Bargaining Power Of Suppliers
Suppliers in this case would be those supplying the material for aircraft building. Their products have a few substitutes and are important to buyers. However, as there are few aircraft builders in the industry, their power is thus relatively weak. Moreover, jet builders are often the most important customers for the suppliers.
Threat Of Substitute Products
The competitive threat of substitute products increases as they come closer to serving similar customer needs. Product substitutes present a strong threat to firm when customers face few switching costs and when substitute products’ price is lower, or quality (performance capabilities) are greater than those competing products.
This thus spells out the case for the jet aircraft industry, particularly for the VLAs. Thus Boeing and Airbus aggressively competes for improvements in fuel capacity and efficiency of their aircrafts, seating capacity, reliability and safety of their planes as well.
In this case, the introduction (launch) of Airbus’ Industrie’s A3XX would inevitably bring about strong competition from Boeing especially in target markets of the Asian Pacific region. Thus, we have sufficient reasons to believe that Airbus would secure only 65% of the VLA market (mainly shared with Boeing) with the successful launch of their new super jumbo plane.
- Boeing’s Response
So how then would Boeing respond in retaliation of Airbus’ attempts to becoming the market leader for the VLA market? Insights from the case allow us to recognize 5 possible approaches that Boeing would employ.
- Boeing may challenge the launch aid by filing a complaint with the World Trade Organization (WTO) on legal grounds. However, Boeing itself might be vulnerable to WTO sanctions for alleged subsidies on its military contracts and its use of foreign sales corporations (FSC).
- Boeing may invest heavily in research and development, backed by their financial strength, to compete directly against the A3XX in terms of cost efficiencies. Thus cutting its prices on the 747. At least this strategy might divert sales away from the A3XX; it might even deter launch completely by making the economics sufficiently unattractive.
- Another approach would be to also invest heavily in research and development, but is an attempt to develop a competing super jumbo jet. This approach involved the greatest financial risk because Boeing would have to invest $13 billion only to share the VLA market with Airbus
- Develop a stretch version of the 747 (E.g. 747X). Apart from cost, there was this question of whether the 747’s older style and technology could stand up to the newer A3XX in terms of passenger comfort and operating efficiency.
- Finally, Boeing may adopt a “wait-and-see” approach to see if the demand for VLA would rise to new peaks as they remain skeptical that the demand for such aircrafts are still small (i.e. ignore the potential threat for the moment). In fact, no response might be the best option as this gives the market leader more opportunities to enhance profitability by concentrating on its existing product-line while Airbus was tied up developing the A3XX.
Whichever option Boeing selects, it had to be consistent with the firm’s renewed emphasis on shareholder value as they regard shareholder value being the single most important measure of their long-term success. These responses would be of paramount importance later in our report analysis where the actions undertaken by Boeing would thus create scenarios that affects the profit margins of Airbus’ launch.
- Forecasting Demand In The Very Large Aircraft (VLA) Market
20-year forecasts for large commercial aircraft would have to be generated due to enormous up-front investment and the lengthy time period for development. The 2000 forecasts agreed that there would be significant growth in the air transportation industry. Worldwide passenger traffic would almost triple in volume by 2019 - Airbus forecast an average annual growth rate of 4.9% while Boeing forecast growth of 4.8% per year.
More importantly, Airbus, using the GMF (Global Market Forecast) Model, predicts that there would be 1550 new aircrafts seating 500 or more passengers. This is shown in Exhibit 3 where the figures comprise of 1235 passenger planes and 315 cargo planes. This is compared against Boeing’s estimate of only 600 new VLA Aircrafts, 270 of which would be cargo planes, leaving demand for only 330 aircraft seating 500 passengers or more. The latter does not believe the demand for very large airplanes is small.
As pointed out in the article, this discrepancy between the 2 forecasts could be traced to conflicting assumptions regarding the relative importance of flight frequency, new route development, and aircraft size. Airbus believed that increasing frequencies and new routes would only be short-term solutions to the problem of growing demand. Airport curfews, gate and runway capacity and passenger arrival preferences would limit the ability to increase frequencies at many airports.
