Airbus

In July 2000, Airbus Industries' supervisory board is on the verge of approving a $13 billion investment for the development of a new super jumbo jet known as the A3XX that would seat from 550 to 1,000 passengers. Having secured approximately 20 orders for the new jet, the board must decide whether there is sufficient long-term demand for the A3XX to justify the investment. At the time, Airbus was predicting that the market for very large aircraft (VLA), those seating more than 500 passengers, would exceed 1,500 aircraft over the next 20 years and would generate sales in excess of $350 billion. According to Airbus, it needed to sell 250 aircraft to break even and could sell as many as 750 aircraft over the next 20 years. This case explores the two sets of forecasts and asks students whether they would proceed with the launch given the size of the investment and the uncertainty in long-term demand. Teaching Purpose: To illustrate the basic economics of large projects and the complexity in estimating even top-line demand for products with useful lives of up to 50 years. The case illustrates the role of governments in large projects, both as investors and as customers. Finally, to explore the competitive dynamics between a monopolistic and a potential entrant in which entry costs exceed $10 billion. Study Questions:
1. Why is Airbus interested in building the A3XX? What are its objectives? Consider the demand for the product, the duopoly nature of the industry, technology challenges and operational constraints that are, or will be, relevant.
2. As Boeing, how would you respond to this situation – use any data you wish from the case to support your answer? How does your answer depend on what you think Airbus is likely to do?
3. How does this opportunity compare with the basic risks of building an oil pipe line, mine or telecommunications cable in terms of risks and phases of development? Where can Airbus fail with this project? Should Airbus commit to build the...