THE AIRBUS A3801
Gerald Feslmeier, Universitaet der Bundeswehr Munich, Germany
Prof. Dr. Andreas Schueler, Universitaet der Bundeswehr Munich, Germany
On 04/27/2005, the Airbus A380, the largest passenger plane in the world, took off on its maiden
flight. This case study examines whether the development of the A380 has been a success story.
To do so the A380 project is evaluated from three perspectives. First we ask whether the decision
to start the A380 project, which was made at the end of 2000, was in the interest of the
shareholders of Airbus. Next we examine how the decision had turned out had the further
development of the project been anticipated. And finally, the project needs to be examined from
today's point of view by asking whether the project should be continued or terminated.
HISTORY OF AIRBUS INDUSTRY
In the 1960s, European aircraft manufacturers planned to develop a passenger aircraft
competing with the models of the U.S. manufacturers Boeing, Lockheed and McDonnell
Douglas, which dominated the market. U.S. aircraft manufacturers dominated the market as they
produced 85% of all commercial aircrafts while the European manufacturers held a market share
of only 10%. At the beginning however, the plan of the European players was not practicable as
they lacked technical knowledge and capital. The U.S. manufacturers – contrary to their
European competitors – received governmental subisidies for the development of new models.
That was a considerable competitive disadvantage for the European aircraft manufacturers. For
this reason, in January 1966, government delegates from France, Great Britain and Germany
started negotiations regarding a European cooperation of aircraft manufacturers to create the
basis for a government-supported, competitive passenger aircraft. As a result Airbus Industry was
founded in accordance to French law (GIE) on 12/18/1970 in the form of an economic interest
group between German and French companies.2 On the basis of this legal form the firms involved
were able to cooperate closely, without, however, losing their legal independence. The founding
members were the Aérospatiale Group, which emerged from a merger of North and South
Aviation on the French side, and Deutsche Airbus, consisting of Messerschmidt-Bölkow Blohm
and VFW-Fokker on the German side. In 1971 the Spanish CASA (Construcciones Aeronauticas
S.A.) joined this economic interest group, while British Aerospace, a newly founded association
of British aircraft manufacturers, became an official member only in 1979. Figure 1 shows the
shares of each member of the economic interest group after British Aerospace had joined.
1
The case was prepared for classroom discussion rather than to illustrate either effective or ineffective handling of
an administrative situation. The conclusions drawn depend heavily upon the assumptions chosen.
2
GIE : groupement d'intérêt économique.
Figure 1: Ownership Structure Airbus Industry
CASA; 4,2%
Deutsche
Airbus;
37,9%
British
Aerospace;
20,0%
Aérospatiale
Group;
37,9%
The transformation of Airbus into an independent and fully integrated company (AIC)
finally took place at the end of February 2001, retroactive to the beginning of the year.3 This
transformation, including the pooling of the major production sites and the resulting reduction of
the decentralization problem which had existed previously was supposed to raise the efficiency of
Airbus and thereby eliminate a competitive disadvantage to Boeing.
At that time the listed Dutch company EADS N.V. (European Aeronautic Defense and
Space Company), a result of the merger between the French Aerospatiale Matra S.A., the Spanish
Construcciones Aeronáuticas S.A. and the German DaimlerChrysler Aerospace AG on
07/10/2000, held an 80% share of the newly founded corporation. British BAE Systems held the
remaining 20%.
HISTORY OF THE A380
As early as the beginning of the 90s, Airbus, Boeing and McDonnell Douglas each began
planning the construction of a large-capacity aircraft. McDonnell Douglas discarded its plans in
1993 when no partner could be found for its deficient civilian aircraft division. Boeing
negotiated, just like Airbus, with cooperation partners from the aircraft building industry in
Japan. Furthermore, Boeing also sought negotiations with the Airbus-members Deutsche
Aerospace and British Aerospace. Following these negotiations feasibility studies were initiated.
