Airbus A3XX:

Developing the Worlds Largest

Commercial Jet
Group 1

111 Rakshit Jhunjunwala

115 Ankitesh Mathur

211 Manu Shrivastava

301 Balagopal Padmakumar

402 Rishi Bajaj

Airline Industry An Overview
Highly competitive

Capital and Labor intensive

Seasonal industry increased revenues in 2nd and 3rd

quarters

Sensitive Fuel Prices, Price of airfares and customer

demand
Industry Trends
Growth in the industry
YTD (2004 over RPK ASK PLF FTK ATK
2000) Growth Growth Growth Growth
Africa 17.00% 13.60% 1.9 11.50% 4.00%
Asia Pacific 11.70% 14.90% -2.0 25.30% 21.80%

Europe 1.80% -0.20% 2.6 6.90% 3.00%

Middle East 48.40% 43.20% 2.6 53.50% 51.20%
North America 4.10% -0.50% 3.4 2.00% 3,20%
South America 11.70% 7.60% 2.7 13.90% 18.80%
Industry 8.10% 7.20% 0.6 15.90% 11.80%

Where RPK : Revenue per Passenger Kilometer

ASK : Available Seat Kilometers
PLF : Passenger Load Factor
FTK : Freight Ton Kilometer
ATK : Available Ton Kilometer
Source : www.iata.org
 Dynamics of Airline Industry
Competitiveness of an Airline depends on two factors:

1. Revenue - ability of a firm to fill the seats in an airplane

Break Even Load Factor (BLF) which measures the percentage of capacity needed
on a plane to cover its costs. BLF for profitable airlines has generally fluctuated
between 60% and 65%.

2. Costs mostly uncontrollable

Labour Competitive Wage Structure

Fuel

Maintenance

Costs are also attributed to flight time, flight distance, landing fees, en-route
charges, handling, administrative costs and opportunity costs of not flying.
 Dominant Business Models
Currently 2 dominant business models in the airline industry
Hub and Spoke Model
used by traditional / dominant airlines who concentrate their long haul
and international flights at a hub while branching out short haul
services to other cities.
A long haul flight out of the hub typically waits for passengers from
connecting flights to board. Since the volume of passengers is
significantly higher, there is a need for Very Large Aircrafts.

Point to Point Model

used by regional or budget airlines who deploy their aircrafts on a
specific route between 2 airports
the airplane typically does not need to wait for connecting flights;
which results in a faster turnaround time as compared to the 1st model
Washington DC

London

Atlanta
The Boeing Company
Founded in 1916.

Forefront of Civil Aviation for almost a century

From B17s and B29s during World War II,

B52 during Cold War to Boeing787.

Is into sales of:-

Commercial Aircrafts
Military Aircrafts
Missiles
Space System Controls
 Revenues:-US$ 64.306 billion (2010)

Commercial Aircraft -2/3

Military Aircraft ,missiles, space systems- 1/3

Boeing unique importance for US

It Supplies:-

F-15 fighter aircraft to Air Force One

Space Shuttle to support its political strength

Largest contributor to the US BOP in terms of exports

 Boeing fleet consists of 14 models

Flagship of Boeing fleet :-747-400, held 420 passengers

in the standard three-class configuration.

B747 bought for its range and not its capacity

AIRBUS INDUSTRIES
Founded in 1970 by consortium of principle agencies:

DASAGermany
BAE SystemsEngland
Aerospatiale Matra France
CASASpain

Later become simplified joint-stock company in 2001,

owned by EADS (80%) and BAE Systems (20%).
 Employs around 57,000 people

Revenue: 27.45 billion (FY 2008)

Known for producing and marketing:-

First commercially viable fly-by-wire airliner, the Airbus

A320, and
World's largest airliner, the A380.
 A3XX is estimated to cost $13 billion to launch

Investment Total
R&D $11 billion
Capital Expenditure $1 billion
Working Capital $1 billion

Uncertainty in demand => more risky

Highly capital intensive project
Chances of failure could lead to diverse effects on the entire
company (Failure of prominent companies while attempting to
launch new planes)
Ultimate success : ability to break-even and future demands
Why is Airbus interested in building
the A3XX?

