C o mp e t i t i o n i n t h e Ai r c r a f t I n d u s t r y : Ai r b u s v s. B o e i n g

11

CHAPTER

335

In early 2008, Boeing was involved in a titanic
struggle with European consortium Airbus SAS
for dominance of the commercial aircraft indus-
try.^1 Several years ago Airbus committed to
spend $16 billion to develop the A380, the larg-
est plane ever built. Boeing countered by
announcing that it would spend $6 billion on a
superefficient new plane, the 7E7 Dreamliner.
Airbus then announced plans to spend another
$6 billion on the A350, a competitor to the 7E7.
Many detailed calculations went into these
multibillion-dollar investment decisions—
development costs were estimated, the cost of
each plane was forecasted, a sales price per
plane was established, and the number of
planes that would be sold through 2025 was
predicted.
Both companies projected negative cash
flows for 5 or 6 years, then positive cash flows

for the following 20 years. Given their fore-

casted cash flows, both managements decided

that taking on the projects would increase

each company’s intrinsic value. Because the

planes will compete with one another, either

Boeing’s or Airbus’s forecast is probably incor-

rect. One will probably be a winner and the

other a loser, and one set of stockholders will

likely be happy and the other unhappy. As of

the winter of 2008, both companies received

orders for their planes, but both have encoun-

tered problems that have delayed the actual

introduction of the aircraft. The winner is still

undecided.

Projects such as the A350, A380, and 7E7

receive a great deal of attention; but Boeing,

Airbus, and other companies make a great

many routine investment decisions every year,

ranging from buying new trucks or machinery

(^1) Airbus SAS is owned by European Aeronautics Defense & Space Company (EADS), which is owned by the French
government and several large European companies. Airbus was formed because the Europeans wanted to create an
organization large enough to compete with Boeing.

The Basics of Capital

Budgeting

© STEPHEN

STRATHDEE/SHUTTERSTOCK

A i r b u s ,

(^) B
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