Soon, however, Boeing lost interest in developing a completely new aircraft in cooperation with
the Europeans. The main reasons for Boeings retreat were the high development costs which
would have arisen, as well as the assessment by Boeing that only one single type of aircraft could
successfully exist on the market for large-capacity aircraft. Boeing therefore decided in favor of a
3
AIC: Airbus Integrated Company
further development of its 747 product line. A study by the investment bank Lehman Brothers
published in 1996 shows that Boeing made 75% of its profit with the 747. Moreover, with the
747 Boeing held a monopoly, which facilitated the selling of other models in package deals with
the 747. According to this study Airbus would only be able to compete if an even bigger aircraft
type than the 747-600 could be brought to the market. Similar considerations were discussed
within the Airbus consortium. In order to reduce the development effort and the associated risk,
Airbus was looking for additional partners. Airbus succeeded in winning the Belgian Belairbus
and the Dutch Fokker Aviation for the intended large-capacity aircraft with the working title
A3XX.
On 06/23/2000 the supervisory board of Airbus Industries authorized the management to
market the A3XX. The approval of the supervisory board made it possible to sign binding supply
agreements. Already during the annual Farnborough Air Show in England that same year,
Emirates Airlines places the first advance order. Well-known airlines, e.g., Singapore Airlines,
Qantas, Air France, Virgin Atlantic as well as the U.S. leasing company ILFC followed.
Half a year later, on 12/19/2000, the supervisory board decides to begin production of the
A3XX that now was named A380. The A380 is planned as a double-deck aircraft which is to be
offered in five different passenger versions. Depending on the particular version it can transport
between 481 and 656 passengers. With this capacity the A380 takes the top rank worldwide.
Furthermore, in virtue of its large transport volume, the company also offers a cargo version with
a transport capacity of 150 tons. At first, Airbus estimates the development costs at 10.7 bn $. We
assume that in addition to the research and development costs 1 bn $ is needed each for
investments in tangible non-current assets and current assets.4 Furthermore, we assume annual
replacement capex of 100 m $, beginning with the year after the first delivery of the A380 to
customers.5 In addition it is assumed that about 30% of the development costs are capitalized
according to IAS 38. The markdown of the capitalized development costs is carried out via the
anticipated number of units produced over the entire project duration. For simplification we
assume that in case of the tangible non-current assets the linear depreciation method is used over
a markdown period of ten years. We assume that at the end of the project the tangible non-current
assets and current assets are sold at book value. The company expects break-even to occur after
11 years with 250 aircraft sold at a list price of 220 m $ per aircraft.6 The delivery of the first
airplane is scheduled for 2006. At the time of the decision to start the production six airlines
ordered already 50 aircrafts. Other airlines like Deutsche Lufthansa are still considering an order.
Development costs are financed by low-interest bearing governmental loans amounting to
2.5 bn $.7 3.1 bn $ were financed by ten suppliers who develop components for the A380. The
remainder is covered by a capital increase provided by EADS and BAE Systems. In a 1992
bilateral agreement between the USA and the European Union it was stipulated that
governmental subsidies have to be repaid within a period of 17 years. The sum of the overall
subsidies paid out must not exceed 33% of the development costs.8 Repayments of the
governmental loans occur per airplanes sold. For the repayment schedule it was assumed that 500
4
5
6
7
8
The mentioned amount for the net working capital does not include the advances received. We assume in
simplified terms that the advances are due three years before delivery.
For these assumptions see Esty (2001), p. 24.
We assume that that break-even volume describes the number of aircraft to be sold in order to cover the entire
development costs of 10.7 bn $ by the resulting operating profit, if one neglects discounts for first-time customers
for simplification purposes.
Assume in simplified terms that the taking out of loans is carried out in proportion to the amount of the
development costs.
Cf. Council of the EU (1992).
A380 will be sold by year 2018. The interest rate is 4.5%. On the capital market EADS has
received fairly good ratings for years.9 Therefore, if the A380 had to be financed by private debt,
we would assume a low risk premium of 100 basis points over the risk-free interest rate.
With the logistics group FedEx Airbus registers the first customer from the U.S. and
simultaneously the first buyer of the cargo version on 01/16/2001. The order comprises of ten
aircraft amounting to a total price of 2.3 bn $. However, first-time customers usually receive
considerable discounts of about 25%, sometimes up to 50%. One could assume that the first-time
customer discounts apply at least to those planes that are delivered to the customer within the first
four years after start of delivery. In each of the years 2008 to 2010 FedEx is scheduled to receive
three planes. The delivery of the tenth plane is supposed to be carried out in 2011. FedEx chooses
the A380 cargo version primarily because of its size. This way, instead of employing a number of
MD-11 on specific long-distance routes each day, it becomes possible to bundle the transports
and carry them out more cheaply by employing an A380. FedEx expects ton-per-mile-costs to
decrease by about 20%. With its large order FedEx feels prepared for the coming growth in the
cargo market. Forecasts by industry experts assume an annual growth ratio of 7% in the
international airfreight market over the next 20 years.
