MEMO

Airbus A3XX
To: Airbus management
From: Yuxiang Fan, Da Luo, Di Jia, Tiantao Zheng

Business Overview
Airbus Group SE is a European multinational aerospace and defense corporation. The
company operates through Airbus, Airbus Helicopters, and Airbus Defense and Space segments.
The Airbus is now considering to build A3XX, the worlds largest commercial jet.
Objectives for Building A3XX
Despite the gains in market share, Airbus did not have a product to compete with Boeing's
747 in the VLA market. Therefore, Airbus wanted to enter this new segment to get more market
share. Management of Airbus believed that they could capture more than half the VLA market
with A3XX, which would represent a huge financial success and would position Airbus as the
commercial aviation industry leader. Moreover, Airbus believed that air transportation demand
would grow significantly in future and growing economies in Asia such as China would contribute
greatly to the demand for VLA, because Airbus predicted that by 2019, Asia-Pacific airlines would
hold almost half the VLA passenger fleet, and that six of the top ten airports served by VLA
aircraft would be in Asia.
Break-even Analysis
We start by making reasonable assumptions based on the given material. Company profit
margin is assumed to be 20% constant over the period. Tax rate is estimated to be at 38%. As risk
free rate is 6% with asset beta of 0.84, we then have a cost of capital of 6%+6%*0.84=11.04%.
Units sold in 2006 and 2007 are assumed to be at 50% and 75% of full manufacturing capacity.
Based on these assumptions, we estimate 20 Years NPV, Breakeven NPV, and NPV with
Perpetuity to be -$495 million, $23 million, and $2,125 million relatively. Therefore, Airbus needs

to sell 1,304 aircrafts in order to break even, which is greater than the estimate of total demand for
VLA over the next 20 years.
Boeings Response
From Boeings perspective, they have several options to respond Airbus strategy of
developing A3XX. It can start to develop its own VLA to compete against A3XX. However, this
approach shouldnt be recommended as Boeing believes the investment was too high. Cutting
existing 747s price to compete would not be recommended either since profit margin would be
lower. Alternatively, Boeing can compete by developing new point-to-point routes. If Airbus
decides not to develop A3XX, Boeing should still carry on its development of point-to-point route
should there be no other projects available.
Should Airbus Do It?
We dont think Airbus should commit to build the A3XX, and the reasons are as follows.
According to the spreadsheet, we can calculate the IRR of this project, which is 13.31%.
However, this figure is lower than the predicted actual IRR of 20%, which means, this project
cannot meet the expectation of Airbus.
The management also believed that they would break even with a basis of 250 planes with an
expected sale of 750 over the next 20 years. This prediction, however, also contradicts with our
calculation of around 1300 aircrafts to break even. Under this condition, more than 40% of the
VLAs will be unsalable.
Despite the fact that Airbus has a prediction of demand for more than 1500 super jumbos,
which seems to be higher than our break-even point, we still need to take the market share of
Boeing into consideration. As Boeing is dominant in the VLA market, therefore the capacity of
VLA market for Airbus is still too small for 1300 planes.
Based on what we have mentioned above, even though A3XX is a positive NPV project
(perpetuity), it will still be risky for Airbus to implement.

Appendix
Table 1 Discount Cash Flow and Depreciation analysis