strategic analysis of airbus dominant logic david bright, terra christensen, nicholas papas, arc...
TRANSCRIPT
Strategic Analysis of Airbus
Dominant LogicDavid Bright, Terra Christensen, Nicholas
Papas,
Arc Sims, Derrick Smith
Overview
Part I – Customer Needs
Part II – A3XX?
Part III – Airbus Maintenance Services
What Are Your Customers Needs?
Airline Industry Trends?• Point-to-Point• Low Ticket Pricing, Convenience
Lower Costs
Standardization of Planes
What Are Airbus’ Needs?
Increase Diversification
Manage Risks
More Consistent Streams of Revenue
Sustainable Competitive Advantage
Manage Stakeholders
A3XX Project?
Yes• Cross Crew
Standardization• Increased Capacity• Full Product Line
No• Industry Trends• Higher Costs
Does It Meet Your Customer’s Needs?
A3XX Project?
Yes• Expands Product Line• Benefits Stakeholders
No• Poor Financial• Does Not Diversify or
Manage Risk• Not Sustainable
Competitive Advantage
Does It Meet Airbus’ Needs?
A3XX Financials
Assumptions
Sensitivity analysis performed
NPV ranges – (6.8) to (2.7)
IRR ranges – <0 to 6%
A3XX?
Postpone For 5 Years
Alternatives
Financial Services
Stretch Existing Model
Supersonic Technology
Alternatives – Financial Services
Benefits• Lowers airline’s costs• Diversification• Consistent Stream of
Revenue
Problems• Capital Intensive for
Airbus• High Risk• Low IRR
Alternatives – Stretch
Benefits• Use Plane Standards
and CCQ• Manages Capital Risk• Expands Product Line• Quicker Development
Problems• Low IRR• Limited Potential
Capacity• Does Not Diversify
Alternatives – SuperSonic
Benefits• Aligned With Point-to-
Point• Disruptive Technology
Problems• Does Not Diversify• Low Capacity• Financial Results• Airport Infrastructure• Environmental (i.e. Sound)
Airbus Maintenance Services (AMS)
Move to Maintenance and Repair Services
Services Trends
Industry Overview
Airbus Maintenance
Services
Yes• Lowers Costs• Serves Point-to-Point• Promotes New Airline
Entrance• Enhances Relationships
No• Conflict of Interest• Reorganization Costs• Outsourcing Issues
Does AMS Meet Customer’s Needs?
Airbus Maintenance
Services
Yes• Diversifies• Financials• Low Capital• More Sustainable
Competitive Advantage
No• New Industry• Global Issues
Does AMS Meet Airbus’ Needs?
AMS Financials
Assumptions
Sensitivity analysis
NPV
IRR
Payback
Breakeven market share
Internal Rate of Return
Net Present Value
Implementation Issues
Obtaining Personnel, Property, Plant and Equipment
Learning Curve
Supply Chain
Global Issues
Marketing Communications
Implementation Schedule
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Obtained P,P&E
Signing Leasing Agreements
Construction
Training
Launch Marketing
Pilot Testing in Major Hubs
Supply Chain Development
Expand Service Offering
Year 1 Year 2 Year 3 Year 4
Thank You
Questions?
A3XX Financials
Market Size 1,500 Planes per year 75 Airbus market share 80%Selling Price 225 Profit Margin 20%Tax Rate 38%WACC 13%
2000 2001 2002 2003 2004 2005 2016 2017 2018 2019- - - - - 15 60 60 60 60 - - - - - 675 2,700 2,700 2,700 2,700 - - (25) (60) (65) (65) - - - - - (25) (60) (65) 610 2,700 2,700 2,700 2,700 - - (10) (23) (25) 232 1,026 1,026 1,026 1,026 - - (16) (37) (40) 378 1,674 1,674 1,674 1,674 - - 10 23 25 443 1,674 1,674 1,674 1,674
(700) (1,100) (2,200) (2,200) (2,200) (1,320) - - - - - - (250) (350) (50) - - - - - - - (150) (300) (300) (200) - - - -
