A3XX - to launch, or not to launch

From:         Joseph Edward Nemec <nemecj@mit.edu>
Date:         16 Oct 1998 19:17:39 GMT
Organization: Massachusetts Institute of Technology
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I have to say, it is looking more and more likely to me
that the A3XX will not be launched.
I just don't think that they can make any money on it.
They seem determined to go ahead with the project, 
but the numbers do not seem to add up.
Airbus now admits that the development cost is 
going to be at least $10 billion, and I think we 
can be confident that this is likely to be an 
underestimate (perhaps a severe one).
Since the European taxpayer will fund 33% of this, we can
put the development cost to Airbus at $7 billion. I have
yet to see Airbus come up with a large partner to share
that cost. There were rumors about Lockheed-Martin, but
they don't seem to have panned out. Mitsubishi Heavy also
does not seem interested. Add to this the fact that AI
is going to spend $2 billion of its own money, and 
$1 billion of the taxpayer's money to develop the
A340-500/600, and one sees a heavy debt burden
developing. (No wonder Noel Forgeard told the WSJ that he
saw no need for a public listing of Airbus Industrie 
stocks --- I wouldn't want to go to shareholders with this
amount of debt either!) If we figure that net margins
on aircraft of the size of the A340-500/600 and A3XX are
about 5-7%, then Airbus would have to sell about 350
A345/6 to recoup those development costs, and a whopping
700 A3XX to recoup those development costs. This seems
to be a _very_ optimistic forecast, especially since much
of the growth was projected to be in Asia. Given the fact
that EVA has already canceled its LOI for 12 A345/6, 
Garuda has cancelled 6 772ERs, and Singapore, Korean,
and Malaysian have already all canceled or deferred
widebody orders, one wonders about the need for an aircraft
that can carry 550 people, when orders for those that can
carry 380-420 pax are being sent to dry places.

I suspect that Airbus will not cancel the project, but
I doubt that they will go ahead with it. I can imagine
them getting some orders from BA, United, or Singapore, but
I would be amazed if they got a total of 50 firm+options 
between them. I just don't see any economic reason for the 
project to go ahead. It seems to be mostly political ---
part of Jean Pierson's crusade to be bigger, better, and
flying farther than Boeing --- and I don't see it happening.

Comments?

--------------------------------------
This is a pain which will definitely linger.
        -- Brain, after something Pinky did.

Joseph Edward Nemec                    
Operations Research Center               
Room E40-149
Massachusetts Institute of Technology
Cambridge, MA 02139

nemecj@mit.edu
http://web.mit.edu/nemecj/www/
 
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