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Gerald Feslmeier, Universitaet der Bundeswehr Munich, Germany Prof. Dr. Andreas Schueler, Universitaet der Bundeswehr Munich, Germany

On 04/27/2005, the Airbus A380, the largest passenger plane in the world, took off on its maiden flight. This case study examines whether the development of the A380 has been a success story. To do so the A380 project is evaluated from three perspectives. First we ask whether the decision to start the A380 project, which was made at the end of 2000, was in the interest of the shareholders of Airbus. Next we examine how the decision had turned out had the further development of the project been anticipated. And finally, the project needs to be examined from today's point of view by asking whether the project should be continued or terminated. HISTORY OF AIRBUS INDUSTRY In the 1960s, European aircraft manufacturers planned to develop a passenger aircraft competing with the models of the U.S. manufacturers Boeing, Lockheed and McDonnell Douglas, which dominated the market. U.S. aircraft manufacturers dominated the market as they produced 85% of all commercial aircrafts while the European manufacturers held a market share of only 10%. At the beginning however, the plan of the European players was not practicable as they lacked technical knowledge and capital. The U.S. manufacturers contrary to their European competitors received governmental subisidies for the development of new models. That was a considerable competitive disadvantage for the European aircraft manufacturers. For this reason, in January 1966, government delegates from France, Great Britain and Germany started negotiations regarding a European cooperation of aircraft manufacturers to create the basis for a government-supported, competitive passenger aircraft. As a result Airbus Industry was founded in accordance to French law (GIE) on 12/18/1970 in the form of an economic interest group between German and French companies.2 On the basis of this legal form the firms involved were able to cooperate closely, without, however, losing their legal independence. The founding members were the Arospatiale Group, which emerged from a merger of North and South Aviation on the French side, and Deutsche Airbus, consisting of Messerschmidt-Blkow Blohm and VFW-Fokker on the German side. In 1971 the Spanish CASA (Construcciones Aeronauticas S.A.) joined this economic interest group, while British Aerospace, a newly founded association of British aircraft manufacturers, became an official member only in 1979. Figure 1 shows the shares of each member of the economic interest group after British Aerospace had joined.

The case was prepared for classroom discussion rather than to illustrate either effective or ineffective handling of an administrative situation. The conclusions drawn depend heavily upon the assumptions chosen. 2 GIE : groupement d'intrt conomique.

Figure 1: Ownership Structure Airbus Industry

CASA; 4,2% Deutsche Airbus; 37,9%

British Aerospace; 20,0%

Arospatiale Group; 37,9%

The transformation of Airbus into an independent and fully integrated company (AIC) finally took place at the end of February 2001, retroactive to the beginning of the year.3 This transformation, including the pooling of the major production sites and the resulting reduction of the decentralization problem which had existed previously was supposed to raise the efficiency of Airbus and thereby eliminate a competitive disadvantage to Boeing. At that time the listed Dutch company EADS N.V. (European Aeronautic Defense and Space Company), a result of the merger between the French Aerospatiale Matra S.A., the Spanish Construcciones Aeronuticas S.A. and the German DaimlerChrysler Aerospace AG on 07/10/2000, held an 80% share of the newly founded corporation. British BAE Systems held the remaining 20%.

HISTORY OF THE A380 As early as the beginning of the 90s, Airbus, Boeing and McDonnell Douglas each began planning the construction of a large-capacity aircraft. McDonnell Douglas discarded its plans in 1993 when no partner could be found for its deficient civilian aircraft division. Boeing negotiated, just like Airbus, with cooperation partners from the aircraft building industry in Japan. Furthermore, Boeing also sought negotiations with the Airbus-members Deutsche Aerospace and British Aerospace. Following these negotiations feasibility studies were initiated. Soon, however, Boeing lost interest in developing a completely new aircraft in cooperation with the Europeans. The main reasons for Boeings retreat were the high development costs which would have arisen, as well as the assessment by Boeing that only one single type of aircraft could successfully exist on the market for large-capacity aircraft. Boeing therefore decided in favor of a