By the end of 2001 Airbus registers a total of 85 orders and 12 declarations of intent. The
airbus A380 starts with the production in Nantes on 01/23/2002. In the same year the number of
orders increases to 95 planes. Due to orders of well-known airline companies the number of
orders for the Airbus A380 increases to 129 by the end of 2003. Finally, the number of orders
increases to 139 aircraft in 2004. For Airbus the year 2005 starts with the unveiling of an A380 in
Toulouse on 01/18/2005. This aircraft takes off for its maiden flight on 04/27/2005. By the end of
the year 2005, 159 orders for the A380 have been made. Seventeen of these are orders for the
cargo version, the production of which began on 04/12/2005.
On 03/10/2006 the A380 completes its 1000th hour of test flights. Shortly thereafter on
03/26/2006, an evacuation test, required by the European Aviation Safety Agency and the U.S.
aviation agency Federal Aviation as part of the certification process, is passed. Unaffected by
production difficulties the A380 completes a number of test flights in November 2006 and
receives the approval for Europe and the USA in December 2006. Despite the approval, the delay
in delivery due to the production difficulties cause the U.S. logistics group FedEx to cancel its
order for ten cargo versions, making it the first A380 customer to do so. Instead, an order for 15
cargo planes of the type 777 is placed with the competitor Boeing. The U.S. leasing company
ILFC changes the five orders for the cargo version into orders for the passenger version. On
03/01/2007 the last A380 cargo customer (UPS) withdraws its order, after Airbus had announced
that all construction and development work for the cargo plane version would be halted in order
to free up capacity for the passenger version. Despite of the delays in delivery and in spite of the
fact that the list price is now at 319.2 million $,10 more orders for the A380 passenger version are
received. The order volume on 05/31/2007 amounts to 160 A380s distributed among 14
customers.
9
10
At the beginning of 2007 Standard & Poor’s classified EADS as A- with negative prospect.
The list price for the A380 amounts to approx. 280 m $ in the years 2004 and 2005 and to approx. 300 m $ in
2006.
Figure 2: A380 Orders
Etihad Airway s; 4 China Southern
Kingfisher Airlines;
Airlines; 5
5
Qatar Airway s; 2
Korean Air Lines; 5
Penerbangan
M alay sia Berhad
(M AS); 6
Emirates; 47
Thai Airway s
International; 6
Virgin Atlantic
Airway s; 6
Air France
(Group e); 10
Intl Lease Finance
Corp ; 10
QANT AS Airway s;
20
Lufthansa; 15
Singap ore Airlines;
19
TECHNOLOGY
With the A380 an airplane is to be developed that is able to accommodate a significantly
greater number of passengers than previous models and that furthermore operates with lower
operating costs. According to a rule of thumb in aircraft construction, doubling the passenger
number leads to a quadruplication of the airplane weight, so innovative weight-saving materials
have to be used. 3% of the shell of the A380 consists of fiber-glass reinforced aluminum or
GLARE. This is a material combination which consists of alternate layers of aluminum and fiberglass and has been especially developed for the requirements of aircraft construction. GLARE is
lighter than aluminum, more resistant against corrosion and reduces the weight of the A380.
Damages can be fixed using conventional aluminum repair techniques. In addition, carbon fiber
is used. The share of this material in the overall material amounts to 22%. Carbon fiber is 60%
lighter than steel and increases the stability of the aircraft. The A380 is the first airplane which
wing mountings consist of carbon fiber. Altogether, the proportion of carbon composite material
is estimated at 40%. To lower operating costs, the use of fuel economizing jet engines is
necessary in addition to low weight. The selected Trent 900 engine by Rolls-Royce is the largest
engine built for a passenger aircraft and keeps the per capita consumption of kerosene at full
seating to less than three liters for 100 kilometers.11
11
As an alternative to the Trent 900 A380-customers can also choose the GP7200 engines made by the Engine
Alliance, a joint venture of General Electric and Pratt & Whitney.
