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