AIC: Airbus Integrated Company

further development of its 747 product line. A study by the investment bank Lehman Brothers published in 1996 shows that Boeing made 75% of its profit with the 747. Moreover, with the 747 Boeing held a monopoly, which facilitated the selling of other models in package deals with the 747. According to this study Airbus would only be able to compete if an even bigger aircraft type than the 747-600 could be brought to the market. Similar considerations were discussed within the Airbus consortium. In order to reduce the development effort and the associated risk, Airbus was looking for additional partners. Airbus succeeded in winning the Belgian Belairbus and the Dutch Fokker Aviation for the intended large-capacity aircraft with the working title A3XX. On 06/23/2000 the supervisory board of Airbus Industries authorized the management to market the A3XX. The approval of the supervisory board made it possible to sign binding supply agreements. Already during the annual Farnborough Air Show in England that same year, Emirates Airlines places the first advance order. Well-known airlines, e.g., Singapore Airlines, Qantas, Air France, Virgin Atlantic as well as the U.S. leasing company ILFC followed. Half a year later, on 12/19/2000, the supervisory board decides to begin production of the A3XX that now was named A380. The A380 is planned as a double-deck aircraft which is to be offered in five different passenger versions. Depending on the particular version it can transport between 481 and 656 passengers. With this capacity the A380 takes the top rank worldwide. Furthermore, in virtue of its large transport volume, the company also offers a cargo version with a transport capacity of 150 tons. At first, Airbus estimates the development costs at 10.7 bn $. We assume that in addition to the research and development costs 1 bn $ is needed each for investments in tangible non-current assets and current assets.4 Furthermore, we assume annual replacement capex of 100 m $, beginning with the year after the first delivery of the A380 to customers.5 In addition it is assumed that about 30% of the development costs are capitalized according to IAS 38. The markdown of the capitalized development costs is carried out via the anticipated number of units produced over the entire project duration. For simplification we assume that in case of the tangible non-current assets the linear depreciation method is used over a markdown period of ten years. We assume that at the end of the project the tangible non-current assets and current assets are sold at book value. The company expects break-even to occur after 11 years with 250 aircraft sold at a list price of 220 m $ per aircraft.6 The delivery of the first airplane is scheduled for 2006. At the time of the decision to start the production six airlines ordered already 50 aircrafts. Other airlines like Deutsche Lufthansa are still considering an order. Development costs are financed by low-interest bearing governmental loans amounting to 2.5 bn $.7 3.1 bn $ were financed by ten suppliers who develop components for the A380. The remainder is covered by a capital increase provided by EADS and BAE Systems. In a 1992 bilateral agreement between the USA and the European Union it was stipulated that governmental subsidies have to be repaid within a period of 17 years. The sum of the overall subsidies paid out must not exceed 33% of the development costs.8 Repayments of the governmental loans occur per airplanes sold. For the repayment schedule it was assumed that 500

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The mentioned amount for the net working capital does not include the advances received. We assume in simplified terms that the advances are due three years before delivery. For these assumptions see Esty (2001), p. 24. We assume that that break-even volume describes the number of aircraft to be sold in order to cover the entire development costs of 10.7 bn $ by the resulting operating profit, if one neglects discounts for first-time customers for simplification purposes. Assume in simplified terms that the taking out of loans is carried out in proportion to the amount of the development costs. Cf. Council of the EU (1992).