Furthermore, an A380 contains technologies like the Integrated Modular Avionics (IMA),
Network Systems Servers (NSS), Power-by-Wire Flight Controls and the 350 bar hydraulic
system. Avionics describes all technical and technological equipment in an aircraft. With the help
of the IMA originating from military aeronautics, several of these devices are combined into a
module. This type of system architecture reduces the number of different devices, facilitates
maintenance and reduces costs. The NSS enables a paper-free cockpit. Materials such as maps or
the logbook of the airplane can be accessed electronically by the pilot. The Power-by-Wire Flight
Controls enable the continuation of an A380 flight in case of a hydraulics failure. The 350 bar
hydraulic system operates with higher-than-average pressure. This allows the diminution of
control elements, lines and other elements and reduces the weight of the aircraft.
DEVELOPMENT & PRODUCTION
The production of the A380 is distributed among 15 production centers in four European
countries. The split-up of the production requires a high logistical effort. The complex process
starts in Hamburg where Airbus manufactures the nose and fuselage section. These parts are then
transported to Broughton (Great Britain) with a ship made solely for that purpose. In Broughton
the wings are loaded onto that ship, which then sails on to Saint Nazaire. In this French town
Airbus produces the middle section of the fuselage, which is also loaded onto the ship. After that
the parts are transported to Bordeaux. The tailplane section, which is produced in the Spanish city
of Getafe and shipped to Bordeaux separately, and the remaining parts are transported to the
Langon harbor per inland waterway vessel on the river Garonne. From there the parts are
transported to Toulouse, the location of the final assembly, by large trucks.
In addition to the nose and fuselage section, the vertical tail (Stade) as well as the GLARE-parts
of the shell (Nordenham) and the landing flaps (Bremen) originate in Germany. Apart from the
tailplane, the carbon fiber parts of the fuselage (Illescas) and the rudders (Puerto Real) are
manufactured in Spain. The production of the cockpit section is carried out at the French city
Nantes, and the production of further components for fuselage and cockpit in Maulte. The
production of the flight control takes place in Toulouse. Following the final assembly the maiden
flight goes to Hamburg where the paintwork and the interior furnishing are being carried out.
Parts of the interior furnishing are produced, among others, at the German Airbus plants in
Buxtehude and Laupheim. The delivery of the completed aircraft to the customer is intended to
be in Hamburg as well as in Toulouse.
Table 1: Production Sites
Production sites
Manufactured parts
Hamburg
Nose and fuselage section, paintwork, interior furnishing
Stade
Vertical tail
Bremen
Landing flaps
Nordenham
GLARE-parts
Laupheim
Interior furnishing
Buxtehude
Interior furnishing
Broughton
Wings
Meaulte
Components for fuselage and cockpit
Toulouse
Flight control, final assembly
Saint Nazaire Ville
Middle section of the fuselage
Saint Nazaire Grande
Middle section of the fuselage
Nantes
Cockpit section
Puerto Real
Rudders
Getafe
Tailplane section
Illescas
Carbon fiber parts of the fuselage
With the production of the A380 Airbus breaks new ground. The fuselage bracings are not
riveted any more but welded by a laser which leads to a lower aircraft weight as well as lower
maintenance costs. Problems during the production are caused by components which are too big
for air transport between the European plants. Airbus has to move these components by ship and
by truck. Boeing, however, has introduced area-wide air transport for the components of its
models, which apart from the time-saving aspect also results in a transportation cost reduction of
up to 40%. To lower the stock of inventory and achieve a lower capital lockup, Airbus wants to
lower the production time for all of its models by a third. Especially the production time at the
end of the line, i.e. from wing assembly to delivery, is to be reduced.
Approximately 50% of the expenditures arise in Euro due to the location of the Airbus
manufacturing sites. However, Airbus generates its revenues – as it is common in the aerospace
industry – in U.S. Dollar. A weak U.S. Dollar harms Airbus and the parent company EADS.
Therefore EADS uses currency hedging. Only the U.S. Dollar sales volume not hedged (about
30%) is subject to changes in exchange rates. Table 2 shows the development of the actual endof-year exchange rates from 2000 to 2006.
Table 2: Exchange Rates (end of the year)
Date (31.12.)
