Boeing 7E7 Case Study Essay

With only a few large companies across the globe (Boeing, MD, and Airbus), the commercial aircraft industry essentially exhibits the qualities of an oligopolistic competition with intense rivalry. Here is an analysis of competition in the commercial aircraft business using Porter’s Five Forces.

1. Determine the Weighted Average Cost of Capital (WACC) based on using retained earnings in the capital structure.

Of considerable concern is that Boeing and McDonnel Douglas have a significant head start in the market. In a shrinking market, the Tri Star, though far superior to the competition, may have missed the window of opportunity. Airline revenues are down while labor and fuel costs are rising. This will drive down demand for all producers of wide-body aircraft.

Airbus had a reputation for innovative design and technology. All Airbus planes employed “fly-by-wire” technology that substituted computerized control for mechanical linkages between the pilot and the aircraft’s control surfaces. This technology combined with a common cockpit design permitted “cross crew qualification” (CCQ) whereby pilots were certified to fly similar aircrafts, thus offering flexible scheduling in flight crews on various models, leading to better pilot utilization and lower training costs. These features helped explain why Airbus had received over half of the total large aircraft orders for the first time in 1999. However, despite the gains in market share, Airbus still did not have a product to compete with the monopoly of Boeing’s 747 in the VLA market.

Most of the corporations calculate WACC for giving investors an estimate on profitability and for being able to weight future projects. We are presented with Boeing current bonds, which constitute the long term debt portion of capital, and with Boeing’s assets which constitute the equity portion of capital. No other weighted entities (such as preferred shares) are considered. The debt/equity ratio would help with the calculation of weights. Boeing would need to earn at least 15.443% return on its investments (including the 7E7 project) in order to maintain the actual share price.

Our WACC is almost constantly these years – around 5.50% -- via from 5.04% to 5.82%. We also use the scenario analysis for how the WACC and growth rate affect enterprise value and equity value.

1. How would you describe Boeing’s approach to project management? What are its strengths and weaknesses?

For this reason, new, or marginal, costs are used in its calculation. WACC is calculated by multiplying the cost of each capital component by its proportional weight and then summing then together. The capital components included in this calculation are a firms after-tax costs of debt, preferred stock, and common stock.

There were also some unknown variables that needed to be taken into account. Development and per-copy costs were the costs that the board wanted to minimize. The forecast assumes that development costs would be $8 billion. There was great uncertainty surrounding the manufacturing cost of the 7E7. The element that adds the most uncertainty to the manufacturing costs are in the engineering of the aircraft. While the engineering costs could be high, Boeing was hoping that the lower construction costs of using the composite materials would compensate for the elevated engineering costs.

In its published Current Market Outlook (CMO), Boeing forecast a much smaller VLA market despite general agreement on overall growth with GMF. Boeing predicts the total market demand for VLA aircraft is 330 over the next 20 years. In addition, the most of the demand for the lager planes would not materialize for at least ten years. If the predicted market demand is true, there is no way for Airbus to reach the breakeven point. It is most likely Airbus will run out of the business if it commits build A3XX. In this case, Boeing could ignore the A3XX and concentrate on its existing product line. That is to say, Boeing had an opportunity to enhance profitability on its existing products while Airbus was tied up developing the A3XX.

However, in addition to dual usage and their process change, the 7E7 also has to get approved by the Board of Directors. The board, already concerned about the estimated cost of the development of the 7E7, when informed of the risks that are also involved with the plan, will become hesitant to vote yes to the plan. In regards to the external risk Boeing faces, all three are out of their hands. As a partial integrated defense company, Boeing benefited from the war in Iraq, but there is the risk the war could end which would end that portion of Boeing’s government benefits. Terrorism, is a certain uncertainty, meaning it will happen, but that no one knows when it will happen. This is out of the hands of Boeing, as seen in the recent September 11th attacks, planes are a viable option for terrorism. The final external risk is the spreading of the SARS disease. Having reached both China and Canada, and recent global travel restrictions that is cutting into Boeing’s profits. All three of the external risk, are out Boeing’s control must be taking into consideration in looking at the plan for the

Dominating the commercial aircraft market for decades, Boeing is considered to be the most highly competitive U.S aerospace industry. “U.S. firms manufacture a wide variety of products for civil and defense purposes and, in 2010, the value of aerospace industry shipments was estimated at $171 billion, of which civil aircraft and aircraft parts accounted for over half of all U.S. aerospace shipments. The U.S. aerospace industry exported nearly $78 billion in products in 2010, of which $67 billion (or 86% of total exports) were civil aircraft, engines, equipment, and parts” (Harrison, 2011). However, its position of influence has lessened in recent years. This is due to its main competitor, Airbus, who in recent years has made significant

Given the high-tech nature of the airplane industry, there are relatively few suppliers capable of providing parts to Airbus and Boeing. In contrast to Boeing, who relies heavily on suppliers, Airbus has tried to manufacture the

Kd (Wd), Ke (We) and Kp (Wp) are the costs (weights) associated, respectively, with the firm’s interest bearing debt,

In fierce competition with Boeing, venture into VLA segment – as a rather neglected segment by Boeing – could pose as a strategic opportunity for Airbus which it could utilize to build a competitive advantage combined with its technological resources and capabilities. However, its assumptions of a drastic increase in VLAs demanded in next 20 years along with its ability to satisfy most of this are too optimistic. Provided that these assumptions (inc. breakeven points, initial order requirements) are normalized, A3XX is a project worthy to pursue for Airbus in order to exploit a neglected spot on the perceptional map – long-haul + big capacity. When we hold the market itself continues to grow as proposed in the case, this