Case 4-3 Iberia Airlines Builds a BATNA 1

Executive Summery The airplane industry is dominated by Boeing and Airbus in regards to manufacturing, with over 100 buyers worldwide. With having only two major competitors within the manufacturing industry, competition and negotiations can be fierce, long and unpredictable. Depending on the economic state and state of each company that buys airplanes from the two companies, prices and deals can fluctuate and swing often in the favor of the buyer. In the case of Iberia and their sales cycle with both Boeing and Airbus, Iberia’s Chief Financial Officer acted in a very moral and ethical manner when trying to persuade both Boeing and Airbus to drop prices on their costs of planes. He actively engaged in many conversations with both Boeing and Airbus and treated both companies with a great deal of honesty and respect. He also used many great business tactics such as shopping of second hand planes and never giving either Boeing or Airbus any information on who was in the lead for the deal. This lead to Boeing and Airbus dramatically dropping prices and offering more and more incentives as the sales cycle carried on. By communicating with Boeing and Airbus of the others intentions and actions in regards to prices and discounts, Iberia was able to successfully get the ultimate buying price within the range that they had initially wanted. Iberia successfully used Boeing and Airbus against one another to get the best deal possible. Airbus was also ethical and moral in his dealings with Iberia. They never once criticized their competitor and used the advantage of the existing relationship between Airbus and Iberia to close the deal.

Case 4-3 Iberia Airlines Builds a BATNA 1

DEFINITION OF THE KEY TERMS: Best alternative to a negotiated agreement (BATNA)-In negotiation theory, the Best Alternative to a Negotiated Agreement or BATNA is the course of action that will be taken by a party if the current negotiations fail and an agreement cannot be reached. BATNA is the key focus and the driving force behind a successful negotiator. A party should generally not accept a worse resolution than its BATNA. Care should be taken, however, to ensure that deals are accurately valued, taking into account all considerations, such as relationship value, time value of money and the likelihood that the other party will live up to their side of the bargain. Personal Relationship - A relation between people. Political Relation - Social relations involving intrigue to gain authority or power; "office politics is often counterproductive" Negotiation Strategy- A pre-determined approach or prepared plan of action to achieve a specific goal or objective to potentially find and make an agreement or contract in a negotiation with another party or parties. Marketing Strategy- It is a process that can allow an organization to concentrate its resources on the optimal opportunities with the goals of increasing sales and achieving a sustainable competitive advantage. Marketing strategy includes all basic and long-term activities in the field of marketing that deal with the analysis of the strategic initial situation of a company and the formulation, evaluation and selection of market-oriented strategies and therefore contribute to the goals of the company and its marketing objectives. Price cutting-Reduction of retail prices to a level low enough to eliminate competition.

Case 4-3 Iberia Airlines Builds a BATNA 2

1. PROFILE OF THE COMPANIES: 1.1 IBERIA (AIRLINE)

Iberia

Founded

28 June 1927

Focus cities

Barcelona–El Prat Airport

Subsidiaries

 

Fleet size

74

Destinations

75

Parent company

International Airlines Group

Headquarters

Chamartín, Madrid, Spain

Key people

Iberia Cargo Iberia Express

Antonio Vázquez (President) Luis Gallego (CEO)

Website

www.iberia.com

Iberia, trading as IBERIA, is the flag carrier and the largest airline of Spain. Based in Madrid, it operates an international network of services from its main bases of Adolfo Suárez MadridBarajas Airport and Barcelona El Prat Airport. Iberia, with Iberia Regional (operated by an independent carrier Air Nostrum) and with Iberia Express, is a part of Iberia Group. In addition to transporting passengers and freight, Iberia Group carries out related activities, such as aircraft maintenance, handling in airports, IT systems and in-flight catering. Iberia Group airlines fly to over 102 destinations in 39 countries, and a further 90 destinations through code-sharing agreements with other airlines. On 8 April 2010, it was confirmed that British Airways and Iberia had signed an agreement to merge, making the combined operation the third largest commercial airline in the world by revenue. Shareholders of both carriers approved the deal on 29 November 2010. The newly Case 4-3 Iberia Airlines Builds a BATNA 3

merged company, known as International Airlines Group (IAG), was established in January 2011, although both airlines will continue to operate under their current brands.

1.1.1 HISTORY

Iberia 1992-2013 historical logo

Iberia, Transports was incorporated on 28 June 1927 with a capital investment by the financier Horacio Echeberrieta and Deutsche Luft Hansa of 1.1 million pesetas. Flight operations started on 14 December 1927. Within a year, the company was sponsored by the Spanish government to provide postal transport between Madrid and Barcelona. During the dictatorship of Miguel Primo de Rivera, the aviation companies in Spain were combined and became statecontrolled as a general interest public utility, coming into effect in early 1928. As a consequence, Iberia was merged into Compañía de Líneas Aéreas Subvencionadas S.A. (C.L.A.S.S.A.) and ceased activities on 29 May 1929. The name "Iberia" continued to be registered by DirectorGeneral Daniel de Araoz y Aréjula. As the name "Iberia" was still registered, it was used when operations began in nationalist-held territory towards the end of the Spanish Civil War. Following the Civil War, Iberia became a purely domestic airline.