A380 will be sold by year 2018. The interest rate is 4.5%. On the capital market EADS has received fairly good ratings for years.9 Therefore, if the A380 had to be financed by private debt, we would assume a low risk premium of 100 basis points over the risk-free interest rate. With the logistics group FedEx Airbus registers the first customer from the U.S. and simultaneously the first buyer of the cargo version on 01/16/2001. The order comprises of ten aircraft amounting to a total price of 2.3 bn $. However, first-time customers usually receive considerable discounts of about 25%, sometimes up to 50%. One could assume that the first-time customer discounts apply at least to those planes that are delivered to the customer within the first four years after start of delivery. In each of the years 2008 to 2010 FedEx is scheduled to receive three planes. The delivery of the tenth plane is supposed to be carried out in 2011. FedEx chooses the A380 cargo version primarily because of its size. This way, instead of employing a number of MD-11 on specific long-distance routes each day, it becomes possible to bundle the transports and carry them out more cheaply by employing an A380. FedEx expects ton-per-mile-costs to decrease by about 20%. With its large order FedEx feels prepared for the coming growth in the cargo market. Forecasts by industry experts assume an annual growth ratio of 7% in the international airfreight market over the next 20 years. By the end of 2001 Airbus registers a total of 85 orders and 12 declarations of intent. The airbus A380 starts with the production in Nantes on 01/23/2002. In the same year the number of orders increases to 95 planes. Due to orders of well-known airline companies the number of orders for the Airbus A380 increases to 129 by the end of 2003. Finally, the number of orders increases to 139 aircraft in 2004. For Airbus the year 2005 starts with the unveiling of an A380 in Toulouse on 01/18/2005. This aircraft takes off for its maiden flight on 04/27/2005. By the end of the year 2005, 159 orders for the A380 have been made. Seventeen of these are orders for the cargo version, the production of which began on 04/12/2005. On 03/10/2006 the A380 completes its 1000th hour of test flights. Shortly thereafter on 03/26/2006, an evacuation test, required by the European Aviation Safety Agency and the U.S. aviation agency Federal Aviation as part of the certification process, is passed. Unaffected by production difficulties the A380 completes a number of test flights in November 2006 and receives the approval for Europe and the USA in December 2006. Despite the approval, the delay in delivery due to the production difficulties cause the U.S. logistics group FedEx to cancel its order for ten cargo versions, making it the first A380 customer to do so. Instead, an order for 15 cargo planes of the type 777 is placed with the competitor Boeing. The U.S. leasing company ILFC changes the five orders for the cargo version into orders for the passenger version. On 03/01/2007 the last A380 cargo customer (UPS) withdraws its order, after Airbus had announced that all construction and development work for the cargo plane version would be halted in order to free up capacity for the passenger version. Despite of the delays in delivery and in spite of the fact that the list price is now at 319.2 million $,10 more orders for the A380 passenger version are received. The order volume on 05/31/2007 amounts to 160 A380s distributed among 14 customers.

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At the beginning of 2007 Standard & Poors classified EADS as A- with negative prospect. The list price for the A380 amounts to approx. 280 m $ in the years 2004 and 2005 and to approx. 300 m $ in 2006.

Figure 2: A380 Orders

Etihad Airway s; 4 China Southern Kingfisher Airlines; Airlines; 5 5 Qatar Airway s; 2 Korean Air Lines; 5 Penerbangan M alay sia Berhad (M AS); 6 Thai Airway s International; 6 Virgin Atlantic Airway s; 6

Emirates; 47

Air France (Group e); 10

QANT AS Airway s; 20

Intl Lease Finance Corp ; 10

Lufthansa; 15 Singap ore Airlines; 19

TECHNOLOGY With the A380 an airplane is to be developed that is able to accommodate a significantly greater number of passengers than previous models and that furthermore operates with lower operating costs. According to a rule of thumb in aircraft construction, doubling the passenger number leads to a quadruplication of the airplane weight, so innovative weight-saving materials have to be used. 3% of the shell of the A380 consists of fiber-glass reinforced aluminum or GLARE. This is a material combination which consists of alternate layers of aluminum and fiberglass and has been especially developed for the requirements of aircraft construction. GLARE is lighter than aluminum, more resistant against corrosion and reduces the weight of the A380. Damages can be fixed using conventional aluminum repair techniques. In addition, carbon fiber is used. The share of this material in the overall material amounts to 22%. Carbon fiber is 60% lighter than steel and increases the stability of the aircraft. The A380 is the first airplane which wing mountings consist of carbon fiber. Altogether, the proportion of carbon composite material is estimated at 40%. To lower operating costs, the use of fuel economizing jet engines is necessary in addition to low weight. The selected Trent 900 engine by Rolls-Royce is the largest engine built for a passenger aircraft and keeps the per capita consumption of kerosene at full seating to less than three liters for 100 kilometers.11

As an alternative to the Trent 900 A380-customers can also choose the GP7200 engines made by the Engine Alliance, a joint venture of General Electric and Pratt & Whitney.

