Airbus Case Study

Question 1 Why is Airbus interested in building the A3XX? What are its objectives?

From the perspective of the industry and the market, on the supply side, it is highly monopolistic one with two dominating players, Boeing and Airbus.

On the demand side, according to Airbus global market research, there would be significant growth in the air transportation industry, particularly in VLA. Worldwide passenger traffic would almost triple in volume by 2019.  Airbus forecast an average annual growth rate of 4.9% while Boeing forecast growth of 4.8% per year. But as Boeing analyzed, due to slow growth of the availability of new routes and flight slots, the rise in passenger and cargo traffic will be largely achieve by higher capacity aircrafts and major airports, with especially high demand in VLA for Asia. And Airbus forecast a much smaller VLA market in regard to the relative importance of flight frequency, new route development, and aircraft size. Hence, the future demand expectations of Boeing about VLA is in line with future success of the project.

As for competitor, it is critical for Airbus to build the A3XX to compete with Boeing. Boeing is the only competitor for Airbus, with about twice in market share than that of Airbus in terms of deliveries which are normally comprised of large proportion of revenue. Boeing held monopoly in VLA market in terms of its 747 airplanes while Airbus have the ambition to build the new A3XX to compete against Boeing and capture more market share.

In regard to product and service, the new 3XX aircraft is superior to other aircrafts in the industry for its economy, safety, design and performance. More importantly, due to the technology, “cross crew qualification” (CCQ) whereby pilots were certified to fly similar aircraft, training costs are reduced and utilization is improved, which explains the higher order market share for Airbus. In this way, a new aircraft also benefits greatly from the CCQ.

Financially, a larger aircraft operating over long distance had a better economy since it only costs 12% more to operate the flight as compared to that of 747 and provides 35% more space which can be served as a new source of revenue and charge premium for customers. Airbus had a target pre-tax IRR of 15%, but thought the actual IRR, might be as much as 20%.

Overall, Airbus’s objective is to introduce a new aircraft to compete with its main and probably the only one competitor, Boeing, and to obtain sustainable growth in aircraft orders and profitability.

Question 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 to 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. Assume a market-risk premium of 6% in your analysis.