Airbus Case Analysis
1. Why is Airbus interested in building the A3XX? What are its objectives?
Airbus predicts that there would be demand for more than 1500 super jumbos over the next 20 years that would generate sales in excess of $350 billion. And they could sell as many as 750 over jumbos over the next 20 years with a break even on undiscounted cash flow basis with the sales of only 250 planes. There is a huge profit in this business if Airbus succeeds in the industrial launch of A3XX jumbo jets.
In addition, Airbus has received over half of the total large aircraft orders for the first time in 1999 thanks to the “cross crew qualification” feature. Capturing more than half of the very large aircraft (VLA) market with the A3XX would constitute an enormous financial success and would position Airbus as the commercial aviation industry leader.
Despite the gains in the market share, Airbus still did not have a product to compete with Boeing’s 747 in the VLA market. Airbus wants to break the monopoly of the 747.
The A3XX would have more space, be safer, and offer a higher operational margin for the Airlines. And it is especially attractive on longer routes. Once introduced, A3XX would have higher sales than 747.
Moreover, Airbus believed it had solved all of the problems due to the large size of the plane and had begun the necessary procedures for regulatory approvals in the United States and elsewhere.
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Based on its Airbus’s Global Market Forecast (GMF), the company believes Airline would attempt to increase aircraft size when it was no longer feasible to increase flight frequencies. Hence, there is an increasing demand for super jumbos.
Airbus predicts the growing economy in Asia like China will contribute greatly to the demand for VLAs in the future.
Airbus felt confident in its analysis that capacity increases would eventually prevail. Airbus wants to embrace the same success in the A3XX as 747 had before.
2. How many aircraft does Airbus need to sell in order to break even on the investment? Is this number greater or less than your estimate of total demand for very large aircraft (VLA) over the next 20 years?
a. Hint: Consider all capital providers as a single entity and calculate the break-even return on them collectively. To calculate the break-even number of planes, calculate the present value of the required investment, and compare it to the present value of a growing perpetuity of cash flows from plane sales beginning in 2008. Please assume a discount rate (cost of capital) of 11% in your analysis. If you use this simplified approach, since you are estimating cash flows from a perpetuity, your answer will be in a number of planes per year (forever), such that NPV is zero. The growth in the perpetuity comes from rising prices (i.e., not more planes).
Airbus A3XX Projections
($ millions) | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 |
Revenue | | | | | | | | | $10,800 | $11,016 |
Number of planes | | | | | | | | | 48 | 48 |
Price per plane | | | | | | | | | $225 | $230 |
R&D | | ($1,100) | ($2,200) | ($2,200) | ($2,200) | ($1,320) | ($880) | ($660) | ($440) | |
Depreciation | | $0 | ($25) | ($58) | ($87) | ($83) | ($75) | ($67) | ($61) | |
Operational Profits | | ($1,100) | ($2,225) | ($2,258) | ($2,287) | ($1,403) | ($955) | ($727) | $2,160 | $2,203 |
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Tax | | $418 | $846 | $858 | $869 | $533 | $363 | $276 | ($820.80) | ($837) |
Net Income | | ($682) | ($1,380) | ($1,400) | ($1,418) | ($870) | ($592) | ($451) | $1,339 | $1,366 |
| | | | | | | | | | |
Add: Depreciaition | | $0 | $25 | $58 | $87 | $83 | $75 | $67 | $61 | |
CapEx | | $0 | ($250) | ($350) | ($350) | ($50) | $0 | $0 | $0 | |
Working Capital | | $0 | ($150) | ($300) | ($300) | ($200) | ($50) | $0 | $0 | |
Cash Flows | | ($682) | ($1,755) | ($1,992) | ($1,981) | ($1,037) | ($567) | ($384) | $1,400 | $1,366 |
Terminal Value | | | | | | | | | $15,178 | |
Total CF | | ($682) | ($1,755) | ($1,992) | ($1,981) | ($1,037) | ($567) | ($384) | $16,577 | |
NPV | $1,290 | | | | | | | | | |
IRR | 15.7% | | | | | | | | | |
Assumption:
1)
Price per plane | $225 |
Operational Margin | 20% |
Tax Rate | 38% |
Cost of Captial | 11% |
Growth Rate (Inflation) | 2% |
2) Assume the cash flow will grow as a perpetuity from Year 2009.
3) The Capital Expenditures and Depreciation will cancel each other out starting from 2009.
4) The growth in the perpetuity comes from rising prices. Hence, the growth rate equals to the inflation rate.
Airbus needs to sell 39 aircrafts annually in order to break even on the investment. The total demand for very large aircraft is 1,235 over the next 20 years (GMF 2000).
The annual demand from 2009 to 2019 would be 112. So the breakeven point is much less than the total demands.
3. As Boeing, how would you respond to this situation? How does your answer depend on what you think Airbus is likely to do? Please provide some calculations to support your answers.
In its published Current Market Outlook (CMO), Boeing forecast a much smaller VLA market despite general agreement on overall growth with GMF. Boeing predicts the total market demand for VLA aircraft is 330 over the next 20 years. In addition, the most of the demand for the lager planes would not materialize for at least ten years. If the predicted market demand is true, there is no way for Airbus to reach the breakeven point. It is most likely Airbus will run out of the business if it commits build A3XX. In this case, Boeing could ignore the A3XX and concentrate on its existing product line. That is to say, Boeing had an opportunity to enhance profitability on its existing products while Airbus was tied up developing the A3XX.
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... have a useful life of 50-plus years), Airbus and Boeing both generate long-term demand projections for their products. Airbus's Global Market ... in 2000 ($45.6 billion) and more than 70% of Airbus' total revenues in 2000. The inherent risk associated with this major ... as pricing, sales forecasts, production cost, additional investments and tax rates. We assume that only one data changes while others ...
4. Should Airbus commit to build the A3XX? How many orders should Airbus have before committing to develop the plane? Again, provide some numerical support for your answers.
Because the analysis above gives a positive NPV, it is in airbus best interest to build the A3XX. But since Airbus needs to sell at least 39 annually aircrafts to reach breakeven, they should have more than 39 orders before committing to develop the plane.
