Boeing & the Washington Aerospace Industry

Arend Pryor
Dec 24, 2021
8 min read

Updated: Jan 17, 2022

Author: Arend Pryor | Published: 06/05/2021

Details: Sharing content created as part of pursuing my MBA degree

Assignment: Select one of the economic concentrations (clusters) below:

> Seattle-Tacoma-Olympia, WA aerospace / defense industry
Central California winemaking industry
Hollywood movie industry
Silicon Valley Technology hub
Texas / Louisiana Gulf Coast crude oil and natural gas production and refining
Pre-1994 vs Post-1994 US auto and light truck production and the reasons for the change in economic concentration

Using the economic concentration above, write an evaluation of economists’ assessments of the role the 4 factors of production played in determining how the economic concentration you selected has evolved. Include the following in your evaluation:

Analyze how the economic concentration was influenced by competition and pricing.
Analyze how the economic concentration influenced the supply chain.
Analyze which of the 4 factors of production were the most and least important in determining the economic concentration.
Predict changes you anticipate for the area of economic concentration you chose. Support your predictions.

The road to being a leader in your industry is no doubt a long one that takes much dedication and sacrifice, not just from those at the top, but the entire team. Once a company, or group of companies within an industry achieves a significant share of the market, this is known as economic concentration and there are many factors that play a role in obtaining and maintaining this status. The aerospace industry in the state of Washington for instance, is one such industry and at the helm leading the charge was the airline manufacturer Boeing. In this section of my report, we are going to talk about the aerospace industry in Washington and analyze how their economic concentration was influenced by competition and pricing. Next we will take a look at the supply chain for this industry and examine what role it has had on economic concentration. We will then take a look at the four factors of production and determine which of these were the most and least important in being ranked number one in the U.S. Lastly, we will cover some of the issues affecting the aerospace industry in Washington, specifically Boeing, and make some predictions as to what the future holds.

If you looked up the largest building in the world, Guinness book of World Records would display a picture of the Boeing aerospace factory in Everett Washington (Top 10 Things You Probably Don’t Know about Boeing, 2019). It all started 50 years after the founding of Seattle, Washington in 1851. An entrepreneur named William Boeing partnered with an engineer by the name of G. Conrad Westerveldt to create a plane designed to provide mail service to remote settlements in the area. Shortly thereafter, Washington’s aerospace industry was officially born. Boeing was the spark that started the fire that now includes approximately 1000 aerospace companies located throughout the state, with the main hub of companies centered in Seattle. (A brief history of WA state's aerospace industry, 1997).

The Teal Group Corporation is known in the airline industry, and to investors, as one of the most trusted and respected groups for providing comprehensive analysis data and thoughts on supply and demand for the global aircraft manufacturing industry (Teal Group Corporation, 2021). This group produces an annual report that provides a state-by-state analysis of economic factors that determine a state’s competitive advantage within the industry. Metrics used in the study include eight total categories, each of which has several sub-categories consisting of costs, labor and education, risk to operations, infrastructure, economy, aerospace industry, research and innovation, taxes and incentives. Out of these eight categories, the state of Washington ranked within the top twenty in all categories and made the top five in five of the eight categories according to the 2019 report.

Equally as impressive, the state was ranked number one in the industry out of all 50 U.S. states for 2019 and 2018, which speaks to the level of economic concentration in Washington for the aerospace industry (Teal Group Corporation, 2019). This has much to do with Boeing establishing a foothold early on and investing in the future of the company and continuing to maintain the skill of their workforce. This has led to the company being a powerhouse, not just in Washington, but in the industry as they control 60% of the large commercial jetliner market share along with Airbus, as detailed in figure 1 below, which depicts aircraft deliveries by market.

Figure 1: World Aircraft Deliveries by Market (Teal Group Corporation, 2018)

As previously mentioned, Washington ranks number one as being the most competitive state when it comes to the aerospace industry based on its top five scores in the areas of cost, labor and education, industry, risk to operations, economy and taxes and incentives as shown in the table in figure 2 below (Teal Group Corporation, 2019). These factors aid in achieving a competitive advantage as do the high barriers to entry of the industry.

Figure 2: Top 10 Most Competitive States (Teal Group Corporation, 2019)

Pricing also plays a role in the economic concentration of the Washington aerospace industry. Boeing for example, manufacturers several different models using various facilities around the state, including the popular 737Max, one of the company’s top selling airliners. The average list price of this aircraft is just under 100 million dollars and is one of the company’s least expensive models (Statista, 2021). With some of the most popular aircraft being built in Washington, it makes sense that there would also be a concentration of supporting businesses, employees and a skilled labor force, all of which help keep the industry in the number one spot. As noticed in the Teal Group’s analysis, the metric of cost carries the heaviest weight overall and Washington ranks the highest in this category as shown by the table in figure 3 below. The sub-categories in this figure that help push the state into this ranking include costs for unit labor, unit material, energy and construction. All of which play a role in helping the state retain an economic concentration (Teal Group Corporation, 2019).

