What would be the value of a new VLCT to both companies?
In order to value the market for VLCT, we constructed a financial model using minimal assumptions and no outside data (See Exhibit 1). In terms of the qualitative benefits for both:
* Monopoly status on VLCT market
* Douglas eliminated as competition
* Significantly raise barriers for new industry entrants
MAJOR ASSUMPTION: This evaluation of VLCT based on each company developing the aircraft independently and without competition. | Value Added|
Airbus| * The development of the VLCT must match market size (hub-and-spoke model) * Decrease cost per passenger of hub travel (economies of scale) * Increases demand for smaller planes to operate “spokes” * New segment in product line (VLCT) * Estimates demand at 1000 VLCT in the next 20yrs (~$2 trillion in revenue)| Boeing| * Monopolize VLCT market * Estimates demand at 250 VLCT in the next 20yrs (~$500 billion in revenue) * Lower cost alternate VLCT – Develop 747 stretch (@$4-6B vs. $5-20B)|
If you were Airbus, how would you respond to Boeing? Should Airbus collaborate with Boeing in the development of the VLCT? | | Airbus|
| | Develop VLCT| Don’t Develop VLCT|
Boeing| Develop VLCT| Massive losses for both (-,-)| Continued monopoly for Boeing, no gains for Airbus(+,0)| | Don’t Develop VLCT| Duopoly in the VLCT market (0,+)| Boeing maintains VLCT monopoly, no gains for Airbus (0,0)|
* Doesn’t make sense for Boeing because market isn’t there (need 400 to break even yet market size is capped at 300) * Substitute (cannibalization) of 747’s (which comprise 70% of Boeing’s revenue) WHY AIRBUS SHOULDN’T DEVELOP VLCT WITH BOEING AND WHY THEY SHOULD DEVELOP THEIR OWN * Bigger share of PIE if developed alone
* Retain technology IP and forge relationships with key suppliers * Start from scratch (anyways) – design to tailor to airline’s needs...