1.2 BOEING

The Boeing Company

Type

Public

Industry

Aerospace Defense

Founded

Seattle, Washington, United States (July 15, 1916)

Founder(s)

William Boeing

Headquarters

Chicago, Illinois, United States

Area served

Worldwide

Key people

W. James McNerney, Jr., Chairman & CEO

Case 4-3 Iberia Airlines Builds a BATNA 4

Divisions

Website

Commercial Airplanes Defense, Space & Security Boeing Capital Engineering, Operations & Technology Shared Services Group boeing.com

The Boeing Company is an American multinational corporation that designs, manufactures, and sells fixed-wing aircraft, rotorcraft, rockets and satellites. It also provides leasing and product support services. Boeing is among the largest global aircraft manufacturers, is the secondlargest aerospace & defense contractor in the world based on 2012 revenue and is the largest exporter in the United States by dollar value. Boeing stock is a component of theDow Jones Industrial Average. The Boeing Company's corporate headquarters are located in Chicago and the company is led by Chairman and CEO James McNerney. Boeing is organized into five primary divisions: Boeing Commercial Airplanes (BCA); Boeing Defense, Space & Security (BDS); Engineering, Operations & Technology; Boeing Capital; and Boeing Shared Services Group. In 2013, Boeing recorded $86.623 billion in sales, ranked 30th on the Fortune magazine "Fortune 500" list (2013), ranked 95th on the "Fortune Global 500" list (2013), and ranked 26th on the "World's Most Admired Companies" list (2013).

1.3AIRBUS

Airbus SAS

Type

Subsidiary

Industry

Aerospace

Founded

1970 (as Airbus Industrie) 2001 (as Airbus SAS)

Founder(s)

Bernard Lathière, Roger Béteille, Henri Ziegler

Case 4-3 Iberia Airlines Builds a BATNA 5

Headquarters

Key people

Blagnac, France

Fabrice Brégier, Tom Enders (Chief Executive Officer)

Gunter Butschek (Chief Operating Officer)

Parent

Airbus Group (formerly EADS)

Subsidiaries

Airbus Corporate Jets

Website

www.airbus.com

Airbus SAS is an aircraft manufacturing division of Airbus Group (formerly European Aeronautic Defence and Space Company). Based in Blagnac, France, a suburb ofToulouse, with production and manufacturing facilities mainly in France, Germany, Spain and the United Kingdom, the company produced 626 airliners in 2013. Airbus began as a consortium of aerospace manufacturers, Airbus Industrie. Consolidation of European defence and aerospace companies in 1999 and 2000 allowed the establishment of a simplified joint-stock company in 2001, owned by EADS (80%) and BAE Systems (20%). After a protracted sales process BAE sold its shareholding to EADS on 13 October 2006. Airbus employs around 63,000 people at sixteen sites in four countries: France, Germany, Spain and the United Kingdom. Final assembly production is based at Toulouse, France; Hamburg, Germany; Seville, Spain; and, since 2009 as a joint-venture, Tianjin, China. Airbus has subsidiaries in the United States, Japan, China and India. The company produces and markets the first commercially viable fly-by-wire airliner, the Airbus A320, and the world's largest passenger airliner, the A380.

2.0 CASES INSIGHTS: Iberia wanted to buy new jetliners in this case.

2.1 PERSONS PROFILE: Enrique Dupuy: chief financial officer and the man who led its search for wide body jets, meant from the start to run a real horse race. Dupuy made it very competitive, His rule: “Whoever hits its target, wins the order”. Leahy (Airbus): who is fumed at Iberia's pricing demands. A New York City native and the company's highest-ranking American, he pursues one goal: global domination over Boeing.

Case 4-3 Iberia Airlines Builds a BATNA 6

Bright (Boeing): who had been appointed Boeing 777 as a "revenue machine". He insisted that his could earn Iberia about $8,000 more per flight than the A340-600 because it can hold more seats and is cheaper to operate.

2.2 TWO COMPETITORS: Airbus and Boeing are competing for market share through price cuts. In a volatile industrial market this guarantees major advantages in the bidding process. We, of course, cannot and would not counsel collusion between the aircraft makers. But, both firms would be better off with less aggressive price discounting. One of Boeing's failings is to not have a European working on business in that part of the world. Notice how Airbus has hired an American (Leahy) to them.

2.3 VALUE IBERIA AIRLINES DELIVER They used medium and low capacity aircraft on low density routes. Generally they only made domestic flights and rarely international ones. They competed with flag carriers and also with low cost carriers, which had caused a decline in their per passenger income. For that reason, some regional companies decided to go into partnership with flag carriers which results to also low cost carriers.

2.4 IBERIA AIRLINES AMBITION Its ambition is to suffice the need of its passengers while giving low cost in a way that their service will be still in the best in the market.