However, intuitively, applying present day context with the terrorism attacks and the subsequent crash of many major economies, it has put an even more pessimistic cover on the forecast of Airbus. Although the increased curfews and security checks may push for the idea of A3XX’s large seating capacity, however, they are more vulnerable as likely terrorism targets. The sharp decline in confidence of airport security has also lead to even larger drops in passenger traffic growth. Ultimately, it may not justify the case for operators to hold purchase A3XX as the seating capacity may not be fully utilized until the periods of uncertainties have tide past. Airbus’ “star” market being Asia, too, may now be a wrong focus as many parts of Asia are having much political and economic problems of their own.
Ultimately, our opinion is that Boeing’s forecast is overly pessimistic whereas the forecast of Airbus is overly optimistic. Thus our forecast of the VLA market would be to average out the 2 forecasts = (600 + 1550) / 2 = 1075
Thereafter, we believe the that Airbus would be only able to attain 65% of the VLA markets demand, facing the strong pressures of competition as highlighted in the Five Forces Model, bringing us to a forecast estimate of (1 - 0.35) x 1075 ≈ 700 aircrafts for Airbus Industrie.
4. Net Present Value Analysis
- Data Given and Assumptions Made
- Financial Data Given
Although the A3XX has a higher list price than 747-400, but Airbus claims that the increased capacity and reduced costs would provide for superior economics to the operator.
Operating Cost per Flight = 12% greater than 747’s
Plane’s seating capacity = 35% greater than 747’s, thus provide
almost 25% more Volume for Free
Breakeven capacity = 323 compared 290 for 747
Costs of Launching of A3XX = $13 billion
R & D Expenditure = $11 billion
($10b to develop 2 passenger versions; $1b to develop cargo version)
Capital Expenditure = $1 billion
(Property, Plant, Equipment, i.e. tools, jigs, and factories which
would be depreciated over 10 years on a straight-line basis)
Working Capital = $1 billion
$700 million would already have been spent by the end of year 2000.
- Assumptions On The NPV Calculation
Important assumptions must be first made before we begin our calculation. We have assumed that sales of planes take place in the year of 2006 and the planes are paid in the full amount once they are delivered. Before 2008, the planes are sold at a price of $216 million each. The price per plane after this period is then $225 million. In addition, we assumed that The price of planes also increases yearly with inflation of 2% and that the first 50 orders are given a ‘Launch discount’ of 25%.
Production begins at the end of 2005. At this point, it is also reasonable to assume that the plant is only able to produce an output of 24 planes for sale in 2006, 50% of full capacity. Production for 2007 would then rise to 75% of full capacity i.e. 36 plane, and after which the plant operates at maximum capacity with an output of 48 planes yearly.
Operating profits are taken at 15% of revenue.
Research and Development (R&D) expenditure of $1 Billion is spread over the first 8 years, after which no more expenditure is incurred on R&D.
Depreciation of plant and equipment is calculated on a straight-line basis over a period of 10 years, based on the total amount of capital expenditure, i.e. $1 billion.
Capital expenditure totals an amount of $1 billion, payable in 4 installments.
4.1.3. Assumptions On The Rate Of Return
The cash flow values are calculated on a discount rate of 11%. This is derived as follows:
E(r) = Rf + β (Rm – Rf)
= 6% + 0.84 (12% - 6%)
= 11.04
≈ 11%
where
Rf is the risk-free rate, taken from the yield of long term US government bonds
Rm is the expected return on the market
β is the asset beta of aircraft manufacturers
In this analysis, we have assumed Rm to be 12% with references to analysis of such written in that year. (refer to references)
4.2. Base Case Calculation
The Net Present Value (NPV) is the most useful of these discounted cash flow methods. NPV analysis yields a result, expressed in after-tax dollars (important for profit-based operations), that takes into consideration the difference in the value of future cash flows and the cost of raising the capital required for the investment. NPV helps make sound decisions about whether to accept or reject potential investment projects based on an objective financial criterion. Projects associated with positive NPVs represent net savings for the organization.