Furthermore, an A380 contains technologies like the Integrated Modular Avionics (IMA), Network Systems Servers (NSS), Power-by-Wire Flight Controls and the 350 bar hydraulic system. Avionics describes all technical and technological equipment in an aircraft. With the help of the IMA originating from military aeronautics, several of these devices are combined into a module. This type of system architecture reduces the number of different devices, facilitates maintenance and reduces costs. The NSS enables a paper-free cockpit. Materials such as maps or the logbook of the airplane can be accessed electronically by the pilot. The Power-by-Wire Flight Controls enable the continuation of an A380 flight in case of a hydraulics failure. The 350 bar hydraulic system operates with higher-than-average pressure. This allows the diminution of control elements, lines and other elements and reduces the weight of the aircraft. DEVELOPMENT & PRODUCTION The production of the A380 is distributed among 15 production centers in four European countries. The split-up of the production requires a high logistical effort. The complex process starts in Hamburg where Airbus manufactures the nose and fuselage section. These parts are then transported to Broughton (Great Britain) with a ship made solely for that purpose. In Broughton the wings are loaded onto that ship, which then sails on to Saint Nazaire. In this French town Airbus produces the middle section of the fuselage, which is also loaded onto the ship. After that the parts are transported to Bordeaux. The tailplane section, which is produced in the Spanish city of Getafe and shipped to Bordeaux separately, and the remaining parts are transported to the Langon harbor per inland waterway vessel on the river Garonne. From there the parts are transported to Toulouse, the location of the final assembly, by large trucks. In addition to the nose and fuselage section, the vertical tail (Stade) as well as the GLARE-parts of the shell (Nordenham) and the landing flaps (Bremen) originate in Germany. Apart from the tailplane, the carbon fiber parts of the fuselage (Illescas) and the rudders (Puerto Real) are manufactured in Spain. The production of the cockpit section is carried out at the French city Nantes, and the production of further components for fuselage and cockpit in Maulte. The production of the flight control takes place in Toulouse. Following the final assembly the maiden flight goes to Hamburg where the paintwork and the interior furnishing are being carried out. Parts of the interior furnishing are produced, among others, at the German Airbus plants in Buxtehude and Laupheim. The delivery of the completed aircraft to the customer is intended to be in Hamburg as well as in Toulouse. Table 1: Production Sites
Production sites Hamburg Stade Bremen Nordenham Laupheim Buxtehude Broughton Manufactured parts Nose and fuselage section, paintwork, interior furnishing Vertical tail Landing flaps GLARE-parts Interior furnishing Interior furnishing Wings

Meaulte Toulouse Saint Nazaire Ville Saint Nazaire Grande Nantes Puerto Real Getafe Illescas

Components for fuselage and cockpit Flight control, final assembly Middle section of the fuselage Middle section of the fuselage Cockpit section Rudders Tailplane section Carbon fiber parts of the fuselage

With the production of the A380 Airbus breaks new ground. The fuselage bracings are not riveted any more but welded by a laser which leads to a lower aircraft weight as well as lower maintenance costs. Problems during the production are caused by components which are too big for air transport between the European plants. Airbus has to move these components by ship and by truck. Boeing, however, has introduced area-wide air transport for the components of its models, which apart from the time-saving aspect also results in a transportation cost reduction of up to 40%. To lower the stock of inventory and achieve a lower capital lockup, Airbus wants to lower the production time for all of its models by a third. Especially the production time at the end of the line, i.e. from wing assembly to delivery, is to be reduced. Approximately 50% of the expenditures arise in Euro due to the location of the Airbus manufacturing sites. However, Airbus generates its revenues as it is common in the aerospace industry in U.S. Dollar. A weak U.S. Dollar harms Airbus and the parent company EADS. Therefore EADS uses currency hedging. Only the U.S. Dollar sales volume not hedged (about 30%) is subject to changes in exchange rates. Table 2 shows the development of the actual endof-year exchange rates from 2000 to 2006. Table 2: Exchange Rates (end of the year)
Date (31.12.) 1 US $ in 2000 2001 2002 0,95411 2003 0,79669 2004 0,73314 2005 0,84441 2006 0,75798

