In july2000, Airbus Industries supervisory board was almost consenting to a $13billion financing plan for the construction of a novice super jumbo airplane, known as the A3XX which would have a seating capacity ranging from 550 to 1000 commuters. With an estimate of 20 orders for the new plane, the board was to determine if there would be enough demand for the A3XX in the future to allow room for the funding. At that point in time, Airbus was speculating the demand for a very large aircraft (VLA) – those that had the capacity for more than 500 commuters, would take over 1500 airplane in a period of 2 decades and would lead to a revenue exceeding $350billion. As per Airbus, it needed to trade 250 vehicles to break even, and was in a position to trade up to 750 aircrafts over the next 2 decades. The case looks into the two predictions that have been made and encourages the students to decide if they would go ahead with the development in light of the investment requirements and the uncertainty of the future demand.
Cash Flow Calculations
Should Airbus enter the jumbo jet segment?
If so, how? And, what should Boeing do about it?
Why is Boeing’s demand estimate for very large aircraft so different from Airbus’ estimate?
What is your estimate of the demand for the A-3XX? Please explain your methodology, and the reasons you obtain different estimates from those reported by Boeing and Airbus.
What is the cost of capital for Airbus?
What is the breakeven volume for Airbus? Assume that the revenue stream for Airbus can be treated as perpetuity, and that the various costs are to be discounted at the appropriate cost of capital for Airbus.
What are the financial and non-financial risks for Airbus? How has Airbus attempted to control the downside impact of these risks?
As Airbus senior management, are you going to develop the A-3XX?
As Boeing senior management, how will you respond to (a) the threat and (b) the actual development of the A3-XX?