Analysis of Airbus A3XX Project and its Impact on Aviation Industry

This article analyzes the Airbus A3XX project, its impact on the aviation industry, and a comparison with Boeing's 747. It includes calculations of NPV, discussion on market forecasts, and the future of very large aircrafts. The article also discusses the demand for very large aircrafts, the challenges faced by Airbus, and the potential of the A3XX project. The subject is finance and the college/university is not mentioned.

Running header: FINANCE
Finance
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
Answer to Question 1.................................................................................................................2
Answer to Question 2.................................................................................................................3
Answer to Question 3.................................................................................................................4
Answer to Question 4.................................................................................................................5
Answer to Question 5.................................................................................................................6
Answer to Question 6.................................................................................................................6
Reference....................................................................................................................................7

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Answer to Question 1
On June 23, 2000, a super jumbo jet named A3XX was approved by the Airbus
Industry’s Supervisory Board. This jet could provide the carrying capacity to 550 to 990
passengers. This jumbo jet had a list price of $216 million and it cost $13 billion to develop.
The development of this aircraft was ongoing since 1990. The Authorization to Offer (ATO)
permitted the company to start delivering this aircraft by 2006. The company announced
about the first order of the aircraft in July 2000. It got a total of twenty two orders of that
model from Air France, Emirates Airlines and International Lease Finance Corporation. The
management of the company also expected to notice a considerable hike in the market of very
large aircraft (VLA) in the next 20 year (they assumed to sell as much as 750 aircrafts in the
meantime). The management even predicted that they would break on an undisclosed cash
flow basis as selling 250 planes (Adler et al. 2018). They also expected that the sales of this
particular model would help to gain the profit of $350 billion.
There is no doubt that Airbus was one of the leading companies in Aviation industry.
But their main competitor in this industry was Boeing Company. It had been ruled the
aviation industry for more than fifty years. The market was also in favour of Boeing since the
World War II. The sales of Boeing aircraft used to gain two third of its revenue from the
commercial aircraft. The rest was dependable upon fighter jets and space shuttle. They also
provided 14 models from 5 aircraft families. The flagship of the Boeing industry was the 747-
400. It was also a very large aircraft (VLA) which could carry up to 420 passengers and had
three different classes to offer. The Boeing Company announced about the initial 25 order of
this aircraft and its stock price jumped at 5.1%. The management of the company expected
that this specific model would generate sales more than 700 planes in between 1980. But this
prediction failed as this project failed and this caused the company to face a very difficult
situation.

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As of 1990s, the 90% of the sold aircrafts was large aircrafts (consisting seats
between 70-400) and the number was quite sufficient at that time. There were demands for
very large aircrafts, but not enough to compensate the huge expenses regarding the
manufacturing and development of such huge aircrafts. There was a huge amount of
uncertainty regarding launching such aircrafts as the demands was not up to the expectations.
Thus the company should wait till there was enough demand to ensure enough order for the
model of the aircraft (DeCorla-Souza and Farajian 2017). If it postponed the project for the
future, there might be a chance that Boeing Company would leave them behind in the case of
large aircrafts. But when it comes to the matter of launching, where the huge amount of
capital is invested, the company should be more careful regarding that matter.
Answer to Question 2
In the Global Market Forecast (GMF) published by Airbus, they assumed and
indicated about some of the key features of the growth in the aviation industry. In 2000, the
GMF stated the growth forecast about the upcoming 20 years where it showed there will be a
hike on the worldwide passenger traffic by 4.9%. Airbus also predicted the demand for new
aircrafts on an overall basis of 10,000 routes linking 2,000 airports. The company also
forecasted for 14,661 new passenger aircrafts on which 1550 aircrafts for carrying 500 and
above passengers (Duckett and Willcox 2015). While Boeing forecasted a much smaller very
large aircraft market. They also targeted specifically the long distance flights as the major
benefactor of the very large aircrafts. But at the same time, the increasing frequency of flights
can also mar the market of very large aircrafts. For this scenario, the 747-400 would be the
perfect choice for the airlines companies.
As Airbus had not disclosed the exact cost of the project, it can be assumed that the
development of the aircraft might reach at the cost of $15 billion or more. The expected price

