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Analysts Take II On A3XX

Fri Oct 06, 2000 8:58 am

Check out this story which hit Reuters today.

SEATTLE, Oct 5 (Reuters) - Airbus Industrie [ARBU.UL] has
overestimated demand for its proposed 555-seat A3XX megajet,
which may not generate positive cash flow before 2017, analysts
at Credit Suisse First Boston said on Thursday.
The A3XX will offer big technological advances over today's
commercial fleet but Airbus will struggle to meet its sales
forecast of 768 copies over the next 20 years, CSFB analysts
said after meeting officials from Airbus earlier this week.
Airbus, a joint venture of European Aeronautic Defence &
Space Co. (EADS) and BAE Systems Plc ,
will probably book the 50 to 60 orders needed to begin A3XX
production by the end of 2000, the analysts said.
But the second wave of buyers -- which would likely not be
given the fat discounts typically offered to launch customers
-- may prove much harder to find, the analysts wrote in a
report to clients.
"Airbus's 20-year A3XX sales forecast appears to be quite
aggressive," the report stated. "Is there a decent financial
return at reasonable risk? Who knows? The current business case
assumptions appear to be extremely optimistic."
CSFB agreed with Airbus's projections for selling about 250
A3XXs to airlines serving major hub-to-hub routes like New
"This is a base case we can live with. The other 500
aircraft sales are rather more speculative," the report said.
Airbus will not compete with Seattle-based rival Boeing Co.
in the market for jets seating 400 to 480 passengers,
leaving room for Boeing's flagship 416-seat 747, CSFB said.
With Airbus not expected to ship A3XXs before 2006, the
jetmaker will have to deliver its projected 768 superjumbos
over a period of 14 years, meaning it would have to capture 70
percent of the large jet market in that period, CSFB said.
Under Boeing's more conservative market estimate of 1,000
jumbo jet sales in the next 20 years, the Airbus goal looks
even more ambitious, CSFB said.
"No background information was given to support this view,"
the report said.
Even assuming A3XX sales reach the goal of 768, Airbus will
not take in the $175 billion in revenues it projects from those
sales, which would require a sales price of $227 million, above
the list price of $216 million, CSFB said.
"This does not work. There is no inflation in prices, and
discounts are commonly 20 percent. How can they generate an
average price of $227 million against catalogue of $216
million," the report said.
Last week Singapore Airlines Ltd. said it would
buy 10 A3XXs and take options on 15 more, valuing the deal at
$8.6 billion, or $344 million per plane, including spares and
after-sales support.
Airbus and Boeing have waged a spirited battle for
commercial jet orders for years, and CSFB estimated that the
customers that have ordered the first 32 A3XXs have enjoyed 30
percent discounts from list price.
Airbus recently lowered its estimate for A3XX development
costs to $10.7 billion from $12 billion and expects to generate
cash flow of $60 billion from the project over 20 years,
breaking even by 2011, the CSFB report said.
CSFB said those projections were too optimistic, noting the
cash flow estimates ranged from $20 billion to $100 billion
over 20 years.
"Airbus analysis shows cash flow neutral position could be
delayed to 2017. Who knows," CSFB said.
Some analysts peg A3XX development costs at $15 billion to
$20 billion.
The project's technical risks are low, and Airbus's heavy
use of advanced computer-aided design techniques will help rein
in production costs, CSFB said.
"We believe the aircraft works and will be the most
advanced aircraft in the world in 2006, by some margin," the
report said.

RE: Analysts Take II On A3XX

Fri Oct 06, 2000 10:25 am

Uh oh..............................................................
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RE: Analysts Take II On A3XX

Fri Oct 06, 2000 12:09 pm

After all the smoke of debate clears, a few points emerge:

1. This a/c will be built. AI will probably get the 50 orders they need.

2. This a/c will work. There is nothing particularly magical about either the technology or design.

3. There will be demand for this a/c. Traffic between such hubs as JFK, LAX, SFO, NRT, LHR and CDG (for example) will justify placing a 550 seat a/c on many routes between these points in the next 5 years. Few disagree with this projection.

