Airbus a3 xx developing the worlds largest commercial jet case word file Harvard Business School Case

1. Neeraj Mehra
Airbus A3XX: Developing the World’s Largest Commercial Jet
1. Why is Airbus interested in building the A3XX? What are its objectives?
Solution:
 Boeing held monopoly in VLA market in terms of its 747-xxx airplanes.
 Airbus didn’t have any airplanes to compete with the 747’s and hence wanted to enter
this new segment.
 Airbus’s market research has predicted that the VLA segment will have unprecedented
growth due to increased demand of air travel and growing traffic at major airports across
the world.
 The rise in passenger / cargo traffic could be achieved by higher capacity aircrafts only.
 Airbus predicted that growing economies like China and other Asian economies would
contribute greatly to the demand for VLAs in the future.
 Airbus also believed that a larger aircraft operating over long distance flights had a better
operating economy. It only costs 12% more to operate the flight as compared to a 747
but provides 35% more space which was effectively a source of revenue.
 Moreover the greater space and more efficient design allowed airlines to provide more
services in their aircrafts which could be used to charge premium to customers.
 The Passengers attributed a special appeal to the state of art facilities provided in such
aircrafts.
 VLA Airbus A3XX would have 4 engines compared to the conventional 2 engine design
which also added a safety level in terms of long distance air travel.
 It had better aisle space which was crucial in terms of passenger evacuation in cases of
emergencies.
Overall, VLA aircrafts would provide the most optimum solution to the growing air travel
needs.
2. How many aircraft does Airbus need to sell in order to break even of the investment? Is
this number greater or less than your estimate of total demand for very large aircraft over
the next twenty years?
Solution:
Calculation has been made in the excel sheet.
Inflation: 2%; Profit Margin (till 2015): 20%; Profit Margin (post 2015): 25%.
The results with above assumptions are as follows:
Utilisation NPV IRR BreakEven
80% -567 8.25% N/A
85% 0 8.85% 829
90% 492 9.35% 779-824
100% 1551 10.38% 715-765

2. Neeraj Mehra
In the above Y axis has the NPV and the X axis is the number of planes.
The point at which the line intersects the X axis is the point of breakeven sales where
NPV=0.
The graph has been drawn for different capacity utilisation.
Another case has been taken in the excel sheet wherein the inflation is taken as 4%. In
such cases we see a higher NPV and a lower value for breakeven sales.
3. As Boeing, how would you respond to this situation? How does your answer depend on
what you think Airbus is likely to do?
Solution:
Boeing has 4 options:
 Come up with a bigger version of 747 aircrafts.
 Price cuts of 747 airplanes.
 Come up with a competing super jumbo jet
 Ignore the potential threat posed by Airbus and maintain status quo
Cutting price is not a solution as it might only divert sales and margins for Boeing would
also reduce.
Developing a new super jumbo jet will require considerable development costs. The
market for these planes is not enough to sustain and earn positive NPV for 2 players in
the segment.
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100%
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3. Neeraj Mehra
So, maintaining status quo or coming up with a bigger version are the options they are
left with. Developing a bigger version would give the number of seats required but will
not be able to match the newer technology, style, comfort, and operating efficiency
brought in by the Airbus planes.
So, the best option would be to maintain status quo and capitalize on their existing
products.
4. Should Airbus commit to build the A3XX? How many orders should Airbus have before
committing to develop the plane?
Solution:
No, Airbus shouldn’t go ahead building the A3XX.
Currently they have spent a total of USD 700 million as R&D expense. A 100% capacity
utilisation with inflation of 2% gives us a breakeven of 715-765 planes with NPV=$1550
millions and IRR=10.38%.
With the inflation of 4%, breakeven is attained at 615-665 planes with NPV=$3778
millions and IRR=11.84%.
The breakeven analysis has been calculated in the excel sheet, which should be used to
define the number of orders Airbus must have before committing to develop the planes.
Industry Experts estimates the demand for VLA planes to be around 750 for the next 20
years.
However, estimates of Boeing are pessimistic at less than 350. Estimates of Airbus are
very high at more than 1200 planes. If Airbus is highly confident of their estimates it
would make sense to go ahead in developing the planes.
However, considering the industry estimates by experts, they shouldn’t go ahead.