Enter new segment VLA

An optimistic outlook at receiving orders for VLA aircraft

owing to its capture of more than half of the VLA
market by terms of orders (in 1999)

Market research potential and increased demand

Growing economies in Asia like China

Increasing point to point route frequency is not a

solution as it leads to congestion
Cont.

Large range of travel without any stopovers - key point

in purchase decision making

Better operating economy 12 % more to operate as

compared to 747s but has 35% more space

More customer satisfaction, comfort

Higher number of premium flyers

Cont.
4 engines per aircraft as compared to the usual 2
engines increase the safety factor

Would be the King of the air and any premium airline

would feel the need to have it

More sources of revenue due to increased space

Commercial aviation sector leader

What are its objectives
Ascertain the need

Secure as many orders

Build a new product that could match the requirements

of the industry over the next 20 years

Meet the standards and norms for building very large

aircrafts according to the U.S Federal Aviation
Administration (FAA)
Cont.
Secure cheap source of financing with risk mitigation of
the project

Create a product that would be the highest level of

luxury and thus would be imperative for any premium
airline brand to purchase to drive up revenues from its
high yield business class flyers

Increase sales of its product and capture majority of the

commercial airline industry to become a leading player
(ahead of the current leader Boeing)
Economies of Large Projects
Benefits of large scale projects
Setting cost:
Project cost of new capacity =
(Project cost of old capacity) * (New
capacity/Old capacity)n

Where n ranges from .5 to .9 (usually

its around .7)
Example
Say old capacity is 100 TPD and cost is 1000 crore. Now the
new capacity is 200 now the cost calculation.

= 1000 * (200/100).7

= 1624.5 Crore

Thus instead of expected proportional cost of 2000 crore we

are saving 376 crore.
Higher Debt to equity ratio

D/E ratio

More than
Less than
10000
500 crore
crore

1.5:1 4:1
Benefits

Projects Benefits
Economies
finance SPV given by
of scale.
benefits Government
CONTD...
ADVANTAGES DISADVANTAGES

Cheap credit.
Restrictions by lenders.
Bargaining power for interest
rates.
Efficient use of capital
equipments. Time and cost over run.

Bargaining power in buying and

selling.

Benefits of R&D. Large payback period

Utilization of byproducts.
possible changes in policy, tax
Lower advertisement cost per rates, technology etc.
unit.
 Easy
monitoring

Less Lenders can

borrowers- afford to
easy to spend more in
manage reports etc.

Advantages
Lenders
Project
financing
High risk limited
recourse.

Disadvantages
Airbus economics In general for large
projects
Cost 13 Bn. Usually very high over 1 Billion

Cost overrun 2 Bn. Cost overrun can be a problem, in

most of the cases it takes place,
because of many issues ranging from
political issues to design problem.

Operating margins 15%-20% Are good but also the interest rates
are high to adjust.

Effective tax rate 38% Depends upon the country.

Inflation 2% Depends upon the country and other

factors.

Production capacity 48 planes High

per year
Limited Optionality
On the decision making process, Airbus has limited
optionality with respect to the fact that it does not
have a product in the Very Large Aircraft (VLA) category
that is therefore dominated by rival Boeing and its 747
series of aircraft.

If it fails to take the decision of going ahead, there is no

other option for the aircraft operators but to purchase
VLAs from Boeing.
Cont.
In Finance, Optionality: The value of additional optional
investment opportunities available only after having
made an initial investment.

The investment decision itself involves considerable

optionality (to ramp up, abandon, change, etc.)

It is important to recognize that there is limited optionality

here.

For example, the value resulting from an ability to stage

investment is less in this case because one does not learn
much about demand during the construction processmost of
the demand will not materialize until several years hence.
Cont.
A decision to wait before committing to industrial launch has
limited benefit for the same reason, as the demand cannot be
ascertained in a short period of time.

It will be a trade off if they decide to hold on until sufficient

demand rises at the risk of not being able to fulfill the orders
in a timely manner.

Finally, the highly specialized nature of the assets and

development research implies that abandonment has little
value.

The investments put into the development and construction

of the final product cannot fetch a sizeable percentage of the
initial value.
Thank you