Airbus Vs Boeing Case Study

Ruslan Kovalenko s1412158

Ievgen Glazunov s1412630

Orest Shemeliak s1412939

Nataliia Tokovchuk s1412656

Nadiia Krychylska s1411882

Case Study

at BI Norwegian Business School

- Airbus A3XX -

GRA 6538 - Applied Valuation

GRA 6538 – Applied Valuation

Due date:

24.02.2015

Study location:

BI OSLO

Executive summary: Airbus, one of two major aircraft manufacturers, considers the launch of a super jumbo A3XX that is expected to become a new leader among VLAs. The project is appealing due to high expected growth of VLA market segment and high profitability of large commercial jets. At the same time high magnitude of initial development expenditures and uncertainty regarding future demand raise questions whether the project is worth implementing. Our recommendation is that that with NPV of $1780.3M the project should be undertaken. We estimate that Airbus will be able not only to fulfil the minimum required break-even demand of 554 aircrafts till 2019 but also get excessive return on the A3XX launch. To better understand how the uncertainty of demand and other risk factors might influence the A3XX launch profitability we perform scenario and sensitivity analyses.

Break-Even analysis and Demand estimation: Using DCF framework we identify that to earn zero NPV on A3XX in steady state starting from 2008 Airbus must sell 41,35 aircrafts per year. Taking into account our assumptions regarding ramp-up period that Airbus needs to achieve full capacity this means 24.8 and 33 units in 2006 and 2007 respectively. These total to sales of 554 aircrafts up till 2019 for Airbus to break even. Our VLA demand forecast falls in between optimistic and pessimistic estimations made by Airbus and Boeing respectively. We project the sales of 652 aircrafts over the explicit forecast period (2006-2019). (Exhibit 2 contains detailed description of DCF assumptions). Our analysis suggest that after delivering backlogged aircrafts in 2006 and 2007 Airbus will fulfil demand of 50 planes per year which equals full capacity number of aircrafts the company can produce at steady state. Starting from 2013 up till 2017 the number of yearly completed orders is expected to go down gradually from 50 to 46 as far as we expect Boeing to come up with a competitive response. Sales of 46 aircrafts per year is a sustainable number in the long-run since we assume that A3XX won’t be able to outperform Boeing’s 747 over the period of its domination in the VLA market. (Exhibit 1 illustrates more information on revenue forecasting).