Boeing Case Study Analysis

2.0 Analysis, Theories and Comparatives

2.1 Uncertainty in the Forecasting of Demand

One could say that Boeing had good instincts when deciding to withdraw from the joint study of the development of the A3XX as the uncertainty in the forecasted demands for the Airbus A3XX proved to be one of the biggest obstacles for them to overcome. It is, however, understood that there is plenty of risk and investment involved in an industry of this calibre. To begin with, the data available on VLA quantities are limited and the only relevant information would be the future demand forecasts by Airbus and Boeing themselves. Due to the lengthy time required to produce a design and also develop an airplane, a huge up-front investment and have useful lives

However, Boeing had a different view on the VLA market. They found the demand of large airplanes would not materialize for at the very least in 10 years’ time. With that being said, the forecasted deliveries of large cargo aircrafts by Airbus would be close to Boeing in this period from 2000 to 2019, Airbus being at 315 and Boeing at 270. There was a vast difference in the forecasted deliveries of VLA passenger aircrafts with 500 seats or more, Airbus forecasting 1235 while Boeing at 330. Other comparisons of Boeing and Airbus 20-year market forecast include commercial aircrafts in operation, with Airbus at 22620 and Boeing at 31755, Boeing also included regional jets which had less than 70 seats. Besides that, Boeing showed higher forecasted deliveries of new commercial aircrafts over 20 years, at 22315 while Airbus was at 15364. Boeing would also forecast a higher valuation of their new aircraft market in 20 years’ time, which was $1.49 billion while Airbus was at $1.31

When the production of A3XX reached its optimum capacity in 2008, the average realised price of it would be $225 million with operating margins of between 15% and 20%, which was the same margins as what the Boeing 747 had. These were all sorely based on earnings before the repayment of the launch aid that was provided by the government and also risk sharing partners.

In connection to that, the investments from RSPs and the launching aid were not treated clearly. It could be considered as either cumulative preferred stock or as debts. If it is assumed as a preferred stock, appropriate measures would be to discount cash flows at an unlevered cost of capital. Asset cost of capital is associated with the cost of funds used to run a business.

On the contrary, given that the margins of A3XX were based on earnings before the repayment of launching aids and RSPs, the investment can be taken as a debt and would require the calculation of the value using interest tax shields by using either a levered cost of capital such as weighted average cost of capital