The economic life of the project is set at 20 years. Because Airbus will use funds from funds managers to finance this project, we have assumed that the Airbus can pick from two mutually exclusive investment projects:
(1) Launch the A3XX for the next 20 years
(2) Don’t launch the A3XX.
NPV Formula
Given a discount rate of 11% and over 20 years, the NPV we derived is $2,274.35 (refer to table 1). Airbus should thus go ahead with the launch as the present value of their future cash flows yields an optimistic figure.
Profitability Index Analysis
Profitability Index (PI) is closely related to the NPV and hence, generally leads to identical decisions. Nevertheless, to hone and complement our NPV analysis, we are doing the PI analysis to give a different perspective on the profitability of the launch of A3XX when there are limited available investment funds. Although it is quite unlikely that Airbus will develop a new product in near future, PI can also be used to rank potential Airbus projects at hands to enable rationing of capital.
Assuming that Airbus’s Launch of A3XX is an independent project,
PI = 1 + NPV _
Initial Investment where PI measures the “bang for the buck”
(i.e. value created per dollar invested)
= 1 + (2274.35/13000}
= 1.175
PI for the launch of A3XX > 1 further supports our group’s analysis that the launch should be given the green light.
4.3. Conclusions Of NPV Analysis
A positive NPV of $2,274.35 indicates that Airbus should commit itself to the project and start manufacturing the aircrafts. Our calculations are further supported by the fact that Airbus has in fact already started the manufacturing of A3XX series of planes. The launch will be good to Airbus because the launch of the new planes will dilute the market share hold by Boeing. Furthermore, it will give Airbus the opportunity to enter the VLA industry.
The calculation of our NPV will served as a base case for our decision tree. The reason that we take this as our base case is because at this point we do not take into consideration whether Boeing will launch or not launch. In the case where Boeing launch and Airbus’s expected return on A3XX is higher than projected, it will be reflected in our best-case scenario. And vice versa, the worst case will be when Airbus does not launch it A3XX and Boeing launches the superjumbo. These scenarios would be further elaborated in the decision tree analysis.
We will further support our evaluation of whether or not to launch with other criterions, such as the sensitivity, breakeven analysis, decision tree analyses as the NPV analysis exclusively will not give a complete picture on the decision making process that the Airbus management undertakes.
5. Breakeven Analysis
- Breakeven Quantity
Break-even analysis is the process of determining the production volume needed to make revenues equal to costs, that is, when NPV is zero. It is commonly used to compare the cost functions of two or more facility alternatives, hence aiding in the choice between them.
For example, using the illustration of Airbus, the management believed they would break-even on an undiscounted cash flow basis with sales of 250 planes. A positive annual profit would be made if more than 250 planes are sold. If less than 250 planes are sold, a loss would incur.
The following table contains the variable definitions and formulas for straight-line break-even analysis.
In reality, we have to take into consideration taxes and depreciation,
Break-even quantity using Accounting Numbers:
Contribution margin/ = (p – v)*(1-Tc) where Tc is the corporate tax rate
After-tax difference per plane
After-tax sum of costs = (FC + Depreciation)* (1-Tc)
Accounting profit break-even qty = After-tax sum of costs = (FC + Dep)* (1-Tc)
After-tax difference per plane (p – v)*(1-Tc)
Present Value Break-even quantity:
To calculate the present value break-even quantity, assuming for α years at a rate of β%, express initial investment as a α-year equivalent annual cost (EAC), determined by dividing the initial investment by the appropriate α-year annuity factor:
Initial investment
After-tax costs (regardless of output) = EAC + [FC*(1-Tc)] – (Depreciation* Tc)
That is, in addition to the initial investment’s equivalent annual cost, firms pay fixed costs each year and receive a depreciation tax shield each year. The depreciation tax shield is written as a negative number because it offsets the costs in the equation.
