Airbus

CONSULTING memorandum

Executive summary

After an in depth analysis of Airbus’ strategy to develop the new A3XX super jet we concluded that making this move would most likely prove to be a profitable endeavor.

Considering the situation as a simultaneous game exercise, the launch scenario would produce a positive NPV of 2.261 billion dollars at a 15% discount rate.

The underlying assumptions in this analysis are:

• A total demand of 1100 unit over the duration of the project

• Initial capital investment of 13 billion dollars

• An 80% learning curve throughout the 20 years of the project

Our sensitivity analysis shows that even if the forecasted demand drops 40%, or if they overrun the initial capital investment estimate by 18%, the project would still be profitable and yield a positive NPV.

Several publications agree that the normal learning curve effect for the aircraft industry is 80%. We have found that this variable is the one that has the greatest effect in the NPV with a limit of 82.6% as the point where the project is not viable anymore.

Because the learning curve effect is the most critical factor for the success of the project, Airbus should carefully manage its human assets making sure that effective hiring, retention, and incentive policies are in place.

The study of the possible actions that this project might trigger Boeing to do, highlight a dominant strategy on their part for not launching a competitive super jet under the same assumptions mentioned above. However, if the demand grows beyond what is expected or if the US government subsidizes the initial capital investment for Boeing, the conditions would allow both companies to go into the market profitably.

If we consider the situation as a sequential strategic move, we see that Airbus has an incentive to be the first mover and launch in order to gain 1.5 or 2.2 billion depending on Boeings response. (See Figure 1)

Learning Curve Cost Reductions

In order to...