1 US $ in €
2000
2001
1,06202 1,12892
2002
2003
2004
2005
2006
0,95411
0,79669
0,73314
0,84441
0,75798
To increase its presence in the respective regions and at the same time lower the
dependence on the Euro, the Airbus parent company EADS plans an expansion of the industrial
production to six countries outside of Europe. Boeing follows a similar strategy. A third of the
planned 787, also called "Dreamliner", is to consist of components manufactured in Japan. In
case of the A380, however, only 5% of the parts are manufactured by Japanese companies.
Presence in the Asia-Pacific area is considered important as this region will become the largest
market for civilian aircraft with a world market share of about 35.8% (calculations based on the
value of the planes delivered) by 2025.
Another strategic issue is the shift of production processes to suppliers. On the one hand
this is supposed to reduce the 40% vertical range of production to 30% over medium-term,
thereby reducing the risk airbus faces in regards to its product development process. Boeing too
reduced the quota of the vertical range of production for the 787 to a third. On the other hand
Airbus wants to utilize the suppliers as gateways to new markets.
According to Airbus’ plans at the end of 2000 up to 14 A380 are supposed to be handed
over to customers in the second quarter of 2006. In 2007 35 aircraft of this type are due for
delivery and as soon as 2008 production is to reach the annual quantity of 45 A380. The
management of Airbus Germany estimates the complete duration of the A380 project to be 25 to
30 years.
The development of the A380 does not proceed smoothly. For example, the start of
production has to be postponed by three months, because parts of the air conditioner do not fit in
the air plane fuselage. The reason for this mishap lies with the fact that engineers did not work
with the correct size of the air conditioning when using the 3-D computer program CATIA at
first. CATIA is meant to enable a simultaneous development of the different aircraft components
at the different sites.
In December 2004, Airbus’ president Forgeard announces that the development of the
A380 is delayed. The maiden flight of the A380 planned for the end of 2004 is postponed to the
1st quarter of 2005 and shortly after to the second half of April 2005. The development costs are
likely to be 1.45 bn € higher than expected. The estimated weight of the A380 will also increase
from 540 tons to 565 tons; thus the mileage cost also increases. Airbus announces in the middle
of the year 2005 that the delivery of the A380 could be delayed by up to six months. This delay is
caused by problems with the wiring and the cabin equipment.
Airbus suffers another setback when rips form on both wings during necessary
certification examinations of the A380. According to the regulations the wings have to endure the
1.5-fold of the normal maximum operating strain unscathed. During the test the A380 was able to
withstand the 1.45-fold of this strain without problems. Therefore Airbus is optimistic that it will
still be able to carry out the necessary improvements without delays in delivery. In the middle of
2006 Airbus reports a further delay of the delivery date of up to seven months. Only the delivery
of the first planes to Singapore Airlines at the end of the year can be carried out. In 2007 the
delivery of nine, in 2008 of up to 30, and in 2009 of 40 A380 is expected. Problems with
complex board electronics are cited as a reason for this new postponement. The assembly of the
A380 has not attained serial production readiness yet. As a result, Emirates, the biggest A380
client, gives official notice of claims for damages against Airbus. Other airline companies like
Singapore Airlines are also contemplating this option. A cancellation of the A380 orders,
however, is not unproblematic for the airlines. Thai Airways for example would lose 97 million $
in advance payments if it would cancel its order for six A380.
Due to the development problems Noël Forgeard, who in the meantime has taken over the
position of the Co-CEO of EADS, and Gustav Humbert, his German successor at Airbus, step
down. Moreover Forgeard is accused of having used information about the production difficulties
for insider trading in March 2006. With these transactions Forgeard and his family are said to
have made approximately 2.5 m €. Frenchman Christian Streiff, foreign to the aircraft industry,
who most recently had been Deputy CEO to the multinational glass and construction products
manufacturer Saint-Gobain, becomes the new CEO of Airbus. Streiff replaces the previous A380
program director Charles Champion with Mario Heinen who is regarded as an expert in the field
of serial production. Apart from personnel changes organizational changes are undertaken.
Instead of the previous organizational separation of individual work stages, integrated teams are
now to be installed. Moreover, almost all A380 activities in Germany are under the exclusive
management of Rüdiger Fuchs with immediate effect.
