Essay About Airbus Projects And Growth Rate Of The Industry

Essay Preview: Mr.
Report this essay
Corporate Finance: NPV for Airbus Projects
The decision to commit to a huge investment of $13B to develop the Airbus A3XX super jet should not be
taken lightly. There are many issues to consider regarding the profitability of the project. Firstly, there are
conflicting projections of the market demand from Airbus and Boeing, which could lead to dramatic
differences in the demand for Very Large Aircraft (VLA) and ultimately the number of planes sold. We
must also consider the growth rate of the industry, the riskiness of the project, the ability to use the tax
credits accumulated during initial development, and currency exchange rates since most plane sales are
priced in US dollars.
Based on careful review of all factors, we recommend that EADS move forward and develop the Airbus
3XX aircraft. We used Net Present Values (NPV) and looked at how variability in the main issues affects
that value as the principal indicator of the value of the project. Given the projections of demand, costs,
and timeline we found a NPV of $3.55B and then measured the effect of change in several of the key
assumptions.
The main advantages of the project are the huge payout if it goes as planned, solid growth rates in the
airline industry, and the risk sharing with partners and governments. The government launch aid works
similar to debt with very favorable interest rates (market rate) to be paid over 17 years, but with the
added benefit of not having to pay back if the project is unsuccessful. This will lead to a higher net IRR as
the government will not share in the profits.
Some of the arguments against the project include Boeings lower estimate of the market demand for VLA.
Although they make a valid argument, we feel that they ignore constraints such as airport capacity that
limit flight frequency. Furthermore, they made a claim that 40% of VLA purchases were for range. This
implies that 60% purchased for “other reasons.” There are not many reasons for purchasing VLA other
than range and seating capacity.
We looked closely at all of the issues affecting profitability and concluded that the main issues were
currency rate fluctuations, the increased riskiness of this project over past projects, and total demand.
The following chart exemplifies how changes in each of these would affect the NPV of the project.
Currency Rate
Fluctuations
Risk Premium Demand
New NPV
New Sell
Price New NPV
New Risk
Prem.
Planes
10% Change
$2,584
$2,795 6.6%
$2,584
20% Change
$1,614
$2,320 7.2%
$1,614
30% Change
$1,810 7.8%
40% Change
$(327)
$1,362 8.4%
$(327)
We also found no significant value in delaying the project. Boeing has much to gain by Airbus decision to
delay the project, yet the market forecasts are not going to change significantly in the short‐term.
We believe that Airbus has created a superior forecasting model. Within the VLA market, only Boeings
747 and 777 aircraft are competitors. They currently average 46 and 52 aircraft sales respectively per year.
Calculating 4.8% growth, by 2008 when Airbus expects to be at full production those demand numbers will
have grown to 70 and 79, respectively. Furthermore, Boeing claims that 40% of its customers purchased
for the range of the aircraft. This implies that 60% purchased for the seating capacity or other reasons and
the Airbus 3XX meets or exceeds the range