Airbus Case Study

Airbus A3XX fount study grouping E10, MBA 2011 Airbus A3XX case study, pigeonholing E10 Airbus objectives Both Airbus and Boeing, as well as industry experts expect worldwide passenger traffic to recrudesce at an average annual result roll of 4. 8-4. 9% for the next 20 years (up until 2019). effrontery that the traffic was anticipate to almost triple in volume, few(prenominal) manu particularurers anticipate a significant amplification in aircraft gross sales agreements, although their views on the food commercialise twist were different.Airbus expected hub-to-hub routes to become the dominant event of transportation in key regions (transatlantic and transpacific), opposing Boeings preference for point-topoint routes. Therefore, Airbus forecasted high proceeds roams in very astronomical aircraft (VLA) segment, that was expected to reach 1,235 aircraft by 2019. Although Airbus had comfortably increased its market sh be by 1999, it still did not have a product to compete with Boeings 747 in the highly-promising VLA market segment.Introduction of A3XX could help Airbus drive more than a half of this segment, and disposed(p) the segments very domineering prospects, it could position Airbus as the commercial message aviation industry leader. FCF exercise The model prognosticates Airbus relieve property flows associated with the potential implementation of A3XX contrive in 2001-2020. All calculations be performed in US dollars, net attest crawfish out to be is calculated as of December 31, 2000.Given the uncertainty of model assumptions and the long-term spirit of the model itself, additional sensitivity compendium was performed in respect of (a) operate brinks, (b) implication rate, (c) inflation rate, (d) aircraft sales, (e) enthronement expenditure, and (f) sale monetary value. observe assumptions Sales &038 production Sale footing $216m as of 2006, rising afterwardswards at the inflation rate. Although some of the fi rst contracts are expected to be executed with a significant discount, this is not component parted into the model out-of-pocket to low info availability. Operating margin 15%, learning curve magnetic core was cut due to insufficient data (assuming lower margin in premature years and higher margin at later stages averaging at 15% all over the forecasted period). Sales ramp-up based on the assumptions employ in Lehman Brothers equity look for reports (25% of besotted state capacity in beginning(a) year, 75% in the second year). labor capacity 53 aircraft annually in steady state (based on a total sales estimate of 730-750 aircraft in 2001-2020). Pre-payments although a fraction of the sale price is usually paid in advance, this factor was ignored due to insufficient data (all costs and payments are faux to keep in the year when aircraft is delivered). -1- Airbus A3XX case study, Group E10 Funding &038 investings Funding $11. 9b of quasi-equity, debt is not use in the project. Launch costs $11. 0b for research &038 development, $1. 0 for capital expenditures, $1. 0b for additional on the job(p) capital (as per Dresdner Kleinwort report). Additional capital expenditures assumed at zero after the investment stage (20012008) is over Discount rate 11. % as cost of equity (CAPM = 6. 0% risk-free rate + 0. 84 commercial aviation beta * 6% market risk premium). Depreciation straight delineate over 10 years, starts immediately after corresponding capital expenditures are performed. R&038D expenses are not capitalised. other(a) Inflation constant at 2. 0%. Tax rate 38. 0% (standard french rate). Terminal value growing sempiternity where suppuration is set at the rate of inflation. Boeings response to A3XX set in motion is not explicitly modelled (assuming this factor is already taken into account through unit sales and margins). Although the market demonstrates considerable cyclicality, this factor was ignored for the sake of simplicit y. Modelling results Net present value of the A3XX project is estimated at $528m, consisting of ($1,447m) NPV of 2001-2020 capital flows and $1,975m of terminal value. The break-even number of planes after the investment stage (in 2009 and beyond) is estimated at 48 per year. In this case the NPV of growing perpetuity is expected at $4,702m (annual inflows of $1,061 growing at 2% with 11% discount rate), spell the NPV of funds flows in 2001-2009 is estimated at ($4,552). Sensitivity