Despite these measures Airbus has to admit further delays in the delivery schedule on
09/21/2006 as ‘continuing difficulties with the industrialization of the wiring of the serial
produced planes have been identified’. On this account customers will receive most likely only
one A380 in 2007 and 13 aircraft in 2008. An increase in the annual production to 45 A380 is
planned for 2010.
After only about three months as Airbus CEO, Christian Streiff submits his resignation on
the grounds of internal differences in the EADS administrative board. Louis Gallois, who at the
same time is Co-Chair of the parent company EADS, takes over his position.
Due to the new production delay, which has contributed to the increase in development costs to
16 bn $ and the breakeven point to 420 A380 aircraft,12 Airbus feels impelled to end almost 1,000
temporary work contracts. Furthermore, Airbus wants to cut about 10,000 jobs in administration
worldwide, to reduce the number of suppliers from about 3,000 to 500 and to increase the quota
of components obtained in low-wage countries by 50%. The outstanding total amounts of
repayable subsidies the A380 project received from the European governments are listed in Table
3.13
Table 3: Governmental Subsidies
Year
2001
2002
2003
2004
2005
2006
2007
Total amounts of repayable
0,55
1,1
2,2
2,5
2,8
3,3
3,6
subsidies in bn €
Through a newly established complaint center, EADS tries to prevent that unclear
allocation of rights, assignments of tasks and national vanities on the German and French sides
hinder information flow. The EADS administrative board for example is reported to have been
informed about the wiring problems too late because of that. Moreover, the sale of the Airbus
shares held by BAE in October 2006 to EADS additionally permits EADS greater integration of
the aircraft manufacturer into the parent company. The integration shall enable a better flow of
information and more effective control.
AIRBUS 380 VS. BOEING 747
With the 747 Boeing has held the monopoly in the market of the so-called Very Large Aircraft,
short VLA, since 1969. Airbus tries to break this position with the introduction of the A380. It
therefore seems reasonable to compare the qualities of both aircraft models. Table 4 contains the
corresponding information. The A380 can transport up to 555 passengers in three-class
configuration and 840 passengers in full economy configuration. In comparison, the 747-400ER,
the newest 747 model in use, only has space for 416 passengers in three-class-configuration and
can transport 568 passengers at most.
Table 4: Governmental Subsidies
12
13
We assume that the investments into the tangible non-current assets and the net working capital have not changed
compared with the original planning (end of 2000).
The values for 2001 and 2007 are estimates.
A380
747-400ER
747-8
Passengers (3 classes)
555
416
467
Passengers maximal
840
568
Not known
Maximum take off weight
560t
413t
440t
0,89Ma
0,855Ma
0,855Ma
15.000km
14.205km
14.815m
Cruising speed
Range
Wingspread
79,8m
64,4m
68,5m
Length
73m
70.6m
76,4m
Height
24,1m
19,4m
19,5m
Main deck: 6,85m
6.1m
6,1m
260 Mio. $
300 Mio. $
Cabin width
Upper deck: 5,92m
List price
319,2 Mio. $
Because of the difference in capacity the permitted take off weight is significantly higher for the
A380 than for the 747. Despite the higher weight, the A380 has a longer range than the 747. The
interior of the A380 is 35% larger than that of the 747 but the operating costs are only 12%
higher than those of the 747. The A380 uses 12% less kerosene per seat and the operating costs
are 15-20% below those of the Boeing 747-400. Moreover, the consumption of less fuel
decreases the emission of ecologically harmful substances, which is why the A380 has
advantages from an ecological point of view. The breakeven point per flight of the A380 is said
to lie at 232 passengers; that of the 747 at 290. This, based on the ordinary three-class seating,
corresponds to an occupancy rate of 42% for the A380 and of 70% in case of the 747. The A380
therefore, according to Airbus data, already covers the costs at a lower occupancy rate on the one
hand, while on the other hand is more profitable at maximum occupancy.
Due to its significantly larger interior the A380, apart from its economic advantages, is
designed to offer greater comfort, e.g., with increased leg room, reduced engine noise and
entertainment facilities like exercise rooms or lounges.
Airports have restricted takeoff and landing capacities, and industry forecasts agree on the
assumption of increasing passenger numbers. The A380 can transport more passengers than the
747 and for this reason is attractive to an airport operator. In order to load and unload an airplane
of this size efficiently, however, two-deck gangways need to be used at the airports. Since the
747 does not require them, this is an argument for the Boeing model.