1,06202 1,12892

To increase its presence in the respective regions and at the same time lower the dependence on the Euro, the Airbus parent company EADS plans an expansion of the industrial production to six countries outside of Europe. Boeing follows a similar strategy. A third of the planned 787, also called "Dreamliner", is to consist of components manufactured in Japan. In case of the A380, however, only 5% of the parts are manufactured by Japanese companies. Presence in the Asia-Pacific area is considered important as this region will become the largest market for civilian aircraft with a world market share of about 35.8% (calculations based on the value of the planes delivered) by 2025. Another strategic issue is the shift of production processes to suppliers. On the one hand this is supposed to reduce the 40% vertical range of production to 30% over medium-term, thereby reducing the risk airbus faces in regards to its product development process. Boeing too reduced the quota of the vertical range of production for the 787 to a third. On the other hand Airbus wants to utilize the suppliers as gateways to new markets.

According to Airbus plans at the end of 2000 up to 14 A380 are supposed to be handed over to customers in the second quarter of 2006. In 2007 35 aircraft of this type are due for delivery and as soon as 2008 production is to reach the annual quantity of 45 A380. The management of Airbus Germany estimates the complete duration of the A380 project to be 25 to 30 years. The development of the A380 does not proceed smoothly. For example, the start of production has to be postponed by three months, because parts of the air conditioner do not fit in the air plane fuselage. The reason for this mishap lies with the fact that engineers did not work with the correct size of the air conditioning when using the 3-D computer program CATIA at first. CATIA is meant to enable a simultaneous development of the different aircraft components at the different sites. In December 2004, Airbus president Forgeard announces that the development of the A380 is delayed. The maiden flight of the A380 planned for the end of 2004 is postponed to the 1st quarter of 2005 and shortly after to the second half of April 2005. The development costs are likely to be 1.45 bn higher than expected. The estimated weight of the A380 will also increase from 540 tons to 565 tons; thus the mileage cost also increases. Airbus announces in the middle of the year 2005 that the delivery of the A380 could be delayed by up to six months. This delay is caused by problems with the wiring and the cabin equipment. Airbus suffers another setback when rips form on both wings during necessary certification examinations of the A380. According to the regulations the wings have to endure the 1.5-fold of the normal maximum operating strain unscathed. During the test the A380 was able to withstand the 1.45-fold of this strain without problems. Therefore Airbus is optimistic that it will still be able to carry out the necessary improvements without delays in delivery. In the middle of 2006 Airbus reports a further delay of the delivery date of up to seven months. Only the delivery of the first planes to Singapore Airlines at the end of the year can be carried out. In 2007 the delivery of nine, in 2008 of up to 30, and in 2009 of 40 A380 is expected. Problems with complex board electronics are cited as a reason for this new postponement. The assembly of the A380 has not attained serial production readiness yet. As a result, Emirates, the biggest A380 client, gives official notice of claims for damages against Airbus. Other airline companies like Singapore Airlines are also contemplating this option. A cancellation of the A380 orders, however, is not unproblematic for the airlines. Thai Airways for example would lose 97 million $ in advance payments if it would cancel its order for six A380. Due to the development problems Nol Forgeard, who in the meantime has taken over the position of the Co-CEO of EADS, and Gustav Humbert, his German successor at Airbus, step down. Moreover Forgeard is accused of having used information about the production difficulties for insider trading in March 2006. With these transactions Forgeard and his family are said to have made approximately 2.5 m . Frenchman Christian Streiff, foreign to the aircraft industry, who most recently had been Deputy CEO to the multinational glass and construction products manufacturer Saint-Gobain, becomes the new CEO of Airbus. Streiff replaces the previous A380 program director Charles Champion with Mario Heinen who is regarded as an expert in the field of serial production. Apart from personnel changes organizational changes are undertaken. Instead of the previous organizational separation of individual work stages, integrated teams are now to be installed. Moreover, almost all A380 activities in Germany are under the exclusive management of Rdiger Fuchs with immediate effect. Despite these measures Airbus has to admit further delays in the delivery schedule on 09/21/2006 as continuing difficulties with the industrialization of the wiring of the serial produced planes have been identified. On this account customers will receive most likely only