(700) (1,100) (2,591) (2,827) (2,525) (1,077) 1,674 1,674 1,674 1,674
- (977) (2,042) (1,978) (1,569) (594) 249 221 196 174
NPV (2,680) P lane sales shown in 2005 to show effect of predelivery payments
Undiscounted 10,196 Also shows production ramp up between 2005 - 2008
IRR Undiscounted 6% Assumes a tax benefit to be applied in years no sales are made, due to depreciation
Net Income BTTaxesNet IncomeOCF
Free cash Flow
Discounted Cashflow
Capital ExpendituresR&D investment
Working Capital
AGGRESSIVE NPV FOR A3XX DEVELOPMENT
Airbus Plane Sales #
DepreciationAirbus Sales (Operating Margin)
Financing Services Financials
Profit Margin 15%Tax Rate 38%WACC 13%
2001 2002 2003 2004 2005 2006 2017 2018 2019280 560 840 1,120 1,400 1,680 840 560 280
(174) (348) (522) (696) (870) (1,043) (522) (348) (174) - - - - - - 400 400 400 106 212 318 424 530 637 718 612 506 40 81 121 161 202 242 273 233 192 66 132 197 263 329 395 445 380 314
240 479 719 959 1,198 1,438 967 727 488
- - - - - - - - - (1,739) (1,739) (1,739) (1,739) (1,739) (1,739) - - -
- - - - - - - - -
(1,499) (1,260) (1,020) (780) (541) (301) 967 727 488
(1,331) (993) (714) (485) (298) (147) 128 85 51
NPV (999) Undiscounted 8,809 IRR undiscounted 10%
NPV CALCULATION FOR FINANCING SERVICES
Lease Payments received
OCF
DepreciationSale of planesNet Income BTTaxesNet Income
Discounted Cashflow
Free cash Flow
R&D investmentCapital ExpendituresWorking Capital
Concorde Financials
Market Size 200 Planes per year 10 Airbus market share 100%Selling Price 200 Profit Margin 18%Tax Rate 38%WACC 13%
2000 2001 2002 2003 2004 2005 2016 2017 2018 2019Airbus Plane Sales # - - - - - 3 10 10 10 10 Airbus Sales (Operating Margin) - - - - - 90 360 360 360 360 Depreciation - - (25) (60) (65) (65) - - - Net Income BT - - (25) (60) (65) 25 360 360 360 360 Taxes - - (10) (23) (25) 10 137 137 137 137 Net Income - - (16) (37) (40) 16 223 223 223 223 OCF - - 10 23 25 81 223 223 223 223
R&D investment (700) (1,100) (2,200) (2,200) (2,200) (1,320) - - - - Capital Expenditures - - (250) (350) (50) - - - - - Working Capital - - (150) (300) (300) (200) - - - -
Free cash Flow (700) (1,100) (2,591) (2,827) (2,525) (1,440) 223 223 223 223
Discounted Cashflow - (977) (2,042) (1,978) (1,569) (794) 33 30 26 23
NPV (7,501) P lane sales shown in 2005 to show effect of predelivery payments
Undiscounted (9,390) Also shows production ramp up between 2005 - 2008
Assumes a tax benefit to be applied in years no sales are made, due to depreciation
Services Forecast1999 2000 2001 2002 2003 2004 2005 2006 2007
1763 1896 2113 2310 2461 2544 2584 2592 25905420 5728 6026 6251 6373 6429 6412 6384 63427183 7624 8139 8561 8834 8973 8996 8976 8932
24.54% 24.87% 25.96% 26.98% 27.86% 28.35% 28.72% 28.88% 29.00%75.46% 75.13% 74.04% 73.02% 72.14% 71.65% 71.28% 71.12% 71.00%
Aircraft Support ServicesEstimate for 2019
x Airplane Servicing 32.3$ 4.13% 13.8$ 14.4$ 15.0$ 15.6$ 16.2$ 16.9$ 17.6$ 18.3$ 19.1$ x Heavy Airplane Maintenance 43.0$ 4.10% 18.5$ 19.3$ 20.1$ 20.9$ 21.8$ 22.7$ 23.6$ 24.6$ 25.6$ x Engine Repair (off wing) 19.6$ 4.12% 8.4$ 8.7$ 9.1$ 9.5$ 9.9$ 10.3$ 10.7$ 11.2$ 11.6$ x Airframe Component Repair 28.8$ 4.13% 12.3$ 12.8$ 13.3$ 13.9$ 14.5$ 15.1$ 15.7$ 16.3$ 17.0$ x Major Airplane Modification 3.5$ 3.22% 1.8$ 1.9$ 2.0$ 2.0$ 2.1$ 2.2$ 2.3$ 2.4$ 2.5$ x Airframe and Engine Repair Parts 18.8$ 4.09% 8.1$ 8.4$ 8.8$ 9.1$ 9.5$ 9.9$ 10.3$ 10.8$ 11.2$