Hence,
Present Value Break-even quantity = EAC + [FC*(1-Tc)] – (Dep* Tc)
(p – v)*(1-Tc)
The accounting break-even quantity differs from the financial break-even quantity. When we use accounting profit as the basis for break-even calculation, we subtract depreciation. At the break-even quantity, there will be sufficient revenues to cover the depreciation expense plus other costs. Unfortunately, at this level of sales, economic opportunity costs laid out for the investment would not be covered. If we take into account the opportunity costs could have been invested at β% in other projects, the true annual cost of the investment would be larger. Depreciation understates the true costs of recovering the initial investment. Hence, companies that break even on an accounting basis are really losing money. They are losing the opportunity cost of the initial investment.
Some weaknesses of break-even analysis:
- A primary weakness is the technique’s inability to deal in a direct way with uncertainty. All the costs, volumes and other information used in the technique must be assumed to be known with certainty.
- A secondary disadvantage of the tool is that the costs are assumed to hold over the entire range of possible volumes. This means that it ignores the fact that experience curve economies can be realized. The experience curve refers to the systematic reductions in production costs that have been observed to occur over the life of a product. Two things explained this experience curve economies: learning effects and economies of scale
- Learning effects: The cost savings that come from learning by doing. Labour productivity increases over time as individuals learn the most efficient ways to perform particular tasks. Equally important, in new production facilities, management typically learns how to manage the new operation more efficiently over time. Hence, production costs eventually decline due to increasing labour productivity and management efficiency.
- Economies of scale: The reductions in unit cost achieved by producing a large volume if a product due to the abilities to spread fixed costs over a large volume and of large firms to employ increasingly specialized equipment or personnel.
- Another disadvantage is that break-even analysis does not take into account the time value of money.
Break-even analysis can be displayed either algebraically or graphically. In either forms, the results are easily explained. This is one of the main advantages because managers would often rather live with a problem they cannot solve than implement a solution they do not understand.
- Conclusions Of Break-even Analysis
Using undiscounted cash flows:
Number of planes required in Year 2011 to achieve 0 NPV = (1153.54/2331.55)*48 ≅ 24
Amount of time required to break-even = 10 + (24/48) = 10.5 years
Number of planes required to break-even = 24 + 36 + 48*3+ 24 = 228 planes
As illustrated in the timeline above, after the undiscounted cash flows are obtained, calculate the cumulative cash flows. Based on the calculation, in 10.5 years’ time, the break-even quantity is 228 planes. This means that Airbus has to sell 228 planes before the cost-versus-revenue will be zero. This, in fact, is quite close to forecast from the Airbus management which stands at 250 planes, revealing signs of accuracy in calculation.
Using discounted cash flows:
As mentioned earlier in Section 5.1, one of the weaknesses of the break-even analysis is that it does not take into account the time value of money, hence the undiscounted cash flow basis is used to calculate the break-even quantity. However, in finance, it is very important to take into consideration the time value of money. Therefore, when calculating the break-even quantity, discounted cash flow should be used instead.
Number of planes required in Year 2014 to achieve 0 NPV = (319.14/528.13)*48 ≅ 29
Amount of time required to break-even = 14 + (29/48) ≅ 14.6 years
Number of planes required to break-even = 24 + 36 + 48*7 + 29 = 425 planes
Comparing that of undiscounted and discounted cash flows, we would realize that, for undiscounted cash flow, the break-even quantity is smaller, than that of discounted cash flow. The break-even quantity can also be obtained within a shorter time for undiscounted cash flow. However, with discounted cash flow, the break-even quantity is obtained through longer periods.
This break-even quantity obtained using the discounted cash flows show a more realistic picture.
- Sensitivity Analysis
Conducting a sensitivity analysis allows us to determine how robust are our results are relative to the key decisions as well as the underlying assumptions we had made. This approach basically examines how sensitive the NPV ($2274.35mil) we had derived earlier is to changes in underlying assumptions (comparing changes in Airbus’s operating margin against changes in discount rate, inflation rate and tax rate). However, we have to note that the limitation of this model is that it treats each variable in isolation when, in reality, different variables are expected to be related.
