Why Is Airbus Interested in Building the A3xx? What Are Its Objectives?
Autor: amhit amhit • January 8, 2016 • Case Study • 1,141 Words (5 Pages) • 2,473 Views
1. Why is Airbus interested in building the A3XX? What are its objectives?
Boeing has held a monopoly in the Very Large Aircraft (VLA) segment of the civil aviation market with its unprecedented and as-yet unparalleled model, the 747 ‘Jumbo Jet’. The 747 represented a substantial competitive advantage from 1965 to the present day. Historically, Boeing has always been larger than Airbus, with 1999 seeing Boeing’s sales of $57,993 million compared to Airbus’ $16,700 million; and similarly Airbus held only 33.1% of the civil aviation market share compared to Boeing’s 66.9%.
Airbus is thus driven to capture a larger market share in civil aviation. Airbus found an opportunity, according to their analyses, to significantly grow their market share in the VLA segment. Airbus believes that air transportation demand will grow substantially in coming decades, and that the apparently slow growth of the availability of new routes and flight slots will not be sufficient to cope with the industry’s demand. Therefore the best available route for Airbus to compete will be to meet the demand for additional capacity through increasing the number of seats / volume of cargo per plane.
Success would create significant increases in market share and revenue. IRR for the A3XX project is estimated by Airbus management to be 15%-20%. Airbus is also interested in developing the A3XX in part to cross-subsidise the development rest of its range, which might add 1.5% to this project’s IRR.
2. Project all the future free cash flows of Airbus if it decides to go ahead with the A3XX. Given your projected cash flows, what is the NPV of the project?
Using available data from the case provided and making a number of specific assumptions and omissions, we can provide the following likely case predictions:
A summary of FCF from 2000 to 2008 (and terminal value) is predicted to be as follows:
$ millions | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 |
FCF | (1,052) | (1,949) | (1,936) | (1,534) | (805) | 877 | 984 | 1,101 |
Terminal Value | 12,229 |
As a result of the above, the Net Present Value (NPV) of the A3XX project is predicted to be $1,293 billion.
The full model (including notes on assumptions and omissions) can be found in the attached Appendix.
3. How many aircraft does Airbus need to sell in order to break-even on the investment? Consider alternative potential scenarios.
...