Flight Crew Training 3.4$ 3.36% 1.7$ 1.8$ 1.8$ 1.9$ 2.0$ 2.1$ 2.2$ 2.3$ 2.4$ Airport and Route Infrastructure 43.0$ 3.38% 21.4$ 22.3$ 23.2$ 24.2$ 25.2$ 26.2$ 27.3$ 28.4$ 29.6$ Used Airplane Remarketing 1.4$ 3.36% 0.7$ 0.7$ 0.8$ 0.8$ 0.8$ 0.9$ 0.9$ 0.9$ 1.0$
86.7$ 90.3$ 94.0$ 97.9$ 101.9$ 106.2$ 110.5$ 115.1$ 119.9$
Airplane Servicing 3.39$ 3.57$ 3.88$ 4.20$ 4.52$ 4.79$ 5.05$ 5.29$ 5.53$ Heavy Airplane Maintenance 4.54$ 4.79$ 5.21$ 5.64$ 6.06$ 6.42$ 6.78$ 7.09$ 7.42$ Engine Repair (off wing) 2.06$ 2.18$ 2.36$ 2.56$ 2.75$ 2.92$ 3.08$ 3.22$ 3.37$ Airframe Component Repair 3.02$ 3.19$ 3.46$ 3.75$ 4.03$ 4.27$ 4.50$ 4.72$ 4.93$ Major Airplane Modification 0.44$ 0.47$ 0.51$ 0.55$ 0.59$ 0.62$ 0.66$ 0.69$ 0.72$ Airframe and Engine Repair Parts 1.99$ 2.10$ 2.28$ 2.47$ 2.65$ 2.81$ 2.97$ 3.11$ 3.25$
15.44$ 16.29$ 17.71$ 19.16$ 20.60$ 21.84$ 23.04$ 24.12$ 25.22$
Based on assumption that aircrafts are retired after 30 years of service
Airbus' planes
Potential Maintenance & Support Services Market
Airbus Planes' Share of Aircraft Support Service
Share of overall aircrafts in operation
Boeing
Total aircrafts in operation
Total Support Services
Boeing's planesTotal Aircrafts
Airbus
AMS Financials
Airbus market share (Target 20%) 40%
Operation cost as % of services 85%
Total Market Share Growth 4%
Tax rate 38%
WACC 13%
2000 2001 2002 2003 2004 2005 2006 2007 2008
Services market growth in relation to overall growth 1.32% 1.40% 1.48% 1.54% 1.58% 1.61% 1.62%
Support Service Based On Current Backlog 16.29$ 17.71$ 19.16$ 20.60$ 21.84$ 23.04$ 24.12$ 25.22$
Support Service Based On Growth 20.46$ 17.94$ 19.43$ 20.91$ 22.17$ 23.40$ 24.51$ 25.63$
Support Services Market for Airbus Planes 20.46$ 17.94$ 19.43$ 20.91$ 22.17$ 23.40$ 24.51$ 25.63$
Market Share (w/ 4-Year Ramp-Up) 10% 20% 30% 40% 40% 40% 40%
Airbus Support Services 1.79$ 3.89$ 6.27$ 8.87$ 9.36$ 9.80$ 10.25$
Operation Cost (1.53)$ (3.30)$ (5.33)$ (7.54)$ (7.96)$ (8.33)$ (8.71)$
Depreciation (0.15)$ (0.20)$ (0.25)$ (0.25)$ (0.25)$ (0.25)$ (0.25)$
Net Income BT 0.12$ 0.38$ 0.69$ 1.08$ 1.15$ 1.22$ 1.29$
Taxes (0.05)$ (0.15)$ (0.26)$ (0.41)$ (0.44)$ (0.46)$ (0.49)$
Net Income 0.07$ 0.24$ 0.43$ 0.67$ 0.72$ 0.76$ 0.80$
OCF 0.22$ 0.44$ 0.68$ 0.92$ 0.97$ 1.01$ 1.05$
Capital Expenditures (1.5)$ (0.5)$ (0.5)$ Term. Value
Free Cash Flow (1.5)$ (0.28)$ (0.06)$ 0.68$ 0.92$ 0.97$ 1.01$ 1.05$ 4.20$
Discounted Cash Flow (1.5)$ (0.25)$ (0.05)$ 0.47$ 0.57$ 0.53$ 0.49$ 0.46$ 1.62$
NPV 2.4$ Internal Rate of Return 30%
Note: Airbus marketshare, operation costs, total market share,IRR and NPV distribution inputs and outputs are shown in Exhibit 7.
10 Year Terminal Value
WACC 0.1263g -10%2007 1.05$
0 1 2 3 4 5 6 7 8 92008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Cash Flows 0.94 0.85 0.76 0.69 0.62 0.56 0.50 0.45 0.41 0.37Disc Cash Flow 0.94 0.75 0.60 0.48 0.38 0.31 0.25 0.20 0.16 0.13
NPV 4.20
AssumptionsA3XX selling price 216 Boeing price 150 Passenger growth rateAirbus 0.049Boeing 0.048
Airplane Demand VLAAirbus 2,277 Boeing 1,010 Airline Monitor predicted demand of A3xx 515
Operating Margins 15-20%Tax rate 38%
straightline basis of depreciation 10 years
target pretax IRR of 15%
risk free rate 0.060inflation 0.020market rate of return 0.139Betas of similar 0.840
Full Capacity of 4 planes per month in 2008
WACC 0.126