Neeraj Mehra
Airbus A3XX: Developing the World’s Largest Commercial Jet
1. Why is Airbus interested in building the A3XX? ...
Neeraj Mehra
In the above Y axis has the NPV and the X axis is the number of planes.
The point at which the line intersect...
Neeraj Mehra
So, maintaining status quo or coming up with a bigger version are the options they are
left with. Developing ...
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Airbus a3xx developing the worlds largest commercial jet Case Analysis

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Harvard Business School Case

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  • please help me to find these questions answers ?
    1. Why is Airbus interested in building A3XX? What are its objectives? Evaluate the
    pros n cons.

    2. How many aircraft does Airbus need to sell in order to breakeven on the
    investment? Is this number greater or smaller 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 breakeven return to them collectively. To calculate the breakeven 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 sale beginning in 2008. Please assume an equity risk premium of 6% in your analysis. Please also use the attached spreadsheet to guide your calculation.

    3. Using the following Table, do sensitivity analysis on the BE using different margin of profits: 10%, 15%, 20%, 25% n 30%.


    Operating Margin
    R&D 10% 15% 20% 25% 30%
    $9B ? ? ?
    $10B ? ?
    $11B ? ? ?
    $13B ? ? ?


    4. As Boeing, how would you respond to this situation, do nothing or fight back , why? If you decide to fight back, evaluate the following options:
    A. File WTO complain.
    B. Build a stretch version of 747 (747X):
    C. Cut prices.
    D. Build a competing super jumbo jet.
    E. Collaborate with Airbus.
    Which option would you take, why?

    5. How did the Airbus use the following structure to mitigate risks?

    A. Organizational structure.
    B. Financial structure.
       Reply 
    Are you sure you want to  Yes  No
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Airbus a3xx developing the worlds largest commercial jet Case Analysis

  1. 1. Neeraj Mehra Airbus A3XX: Developing the World’s Largest Commercial Jet 1. Why is Airbus interested in building the A3XX? What are its objectives? Solution:  Boeing held monopoly in VLA market in terms of its 747-xxx airplanes.  Airbus didn’t have any airplanes to compete with the 747’s and hence wanted to enter this new segment.  Airbus’s market research has predicted that the VLA segment will have unprecedented growth due to increased demand of air travel and growing traffic at major airports across the world.  The rise in passenger / cargo traffic could be achieved by higher capacity aircrafts only.  Airbus predicted that growing economies like China and other Asian economies would contribute greatly to the demand for VLAs in the future.  Airbus also believed that a larger aircraft operating over long distance flights had a better operating economy. It only costs 12% more to operate the flight as compared to a 747 but provides 35% more space which was effectively a source of revenue.  Moreover the greater space and more efficient design allowed airlines to provide more services in their aircrafts which could be used to charge premium to customers.  The Passengers attributed a special appeal to the state of art facilities provided in such aircrafts.  VLA Airbus A3XX would have 4 engines compared to the conventional 2 engine design which also added a safety level in terms of long distance air travel.  It had better aisle space which was crucial in terms of passenger evacuation in cases of emergencies. Overall, VLA aircrafts would provide the most optimum solution to the growing air travel needs. 2. How many aircraft does Airbus need to sell in order to break even of the investment? Is this number greater or less than your estimate of total demand for very large aircraft over the next twenty years? Solution: Calculation has been made in the excel sheet. Inflation: 2%; Profit Margin (till 2015): 20%; Profit Margin (post 2015): 25%. The results with above assumptions are as follows: Utilisation NPV IRR BreakEven 80% -567 8.25% N/A 85% 0 8.85% 829 90% 492 9.35% 779-824 100% 1551 10.38% 715-765
  2. 2. Neeraj Mehra In the above Y axis has the NPV and the X axis is the number of planes. The point at which the line intersects the X axis is the point of breakeven sales where NPV=0. The graph has been drawn for different capacity utilisation. Another case has been taken in the excel sheet wherein the inflation is taken as 4%. In such cases we see a higher NPV and a lower value for breakeven sales. 3. As Boeing, how would you respond to this situation? How does your answer depend on what you think Airbus is likely to do? Solution: Boeing has 4 options:  Come up with a bigger version of 747 aircrafts.  Price cuts of 747 airplanes.  Come up with a competing super jumbo jet  Ignore the potential threat posed by Airbus and maintain status quo Cutting price is not a solution as it might only divert sales and margins for Boeing would also reduce. Developing a new super jumbo jet will require considerable development costs. The market for these planes is not enough to sustain and earn positive NPV for 2 players in the segment. -10000 -8000 -6000 -4000 -2000 0 2000 4000 2005 2010 2015 2020 2025 2030 100% 90% 85% 80%
  3. 3. Neeraj Mehra So, maintaining status quo or coming up with a bigger version are the options they are left with. Developing a bigger version would give the number of seats required but will not be able to match the newer technology, style, comfort, and operating efficiency brought in by the Airbus planes. So, the best option would be to maintain status quo and capitalize on their existing products. 4. Should Airbus commit to build the A3XX? How many orders should Airbus have before committing to develop the plane? Solution: No, Airbus shouldn’t go ahead building the A3XX. Currently they have spent a total of USD 700 million as R&D expense. A 100% capacity utilisation with inflation of 2% gives us a breakeven of 715-765 planes with NPV=$1550 millions and IRR=10.38%. With the inflation of 4%, breakeven is attained at 615-665 planes with NPV=$3778 millions and IRR=11.84%. The breakeven analysis has been calculated in the excel sheet, which should be used to define the number of orders Airbus must have before committing to develop the planes. Industry Experts estimates the demand for VLA planes to be around 750 for the next 20 years. However, estimates of Boeing are pessimistic at less than 350. Estimates of Airbus are very high at more than 1200 planes. If Airbus is highly confident of their estimates it would make sense to go ahead in developing the planes. However, considering the industry estimates by experts, they shouldn’t go ahead.

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