Airbus Case Study

1 Why is Airbus interested in building the A3XX? What are its objectives?

• Strengthen the marked position in very large aircrafts (e.e Airbus captures more than half of the orders in total and more than half of the orders of very large aircrafts.)

• Airbus aims to become aviation industry leader. Airbus does not have a product competing with the Boeing 747, which is a monopoly.

• The long term forecast projected a demand in very large airplanes.

• Airbus thinks that Hub-to-Hub business remains whereas Boeing believes that new point-to-point routes will deal with the higher passenger volume. Therefore Boeing projected lesser demand in very large airplanes – 330 vs. 1.235 airplanes. (Exhibit 6)

2 What financial terms are in the case and what do they mean?

• Sales price: 216 $million

• Number of estimated Sales within the next 20 years: 750

• Airbus’s Operating margin: 15% to 20% of the Sales

• Analysts’ Operating margin: 20 to 30%

• 13 billion overall expenditures

• Some costs are capitalized → 1 billion depreciation straight-line over 10 years.

• 700 million have already been spent before 2000

• Sunk cost and opportunity costs are not to be taken in consideration

The A3xxx is financed in three ways:

• 3.5 billion come from vendors as they agree to bear the cost for R&D. On return they are exclusive partners and would be repaid on a per plane bases.

• 3.6 billion launch aid from Government. Needs to be repaid on a per plane bases

• 5.9 billion is provided by the owners themselves. (IPO?)

20-year forecast from Boeing as well as Airbus are available. General demand in passengers is estimated similar from Airbus and Boing. Forecast for very large aircrafts provided by Sales estimate from Airbus as well as Boeing

Airbus targets a pre-tax IRR (internal rate of return) of 15% whereas a more optimistic IRR could be 20%.

Boeing’s financing is based on equity therefore influenced by shareholders. The shareholders are more sensitive to the riskiness of the project. When Boeing pulled out from the A3XX project, the share price went up.

3 What are possible metrics to use in making a decision of this type? Do we have information in the case, which makes that possible?

• Investment