one A380 in 2007 and 13 aircraft in 2008. An increase in the annual production to 45 A380 is planned for 2010. After only about three months as Airbus CEO, Christian Streiff submits his resignation on the grounds of internal differences in the EADS administrative board. Louis Gallois, who at the same time is Co-Chair of the parent company EADS, takes over his position. Due to the new production delay, which has contributed to the increase in development costs to 16 bn $ and the breakeven point to 420 A380 aircraft,12 Airbus feels impelled to end almost 1,000 temporary work contracts. Furthermore, Airbus wants to cut about 10,000 jobs in administration worldwide, to reduce the number of suppliers from about 3,000 to 500 and to increase the quota of components obtained in low-wage countries by 50%. The outstanding total amounts of repayable subsidies the A380 project received from the European governments are listed in Table 3.13 Table 3: Governmental Subsidies
Year Total amounts of repayable subsidies in bn 2001 0,55 2002 1,1 2003 2,2 2004 2,5 2005 2,8 2006 3,3 2007 3,6

Through a newly established complaint center, EADS tries to prevent that unclear allocation of rights, assignments of tasks and national vanities on the German and French sides hinder information flow. The EADS administrative board for example is reported to have been informed about the wiring problems too late because of that. Moreover, the sale of the Airbus shares held by BAE in October 2006 to EADS additionally permits EADS greater integration of the aircraft manufacturer into the parent company. The integration shall enable a better flow of information and more effective control. AIRBUS 380 VS. BOEING 747 With the 747 Boeing has held the monopoly in the market of the so-called Very Large Aircraft, short VLA, since 1969. Airbus tries to break this position with the introduction of the A380. It therefore seems reasonable to compare the qualities of both aircraft models. Table 4 contains the corresponding information. The A380 can transport up to 555 passengers in three-class configuration and 840 passengers in full economy configuration. In comparison, the 747-400ER, the newest 747 model in use, only has space for 416 passengers in three-class-configuration and can transport 568 passengers at most. Table 4: Governmental Subsidies



We assume that the investments into the tangible non-current assets and the net working capital have not changed compared with the original planning (end of 2000). The values for 2001 and 2007 are estimates.

A380 Passengers (3 classes) Passengers maximal Maximum take off weight Cruising speed Range Wingspread Length Height Cabin width 555 840 560t 0,89Ma 15.000km 79,8m 73m 24,1m Main deck: 6,85m Upper deck: 5,92m List price 319,2 Mio. $

747-400ER 416 568 413t 0,855Ma 14.205km 64,4m 70.6m 19,4m 6.1m

747-8 467 Not known 440t 0,855Ma 14.815m 68,5m 76,4m 19,5m 6,1m

260 Mio. $

300 Mio. $

Because of the difference in capacity the permitted take off weight is significantly higher for the A380 than for the 747. Despite the higher weight, the A380 has a longer range than the 747. The interior of the A380 is 35% larger than that of the 747 but the operating costs are only 12% higher than those of the 747. The A380 uses 12% less kerosene per seat and the operating costs are 15-20% below those of the Boeing 747-400. Moreover, the consumption of less fuel decreases the emission of ecologically harmful substances, which is why the A380 has advantages from an ecological point of view. The breakeven point per flight of the A380 is said to lie at 232 passengers; that of the 747 at 290. This, based on the ordinary three-class seating, corresponds to an occupancy rate of 42% for the A380 and of 70% in case of the 747. The A380 therefore, according to Airbus data, already covers the costs at a lower occupancy rate on the one hand, while on the other hand is more profitable at maximum occupancy. Due to its significantly larger interior the A380, apart from its economic advantages, is designed to offer greater comfort, e.g., with increased leg room, reduced engine noise and entertainment facilities like exercise rooms or lounges. Airports have restricted takeoff and landing capacities, and industry forecasts agree on the assumption of increasing passenger numbers. The A380 can transport more passengers than the 747 and for this reason is attractive to an airport operator. In order to load and unload an airplane of this size efficiently, however, two-deck gangways need to be used at the airports. Since the 747 does not require them, this is an argument for the Boeing model. As one can see, the A380 has some attractive qualities. With the development of the 7478, whose official project start was on 11/14/2005, Boeing tries to react to the A380. In order to stay competitive, Boeing tries to improve efficiency by increasing the number of passengers that can be handled per flight. That the capacity of the 747-8 does not even get close to that of the A380 can be explained by Boeings more cautious assessment of the demand for very large aircraft.

