Break-Even Point of Industry Essay

1. Airbus Interests & ObjectivesFirst of all, the expectant and cost-efficient A3XX would be popular with significant growth in the air transportation industry. Worldwide passenger traffic would almost triple in volume by 2019, with fuel price rising in the future. Creating large and cost-efficient aircrafts, rather than increasing frequencies and building new routes, would be the long-term solutions to the problem of growing expect. Therefore, this leap out go out be strategically significant. Secondly, Airbus wants to gain trade shares in the VLA market and break up the monopoly of the 747, but it didnt have a product to compete with Boeings 747. Compared to the 747, the A3XX provides more advantageous features which would attract passengers specially on the longer routes, such as more space per seat, four-engine plane, etc. The combination of increased capacity and reduced costs would provide superior economics. Airbus mat confident that capacity increases would eventually prevail. As we stated above, Airbuss objectives are to break up the monopoly of the 747, to increase its market share in the VLA market, to gain immense financial success and to be an industry leader.2. Break-Even Point & Market DemandProduction will be able to reach full capacity from 2008, with point and delivery assumed on a stable level. During this period, the capital expenditure will be offset by depreciation in calculation of bare cash flow, and R&D will be included in the operating margin. The company, as assumed, will produce and deliver 22 aircrafts for the airlines which have ordered, with 6 in 2006 and 16 in 2007. Since $700 million would have already been spent before the decision, this amount of investment should be treated as sunk cost, hence irrelevant to the NPV analysis. To break even, with assumed operating margin of 18%, Airbus should produce and sell about 40 VLAs every year since 2008, or 495 in score before 2019. Taking the estimated margin from Lehman Br others and CS First Boston into consideration, total orders needed for break-even can range from 306 to 509 in 20 years.From the view of Airbus, the market demand for VLA, 1550 in years, is large enough to take this project. And it is pretty safe to launch the maturement since, even with lowest estimated margin, 38% of total market share will guarantee a break-even. However, Boeing gives a totally different perspective and a much lower forecast on potential market demand. Under this estimation, A3XX development will have little chance to make a profit. Airbus should take at least half a market on VLA to make that project fruitful.3. Boeings ResponseBased on the analysis before, the VLA market is so promising that Airbus is very likely to launch the A3XX. Facing with this threat, the most important race for Boeing is to prevent Airbus from dominating the VLA market. Therefore, Boeing can cut the price of existing 747 product lines and produce 747 stretch as response to Airbus. Prod ucing 747 stretch which may contain 550+ passengers wint be too costly for Boeing since is a modification over the current model, and that can powerfully compete with A3XX in the VLA market.Before the stretch variance is market available, Boeing can offer a price cutting of the existing 747 which can not only divert sales away from A3XX, but in like manner make A3XX project less attractive. Other alternatives might not fit. Firstly, fighting the A3XX on legal grounds (improper subsidies) will probably induce the revenge grunt from Airbus, making Boeing itself to pay a large penalty. Secondly, to develop its own super jumbo jet is costly and maybe not profitable. Whats worse, in 1997 Boeing face the first loss in more than 50 years, its better for Boeing to have a prudent stable strategy than an aggressive investing.4. The Threshold To putWe think Airbus should order to build A3XX. The Annual Sales and Orders as of 1999 show that Airbus currently faces a disadvantage in compet ition with Boeing on almost every size of passenger aircraft. Worse is that, while Boeing pockets the market for VLA, Airbus even has no product to compete. Breaking the monopoly on this market becomes critical for Airbus, which is aiming to lead the industry. Strategic significance of A3XX makes this project worth an effort. Compared with the situation when Boeing launched its 747 development with 25 initial orders, the current 22 orders, with other 34 probable, is not a negative sign to commit the project. However, there would also be great risk in the new aircraft development. The possible poor market demand will make the project unprofitable. more important is that new A3XX should be sold quickly in early years to exploit learning curve effect on manufactory and charm market before Boeing reacts.