- . Analysis Of Changes In Operating Margin Against Changes In Discount Rates
As shown in the Table 2, holding operating margin to be 15%, we can see that Airbus will get positive NPV at any discount rates (ranging from 9% to 13 %). Higher discount rate might be due to higher market rate of return (13% of discount rate results from 14.3% of market rate of return) or undiversified risk. Thus, it will result in lower NPV. However, a drop in operating margin to 5% will result in negative NPV at any discount rates. This might be due to increasing risk if Boeing decides to enter the competition by launching VLA similar to A3XX. It, too, indicates that Airbus would have to keep operating costs low and operation margins higher than 5% it its decision was to launch the A3XX so as not to negate their earnings for this project.
- . Analysis Of Changes In Operating Margin Against Changes In Steady State
Number of Planes
By varying the number of planes that are likely to be sold in Airbus A3XX’s steady state (i.e. from Year 2008 onward), we can see the possible effects if Boeing decided to produce VLA similar to A3XX. Having Boeing to come into play, the market share of Airbus will inevitably dwindle and hence, the assumed steady state of 48 planes per year will not be realizable. Assuming that Boeing and Airbus will then share the VLA market, a more reasonable steady state for both is might be about 28 planes per year. This will results in a negative NPV of $1373.78 mil. This suggests that it might be viable to have this new superjumbo in the market by one provider, but definitely not two.
- . Analysis Of Changes In Operating Margin Against Changes In Inflation Rate
Assuming that the operating margin of 15% holds, we can see from the Table 2 that there were insignificant changes in Airbus’s operating margin should the inflation varies. This result might be due to the fact that we had varied the price of the plane according the increasing rate of inflation (2%) for simplicity sake. However, it is visible that a drop in the operating margin by 5% will result in a negative NPV bracket. This finding puts a considerable doubt on the feasibility of Airbus’s launching A3XX.
- . Conclusions of Sensitivity Analysis
It is evident that the response of Boeing whether or not it will launch a series similar to A3XX in defense, is significant in Airbus’s profitability. By having Boeing to compete head on, Airbus’s operating margin will definitely drop from the 15% we had originally assumed. This puts Airbus’s NPV for A3XX into a unfavorable position as seen from the Table 2– out of the 4 variables we had analyzed, a drop in 5% operating margin will most likely result in a negative NPV.
Decision Tree Analysis
- . Rationale Behind Assigning Probabilities
Best Case Scenario – 20%
This scenario occurs when Airbus decides to launch the A3XX and Boeing does not follow suit. Boeing in this case would thus be adopting the “wait-and-see” approach as discussed earlier in their responses as they remain skeptical of A3XX’s profit potential. However, we are assuming the passiveness of Boeing coupled with the confidence of aircraft buyers in the industry actually brought about an unexpected increase in the operation margins. Economies of scale might have been reaped as well to lower the costs to A3XX’s development. Thus, the operation margin in this case is assumed to be 25%.
Figures from the sensitivity analysis above had revealed that with an operation margin of 25%, interest rates held constant, the NPV of the project would be $8111.35 million. (Refer to Table 2) However, we have assigned the probability of this scenario as only 20% probable. This is because unexpected gains would be difficult to achieve.
Satisfactory Scenario – 50%
This scenario is much like the base case that we have assumed in our NPV calculation. That is to say, it is what we feel would most likely occur (0.5) where Boeing once again adopts no response and Airbus has no unexpected gains or cost reductions. Effectively, we have assumed that less of these external pressures, and with Airbus being able to produce and sell at full utilization of capacity, their operation margin would be 15%. Figures from the sensitivity analysis above reveals that with an operation margin of 15%, interest rates held constant, the NPV of the project would be $2274.35 million. (Refer to Table 2)
This scenario is most probable because Boeing has all along been pessimistic of the gains potential in the A3XX. They would not retaliate irrationally, but rather, observe and assess the progress of Airbus.
Worst Case Scenario – 30%
Finally, this is the case where Airbus will launch and Boeing follows up by pouring in funds for research and development programs, either in attempts to build a new super jumbo, or compete against Airbus in terms of cost efficiencies. This poses strong competition and we estimate that much greater proportion of the market would thus have to be shared with Boeing. Airbus may not even produce at full utilization of their capacity. The operation margin attainable in this case would thus be only 5%. This has a higher probability than the best case scenario as the competitive nature of the industry is rather intense and once the monopoly strength of Boeing has been threatened, they would most likely respond swiftly.
