March 26th 2013
Launched in 2000, Airbus Integrated Company (AIC) is a French aircraft-manufacturing corporation that assumes all of the Airbus-related activities. Prior to AIC, Airbus Industrie was founded in 1970 through a consortium of the aerospace companies of Germany, France, England, and Spain. In June 2000, the Supervisory Board of the consortium approved an Authorization to Offer (ATO), which granted the sales force permission to begin taking firm orders for the A3XX, a proposed super jumbo jet that would seat from 550 to 990 passengers. With the announcement of the first orders for the A3XX in July 2000, the management level needs to decide whether they should commit to launch the A3XX given the uncertainty of long-term demand, the enormous up-front investment, and the fact that a failed launch could cause a company to exit the industry as in the case of several prominent companies. The VLA Market
A3XX is under the VLA category which is defined as the very large aircraft with over 500 passengers or carrying more than 80 tons of freight. Boeing Company and Airbus Industrie have formed a duopoly in this market segment. The operation of VLA can bring higher profit margin. However, the initial investment required for launching this kind of aircraft is extremely high, and both companies can be dragged down if fail. Boeing and Airbus have had discrepancy for predicting the future size of the VLA market. They are still unsure how many market shares that Airbus will take over when it enters the VLA segment with its A3XX model. Airbus Industrie and the A3XX
Airbus Industrie has been profitable over the recently years (Exhibit 1). As the other biggest player in the commercial aircraft manufacturing industry, Boeing has been capturing 60% to 70% of orders and deliveries historically. Airbus, however, has taken more than 50% of aircraft orders for the first time in 1999 (Exhibit 2). More importantly, Airbus has earned a reputation for innovative design and technology. Its “fly-by-wire” technology that computerized control of pilot and control surface and common cockpit design facilitate the crow crew qualification (CCQ) that allows pilots to fly similar aircraft, which in turn leads to better pilot utilization and lower training costs. At the same time, the host governments had significant interest in the consortium given that it provides many jobs and military aircraft and space system. The most significant weakness of the consortium is that it lacks product to compete with Boeing 747 in the VLA segment. In response, Airbus Industrie developed and finalized the basic design of A3XX in 1999, a model that would seat 550 passengers in the standard three-class configuration. The model would cost $13 billion to develop and have a list price of $216 million. Despite the enormous up-front investment, Airbus believes that the A3XX would constitute an attractive financial success (generate sales in excess of $350 billion over the next 20 years and $70 billion in operating profit with a 20% operating margin). In addition, as a natural extension of the “fly-by-wirer” family of aircraft, features of this model make it attractive among passengers, particularly on longer routes. The more space per seat and wider aisles provide more comfort and the four-engine design is believed to increase safety. Meanwhile, Airbus has gained support from both the European host governments and customers through launch aid and firm orders. In a nutshell, through the launch of the A3XX, Airbus hopes to eliminate the Boeing’s monopoly position and its ability to cross-subsidize smaller aircraft and ultimately, to position Airbus as the commercial aviation industry leader. Project Economics
There are two assumptions for evaluating the A3XX project based on different opinions of Airbus and some industry analysts. Airbus assumes a $13 billion initial cost through 8 years, while some...