4. Hub airports will be modified to accommodate this a/c. Slot-limited hub airports have an incentive to do so.

However, realities abound:

1. The number of routes that warrant A3XX use are very limited. Airlines carefully size their a/c to the route to maximize revenue. You won't find a 747 flying from EWR to LAS. Bigger is not necessarily better.

2. In the last decade Boeing delivered just under 1700 737s and about 480 747s. Generally, smaller a/c generate more sales than their larger brothers. 747 demand has been tepid at best in the last 5 years. AI will strip away some 747 sales, and add some orders the 747 wouldn't have gotten anyway. However, it is hard to believe A3XX sales will exceed those of the 744. AI projections are very rosy.

3. AI is now controlled by EADS, a company that is supposed to make money. Therefore, the decade-long A320 "sale" will need to end. They need to sell for profit, not market share if the board members want to keep their jobs. Airlines may be shocked to find out AI is now selling a/c for profit.

4. The A3XX interior will not resemble the Venitian Hotel and Casino. There will be no spas, olympic-sized swimming pools or amusement parks in this a/c. Airlines need to cram as many seats in the beast as possible to obtain the seat/mile costs AI is boasting. One exception may the a/c sold to the likes as the Sultan of Brunei and Bill Gates.

From these points, I surmise that I will see this a/c at my favourite hub airport in 2006. However, EADS may be begging EU governments for more euros in about a decade. Old habits die hard.

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RE: Analysts Take II On A3XX

Fri Oct 06, 2000 2:02 pm

That is a pretty scathing analysis from CS First Boston. I agree with Marc though, Airbus will build it, airlines will buy it, but whether this turns into a boondoggle for Airbus is very much a possibility. Two very key points about cash flow and earnings per share: This is the only thing that matters to the two new bosses at Airbus, Mr. Shareholder and Mr. Accountant. Once you get past them, there's the tax collector to finish you off. These are three new people in Airbus' life and they can be extremely unpleasant. Just ask Boeing.
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RE: Analysts Take II On A3XX

Fri Oct 06, 2000 4:30 pm

For every analyst painting a lass than rosy picture, you can always find one painting the opposite view. Given the origin of the article, I'd take it with more than a pinch of salt. Given the lack of interest in the 747X proposal, this is the next logical step for Boeing. In the absence of a real competitor to the A3XX, simply undermine confidence in it. After all, it may be a good thing, if the industry can be swayed enough, the failure of the project would ruin AI, and Boeing can lapse back into their industry dominating slumber
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RE: Analysts Take II On A3XX

Fri Oct 06, 2000 9:50 pm

Kangar, you wrote:
"For every analyst painting a lass than rosy picture, you can always find one painting the opposite view. "

That's absolutely right. And look what I found here:

"PARIS, Oct 5 (Reuters) - Credit Lyonnais Securities raised European aerospace giant EADS to "buy'' from "add'' on Thursday following a detailed Airbus superjumbo presentation to analysts in Toulouse on Wednesday.

Credit Lyonnais analyst Philippe Gossard, who said the meeting had allayed fears about the viability of the ambitious A3XX programme, also set a 28.3 euro price target for EADS shares, based on a forecast of 650 A3XX aircraft sold over the next 20 years.

Gossard said in a research note he expected recent A3XX orders from Singapore Airlines and leasing firm ILFC to lead to additional orders from Singapore's Star Alliance partners and ILFC's rival lessors.

He also said Airbus was well positioned to compete against arch-rival Boeing (NYSE:BA - news), which is developing a stretched version of its 747 jumbo, in the large aircraft segment."

Both sides of the story need to be mentioned.

the WorldTraveller

Tan Flyr
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RE: Analysts Take II On A3XX

Fri Oct 06, 2000 10:20 pm

EWR spotter captures the essence of a post I put on this subject a week or so ago on here somewhere. Bottom line, for the long run the A3XX is a highly speculative adventure. When you honestly crunch the numbers, the chances of a profit from this project evaporate.

Please don't turn this into a Boeing vs AI thing, I am just doing this from over 25 yrs of business experience.

