Airbus 3xxx Case
Airbus A3XX: Developing the World’s Largest Commercial Jet
Introduction:
From its inception in 1970, Airbus has maintained a reputation for innovative design and technology. Airbus has employed a “fly-by-wire” technology on all of its planes as an efficient alternative to computerized control for mechanical linkages. In addition, Airbus streamlined operations and features that have lead to better pilot utilization and lower training costs. These advances help explain why Airbus had received over half of the total large aircraft orders for the first time in 1999. Although gaining market share, Airbus faced intense rivalry with The Boeing Company, whose unique importance in the US economy as a whole and rich history allowed it to become the world’s leading producer of commercial aircraft. In the late 1990’s, looking to gain market share within the very large commercial airplane market and gain a competitive advantage against Boeing, Airbus was faced with a capital budgeting decision of whether or not to proceed in building the world’s largest commercial jet, the A3XX. The A3XX would aim to challenge the Boeing 747, which had held a monopoly of the Very Large Aircraft (VLA) market for the last 30 years. In order to make the decision of whether to take on this project, Airbus needed to find out the net present value of this investment. In this case, our team used both weighted average cost of capital (WACC) and flow to equity (FTE) to analysis the whole undertaking.
Assumptions
Before getting into more details about the expected financial return from the investment, we need to clarify several key issues. First, the investment in the A3XX is incredibly complex and we have, by necessity, used assumptions to simplify the case to build a more tractable model. For the whole market, we assume a risk free rate of 6.0% and this would remain a constant as well as the market premium (from information on the European market in 2000, we assume the market risk premium would
Introduction:
From its inception in 1970, Airbus has maintained a reputation for innovative design and technology. Airbus has employed a “fly-by-wire” technology on all of its planes as an efficient alternative to computerized control for mechanical linkages. In addition, Airbus streamlined operations and features that have lead to better pilot utilization and lower training costs. These advances help explain why Airbus had received over half of the total large aircraft orders for the first time in 1999. Although gaining market share, Airbus faced intense rivalry with The Boeing Company, whose unique importance in the US economy as a whole and rich history allowed it to become the world’s leading producer of commercial aircraft. In the late 1990’s, looking to gain market share within the very large commercial airplane market and gain a competitive advantage against Boeing, Airbus was faced with a capital budgeting decision of whether or not to proceed in building the world’s largest commercial jet, the A3XX. The A3XX would aim to challenge the Boeing 747, which had held a monopoly of the Very Large Aircraft (VLA) market for the last 30 years. In order to make the decision of whether to take on this project, Airbus needed to find out the net present value of this investment. In this case, our team used both weighted average cost of capital (WACC) and flow to equity (FTE) to analysis the whole undertaking.
Assumptions
Before getting into more details about the expected financial return from the investment, we need to clarify several key issues. First, the investment in the A3XX is incredibly complex and we have, by necessity, used assumptions to simplify the case to build a more tractable model. For the whole market, we assume a risk free rate of 6.0% and this would remain a constant as well as the market premium (from information on the European market in 2000, we assume the market risk premium would