Airbus A3XX: Developing World’s Largest

Commercial Jet (A)

 Background
• As supervisory Board of Airbus Industries we are
analyzing if we can Authorize to Offer (ATO) the A3XX,
a proposed super jumbo jet that would seat from 550
to 990 passengers, have a list price of $216 million,
and cost $13 billion to develop.
• We are hoping to secure orders for 50 jets from as
many as five major airlines.
 Background Cont’d
• The real question is whether there is sufficient long-
term demand to justify industrial launch.
• We believed we will break even on an undiscounted
cash flow basis with sales of 250 planes, and sell as
many as 750 over the next 20 years!
• We predict that there will be demand for more than
1,500 super jumbos over the next 20 years that will
generate sales in excess of $350 billion.
 Forecasting Demand

• Since large jet aircraft will take years to design and

develop, large investment is required.
• Long-term demand projections have to be
developed.
• 20-years forecasts are to be prepared.
Forecasting Demand
 Forecasting Demand cont’d

• A forecast on average annual growth rate in

transportation industry of 4.9% is reported for
Airbus and 4.8% for Boeing.
• Additionally, an annual demand for a new aircraft is
expected on each of 10000 passenger routes linking
200 airports.
• We are confident in our forecast analysis that
capacity increase will eventually prevail.
Forecasting Demand cont’d
Forecasting Demand cont’d
 Financial Strategy

• The A3XX will cost approximately $13 billion to

launch: $11 billion for research and development, $1
billion for property, plant, and equipment, and $1
billion for working capital.
• An estimated $700 million that is expected to have
been spent by the end of 2000 is not included in the
13 billion investment.
 Financial Strategy cont’d
• Funding will come from three sources: $3.5 billion
from vendors referred to as "risk sharing Partners"
(RSPs); $3.6 billion of "launch aid" from the partners'
national governments; and $5.9 billion from the
Airbus partners themselves in proportion to their
ownership interests.
• Additionally, there will be early cash flows from
progress payments made by airlines prior to delivery.
 Financial Strategy cont’d
• Launch aid repayment is expected to come through a
per plane fee.
• For this reason, plus the fact that non-repayment does
not trigger default, launch aid more closely resembles
cumulative preferred stock than debt.
Financial Strategy cont’d
 Project Economics
• If the project is successful, the cost will remain at $13
billion and our first expected delivery of planes will be
in 2006.
• We will have an average realized price of approximately
$225 million and operating margins of ranging from
15% to 20% when our full production capacity of just
over four planes per month is met.
 Project Economics cont’d

• These margins are based on earnings before

repayment of launch aid and risk sharing capital.
• The project is likely to have an effective tax rate
equal to 38%.
 Project Economics cont’d
• In general, larger planes are expected to earn bigger
margins predicting that the companies will make
virtually all of their profits on wide body jets.
• Among other factors, financial success depends on
getting enough early sales to drive down costs
through learning curve effects.
 Project Economics cont’d
• The basic idea is that unit costs, such as direct labor,
declines as a function of cumulative output.
• As a result, the faster Airbus sells planes, the more
profitable it would become.
 Conclusion
• There is need to put the company on the line every
three or four years in this business.
• If there is a chance of a launch to fail, it could cause a
company to exit the industry.
• A decision of proceeding with the A3XX is an
extraordinary risk and it has to be very well thought
through by a conservative, no nonsense team of
people.
Thank you