Case Airbus A3xx

Case Airbus A3XX

Zihao xiao        

   Airbus was founded as a consortium of the principal aerospace companies of European countries. The partners combined their resources and technology to produce a more competitive line of commercial aircraft. Currently, Airbus is planning to launch a new very large aircraft called A3XX.

   Before the launch of A3XX, Boeing 747 dominated the market of very large aircraft market, 747 has more space and longer mile range than almost all aircrafts at that time. In order to compete with Boeing, an introduction of A3XX would help Airbus to gain market share in VLA market and break the monopoly of Boeing 747. Besides that, A3XX’s features are more superior than those of most aircraft, and these features such as more space, seats, wider aisles, and less training cost for pilots, would attract customers despite A3XX costs more than Boeing 747. On the other hand, the forecasts future demand of A3XX seem to be very bright, because some companies had agreed to secure order for 22 jets. Management team also forecasted that they could sold as many as 750 jets over 20 years, this is far above the breakeven with sales of 250 planes. In exhibit 6, the passenger traffic growth rate is stable, around 5% per year, which means there is no fluctuation on passenger’s preference of travelling method, and the value of 20-year market for new aircraft is appreciating year by year. Moreover, under the optimal assumption, A3XX project would bring IRR of 15% to 20% to the company, and that will increase the firm’s value.

   Given the fact that A3XX is an expensive and risky project, the objectives must be clear and achievable. First of all, although the management team is optimistic about the future demand, it is still the most important factor to get clear. Airbus should have estimated number on how many pre-orders and how many future orders. Otherwise, the company will have slow inventory turnover that will cause high inventory cost to drag the revenue down. Secondly, Airbus has to make sure that whether this project would bring positive NVP or not, because the project requires a huge amount of initial investment and longer time periods, hence the company should consider firm-specific risk and market risk in forecasting future cash flow. Finally, Airbus must make sure all production lines running smoothly, for the reason that, product delay will not only cause the firm lose its competitive advantage, but also bring bad image to customers.

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   Let me analysis free cash flows from the excel chart I made. I am aware of that A3XX would cost approximately 13 billion dollars to launch, and that I did not take into account the 700 million dollars spent in 2001, because they are sunk cost. For the revenue part in 2008, I know that total potential orders are 50 jets and given that each jet will be sold for 216 million, hence we get the revenue of 10800. I also take the mid-point of operating margin of 15% to 20% to get the 17.5%. in addition, I used straight line method to calculate 10-year accumulative depreciation. Tax rate is given, which is 38%, and in order to estimate discount rate, I used CAPM model, in this case is 6% plus 0.84 times 6%, which is 11.04%. I analyzed free cash flow by net income plus depreciation, minus Cap Ex, and minus increase in working capital, and sum the discounted free cash flows each year to get the net present value of negative 6341.37. Moreover, there is a perpetuity growth of the plane price starting from 2008, and growth rate can be regard as inflation rate of 2%. I also prepared free cash flow from 2009 to 2020, I changed plane’s price by 2% growth rate per year. To find the break-even sales, we need to know how many planes are sold to get net present value of zero. In excel sheet, I used 50 orders to get NPV of 506.57and if company only sells 47 jets annually, it will achieve break-even on its investment. According to Exhibit 6, the total demand from 2000 to 2019 would be 1235, and company will sell 950 jets under break-even sale in 20 years. Therefore, the break-even sale is less than the total demand.