I believe that down the road this could cast a long shadow on AI when the money starts getting sucked up real quick.
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RE: Analysts Take II On A3XX

Fri Oct 06, 2000 10:25 pm

Being new to these forums I would like to offer my opinion.

Im only new so plese be nice in your coments.

To go by one analyst report is silly. Things have happend before, like the initial start up of 747. They said no one would buy it. The airports would need changeing and all the rest.

How they were proved wrong. The same thing will hapen with the a3xx. Airports for what they are worth these days are money making. If a3xx need to fly to them they have to make sure they can handle thems.

Regardless if it takes airbus 15 years to recop its money. They will and look further to bigger and better a3xx. The design is flexible, smart and latest technology.

Adam smith [url=]nitrotek[/url]
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Joined: Thu Mar 09, 2000 2:45 am

RE: Analysts Take II On A3XX

Fri Oct 06, 2000 11:47 pm

I must say that WorldTraveller and Kangar are right, that for every analyst who says the A3XX will fail, there is one that says it will prosper. Unfortunately, they seem to be playing sides, with the former coming from U.S. analysts, and the latter, from Europe. However, there is one point that has always bugged me about Airbus' projections, a fact EWRSpotter aluded to in his post:

Airbus is projecting that VLA sales in the next 20 years will exceed ALL 747 sales in the past 30. Think about that for a minute. Its a given that there are routes that would benefit from a VLA. But is there enough to justify that kind of a prediction? I just don't see that happening.

All gave some. Some gave all.

RE: Analysts Take II On A3XX

Sat Oct 07, 2000 12:59 am

Please tell me if I'm wrong when I understand from most of the posts on this subject that Airbus is managed by a bunch of financially incompetent idiots listening to the blabbering of technical morons who should not be allowed even to design a paper aeroplane, backed by a group of paranoid governments out to injure US commerce and technology leadership and financed by a nationalistic crowd of shareholderswho know nothing about stock markets.
Did I get it?
Topic Author
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Joined: Tue May 18, 1999 1:52 am


Sat Oct 07, 2000 1:17 am

Actually Skyhooked, I don't think anybody thinks Airbus is a bunch of idiots or morons. Quite to the contrary, they are innovative and make great products. The controversy arises out of the viability of a business plan for the A3XX. Boeing lovers would like to see Boeing build an A3XX type aircraft, but Boeing says the potential sales don't justify the enormous investment. Airbus thinks otherwise. There is speculation that the A3XX project is political and will go forward in spite of a weak business case. I don't think anybody on this forum doubts the need for a NLA or the A3XX. The only disagreement arises from the number actually needed. Don't forget, the Concorde was built at enormous cost, and while an engineering masterpiece, was a commercial flop. It doesn't mean Concorde's proponents were idiots, but they had certian rules and priorities they felt were important. I think the A3XX will sell about 250, maybe 300 units. Not bad, but not very financially successful. Boeing cannot justify making this investment.
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RE: Navion

Sat Oct 07, 2000 4:13 am

That is precisely what is meant by saying people seem to assume the AI management is incompetent. They have doubtless conducted _exhaustive_ feasibility studies on the A3xx. They conducted massive studies on peoples' reactions to elements in the cabin, culture to culture.

I have no doubt that AI has an unbiased, realistic and reliable estimate on future sales. Now whether that is the one they release on their press releases is another matter. However, they have done the maths over many times and obviously concluded it's worthwhile to build the A3xx.

Making money directly on the program is only one, if important, factor. Others are having a complete product line to offer complete solutions for customers and preventing Boeing from cashing in with their 747. It gives Airbus more business if they can offer packages containing A3xx along with their existing planes, as those packages are more attractive than Airbus planes + 747s. Monopolies tend to be very profitable and it would be an error for Airbus to let Boeing have the large-airplane segment monopolized. Also, they'll develop new materials, methods, processes and technologies for A3xx which can be applied to their future projects as well.

Of course they'll try and sell as many as they can, and with the air transport industry growing at such brisk rate they may well end up selling hundreds and hundreds of A3xx in various versions over the years. But the question of whether or no they should build the plane is far more complex than that.

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