As one can see, the A380 has some attractive qualities. With the development of the 7478, whose official project start was on 11/14/2005, Boeing tries to react to the A380. In order to
stay competitive, Boeing tries to improve efficiency by increasing the number of passengers that
can be handled per flight. That the capacity of the 747-8 does not even get close to that of the
A380 can be explained by Boeings more cautious assessment of the demand for very large
aircraft.
MODEL RANGE
The models currently offered by Airbus and Boeing are listed in Table 5. The capacity of the
Airbus models corresponds to the typical capacity while the Boeing models are listed with their
minimum and maximum capacity.
Table 5: Product range Airbus vs. Boeing
Airbus
Boeing
Model
Range
Capacity
Model
Range
Capacity
A318
5.950
107
737-600
5.648
110-132
A319
6.800
124
737-700
5.940-10.200
126-149
A320
5.700
150
737-800
5.665
162-189
A321
5.600
185
737-900
5.925
180-215
A300
7.700
266
767-200
12.200
181-255
A310
9.600
220
767-300
11.065
218-350
A330-200
12.500
253
767-400
10.415
245-375
A330-300
10.500
295
777-200
9.695-17.500
301-440
A340-200
14.800
239
777-300
11.135-14.685
368-550
A340-300
13.700
295
787-3
4.650-5.650
290-330
A340-500
16.700
313
787-8
14.200-15.200
210-250
A340-600
14.600
380
787-9
14.800-15.750
250-290
A350-800
15.400
270
747-400
13.450-14.205
416-524
A350-900
15.000
314
747-8
14.815
467
A350-1.000
14.800
350
A380
15.200
555
Exhibits 1 and 2 in the appendix show all deliveries and orders; the difference between
orders and deliveries is the current order backlog.
EXPECTED MARKET VOLUME
Airbus and Boeing assess the demand for large-capacity aircrafts differently. The
forecasts, that are made every year over a period of twenty years, are termed Global Market
Forecast (GMF)14 for Airbus and Current Market Outlook (CMO) for Boeing.15 Both companies
assume that air traffic will increase strongly from 2006 to 2025. Airbus forecasts an annual
growth rate of 4.8%, Boeing of 4.9%. Moreover, both companies award the greatest growth
potential to the Asia-Pacific market. In accordance with the GMF represented in Table 6 Airbus
14
15
Cf. Airbus (2006).
Cf. Boeing (2006).
assumes that between 2006 and 2025 21,860 airplanes with at least 100 seats each will be
delivered. Furthermore, Airbus expects a delivery of 3,580 cargo planes of which only 803 are,
however, already designed as cargo planes ex factory; the remaining 2,777 result from the
conversion of passenger airplanes. 1,665 of the 22,663 new passenger and cargo planes are to
belong to the VLA segment.
Table 6: Global Market Forecast (Airbus)
100
125-210
Small
Intermediate
seater
seater
twin aisle
twin aisle
VLA
Total
Africa
73
317
152
47
29
618
Asia-Pacific
173
3.759
1.367
735
708
6.742
CIS
46
387
65
43
7
548
Europe
625
3.407
885
358
292
5.567
Latin America
275
916
169
30
8
1.398
Middle East
42
305
339
138
116
940
North America
772
4.233
768
171
103
6.047
2.006
13.324
3.745
1.522
1.263
21.860
& Caribbean
Total
As Table 7 shows, according to the CMO a total number of 27,210 planes are to be
delivered by Boeing between 2006 and 2025; 9,490 of these aircrafts in North America. For this
time period Boeing forecasts 990 airplane sales worldwide in the class "747 and larger"; of these
more than half are for the Asia-Pacific market.
Table 7: Current Market Outlook (Boeing)
Asia-Pacific
North America
Regional jets
Single aisle
Twin aisle
747 and larger
Total
580
4.230
2.520
570
7.900
2.040
5.880
1.410
160
9.490
Europe
450
4.530
1.460
160
6.600
Middle East
60
430
540
80
1.110
Latin America
260
1.220
190
10
1.680
Africa
60
250
110
10
430
Total
3.450
16.540
6.230
990
27.210
If one compares the forecasts of the two companies, it becomes evident that Airbus
expects a total of 1,665 new machines in the VLA segment; Boeing, however, expects only 990.
