We have been invited to elaborate the financial conveniences for Boeing producing a new plane

1. Boeing 7E7
Recommendation
Team 1: Matteo Franchina, Barry Vickery, Egle Markune,
Sunkanmi Ola, Umesh Odedra

2. Position / Business Challenge
◉ Provide an overview in relation to the valuation of the 7E7 Dreamliner
programme
◉Provide a Go / No Go direction to the board in relation to the required
investment for the planned 7E7 Dreamliner
◉Strategic analysis to support the proposal

3. Boeing Overview
Boeing operates has 5 main segments:
1. Commercial Airplanes
2. Boeing Military Aircraft (BMA)
3. Network and Space System (N&SS)
4. Global services and Support (GS&S)
5. Boeing Capital Corporation (BCC)

4. Current Environment
1. Situation & Factors: In the wake of the 9/11 attacks, the airline industry has
suffered a deep decline with many airlines downsizing and even filing for
bankruptcy in some cases as the industry was already in a weak financial position
before the attacks. Within the US majorly, short distance travel has dipped and will
understandably take years to recover.
2. Critical Need: As a direct impact of 9/11 on our commercial aircraft sales, we have
lost our market position and market share to Airbus. The swing in the balance
came right after the 2001 attacks where Airbus took advantage to launch the A330
and became the market leader in 2002. Following the cancellations of the 747x and
the Sonic Cruiser projects, we need a real response that will drag us out of our
financial slump.

5. Rivalry:
Commercial
Suppliers:
Low
Porters 5 Forces
Buyers:
High
Threat of
Entry: Low
Substitutes:
High

6. Porters 5 Forces
Buyers: High –
The economical global situation
is forcing the price down.
Costumers require more
services, more economies, lower
operation costs and more
flexibility.
Substitutes: High –
The passenger airplane can be
substituted with a train, a ship, a
car, a helicopter or a private jet
on medium range flights.
Suppliers: Low –
Being in a Duopoly the company
has the power to negotiate the
price of supplies du to global
economies of scale.
Rivalry: Commercial –
Airplane is a Duopoly market,
largely airbus and Boeing,
resulting in low profit margins in
the airline industry
Threat of Entry: Low –
To enter in this market requires a
tremendous amount of money, that
has be invested in R&D without any
guarantee on the return

7. SWOT Analysis
Strengths
1. Strong global network
and alliances
2. A broad product line
cover all airplanes
sizes
3. Performance balance
between defense and
commercial business
Weaknesses
1. An inefficient, rigid, and
semi-autocratic
management style, this
is result of its military
heritage and biases.
2. Workers actions, labor
problems.
3. Dependence on US
government
commitments.
Opportunities
1. The 7E7 would
be unrivaled and
would let Boeing
regain market
shares.
2. 400 city pairs
Threats
1. Slowdown in the
commercial jet
market
2. Uncertain Global
environment
3. High presence of
Airbus in Europe

8. 20% less fuel / 10% cheaper to operate
(compared to Airbus A330)
Benefits
‘With the 7E7 Dreamliner, Boeing
is using a new approach to
design which takes into greater
account the cost to maintain
airplane structure and systems
over their lifetimes. As a result
of this approach, the basic 7E7
airplane will have 30 percent
lower airframe maintenance
costs than any comparable
product and will be available for
revenue service more often than
any other commercial airplane.’

9. ‘Instead of higher and
faster, the mantra for the
future will be leaner and
cheaper’ (Boeing CEO)
7E7

10. 7E7 Benefits / USP
◉Wider aisles
◉Lower cabin altitude
◉Increased cabin humidity
◉In-flight entertainment
(internet access)
◉Interchangeable seat
configurations
◉Claimed to have the lowest
‘footprint’ for take-off and
landing
◉Safer flight (structure
monitoring systems)
◉Crew connectivity
◉35% less scheduled
maintenance hours
Traveller Benefits Customer Benefits

11. Recommendation
◉ In summary the recommendation is to proceed with the programme
◉ It would be important to launch the 7E7 and also hold a different view on the initial target market.
The 7E7 will provide our customers with higher fuel and operational efficiency considering the
increased global oil prices and based upon market feedback.
◉ A focus on the international market outside the US would be the best approach although the
model would also be suitable for American airline operators due to its flexibility to be switched for
both short and long distance usage.
NPV = 3 065 / IRR = 15,7% / WACC = 10,5% / Debt/Equity = 0,525

12. Analytics
◉ NPV = 3 065
◉ WACC = 10,5%
◉ IRR = 15,7%
◉ Recommendation: to implement project, since NPV is positive
◉ Current ratio – 0,85 in 2002
◉ Debt ratio – 0,85. Highly leveraged
◉ ROE – 30% (w/o accounting change in 2002). High since company is highly
leveraged
◉ Observation: company does not have sufficient own funds to finance the
project, so additional debts or increase equity

13. Assumptions
◉ WACC calculation is including CAPM, assuming
• Beta is 1,45 (S&P 500 60 trading days – as it reflects better volatility of
market after September 11);
• 30-year Treasury bonds yield is used as Risk free rate of return;
• Market rate of return is average rate of 10 years (1988-2008) in S&P
500
◉ Based on the following sensitivity analysis $8BN of investment is
recommended amount

14. Sensitivity Analysis

15. MVA
◉Management added complexity by issuing inconsistent
messages
◉Misscommunication resulted in negative market
perception due to the cancellation of orders

16. Questions

17. References
http://www.ausbt.com.au/scoot-maps-out-boeing-787-routes-for-sydney-perth-hong-kong
http://www.seatmaestro.com/airplanes-seat-maps/air-india-boeing-b737-dreamliner/
http://www.seatguru.com/airlines/Thomson_Airways/Thomson_Airways_Boeing_787-8.php
http://www.seatguru.com/airlines/British_Airways/British_Airways_Boeing_787-8.php
http://www.aopa.org/Pilot-Resources/Aircraft-Ownership/Tips-on-Buying-Used-Aircraft/Hypothetical-Operating-Cost-Calculation
http://www.forbes.com/sites/stevedenning/2013/01/17/the-boeing-debacle-seven-lessons-every-ceo-must-learn/#6cdd9a1b744f
http://boeing.mediaroom.com/2001-06-19-Boeing-Sonic-Cruiser-Will-Change-The-Way-The-World-Flies
http://archive.fortune.com/magazines/fortune/fortune_archive/2002/12/09/333457/index.htm
http://www.thefiscaltimes.com/Articles/2011/09/09/Economic-Cost-of%209-11-Three-Industries-Still-Recovering
http://traveltips.usatoday.com/effects-911-airline-industry-63890.html
http://www.iata.org/pressroom/Documents/impact-9-11-aviation.pdf
http://www.thefiscaltimes.com/Articles/2011/09/09/Economic-Cost-of%209-11-Three-Industries-Still-Recovering
http://traveltips.usatoday.com/effects-911-airline-industry-63890.html
http://www.iata.org/pressroom/Documents/impact-9-11-aviation.pdf

18. Lessons to be learned
◉Underestimation of ‘Real Life’ outsourcing risks leading to:
1. Time delays: Supplier Communication Integration, product mismatch revisions
2. Increase in cost: Production revision, customer delay compensations, buyouts
to plug outsourcing shortfalls

19. Back-up

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