Airbus A3Xx Case

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Executive Summary
In fierce competition with Boeing, venture into VLA segment – as a rather neglected segment by Boeing – could pose as a strategic opportunity for Airbus which it could utilize to build a competitive advantage combined with its technological resources and capabilities. However, its assumptions of a drastic increase in VLAs demanded in next 20 years along with its ability to satisfy most of this are too optimistic. Provided that these assumptions (inc. breakeven points, initial order requirements) are normalized, A3XX is a project worthy to pursue for Airbus in order to exploit a neglected spot on the perceptional map – long-haul + big capacity. When we hold the market itself continues to grow as proposed in the case, this can be win-win case for Boeing as well, which can concentrate on its existing operations. When we look at the category, Airbus’s venture of A3XX into the existing market of commercial jet aircrafts is an example of product development. As of end of 1999, when we say commercial jet aircraft manufacturing and sales market, we’re talking of an oligopolistic $56.5 billion market, which is expected to double by 2019. It is evident from the case that this is a highly regulated market, both by national and international institutions, where states are among the major stakeholders (direct investments by states, employment creation, military affiliations, launch aid restrictions, etc.). However, due to investment intensive (R&D, capital) nature of the market, projections - esp. ones concerning launches - need to be comprised of accurate net present value calculations (as opposed to undiscounted cash flows) which in turn are based on realistic demand forecasts. Given the admonitory cases of Boeing 747’s initial launch disappointment (yet later reversal of fortune) and the “faithfully departed” due to failing launches, to predict in this market is particularly hard. We can also bear in mind the market’s linkage to tourism, an industry with demand highly vulnerable to external effects, if we want to reinforce this assumption. What we know though, both the players see a sustainable annual growth of approx. 5% in passenger traffic over the next 20 years. An important point to note is that aircraft support services constitute a bigger portion of the commercial jet aircrafts market, so Airbus, like its counterpart, could consider the possibility of vertical integration (backward: manufacturing of engines, parts, training, maintenance, etc.; forward: used airplane remarketing) as a more secure means of cost efficiency & increased profits. In terms of issues related to the company, it can be said that, with A3xx, Airbus is on the verge of adding a new product line to the existing category of commercial jet aircrafts, VLA. In the VLA market, Boeing almost had a monopoly with 747s. Airbus wanted to shake it with a product, more advanced in capacity and technology, suited well to its already established image of being innovative in design and technology (thanks to “fly-by-wire”, CCQ technologies). The initial problem could be seen with the product’s positioning; as a result of conflicting strategies presumed to be followed by Airbus. A3xx is a differentiated product more technologically advanced (e.g. four engines as opposed to two), has superior design (e.g. triple-decker, more space per seat) option for augmented services (lounge, showers, etc.). With this feature it tries to appeal to serving long-haul travelers and particularly “high yield” travelers. The price is proportionately more expensive. Airbus, on the other hand, stresses on the cost efficiency paradigm (lower breakeven point with 323/550=59% load factor as opposed to Boeing’s 290/420=69%) due to increased capacity. However, increased capacity is only meaningful with increased occupancy after breakeven point and if the demand doesn’t guarantee a proportional increase in load factor, paying almost 50% more for a VLA (747 at $150mil vs. A3XX at...
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