Figures from the sensitivity analysis above reveals that with an operation margin of 25%, interest rates held constant, the NPV of the project would be negative $3562.65 million. (Refer to Table 2)
-
. Decision Tree Analysis
Invest ($13,000m)
($700m)
Abandon ($700m)
Expected payoff = (0.20 * 8111.35) + (0.50 * 2274.35) + (0.30 * -3562.65)
= $1690.65 m
- . Conclusions Of Decision Tree Analysis
The decision tree analysis shows us what payoffs are involved in deciding whether or not to launch the project. It gives us a clearer picture of actual NPV than our Base Case NPV because it takes into account the possibilities of certain contrasting scenarios arising, usually as a result of changes and responses of the external environment of the firm, in this case, Airbus’s main competitor – Boeing.
At the decision node in the beginning, Airbus has already spent $700m prior to the investment decision date so this is considered a sunk cost, whether or not the project is undertaken.
In our analysis, we deliberated three market scenarios, which are a result of Boeing’s response to the launch. The decision tree analysis gives us a much clearer view of what payoffs Airbus might receive from the launch, considering these scenarios. The expected payoff was calculated on the basis of a 20% chance of Best Case Scenario occurring, a 50% chance of a Satisfactory Scenario and a 30% chance of the occurrence of the Worst Case Scenario. The expected payoff is a positive figure which means Airbus can expect to profit from the launch.
Alternatively, if Airbus decided against the launch, all they lose out is the $700m, which had been incurred initially.
Therefore, a decision tree gives us a better idea of what actual payoffs can be expected, taking into account the external environment of the firm, and assuming the probabilities of the market scenarios taking place.
- Conclusion
- Current Developments
In Early 2001, EADS Airbus, set out to attack the monopoly of Boeing by officially launching the A380, which now will become the largest passenger aircraft with more than 550 seats. This aligned snuggly with our analysis, based in 2000 that Airbus should forge ahead with the project due to positive present value of estimated future cash flows.
The launch of the A380 programme pushed Boeing, which had previously led the pack in commercial aviation, into the position of challenger. The roles were now reversed and now Boeing had to come up with an answer. The first answer was the B747X, an extended and face-lifted version of the B747. This move fell within with our analysis in Section 3.2, about Boeing’s retaliation to Airbus’s launch of the A380. They had indeed poured in huge research and investments and developed a stretched version of the 747s. But despite a heavy marketing effort in the beginning of 2001, Boeing did not have the same success with its 747X as Airbus did with the A380. Given the segment’s slim size, Boeing had no other choice than to withdraw from the race and create another niche in which to compete.
In April 2001, Boeing retaliated by presenting the concept of the Sonic Cruiser, which does not only have a surprisingly new design with canards and delta wings, but also a very different strategic approach to the market. While Airbus’ competitive driving factor is a more comfortable super-jumbo intended to fly between the world’s major hubs at a very low cost-per-seat, Boeing’s one is a faster, smaller and more flexible long haul aircraft designed to meet the customers’ desire for direct point-to-point flights between smaller distant, medium-sized flights, foreseeing the increasing congestion of the world’s large hubs.
This move is an explicit attempt by Boeing to “sandbag” Airbus. Once Airbus had committed to develop the super-jumbo, Boeing announced a change in the game in large aircraft, from a focus on size to a focus on speed (and range), knowing that Airbus could not imitate, in terms of resources and speed in launching. However, the fact that Boeing has yet to commit to the sonic cruiser, it may plausibly (still) be regarded as a feint or a phantom plane that simply gave Boeing something positive to announce as it was forced, by credibility constraints, to withdraw from the contest to develop new very large aircraft. Moreover, future changes in public opinion about ecological aspects as well as the evolution of the world economy and the oil price will certainly be decisive for whether low operating costs and higher-flying comfort will win over high speed and flexibility.