MODEL RANGE The models currently offered by Airbus and Boeing are listed in Table 5. The capacity of the Airbus models corresponds to the typical capacity while the Boeing models are listed with their minimum and maximum capacity. Table 5: Product range Airbus vs. Boeing
Airbus Model A318 A319 A320 A321 A300 A310 A330-200 A330-300 A340-200 A340-300 A340-500 A340-600 A350-800 A350-900 A350-1.000 A380 Range 5.950 6.800 5.700 5.600 7.700 9.600 12.500 10.500 14.800 13.700 16.700 14.600 15.400 15.000 14.800 15.200 Capacity 107 124 150 185 266 220 253 295 239 295 313 380 270 314 350 555 Model 737-600 737-700 737-800 737-900 767-200 767-300 767-400 777-200 777-300 787-3 787-8 787-9 747-400 747-8 Boeing Range 5.648 5.940-10.200 5.665 5.925 12.200 11.065 10.415 9.695-17.500 11.135-14.685 4.650-5.650 14.200-15.200 14.800-15.750 13.450-14.205 14.815 Capacity 110-132 126-149 162-189 180-215 181-255 218-350 245-375 301-440 368-550 290-330 210-250 250-290 416-524 467

Exhibits 1 and 2 in the appendix show all deliveries and orders; the difference between orders and deliveries is the current order backlog. EXPECTED MARKET VOLUME Airbus and Boeing assess the demand for large-capacity aircrafts differently. The forecasts, that are made every year over a period of twenty years, are termed Global Market Forecast (GMF)14 for Airbus and Current Market Outlook (CMO) for Boeing.15 Both companies assume that air traffic will increase strongly from 2006 to 2025. Airbus forecasts an annual growth rate of 4.8%, Boeing of 4.9%. Moreover, both companies award the greatest growth potential to the Asia-Pacific market. In accordance with the GMF represented in Table 6 Airbus

14 15

Cf. Airbus (2006). Cf. Boeing (2006).

assumes that between 2006 and 2025 21,860 airplanes with at least 100 seats each will be delivered. Furthermore, Airbus expects a delivery of 3,580 cargo planes of which only 803 are, however, already designed as cargo planes ex factory; the remaining 2,777 result from the conversion of passenger airplanes. 1,665 of the 22,663 new passenger and cargo planes are to belong to the VLA segment. Table 6: Global Market Forecast (Airbus)
100 seater Africa Asia-Pacific CIS Europe Latin America & Caribbean Middle East North America Total 42 772 2.006 305 4.233 13.324 339 768 3.745 138 171 1.522 116 103 1.263 940 6.047 21.860 73 173 46 625 275 125-210 seater 317 3.759 387 3.407 916 Small twin aisle 152 1.367 65 885 169 Intermediate twin aisle 47 735 43 358 30 29 708 7 292 8 618 6.742 548 5.567 1.398 VLA Total

