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Airbus A3XX Case Solution & Answer

Airbus A3XX Case Solution

Threats

Airbus industries makes a proposal which will help him to compete with its main competitor Boeing but this will takes times to complete. And in this lead time there is a threat that competition may become more Sevier and hence the current strategy may fail. Furthermore to maintain its position Boeing introduced too many strategies like cutting the price of its aircraft 747 which will divert customer from purchasing Airbus A3XX. The other strategy suggest by Boeing is to develop new product which can compete with A3XX or to enhance current 747 aircraft. Whichever strategy is adopted by Boeing may cause the adverse effect on Airbus. Therefore special consideration should be paid over here.

Currently there is a monopoly in airline industry and Boeing is the only player who provide very large aircraft. Airbus intends to entre in this market but Boeing starts taking legal actions against it. This may cause the possible penalties. Therefore Airbus should take it in account.

Valuation

To value the project we use Net Present Value. Equipment of the project depreciate in 10 years using straight line method. We assume the project WACC as 12%. Inflation is expected to be 2%. Hence the project gives net value of 24.29million see exhibit three. This indicates that the project is worthwhile for the Airbus Industries. The undiscounted payback of the project is presumed as sale of 250 planes. Company estimates the potential order which should be deliver in 2006 is 137. While the estimated needs of additional VLA is estimated as 905. And there is also a positive growth in the market of VLA. So we can say that the payback of the project will be achieve in three or four months after launching which seems quite good. Furthermore it is estimated that the project will earn operating margin of 15% to 20% which is in line with company’s current IRR. But keep in mind that it is close to the current Targeted IRR. Therefore sensitivity analysis should also be carried out.

Overall we can conclude that the project will increase the net worth of the company because of increasing demand of VLA and some early orders. So company should undertake it.

Suitability of A3XX

The proposed project launching of A3XX aircraft will makes airbus able to compete directly and effectively with its main competitor Boeing. Furthermore in the initial stage the company obtains approximately 52 orders of A3XX and it is estimated that it will obtains further orders which will make total potential orders of approximately 137. This indicates that the product will make a good fit in the market. Furthermore it is estimated that the passenger traffic rate will increase worldwide in next few years and due to this some new large aircrafts will be needed. Currently aircrafts root are very specific more aircrafts are needed to tackle this problem. On the other hand some spokesman comments that they need the aircraft which have approximately seating capacity of 700 to 800. Some airlines argue that the need some super jumbos. Along with this there is currently Boeing who provides very large aircraft. So launching of Airbus A3XX will be worthwhile for Airbus Industries.

Recommendation

Currently Airbus industries finances the project through three main sources Risk Sharing Partner, Launch aid and by their own owners. Risk sharing partners need the stake in the earnings of A3XX. While launch aid who are partner from national government needs a fixe return and stake in the company. So we can say that Airbus industries finance the project through equity. Equity is a costly source of finance because equity holder faces high risk as compare to debt holder. Debt holder return is fixed either company has profit or not and in the case of liquidation they receive their stake in preference of equity holder. Therefore debt is a cheap source of finance.Airbus industries should try to finance the project with borrowing this will reduce the company’s cost of capital and in result there become more difference between project IRR and company cost of capital. Due to this the sensitivity of the project will reduce and the growth rate of the company will increase. But before taking any action gearing and liquidity position of the company should be analyze.

From the Exhibit four we can analyze that there will be growth in Airbus Industries market share in next 20 years. But the growth rate of support services sector increase as compare to delivery sector. Therefore Airbus should try to introduce itself in that market as well.

From exhibit five we can analyze that in the next 9 years there will be biggest growth in aircraft having seating capacity in-between 300 to 350 which indicates that the launch of A3XX may be fail. Therefore Airbus should analyze the industry more consciously. Because it analysis is too optimistic as compare to Boeing Company. For difference in analysis see exhibit six.

Conclusion

Overall we can conclude that Airbus industries operates in a well-established industry. It has high power over the customer and have a competitive position but has a low power over the supplier. The internal position of the company is quite well it has too many opportunities to explore the market like the one that explore itself in the market of Asia and selling through the internet but along with this company has also too may threats like penalties which may be arise due to possible action taking by World Trade Bank (WTO) and the possible failure of project due to launch by passage of time. The proposed project is also suit to the company as describe in valuation and suitability which concludes that the project is quite suitable as the market needs some jumbo aircraft and feasible as the company has too many options to finance the project along with the technologies. The project has a positive Net present value and a low payback period. The IRR of the project is also seems good. So overall the project will enhance company wealth. But sensitivity analysis should also be taken to makes picture more clear. The source of finance chose by the company is an expensive one. Company should give some attention to it so that the project becomes more attractive…………………

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