However, with the global economic slowdown, many fear that Boeing and Airbus would be exposed to overcapacity. However, Airbus is still confident about its A380, especially in these times where cost savings are asked and demanded by the airlines, will be the right offer, so Airbus should stick to their time schedule. In contrast, Boeing is considering whether to ditch their proposed Sonic Cruisers and focus on building a new, cheaper conventional airplane since the airline industry is struggling and everything these days is about doing things cheaper, instead of faster. Some, however, think this is a short-term view that Boeing is taking, and that the company has historically stayed strong by making big bets during downtimes that pan out when the economy picks up.
Airbus continued to achieve impressive results in 2001, despite the economic downturn. An extensive and state-of-the-art product line, combined with prudent industrial policies, rigorous order book management and a truly customer-oriented approach enabled Airbus to consolidate its position as market leader in civil aviation. Day-to-day business was conducted according to plan and the Airbus aircraft family continued to grow with the A340-600 making its maiden flight, final assembly of the first A318, the first A340-500 entering production and preparations for manufacturing the A380 underway at Airbus sites all over Europe.
Indeed, Airbus' A380 met with overwhelming market success in 2001, winning almost 100 sales, as anticipated, just one year after commercial launch. Despite the downturn, Airbus won more new orders than its competitor for the second time in the last three years, and delivered a record number of aircraft leading to its largest turnover ever. In addition, Airbus maintained a healthy and strong order backlog, larger than the competitor's for the second consecutive year. This backlog constitutes a major asset for the coming years. It has continued to increase with respect to the competitor's and, purged of orders from airlines facing severe financial difficulties, it represents more than five solid years of production.
In conclusion, Airbus showed great success on the whole. The launch of the A380, indeed, had benefited Airbus Industrie greatly, hence substantiating our analysis about the project’s positive NVP and that the project should be eventually launched.
On the other hand, Boeing Commercial Airplanes Chief Executive Alan Mulally announced that Boeing will cease work on its proposed high-speed Sonic Cruiser and instead develop a conventional airplane that will use lightweight materials, better production processors and other technologies to operate at significantly lower costs than today's commercial jets, coupled with lower fuel burn. The new "super-efficient" aircraft would help financially foundering airlines would improve their balance sheets by reducing operating costs 15 to 20 percent. It is not clear when the new jet would enter service, as it would depend on the pace of the airline industry recovery. Boeing Chairman Phil Condit said the company would not have a full-fledged launch of any airplane project until late 2003 at the earliest and research and development expenditures are to be hold down at 3 to 3.5 percent of revenues, so Boeing can maintain its profitability during the current down cycle. That will mean a shrinking pool of money for new projects.
Many in the aerospace industry have anticipated the demise of the Sonic Cruiser since last year's September 11 terrorist attacks. The subsequent economic downturn, which triggered more than $7 billion in losses at U.S. airlines in 2001, only heightened pessimism about the project. Many initially gushed about the Sonic Cruiser's promise to cut travel times 15 to 20 percent. By offering such speeds at costs roughly equivalent to today's 767, the Sonic Cruiser would allow airlines to make more money by charging frequent business travelers an even greater premium over coach passengers. That was the idea, at least. But since the dot-com bust, business travelers have stayed in their offices more and, when they travel, are paying cut-rate prices. Against that backdrop, a premium product such as the Sonic Cruiser lost much of its appeal.
No one can predict with full confidence as to whether Boeing or Airbus would emerge as the ultimate leader in the market. However, the evolution of the world economy and the oil price, together with the development within each of them, will definitely contribute to the overall performance.
- References
-
Boeing 2000 Current Market Outlook p.341
-
Airbus Industrie, Global Market Forecast 2000-2019, July 2000 p.61
-
Airbus vs. Boeing in Superjumbos: Credibility and Preemption Report by Benjamin C. Esty (HBS) and Pankaj Ghemawat (HBS), Current Draft: August 3, 2001
-
Strategic Management: Competitiveness and Globalization, Fifth Edition, Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson
-
Corporate Finance, International Edition, Ross. Westerfield. Jaffe.
Website Links
10. Tables
- Exhibits
Source: Boeing Current Market Outlook, Airbus Global Market Forecast and case writer estimates
Source: Dresdner Kleinwort Benson, Aerospace and Defense Report, May 8, 2000