2.5 IBERIA AIRLINES MATTER It matters with the 1.9 billion passengers carried safely by the airline, because of the low cost but efficient carrier. The strategic master plan II 2000-2013, established customer service as one of its priority objectives which in fact result with the passenger’s satisfaction that would be converted to profit.

Case 4-3 Iberia Airlines Builds a BATNA 7

PROBLEM-3.1 Critique the negotiation strategies and tactics of all three key executives involved: Dupuy, Leahy, and Bright. Solution: A good answer will recognize the skill and professionalism of Iberia’s Dupuy who appears to have played the game to perfection. His critical task was to strengthen his BATNA (best alternative to a negotiated agreement). It had been a long time since Iberia had bought Boeing aircraft. He went to great lengths to bring the Boeing executives into the bidding contest, including offering to fly the 14 hours to Seattle. Another brilliant move was to bring the used Singapore Airlines’ 747s into consideration. He had also done a good job during the 1995 (another bad market year for aircraft manufacturers) negotiations with Airbus by including the resale price guarantees. Bright (Boeing) was in trouble from the start but, in a down market he could hardly ignore a big order even from a European airline with strong connections to Airbus. He did do well on the creativity dimension by guaranteeing GE concessions on engine maintenance. Leahy (Airbus) probably gave away too much in price and had neglected to include a confidentiality agreement regarding the final price.

PROBLEM-3.2 Critique the overall marketing strategies of the two aircraft manufacturers as demonstrated in this case. Solution: Airbus and Boeing are competing for market share through price cuts. In a volatile industrial market this guarantees major advantages in the bidding process. We, of course, cannot and would not advise collusion between the aircraft manufacturers. But, both firms would be better off with less aggressive price discounting. A good answer would explore other avenues for winning industrial accounts such as after sales service, guarantees, staff training etc. One of Boeing’s failings is to not have a European working on their business in that part of the world. Notice how Airbus has hired an American (Leahy) to market aircraft/to sell aircraft in the American market. Those two aircraft makers have different advantages. Airbus: 1. It is better investment return 2. Could be more easily integrated with their current planes that are helping to save money in long run 3. Already less expensive to purchase.

Case 4-3 Iberia Airlines Builds a BATNA 8

Boeing: 1. The more seats allowing additional earnings of about $8,000 more per flight 2. Less expensive to operate and maintain 3. Emphasized comfort and operating costs

PROBLEM-3.3 What were the key factors that ultimately sent the order in Airbus's direction? Solution: It appears from the case that the strong personal and political relationships between the top executives at the European firms clinched the deal. In future negotiations with Iberia real consideration has to given to bidding list price and leaving at that. Of course, remind the Iberia folks about how this last transaction went. But, let them pay list price to Airbus just once and perhaps in the next round Boeing will get the order finally.

PROBLEM-3.4 Assume that Iberia is again in the market for jetliners. How should Bright handle a new enquiry? Be explicit. Solution: A good answer will recognize that price cutting has its problems and competition for capital intensive products can also take place on other levels. In future negotiations with Iberia, real consideration has to be given to bidding list price and perhaps concentrating more on a ‘bundle’ of other benefits such as after sales service, pilot training etc. One needs to consider all the aspects of Airbus policy in this particular transaction, in terms of the positive and minor effects of massive discounts on list prices coupled with asset guarantees on the re-sale of secondhand aircraft, maintenance agreements etc. Without proper consideration there could be serious financial consequences for both manufacturer and airline operator. These are some of the aspects that Bright would have to consider should Iberia be shopping for more aircraft in the future.

Case 4-3 Iberia Airlines Builds a BATNA 9

4.0 RECOMMENDATION By analyzing the case we can recommend some strategies to both the Aircraft giant. These are as following: 1. Both the aircraft producer should prepare themselves more to take the challenge 2. They can set an aggressive goal 3. They can improve their BATNA 4. They can make multiple equivalent offers simultaneously to the airlines 5. They can establish a reservation price 6. They can create a scoring system 7. They can carefully analyze the clients BATNA 8. They can negotiate at the package level 9. Both the company can make the first offer and build a rationale

5.0 CONCLUSION Negotiation between two major companies like Airbus and Boeing can make a marketing strategy very strong or the complete opposite, it can cause a strategy to crumble to pieces in an instant. Airbus and Boeing both have dedicated sales representatives, Bight of Boeing and Leahy to their jobs very serious and developed a marketing plan like none other. These two gentlemen understood one important thing when it comes to marketing, plans must be able to adapt to change at any given moment. Prior to the beginning of the negotiation Airbus had an advantage of Boeing. Iberia Airline were currently using the manufacturers largest plane. Airbus had already established a solid reputation with the airline company. Dupuy was familiar with Airbus’s resale guarantee, which was hard to beat by any other company. Although Airbus had previous history with the airline company, Dupuy wanted to look at other manufacturers to get the best competitive price.

Case 4-3 Iberia Airlines Builds a BATNA 10