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Airbus Case

By gats Nov 12, 2008 673 Words
1.Airbus is interested in developing the A3XX because its sees a future need for super jumbo jets. Airbus reasons that as the number of passengers increase, airlines will eventually be unable to add more routes in their flight schedules and will favor planes with higher passenger capacity. Airbus predicts that the VLA market will have a demand for 1,550 planes over a 20-year period (till 2019). In addition to the demand for jets having increased passenger carrying capacity, Airbus also had the following objectives for building the A3XX: (a)With the launch of the A3XX (and 550-passenger capacity), Airbus hoped to capture the VLA market segment. Its primary objective was to eliminate Boeing’s monopolistic control over the VLA market segment and its ability to cross-subsidize smaller jets in its product line. (b)An analyst had also noted that operating margins are the highest for wide body jet planes. Airbus forecasted that if it could capture more than half of the VLA market segment, it would earn very high returns on revenue. (c)Significant growth in the air transportation industry (forecasted growth rate is 4.9%) would lead to increased frequency and new air travel routes. However, congestion at the largest hubs would require an alternative solution. Airbus believed that this created demand for super jumbo jets. (d)Highly differentiated features including more space per seat and wider aisles, and passenger amenities such as cocktail lounges and showers would make the planes attractive to long route travelers.

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3.Boeing has forecasted a demand of 330 VLA planes with a passenger carrying capacity of 550 passengers for the 20-year period through 2019. This is substantially less than Airbus’ forecast. In view of this forecast, it would be best for Boeing not to respond with a competitive offering to the new super jumbo jet launch planned by Airbus. The case says that other companies which were unsuccessful in launching a new plane, suffered grave consequences and some even went out of business.

4.We believe that Airbus should commit to building the A380. Exhibit 1 shows that Airbus can break even if they sell at least 37 planes a year starting in 2008. Airbus production capacity beyond 2008 is 48 planes a year (p8. paragraph 2). Therefore capacity is not a constraint in reaching the breaking even point. Airbus forecast for VLAs over the 20-year period (from 2000 to 2019) is 1550 planes (p 5, paragraph 3), which corresponds to a demand of 77 planes a year, which is above the calculated break-even point. Therefore demand is not a constraint in reaching the break-even point. We believe that Airbus will break even and will also be profitable with the A380. If we ignore the Airbus forecast and use the more conservative forecast of 735 VLAs for 20 years, as projected by The Airline Monitor (page 6, last paragraph), we get a demand of 37 planes a year, which is at the calculated break-even point.

We believe that if Airbus has an order of more than 19 planes in the first year, Airbus should commit to building the A380. In deciding how many orders Airbus should have before committing, we looked at the economics of debt repayment. Exhibit 2 illustrates that out of the 13B capital infusion, 45% comes from equity owners, 27% from RSPs, and 28% from “launch aid. If we define the break-even point as the amount of cash flow required to repay RSPs and “launch aid”, we get a required sales of 19 planes a year starting in 2008. Airbus currently has an order for 22 planes on its books (Case Exhibit 11). Customers like JAL will potentially order more planes in the future based on the performance of the planes during the first few years (page 7, paragraph 2). An order of 19 planes or more during the first year will generate the cash flow to repay at least the RSPs and the “launch aid”.

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