Airbus A3xx Case

Airbus A3XX Case

1. The reasons why Airbus is interested in building the A3XX are:

1. Global economic situation. After the 1997 financial crisis, the world economy is recovering. At the end of 1999, it reached its peak. So it’s safe to say that it will continue to recover in 2000 and further. As economy grow moderately, the need of commercial jet aircraft will increase too. Then Airbus has the opportunity to sell A3XX.
2. According to Airbus analysis and forecast, in the next 20 years, there’s a large market in the VLA segment. Airbus points out that air transportation demand will grow considerably in coming decades, while the current routes and flights are not sufficient to cope with this huge demand. To be specific, in Asia (e.g. China), the demand for VLA is very strong due to rapid growing economy.
3. Although Boeing already has its 747s in VLA market, Airbus still has its own advantage to compete with Boeing. For example, there will be better operating economy because it cost 12% more than 747s but provides 35% more capacity.

The objectives of Airbus:

1. To compete with Boeing in VLA market. In 1999, the annual sales of Airbus is 16.0 billions while that of Boeing is already 36.7 billions. For Airbus, there’s still a long way to go to catch up with Boeing, not to mention how to beat Boeing.
2. Leverage the advantage of A3XX to grab the VLA market share, and boost their growth rate;
3. To build up a good reputation of A3XX in order to win long-term sales contracts globally, especially in Asia.

1. The calculation will be made under the following situation:

A3XX Cost: $13 billion; Inflation: 2%; Actual IRR: 20%. yield of US bond:6%

Discount rate:6%+6*0.84 = 11.04%; growth rate = 2%; operating margin = 20%; Tax = 38%