225 customers. Types of customers include airlines, aircraft lessors, local and national governments, businesses and private individuals. Hence, customer power varies by segment. Aircraft lessors make large purchases (often 20 or more aircraft) during a buying cycle and hence exploit their negotiating leverage over manufacturers, such as Regional Jet. Hence, aircraft lessors have high customer power. All other customers have low-to-moderate buying power, depending on their credit worthiness.
  7. Intensity of Indirect Competition: Larger commercial jets (100 seats or greater) with longer range manufactured by large commercial aerospace and aircraft manufacturers can be used on regional routes. However, these larger aircraft are expensive for customers to operate solely on a regional basis. Hence, intensity of indirect competition is low.
  8. Barriers to Entry: Jet engine, regional aircraft manufacturing requires significant capital investment in production facilities and equipment, as well as strong relationships with various labor unions. Hence, barriers to entry are high.
  9. Offering position: Overall, the company’s offering position is at parity. The company’s jet engine aircraft has a cockpit that is similar to the industry standard and results in low switching costs for new customers. The company’s aircraft offers a range of 500 miles, which is similar to the market average. Maintenance costs over the life of the asset is in line with regional jets of the company’s competitors. On average, the life of the aircraft is 20 years.
  10. Pricing Position: Regional Jet is pricing below the market average, since it is gaining market share (unit volume is growing at 10% vs. market growth of 5%) with a parity offering. Hence, Regional Jet is pricing for share, i.e., in 1999 it had a disadvantaged pricing position.
  11. Operating Position: Regional Jet’s operating cost per aircraft is at parity with the industry. Every jet engine aircraft the company delivered in 1999 cost approximately the same to produce.
  12. Customer Segments: Regional Jet serves 3 types of jet engine aircraft customers: Customers who purchase only 1 aircraft in a buying cycle (approximately every 5 to 15 years, depending on the customer); Customers who purchase 3 aircraft; and Customers who purchase 20 aircraft.