Airbus

Airbus Case

Mark Taranto

Cara Weikel, Goutham Budati, Shounok Sinha, Hou-Shiang Fung & Raggi Chatterjee

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Advanced Corporate Finance - Airbus A3XX

Airbus is interested in building the A3XX for a few reasons, one of them being the need for a large jet solution for commercial airlines. Only Boeing has a product to meet these needs, with the lion-share of the total market. Given this need, Airbus has the following reasons for pursuing the VLA market:

• Due to roomier accommodations, Airbus expects that flights on an Airbus A3XX would be more attractive to passengers, especially on the longer route.

• The Airbus A3XX will have significant improvements in economies of scale over the 747, making it more attractive for use by airlines. Even though the flight operating costs for A3XX is slightly higher (12%) than the 747, the capacity is significantly greater (35%).

• As air traffic increases, Airbus expects that new airports and increased fight frequency will not be sufficient to meet the additional demand. Therefore, they expect that airlines will need to use larger planes with higher passenger capacities in order to meet the market demand.

• A four-engine plane would be safer than two-engine planes, particularly with regard to trans-pacific flights.

To calculate the number of aircrafts Airbus needs to sell in order to be profitable, we made the following assumptions:

• Operating Margin of 20%, (at the highest side of Airbus's estimates, and more conservative than the estimates of industry experts.) A sensitivity analysis was conducted to understand how many aircraft would need to be sold if the operating margins were lower. In those cases, we found that the project would be even less attractive.

• Steady sales growth as the result of raising prices at the rate of inflation, which was given in the case as 2%. As directed in the case, we assumed that the quantity of planes sold would remain constant after the development period.

• Working Capital has only been adjusted for inflation, and would remain relatively stable.

• PP&E investments will be made at the rate of depreciation, replacing everything every 10 years.

In order to profit from this investment, Airbus needs to sell 40 planes per year, resulting in a NPV of $119.59 million. 40 planes is smaller than Airbus's projected demand for VLAs, but considerably larger than Boeing's projected demand. Airbus estimates the market to be between 1235 and 1550 planes over the next 20 years, depending on whether cargo planes are included or not. This equates to an average of 62-78 planes per year. In comparison, Boeing estimates a demand of 330-600 planes, depending on whether cargo planes are included. This is equivalent to a total demand of only 16.5-30 planes per year. We estimate that demand will be somewhere between these two estimates, still in a range above the quantity Airbus would need to sell in order for the project to be profitable.

Please refer Appendices – Figure 1 for reference.