Airbus

Case: Airbus 3XX: Developing the World’s Largest Commercial Jet (A) HBS 9-201-028

1) Why is airbus interested in building the A3XX? What are its objectives?

It wants to enter the VLA (very large aircraft) market and compete with Boeing 747.

It market research shows increased demand for VLA jets by 2019. It indicates that high passenger traffic and high congestion will limit the increase of flight frequencies (point to point) on the paired routes. Hence, airlines with prefer aircraft carriers with increased capacity that will give the airlines operational efficiency and cost savings. It estimates that Airbus will have 12 % more in operational cost than 747 but will be compensated for the large capacity – 25 % more volume for free.

It is particularly targeting the transpacific routes with increased demand in Asian economies such as China.

It also estimates more comfort and customer satisfaction for long-haul passengers and premium flyers.

Hence all these factors would make Airbus A3XX as the leading aircraft both in safety, space and comfort resulting in higher revenues for the firm.

2) How many aircraft is 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?

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. Please assume an equity risk premium of 6% in your analysis.

We analyzed the PV for investments (R&D + Capex + Change in NWC). The PV was (5622 million)

In order to break even we calculated the perpetual cash flows form 2008. In doing so we did a sensitivity around operational margin as shown below in the table.

For e.g., is we assumed...