outlineThe following tables present bi-dimensional sensitivity epitome of the resulting NPV for model variables that have significant predictability issues and / or promising to cause huge changes in the resulting NPV -2- Airbus A3XX case study, Group E10 Project launch considerations Implementation of the A3XX project definitely has a very high risk profile. Although the resulting NPV jut is positive under the base scenario, sensitivity analysis indicates that returns on this project are extremel y sensitive to the underlying model assumptions (e. g. a drop in operating margin by just 2 percentage points results in prohibit NPV).Therefore, in that location is a high risk of negative returns on this project. The projects gainfulness may also be undermined by external market factors. The most life-and-death ones being (a) the response of Boeing to A3XX project launch, (b) growth rate of the VLA market. However, this project is strategically key for Airbus. Over the last several decades, since the opening of Boeing 747 the share of VLA segment has expanded significantly. Additionally, analysts estimate VLA manufacturing has the highest operating margins that is commonly used to subsidise production of smaller aircraft.However Airbus is not present in this segment at this time. Therefore, despite a very spoilt profile of the project, Airbus has good reasons to proceed with this industrial launch. It it difficult to estimate the number of unwavering orders Airbus needs t o have before committing to the project. The monetary model suggests it needs to sell ccc+ aircraft before cumulative non-discounted project cash flow becomes positive. However, taking into account the fact that airlines do not place orders with oral communication time exceeding 5-6 years, it is highly unbelievable that Airbus secures orders for 300+ planes before project launch.A significant amount of orders (e. g. 50+) is likely to be enough to test Airbus posit forecasts. Potential Boeing response Although Boeings estimations of the VLA market are not so approbatory as Airbus, it should definitely take some actions to defend its dominant position on this market. Boeing is unlikely to undertake a homogeneous development project (i. e. develop a new plane for the VLA segment), since it would be a lose-lose strategy for both companies given restrict size of this market segment.Therefore, the most demonstrable decision for Boeing would be to invest in the stretch version of i ts 747 model. This is likely to take significant amount of orders away from Airbus while keeping the investment costs low. In case Airbus decides not to go leading with its A3XX project, Boeing has no incentive to incur whatsoever investment costs whatsoever, since it already has constituted presence in the VLA segment with its 747 aircraft. -3- Airbus A3XX case study, Group E10 Financial projections (in US$ mln) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 tax revenue Operating pro? t R&038D expenses Depreciation EBIT Taxes EBIAT 2,808 421 -880 -100 -559 212 -771 8,813 11,910 12,149 12,392 12,640 12,892 13,150 13,413 13,681 13,955 14,234 14,519 14,809 15,105 1,322 -660 -100 562 -214 775 1,787 -440 -100 1,247 -474 1,720 1,822 -100 1,722 -654 2,377 1,859 -100 1,759 -668 2,427 1,896 -100 1,796 -682 2,478 1,934 -75 1,859 -706 2,565 1,973 -40 1,933 -734 2,667 2,012 -5 2,007 -763 2,770 2,052 2,052 -780 2,832 2,093 2,093 -795 2,889 2,135 2,135 -811 2,946 2,178 2,178 -828 3,005 2,221 2,221 -844 3,066 2,266 2,266 -861 3,127 1,100 -2,200 -2,200 -2,200 -1,320 -25 -60 -95 -100 -1,100 -2,225 -2,260 -2,295 -1,420 418 846 859 872 540 -1,518 -3,071 -3,119 -3,167 -1,960 R&038D expenses Capital expenditure Net working capital Operating pro? t Taxes Free cash ? ow Discounted FCF -1,100 -2,200 -2,200 -2,200 -1,320 418 -250 -150 846 -350 -300 859 -350 -300 872 -50 -200 540 -880 -50 421 212 -296 -158 -660 1,322 -214 448 216 -440 1,787 -474 873 379 1,822 -654 1,168 457 ,859 -668 1,190 419 1,896 -682 1,213 385 1,934 -706 1,227 351 1,973 -734 1,238 319 2,012 -763 1,249 290 2,052 -780 1,272 266 2,093 -795 1,298 244 2,135 -811 1,324 225 2,178 -828 1,350 206 2,221 -844 1,377 190 2,266 -861 1,405 174 -682 -1,755 -1,991 -1,978 -1,030 -614 -1,424 -1,456 -1,303 -611 Aircraft sale price Aircraft sold 216 13 220 40 225 53 229 53 234 53 238 53 243 53 248 53 253 53 258 53 263 53 269 53 274 53 279 53 285 53 -4-