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Developing the World's Largest Commercial Jet.

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Introduction

Contents 1. Introduction 1.1. Purpose And Objective Of Report 1.2. Background Case 1.2.1. Analyzing Airbus' Objectives 1.2.2. Analyzing Boeing 2. Capital Structure 2.1. Assumption Of No Interest Payments 3. Demand Forecast 3.1. Key Competitive Characteristics Of the Commercial Jet Aircraft Industry 3.2. Boeing's Response 3.3. Forecasting Demand In The Very Large Aircraft (VLA) Market 4. Net Present Value Analysis 4.1. Data Given and Assumptions Made 4.1.1. Financial Data Given 4.1.2. Assumptions On The NPV Calculation 4.1.3. Assumptions On The Rates Of Return 4.2. Base Case Calculation 4.3. Conclusions Of NPV Analysis 5. Breakeven Analysis 5.1. Breakeven Quantity 5.2. Conclusions Of Breakeven Analysis 6. Sensitivity Analysis 6.1. Analysis Of Changes In Operating Margin Against Changes In Discount Rates 6.2. Analysis Of Changes In Operating Margin Against Changes In Steady State Number of Planes 6.3. Analysis Of Changes In Operating Margin Against Changes In Inflation Rate 6.4. Conclusion of Sensitivity Analysis 7. Decision Tree Analysis 7.1. Rationale Behind Assigning Probabilities 7.2. Decision Tree Analysis 7.3. Conclusions Of Decision Tree Analysis 8. Conclusion 8.1. Current Developments 9. References 10. Tables 11. Exhibits 1. Introduction 1.1. Purpose And Objective Of Report On June 23rd, 2000, the Airbus Industrie's Supervisory Board has a critical situation at hand. They would have to decide if they were to commit to an industrial launch of the new superjumbo, the A3XX. This is the point where they have already sunk in $700million and a decision to abandon this project would result in the loss for the expense of these preliminary studies and efforts. However, with a decision to commit in launching the superjumbo in an attempt to seize market demand in the Very Large Aircraft (VLA) market, it also indicates the stage where much significant expenditures would begin. Many implications would thus have to be considered before taking on a rational course of action. Most importantly, we have to study the competitive nature of the industry, the profit potential of the launch of A3XX and the volatility that may negate benefits. ...read more.

Middle

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 5.1. 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. ...read more.

Conclusion

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. 9. ...read more.

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