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Airbus A3XX Developing The World's Largest Commercial Jet - Objetives and Question

The document discusses a case study about Airbus developing the A3XX, the world's largest commercial jet. It outlines pedagogical objectives of examining large project economics, demand forecasting 20 years out, government roles in large projects, competitive dynamics between an incumbent and potential entrant, and risk mitigation features. Assignment questions ask about Airbus' objectives, the break-even number of aircraft sales, how Boeing may respond, and how many orders Airbus needs before committing to develop the A3XX.

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Jaime Steven Soto Forero
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170 views1 page

Airbus A3XX Developing The World's Largest Commercial Jet - Objetives and Question

The document discusses a case study about Airbus developing the A3XX, the world's largest commercial jet. It outlines pedagogical objectives of examining large project economics, demand forecasting 20 years out, government roles in large projects, competitive dynamics between an incumbent and potential entrant, and risk mitigation features. Assignment questions ask about Airbus' objectives, the break-even number of aircraft sales, how Boeing may respond, and how many orders Airbus needs before committing to develop the A3XX.

Uploaded by

Jaime Steven Soto Forero
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Airbus A3XX: Developing the World's Largest

Commercial Jet (A & B): Objetives and Question


Pedagogical Objectives

The pedagogical objectives into five goals:

1. the basic economics of large projects. There are large, negative, and relatively certain cash
flows in the early years followed by large, positive, and very uncertain cash flows in later
years. It also provides an opportunity to discuss the limited optionality imbedded in most
projects (little ability to stage investment, to change or expand output, or to recover value
from special purpose assets in the event of default).

2. the complexity in estimating even top-line demand 20 years into the future. The case forces
students to reconcile competing demand estimates in which the differences are due to
disagreements over basic economic assumptions and strategic motivations.2

3. the role of governments in large projects, both as investors and as customers. Public
sponsors consider factors such as employment, trade, and strategic considerations as well
as financial returns (cash flows, NPV's, and IRR's.) One of the case’s more interesting
discussions focuses on Boeing's competitive response in the face of government-aided
competition.

4. the competitive interaction between a monopolist and a potential entrant in an industry


with enormous entry costs. This setting allows you to analyze what makes preemption
credible and how product positioning affects both entry decisions and incumbent
responses. [see Esty and Ghemawat, 2001]

5. several risk mitigation features frequently encountered in large projects: joint venture
structure, vendor finance, and public (government) support. Interestingly, the absence of
debt is not representative of project finance transactions.

Assignment Questions
1. Why is Airbus interested in building the A3XX? What are its objectives?

2. How many aircraft does Airbus need to sell in order to break even on the investment? Is
this number greater or less than your estimate of total demand for very large aircraft (VLA)
over the next 20 years?

Hint: Consider all capital providers as a single entity and calculate the break-even
return to them collectively. To calculate the break-even number of planes, calculate the
present value of the required investment, and compare it to the present value of a growing
perpetuity of cash flows from planes sales beginning in 2008. Please assume an equity risk
premium of 6% in your analysis.

3. As Boeing, how would you respond to this situation? How does your answer depend on
what you think Airbus is likely to do?

4. Should Airbus commit to build the A3XX? How many orders should
Airbus have before committing to develop the plane?

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