“Airbus vs. Boeing in Super Jumbos: A Case of Failed Preemption”

projection of Airbus’ investments in and returns from the superjumbo over a 20-yearhorizon (plus a terminal value). The model uses inputs from Airbus as well as fromequity research reports on Airbus and EADS by analysts at Lehman Brothers (LB), CSFirst Boston (CSFB), Dresdner Kleinwort Benson (DKB), and The Airline Monitor(TAM), an industry consulting and data tracking service.Before getting into more details about the expected financial returns frominvesting in the superjumbo, two limitations to our analysis are worth noting. First, thisinvestment is incredibly complex and we have, by necessity, vastly simplified inputs tocreate a more tractable model. Specifically, we use discounted cash flow analysis, ratherthan real option analysis, to value the superjumbo. While one should recognize theoptionality embedded in a launch decision, valuing these “real options” is exceedinglydifficult given their complexity (i.e. multi-year, sequential construction expenditure,inability to observe the underlying asset, etc.) and the lack of publicly available data. Ourfocus on discounted cash flow analysis may matter less than it first appears to because ofsignificant constraints on optionality in the launch of the superjumbo (see the discussionin Appendix 1). As a result, we believe we have captured the essence of this investmentin a way that is approximately correct. The second caveat is that many of the inputs areinformed estimates because Airbus has released few details other than expectedinvestment costs. Critical details surrounding pricing, volume and, particularly, fundingremain shrouded in secrecy. For example, The Economist noted, “The terms of theBritish government aid are suspiciously secret . . .(which) may indicate the rules havebeen stretched.” 21With those caveats, we focus here on the key assumptions of the model and theprincipal results: additional discussion of key inputs and some omitted factors can befound in Appendix 1. The most critical assumption is that we treat the investment on astandalone basis financed with 100% equity. Whereas Airbus’ investment is clearlyequity, it is less clear how to treat the risk sharing capital and government launch aid.Arguably, these forms of capital more closely resemble cumulative preferred stock thandebt because repayment occurs through a per plane fee: if Airbus does not sell anyplanes, it does not owe any money back. 22 With this assumption, it is appropriate todiscount the cash flows at an un-levered cost of capital (the asset cost of capital,10