Developing the World’s Largest Commercial Jet

On June 23rd, 2000, the Airbus Industrie’s Supervisory Board has a critical situation at hand. They would have to decide if they were to commit to an industrial launch of the new superjumbo, the A3XX. This is the point where they have already sunk in $700million and a decision to abandon this project would result in the loss for the expense of these preliminary studies and efforts. However, with a decision to commit in launching the superjumbo in an attempt to seize market demand in the Very Large Aircraft (VLA) market, it also indicates the stage where much significant expenditures would begin.

Many implications would thus have to be considered before taking on a rational course of action. Most importantly, we have to study the competitive nature of the industry, the profit potential of the launch of A3XX and the volatility that may negate benefits. Our report aims to provide insights to the case scenario (that is, placing ourselves in the Year 2000, the point before the decision was made) and thus, hoping to provide a thorough analysis of whether there was evidence of sufficient long-term profit potential then.

We first studied the nature of competition within the commercial aircraft industry and from which, we will draw conclusions of how Boeing would respond in accordance to the launch undertaken by Airbus. This in turn translates to the plausible scenario for Airbus’ A3XX to investigate if the market was to be shared with Boeing, and will it be substantial enough to support the full utilization of capacity for the Airbus Industrie’s production of A3XX.

After which, we could safely assume that after the Year 2008, when Airbus reach their maximum production capacity, they can then fully utilize their capacity and sell at maximum output. This would thus constitute our base case scenario where the Net Present Value of the future cash flows is the most viable. The Breakeven analysis and Profitability Index reveal more insights into the justification of what the management of Airbus had actually believed and attempts to reason out results that the launch can achieve. We would by then brought our analysis to another level by studying the volatility of market factors like the discount rates, tax rates, and inflation rates and how it would affect the calculated net present value against the backdrop of a scenario analysis of the attainable operation margins for Airbus.

The Decision Tree Analysis attempts to bring forth the most likely occurrences and their relative probabilities of occurrence. This would paint a clearer picture of what the Net Present Value of future cash flows should actually be, being affected by decisions undertaken by Boeing and not just that of a base case scenario. Airbus had a reputation for innovative design and technology. All Airbus planes employed “fly-by-wire” technology that substituted computerized control for mechanical linkages between the pilot and the aircraft’s control surfaces.

This technology combined with a common cockpit design permitted “cross crew qualification” (CCQ) whereby pilots were certified to fly similar aircrafts, thus offering flexible scheduling in flight crews on various models, leading to better pilot utilization and lower training costs. These features helped explain why Airbus had received over half of the total large aircraft orders for the first time in 1999. However, despite the gains in market share, Airbus still did not have a product to compete with the monopoly of Boeing’s 747 in the VLA market.

This comprises the main reason why Airbus is interested in building the A3XX. It attempts to create a dominant design that the market for large planes may pledge allegiance to, moving from simply product innovations to process improvements for the VLA. It does intend to just replicate the 747s and achieve a jumbo jet with the same capabilities. Rather, it aims to increase the seating capacity and reduce costs for the operators by so much more than what Boeing’s alleged monopoly holds, with the objective of seizing the market share.

Analyzing Boeing Being one of the two firms that dominated the manufacturing of large aircraft, Boeing company would definitely respond in retaliation to the introduction of the A3XX from Airbus Industrie, in the latter’s attempt to seize market share. We should hence analyze the sustainable competitive advantages that Boeing possesses before we can make conclusions on their courses of action they would employ. The core competencies of Boeing Company would no doubt be its political strength that is of significant importance to the US economy. With 190,000 employees, it is also the largest single contributor to the US balance of payments. Being the 2nd largest defense contractor, it also leverages on its manufacturing and defense experience to be the world’s leading producer of aircraft.