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of the A3XX might be $225 million. The project might have an effective tax rate at about
38%. The profit margin was expected from A3XX is from 20% to 30%, While it was well
above from the margin of Boeing (which was 15% to 20%). Based on the learning curve
effects, Airbus had targeted to achieve a pre-tax IRR of 15%, but it might be changed to 20%.
As of other references, the bonds of U.S. government were of 6%, inflation was 2%. Apart
from the direct profit from the A3XX, there were other profits too. The model could take over
the market of Boeing 747’s monopolistic market which could add additional 1.5% to the IRR
of the project
Calculation of NPV
Particulars Amount
Average Realized Price $225,000,000.00
Period 10
Average Sales of planes 75
Total Sales per year $16,875,000,000.00
Operating Margin 20%
Operating Profit $3,375,000,000.00
Less:
Depreciation $1,000,000.00
$3,374,000,000.00
Less:
Tax $1,282,120,000.00
PAT $2,091,880,000.00
Add:
Depreciation $1,000,000.00
Discounting factor 8%
Present Value $14,241,560,700.26
Less
Initial Investment $13,000,000,000.00
Net Present Value $1,241,560,700.26
Based on the calculation provided above the NPV is positive.
.

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Answer to Question 3
According to the given data submitted by Airbus, the project was supposed to gain the
expected margin of at least 20%. This analysis however is disagreed in many areas. On one
hand, the exact data is insufficient to account the reliable amount to rely on. On the other
hand, there was also some disagreement regarding the amount of development cost, tax rate
and AIC’s tax status.
But as the demand was not as big as the project, there was very little chance of
success. The initial response from the clients was hopeful, but a long term project cannot rely
on ‘launch’ customers as they are received substantial discount. The company could not start
the production without getting 50-100 order to secure the overall uninterrupted production.
The project was not that influential at that time as the market was not that responsive towards
the product. So the project was regarded as a lose at that concurrent time.
Answer to Question 4
In the Global Market Forecast of Airbus and Current Market Outlook of Boeing, there
are some contrasts that can be seen in both companies’ forecast. Airbus emphasises that to
accumulate with the growing number of the worldwide passenger traffic, there will shortly be
a huge demand for the very large aircrafts. Though Boeing stated that the increasing
frequency of the flights, shorter routes, opening new airports can manage the growing
number of the passenger traffic. But according to Airbus, these are not the permanent
solutions. In order to accumulate growing passengers year by year, the airlines must have to
prepare by increasing the number of seats in the aircrafts.
Though the growing number of airports and aircrafts can provide a temporary solution
to the suffering and waiting of the consumers, it is not a permanent solution. The aviation
industry was started to booming that time. The airlines were trying to gain as much

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passengers as possible to gain the maximum profits. So it is supposed that Boeing should not
understate the huge possibility of very large aircrafts. Beside this, Boeing had their existing
model 747 in market. Observing the subsequent demands of such aircrafts in the market, It is
natural for the company to not to take too much interest in developing and launching new
aircrafts. Apart from this, they may upgrade the 747 version to a modified one.
Answer to Question 5
As Airbus is a government-backed company, they could neutralize the idea as a
provision. The idea was great but poorly executed. So there were scopes to make
improvements in that existing idea. Apart from this, the project could be used as a provision
of the company because in future, the demand for very large aircrafts was to be observed.
Beside this, the project had every potentiality to beat Boeing 747 in the field of very large
aircraft.
Answer to Question 6
This was the starting of an era where very large aircrafts was going to take over the
market. The airlines industry started to feel the need of very large aircrafts very soon as to
provide enough service to their clients. For this, very large aircrafts were the best option
available to them (Nekhlyudov et al. 2016). As the industry was booming, new types of
VLA was emerging in the market. Aircrafts like A380, A340, various models of Boeing 747
was starting to take their own place in the aviation industry. With the demands, the
production also started to increase day by day. Till now the sales of only B747 aircrafts has
reached over 615. And the sales of A380 have reached at 337. Regardless of other models of
other companies, it can be said that the aviation industry is getting accustomed with the new
VLA aircrafts to fulfil the needs of the market.

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Reference
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Classen, D., 2018. Impact of inpatient harms on hospital finances and patient clinical
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Duckett, S. and Willcox, S., 2015. The Australian health care system (No. Ed. 5). Oxford
University Press.
Nekhlyudov, L., Walker, R., Ziebell, R., Rabin, B., Nutt, S. and Chubak, J., 2016. Cancer
survivors’ experiences with insurance, finances, and employment: results from a multisite
study. Journal of Cancer Survivorship, 10(6), pp.1104-1111.