Financial Analysis and Valuation of the Airbus A3xx Project
Autor: Raymond Taylor • May 1, 2015 • Case Study • 1,535 Words (7 Pages) • 2,540 Views
Section 1: Background
Airbus and Boeing hold an industry duopoly on the manufacture of aircraft for consumption by commercial airlines worldwide. Since 1995, Boeing has captured approximately two-thirds of the market share through sales of the 700-series aircraft. To challenge Boeing’s dominance and gain market share, Airbus is considering investing significant time and capital to develop a larger-than-ever jumbo jet in the Very Large Aircraft (“VLA”) class.
Compared to Boeing’s 747, the A3XX would offer higher passenger capacity, wider seats and aisles, and added space sufficient for a cocktail lounge, exercise room, or showers. The A3XX would be equipped with four engines (versus the two currently offered by Boeing’s aircraft), potentially instilling added comfort for long distance passengers. While the A3XX operating cost per flight would be 12% higher than that of the 747, the new aircraft would provide almost 25% more volume for free.
Regular use of the jumbo jet would allow more passengers to fly out of existing major airline airports. This added Airbus presence in major airports would likely be uncontested considering Boeing plans to focus manufacture on medium-sized aircraft under the assumption that passenger demand growth will inevitably lead to increased flights from smaller alternative airports.
Section 2: Financial Modeling and Analysis
The contents of this section include the basis of our capital budgeting model as well the assumptions and calculations used to reach our conclusion.
Calculation of Cost of Capital
To calculate the cost of capital for the A3XX project, we used a Weighted Average Cost of Capital Model (WACC) based on the sources of funding for the project that are listed in Table 1.
Funding ($ Billions) | % of Total | Cost of Capital | ||
Launch aid | 3.6 | 26.87% | 10.99% | |
Vendors/Risk Sharing Partners | 5.9 | 44.03% | 10.19% | |
Airbus Partners | 3.9 | 29.10% | 10.19% |
Table 1
To estimate the Launch Aid cost of capital, we assumed that the cost of capital is the market rate of return since EU rules stipulate that Launch Aid must be repaid at a market rate of return. We utilized the average market rate over a 26-year period from the beginning of 1974 to the beginning of 2000. From Yahoo Finance, we found that this 26-year average is 10.99%.
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