Airbus Case Study

Airbus A3XX

Airbus has expressed interest in the development of the A3XX in order to capitalize on the expected growth in the airline industry (4.8%, according to Airbus’ estimates) and estimated demand of 1,550 in the very large aircraft (VLA) market over the next 20 years. In addition, Airbus does not have a product to compete with the combined range and capacity of Boeing’s 747. By entering the VLA market with a product Airbus believes would be superior to Boeing’s flagship plane, Airbus would significantly reduce Boeing’s effective monopoly in the VLA market as well as its competitive advantage in the market of smaller planes via scaling.

Based on Airbus’ assumptions of 2008 production levels of approximately 4 planes per month at an average sale price of $225 million, the number of A3XX to be sold before Airbus breaks even on a discounted basis varies based on the operating margin range of 15-20%. At an operating margin of 15%, Airbus would need to sell 495 planes before breaking even, 464 at 16%, 436 at 17%, 412 at 18%, 390 at 19%, and 371 at 20%. If Airbus’ assumptions of number of planes per month and average sale price are incorrect, the break-even number of planes would change in line with the actual figures. For instance, for the initial list price of the A3XX at $216 million, the break-even number of planes at an operating margin of 15% increases to 515 and to 386 at 20% (Exhibit 2).

Any of these numbers of VLAs are less than the projected demand for such aircraft according to Airbus’ estimates of 1,550 VLAs seating 500 or more passengers as well as The Airline Monitor’s estimates of demand for 735 A3XXs alone over the next 20 years. However, Boeing estimates demand for only 600 total VLAs capable of seating 500 or more passengers and predicts that most of the demand will not materialize for at least the next ten years.

From the perspective of Boeing, the response to Airbus’ development of the A3XX depends largely on whether or not Boeing believes that Airbus will actually launch this new product. A financially successful launch for Airbus is irrelevant to Boeing as at least some carriers are likely to purchase the A3XX over a competing Boeing product meaning that Boeing would lose out on least some sales, regardless of how profitable the A3XX is. If Boeing believes that an A3XX launch is likely, the company has several potential options.

First, Boeing could develop a new product with similar specifications to that of the A3XX in order to eliminate any advantage that Airbus would have. We advise against this decision as Boeing expects to invest a substantial sum of $13 billion to develop the new product and highly cannibalize its existing product in the VLA market, the 747. If Boeing management is indeed focused on shareholder value, this approach would cost shareholders significant returns in the short-term during