Figure 3: Aerospace Industry Cost Rankings (Teal Group Corporation, 2019)

As you might imagine, airline companies have extremely complex supply chains as the number of parts and materials that go into building an aircraft makes for quite a list. Having very competent supply chain managers who oversee relationships with countless vendors, within the U.S. and internationally, requires next level skills in organization, planning, and forecasting. Boeing for instance, has approximately 1700 vendors within the state that manufacture inputs for their aircraft and at least 6,500 vendors worldwide that supply various inputs, some of which require numerous levels of assembly before the company takes delivery (Keough, 2018). While this requires an immense amount of experience and knowledge, it also speaks to the time Boeing’s supply chain managers have spent forming and maintaining relationships with the countless vendors within the industry. Building a network of this size takes time to cultivate and requires long term contracts for primary and secondary suppliers (Victor, 2020). One of the most important aspects of the supply chain that exists across the aerospace industry in Washington is in the time that’s been spent building these networks and relationships. This experience is invaluable and can be thought of as a competitive advantage on its own. The continued success of the Washington aerospace industry of companies, speaks to the efficiency of the supply chains that keep them thriving.

When talking about the factors of production, we are specifically talking about the combination of land, labor, capital and entrepreneurial ability of a company that goes into producing goods and services (McConnell et al., 2018). While land is certainly an important factor in the production process of large jetliners within the aerospace industry, based on my analysis, this does not appear to be the strongest contributing element in determining economic concentration. The location of the land provides some valuable benefits in terms of being close to shipping ports and having additional space to accommodate growth, however, the most important factors have to do with activities that benefit the customers of the industry. The most important of which would have to be labor, which consist of the physical labor of skilled workers that contribute to the fabrication of goods and services (McConnell et al., 2018). Based on the data collected by the Teal Group in the area of Labor and workforce, Washington ranked second overall in this category as they employ the second most aerospace engineers with 8,480 and they rank first in production workers with 70,562. Compared to Ohio, the state that ranked second in the overall analysis, they employ 11,073 aerospace employees and 2,430 engineers, reference figure 4 below (Teal Group Corporation, 2019).

Figure 4: Washington – Summary of Resources and Revenue (Teal Group Corporation, 2019)

Although the state of Washington ranks number one in the aerospace industry, keeping the top spot will be a tough undertaking considering some of the issues currently being faced by Boeing. Namely the grounding of its 737MAX jetliner by the Federal Aviation Administration (FAA) following the two recent crashes linked to the safety of the flight control systems. As a result, at least 450 737Max jets are currently sitting idle and need approval before the company can deliver them to customers. The company also has a number of completed 787 aircraft in storage, representing $20 billion in excess inventory as well as issues with sales of its 777X airliner due to decreases in international travel because of the pandemic (Gates, 2020). Given the established supply chain and efficient infrastructure that’s currently in place within the state of Washington, my prediction is that the company will first focus on resolving the issues with its 737Max, which will more than likely result in court settlements and possibly new regulations. Once cleared, the company will move forward with shipping and making additional sales of their idle inventory and based on sales from previous years, reference figure 5 below, the numbers for the 737 family of aircraft should start to climb (Samaha, 2021).

Figure 5: Net Orders of aircraft - Airbus vs Boeing 737 Family (Samaha, 2021)

Although there are still concerns related to COVID, local and international travelers are adapting to new regulations and are eager to get out and travel as more restrictions are slowly dialed back. As shown by the table in figure 6 below, the number of airport travelers screened by TSA agents during 2020 was down as compared to data from 2019, with numbers in 2021 starting to rise back to their previous levels (TSA, 2021). Based on this trend, my prediction is that these number will continue to rise until they reach their previous highs of at least 2 million passengers, which would lead to increased demand of aircraft sales.

Figure 6: TSA Checkpoint travel numbers (current year vs prior year) - (TSA, 2021)

When looking at the factors that play a role in achieving economic concentration, there’s no surprise as to how most companies ended up on top. Retracing these steps typically shows the investments made towards the company, its workforce, and more than likely innovation. In this report, we reviewed how this was achieved for the aerospace industry in the state of Washington and how Boeing started it all. From there we analyzed how competition, pricing and the supply chain influenced economic concentration for this industry and some of the metrics involved. Next, we reviewed the role that labor plays in being the most important factor in the production process and how land, although important, ranked as the least important of the four factors. Lastly, we reviewed some of the issues faced by Boeing and the aerospace industry with regard to inventory sitting idle due to recent crashes and the impacts of the worldwide pandemic. As for the future of this industry in Washington, my prediction is that the state will retain their economic concentration after spending time to work through their issues and as Covid restrictions continue to evolve, resulting in fewer restrictions and higher comfort levels with air travel.

References

A brief history of WA state's aerospace industry. (1997). Puget Sound Business Journal,

18(24), 29B. https://link.gale.com/apps/doc/A20030554/ITBC?

u=uphoenix&sid=ebsco&xid=fdd86207

Gates, D. (2020). The market has spoken: jet buyers see a grim Boeing future.

HeraldNet.

https://www.heraldnet.com/business/the-market-has-spoken-jet-buyers-see-a-

grim-boeing-future/

Keough, B. (2018). Managing complexity in the aerospace supply chain. Retrieved

from https://depts.washington.edu/sctlctr/news-events/in-the-news/managing-

complexity-aerospace-supply-chain

McConnell, C., Brue, S., & Flynn, S. (2018). Economics (21st ed.). McGraw-Hill