Airbus assumes that an increased flight frequency or point-to-point connections, i.e. direct
connections between smaller airports, can only be a partial solution for coping with the increase
in demand. Areas of high population density and their corresponding airports will have to
continue to handle the bigger part of the increased traffic volume. Since the capacities of the
airports are limited, larger airplanes are necessary. Contrary to the forecast of Airbus, Boeing
expects a stronger relief for major airports through the increase of direct connections with smaller
planes than the 747 or the A380. Worldwide, a large number of the 747 aircraft has only been
sold on account of their reach and not because of their capacity. Therefore Boeing sees the main
growth potential in long range airplanes like the 787 or the Airbus A350 with a capacity below
that of the 747.
The success of the A380 primarily depends on the extent to which the major airports take
over the role as hubs for international air traffic in the future. Furthermore, it is crucial whether
the promised cost savings of the A380 are realizable, and primarily, whether the airline
companies that have to renew their 747 fleets in the coming years decide for the A380 not least
because of these savings.
QUESTIONS
1. Was the decision to start the A380 project taken in 2000 in the interest of the owners?
Show the dependence of your results upon volumes sold and operating costs! Start with
an unlevered beta factor of 0.84, a constant market risk premium of 5%, a French
corporate tax rate of 38% and an inflation rate of 2%.
2. Would the A380 project have been started if the changes compared to the original plans
had been known already in 2000?
3. Is the decision for the continuation of the A380 project that was at least implicitly taken at
the beginning of 2007 in the interest of the owners?
Exhibit 1: Airbus Orders
first delivery
Total
Orders
Total deliveries
7.285
4.755
A318
2003
100
42
A319
1996
1.517
978
A320
1988
2.818
1.714
A321
1994
652
389
A300
1974
561
558
A310
1983
260
255
A330-200
1994
408
261
A330-200F
1994
18
0
A330-300
1998
281
214
A340-200/300
1993
252
242
A340-500
2003
32
26
A340-600
2002
122
76
A350-800
2013
71
0
A350-900
2013
33
0
A380
2007
160
0
Exhibit 2: Boeing Orders
first delivery
Total
Orders
Total deliveries
6.895
4.214
737-600
1998
69
69
737-700
1998
1.367
951
737-800
1998
2.208
1.205
737-900
2001
224
54
767-200
1984
121
119
767-300
1988
620
564
767-400
2000
38
37
777-200
1995
565
485
777-300
1998
326
149
777F
2008
72
0
787-3
2008
43
0
787-8
2008
426
0
787-9
2008
115
0
747-400
1989
614
581
747-8
2009
87
0
Exhibit 3: French Corporate Tax Rate
Year
Tax rate
2001
2002
2003
2004
2005
2006
36,43%
35,43%
35,43%
35,43%
34,93
34,43
Exhibit 4: Yield curve
Year
End 2000
End 2006
2001
4,610%
2002
4,512%
2003
4,533%
2004
4,590%
2005
4,657%
2006
4,722%
2007
4,786%
3,852%
2008
4,846%
3,891%
2009
4,905%
3,895%
2010
4,961%
3,901%
2011
5,016%
3,912%
2012
5,070%
3,928%
2013
5,122%
3,944%
2014
5,173%
3,962%
2015
5,222%
3,978%
2016
5,270%
3,994%
2017
5,316%
4,008%
2018
5,361%
4,022%
2019
5,405%
4,034%
2020
5,446%
4,045%
2021
5,487%
4,054%
2022
5,525%
4,063%
2023
5,562%
4,071%
2024
5,598%
4,078%
2025
5,632%
4,085%
2026
5,665%
4,091%
2027
5,697%
4,096%
2028
5,727%
4,101%
2029
5,756%
4,105%
2030
5,784%
4,110%
2031
4,113%
2032
4,117%
2033
4,120%
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Airbus (2006). Global Market Forecast 2006-2025.
Boeing (2006). Current Market Outlook 2006-2025.
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Esty, B. (2001). Airbus A3XX: Developing the World’s Largest Commercial Jet (A&B). Case
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Esty, B. (2004). Airbus A3XX: Developing the World’s Largest Commercial Jet (A). Case Study
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