As Table 7 shows, according to the CMO a total number of 27,210 planes are to be delivered by Boeing between 2006 and 2025; 9,490 of these aircrafts in North America. For this time period Boeing forecasts 990 airplane sales worldwide in the class "747 and larger"; of these more than half are for the Asia-Pacific market. Table 7: Current Market Outlook (Boeing)
Regional jets Asia-Pacific North America Europe Middle East Latin America Africa Total 580 2.040 450 60 260 60 3.450 Single aisle 4.230 5.880 4.530 430 1.220 250 16.540 Twin aisle 2.520 1.410 1.460 540 190 110 6.230 747 and larger 570 160 160 80 10 10 990 Total 7.900 9.490 6.600 1.110 1.680 430 27.210

If one compares the forecasts of the two companies, it becomes evident that Airbus expects a total of 1,665 new machines in the VLA segment; Boeing, however, expects only 990. Airbus assumes that an increased flight frequency or point-to-point connections, i.e. direct connections between smaller airports, can only be a partial solution for coping with the increase in demand. Areas of high population density and their corresponding airports will have to

continue to handle the bigger part of the increased traffic volume. Since the capacities of the airports are limited, larger airplanes are necessary. Contrary to the forecast of Airbus, Boeing expects a stronger relief for major airports through the increase of direct connections with smaller planes than the 747 or the A380. Worldwide, a large number of the 747 aircraft has only been sold on account of their reach and not because of their capacity. Therefore Boeing sees the main growth potential in long range airplanes like the 787 or the Airbus A350 with a capacity below that of the 747. The success of the A380 primarily depends on the extent to which the major airports take over the role as hubs for international air traffic in the future. Furthermore, it is crucial whether the promised cost savings of the A380 are realizable, and primarily, whether the airline companies that have to renew their 747 fleets in the coming years decide for the A380 not least because of these savings. QUESTIONS 1. Was the decision to start the A380 project taken in 2000 in the interest of the owners? Show the dependence of your results upon volumes sold and operating costs! Start with an unlevered beta factor of 0.84, a constant market risk premium of 5%, a French corporate tax rate of 38% and an inflation rate of 2%. 2. Would the A380 project have been started if the changes compared to the original plans had been known already in 2000? 3. Is the decision for the continuation of the A380 project that was at least implicitly taken at the beginning of 2007 in the interest of the owners?

Exhibit 1: Airbus Orders

first delivery Total A318 A319 A320 A321 A300 A310 A330-200 A330-200F A330-300 A340-200/300 A340-500 A340-600 A350-800 A350-900 A380 2003 1996 1988 1994 1974 1983 1994 1994 1998 1993 2003 2002 2013 2013 2007 Orders 7.285 100 1.517 2.818 652 561 260 408 18 281 252 32 122 71 33 160 Total deliveries 4.755 42 978 1.714 389 558 255 261 0 214 242 26 76 0 0 0

Exhibit 2: Boeing Orders

first delivery Total 737-600 737-700 737-800 737-900 767-200 767-300 767-400 777-200 777-300 777F 787-3 787-8 787-9 747-400 747-8 1998 1998 1998 2001 1984 1988 2000 1995 1998 2008 2008 2008 2008 1989 2009 Orders 6.895 69 1.367 2.208 224 121 620 38 565 326 72 43 426 115 614 87 Total deliveries 4.214 69 951 1.205 54 119 564 37 485 149 0 0 0 0 581 0

Exhibit 3: French Corporate Tax Rate

Year Tax rate 2001 36,43% 2002 35,43% 2003 35,43% 2004 35,43% 2005 34,93 2006 34,43

Exhibit 4: Yield curve

Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 End 2000 4,610% 4,512% 4,533% 4,590% 4,657% 4,722% 4,786% 4,846% 4,905% 4,961% 5,016% 5,070% 5,122% 5,173% 5,222% 5,270% 5,316% 5,361% 5,405% 5,446% 5,487% 5,525% 5,562% 5,598% 5,632% 5,665% 5,697% 5,727% 5,756% 5,784% 3,852% 3,891% 3,895% 3,901% 3,912% 3,928% 3,944% 3,962% 3,978% 3,994% 4,008% 4,022% 4,034% 4,045% 4,054% 4,063% 4,071% 4,078% 4,085% 4,091% 4,096% 4,101% 4,105% 4,110% 4,113% 4,117% 4,120% End 2006

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