Corporate Finance: Airbus A3XX: Developing the World’s Largest Commercial Jet(A)- Mike Ryan 1.Develop a simple discounted cash flow model to assess whether the A3XX project is positive NPV, using assumptions broadly in line with Airbus' case. Refer to spreadsheet for model. Using the base case of Airbus A3XX selling 500 aircraft looking out to 2020 results in an NPV of -$5.7B. In the bull case of 750 aircraft, the NPV is -$4.7B. 2. Analyze the sensitivity of the project NPV to variables that you think are important. In particular discuss Boeing's view of the likely market. Boeing’s view of the future (looking out 20 years) for air travel is far less reliant on 500+ passenger VLAs. In contrast to Airbus’ view, Boeing only projects a market demand of 330 aircraft. Although Boeing does see the number of passengers growing at approximately 5% per year, the company expects additional point-to-point service (such as to secondary airports) to service the demand with medium-sized, long-range aircraft, such as the 777. Boeing’s projections also imply differences relative to Airbus emphasizing higher flight frequency, lower price sensitivity, and possibly faster turnaround times. Assuming that Airbus is the only supplier of 500+ passenger planes leads to an NPV of -6.0B. Aspects that would impact the relative success of this project include potential investment cost overruns, projects delays, or actual operating margins (due to pricing pressure, operating efficiencies, or market changes). At a 15% Cost of Capital, the challenge for Airbus is to bring cash flow from revenues into the project sooner by spiking demand from service providers, negotiating advantageous terms, and ramping up production quickly (for revenues on delivery and margin boosts from learning curve).
3. Articulate an overall argument either FOR or AGAINST the project, based on the above analysis, as well as your own assessment of the likely outcomes. Include any broader strategic factors that you think are important. Try to advocate convincingly either a strong negative or a strong positive assessment. Given the 15% Cost of Capital, the 6-year lead-time, and the large upfront Capital Expenditures, it is challenging to find a scenario where this project makes financial sense. I would advise strongly against the project. It seems likely that the financing relationships with suppliers and participating governments are artificially lowering Airbus’ risk, thereby leading to an investment that does not make overall financial sense. If the company moves forward, it may be that Airbus considers the brand value of the A3XX as strategically important, establishing a high-end positioning (breaking Boeing’s 747 strong position) that can be leveraged into sales for its other aircraft lines.
Additionally, some of the R&D investments and RSP vendor development may be valuable for the companies other products. Airbus Notes & Assumptions: Total project cost estimate: $13B $11B in R&D $1B in PPE with 10-year straight-line depreciation $1B in Working Capital Financing: $3.5B from RSPs with 0% interest $3.6B in Launch Aid from Governments (17 year term at ‘market rate’) $5.9B in Equity Investment from company Discount Rate: 15% (alternative best case 10% for sensitivity testing) Tax rate: 38% Sales: 1st Delivery in 2006 Full Production of 48 planes/year in 2008 $225M price per plane 15% to 20% margin (before repaying launch aid or risk sharing capital; learning curve effects) Payment terms 50/50 Announced orders- 22 with 10 options = total 32; 100% Probable orders- 34 with 21 options = 55; 75% Potential orders- 30 with 20 options = 50 ; 50% Sensitivity Considerations: Demand Volume for VLAs (Forecasts at 2019: Airbus =1,235, Boeing =330) Pricing Pressure Project Delays Unit Cost Airbus estimates the global demand for total new seats required from 1999-2019 as 1. Seats needed today * annual growth at 5% - existing seats + retired seats + 10% conversions from smaller planes to VLA = 679,323 (growing from 505,707). Assuming a normal configuration of 550/plane, the total VLA market is 1,235 planes. 1997-2001 showed fleet growth in the largest VLAs of 11% over 4 years, but relative reduction in composition of 6.6% across 15 airlines. Airbus’ aircraft demand shows 1997, 1998, 1999, 2000, 2001 delivery and booked demand as follows (for 150, 310, and 300 passenger planes:
57, 80, 101, 82, 139, 126 14, 23, 44, 33, 49, 25 33, 24, 20, 14, 21, 32
