CFI ASSIGNMENT

Airbus A3XX: Developing the World’s Largest Commercial Jet(A)

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 Competitive Interactions

If Airbus launches AX33 then Boeing would have the following strategies:

 File a complaint with the WTO – In view of the recent rulings against Bombardier of Canada
and Embraer of Brazil for improper subsidies, the complaint might prove to be effective for
Boeing

But Boeing itself might fall prey to the alleged subsidies on its military contracts and its use
of foreign sales corporations.

 Stretch Version of 747

 Boeing’s own super jumbo jet with equivalent features of A3XX
 Cut price of 747 to divert sales away from A3XX
 No response and continue to focus on the existing product line

If Airbus chooses not to launch AX33 Boeing would-

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Improve its operating efficiency

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
 Expand market shares of current products

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Boeing instituted a new incentive program that linked compensation with stock price appreciation,

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and established stock ownership guidelines for top executives.
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Role of Government

Governments play a role on both sides as customers, investors, and interested parties.
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As Investor: Funding for A3XX would come from three sources:

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 $3.5 billion from risk sharing partner (RSPs)

 $3.6 billion of “launch aid” from partners’ national governments
 $5.9 billion from the Airbus partners themselves in proportion to their ownership interests
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Launch aid had been a subject of controversy between United States and European Union (EU).
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According to the agreement made in 1992, United States and EU limited the launch aid to a maximum
of 33% of defined development costs. The British Govt approving $835 million in launch aid to
support BAE systems’ share of project saying that it would create 8000 new jobs and safeguard 20000
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more across the British aerospace industry was suspicious.

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As customer: Government plays an important role as customer of military aircrafts, missiles and
space systems. Government revenue constitutes 1/3 rd of Boeing’s total revenue. Boeing supplies F-
15 fighter aircraft to Air Force One and space shuttle to support its political strength. Boeing has an
unique importance to the U.S. economy. It was the second largest contractor to the U.S. government.

Government contributes to a large part of the economy of aircraft industry. Having the Governments
of the partner nations as customers would help Airbus to increase their revenue as well as increase its
market share and attract more investors.

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 Risk Mitigation

The project involved several aspects that were considered as risks and need to be addressed. Some of
the identified risks were:

 Loss of reputation as a result of unexpected delays.

 Delay reasons may be technological, structural or systematic

 Customer financial viability

 Rescheduling of Payments
 Creation of a new mechanism to structure repayments under economic crisis.
 In Airbus case, there was clause that non-repayment would not trigger default
and also there were provisions of repayment to launch paid as per plane fee.

 Management software integration and compatibility

 ERM integration along various verticals of Airbus can vary
 Since ERM is very much responsible to carry out risk mitigation it’s integration is

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crucial for Airbus

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 Withdrawal of orders

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 Refuse One-sided Agreements
 There should not be any situation that agreement would favor only one party

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and would create a win-lose situation. So, concerns of all the parties should
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be dealt with in the agreements.
 In Airbus case, both Boeing and risk sharing partners had their concerns
listed in the agreement creating a win-win situation.
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 Appropriate Agreements
 There might be conflicts between the stakeholders on various issues which
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can persuade any investor to draw back its money from investments. Hence,
innovative agreements should be designed which would make the
collaboration robust.
 Even in Airbus case, strong agreements were done with risk sharing partners
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which mitigated risks.

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ERM is designed to coordinate amongst various functions of Airbus it is essential that it coordinates
and achieves its objective of:
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1. Strategy: selection of high level strategic objectives consistent with risk appetite
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2. Operations: effectiveness and efficiency of operations and resource allocation, in line

with performance and financial targets
3. Reporting: reliability of reporting, in particular
4. Compliance: compliance with applicable laws and regulations.

With increasing application of ERM there is increased understanding of the challenges that may occur
thus better risk mitigation through better vision.

Demand Dynamics

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 Airbus Industries supervisory Board was going to take decision on investing $13 billion to develop
the A3XX, a new super jumbo jet that would have capacity of 550 to 1000 passengers and have a list
price of $216 million. Having secured firm orders for 22 jets, the Board must take a strong decision
that whether there will be sufficient long-term demand to justify the investment or not.

Airbus prediction was that the market for very large aircraft (VLA) would exceed 1500 aircraft over
the next 20 years and would generate sales in excess of $350 billion. It needed to sell 250 aircraft to
break even on an un-discounted cash flow basis, and could sell as many as 750 aircraft over the next
20 years. However, Boeing’s prediction was different from them, the VLA market would be less than
400 aircraft over the next 20 years. The difference stems from fundamentally different perspectives on
the industry's likely evolution: Airbus is predicting an increase in "hub to hub" travel and the need for
larger planes to service key hubs. In contrast, Boeing is predicting an increase in "fragmentation" and
the expansion of point-to-point service.

And hence keeping demand dynamics in mind, we believe that Airbus should go ahead for
this project. Some of the prominent reasons are mentioned below:

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 Positive NPV
Enough demand from market

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 New flying style
 First mover advantage

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