the boeing company report
TRANSCRIPT
March 24, 2011.
To
M. Sadiqul Islam
Professor
Department of Finance
University of Dhaka
Dear Sir,
We submit here our case analysis report as you assigned us to prepare. You asked us to prepare a report
on “Case analysis of the Boeing 7E7”.
This report paper has helped us to increase our understandability on practical field of airline business case
analysis as well as decision making and all of its related aspects. During preparing this report paper we
have enforced our best effort. Surely it enriches our knowledge and promotes our study. We have also
learnt much about the dynamic business world which was previously unknown to us.
Thank you for giving us such an opportunity for working on the topic.
We will be honored to provide you any additional information, if necessary.
Sincerely yours,
Group-07
Fahmida Akter 11-014 Mahmuda Akhter 11-015 Sifat Tangima 11-064 Shahanaj Akter 11-276
This report intends to cover a vast and very important area of business decision making which is analysis
of cases. Here a case analysis has been done on “The Boeing 7E7” which is a commercial aircraft
development program.
The first part is a case overview which states a brief description of what Boeing actually includes. It is
followed by a description of Demand of commercial aircraft, and The Boeing 7E7 is a commercial
aircraft program which was offered by Michael Bair, Boeing Senior Vice President to Boeing
shareholder. The next part provides a history of Aircraft industry. This part includes the socio-political
landscape and other necessary related information. This section is followed by a description of economy
reflected in its information on GDP, War against Iraq, Spasms of global terrorism, Epidemic of SARS etc.
The following part is description of the Boeing 7E7, what it means and what it is all about. The industry
analysis is further extended with the Porte’s 5 factor model analysis identifying the different factors
affecting the industry and relative importance of factors. In the next section company analysis is done
through SWOT analysis, business and financial risk analysis and ratio analysis.
The most important part is presented next which are essentially problem analysis using financial tools.
The sequence is a problem statement, probable solutions, and courses of actions, decision,
recommendation and justification.
TOPICS PAGES
Chapter 1: Introduction 1-3
1.1 Origin of the report 11.2 Objectives of the study 11.3 Methodology 11.4 Limitations of the study 2
3
Chapter 2: The Boeing Company 4-12
2.1 HSBC Group 42.2 International network 82.3 Banks under the HSBC Group 10
Chapter 3: HSBC in Bangladesh 12-20
3.1 Organizational Hierarchy 183.2 Chief Executive Committee 19
Chapter 4: Functional departments & their services 20-43
4.1 Human Resources 224.2 Personal Financial Services 234.3 Corporate Banking 324.4 Treasury 384.5 Finance 394.6 Marketing 404.7 Amanah 42
This report has been prepared as a requirement of the Course curriculum, as a part of Course no-506. The
report has been titled as “Case Analysis on The Boeing 7E7”. The Course started on January 16, 2011 and
report submitted on march 24, 2011. Our honorable course teacher Professor M. Sadiqul Islam, Dept. of
Finance, University of Dhaka assigned the project.
Objectives of the Report
The analysis was conducted to develop the ability to deal with business problems relating to finance. It
was a case study under the broad topic ”Capital Investment Decision and Valuation”. The objectives
were-
To understand and analyze cases from the perspective of business managers,
To identify problems and suitable solutions under diverse conditions,
To learn valuation of firms as well as projects using appropriate techniques,
To incorporate basic understanding of finance in decision making,
Finally, give proper recommendation and justification regarding the cases beneath.
The methodology of the report is mainly based on collection of the primary and secondary data as well as using appropriate method for estimation of different issues not mentioned therein.
A. Data Collection
A.1. Primary Data:
Primary data were collected screening through the case itself to find out appropriate information.
A.1. Secondary Data:
Different types of secondary data are used in this analysis with a view to making the case
presentation worthwhile. In doing so, relevant information have been taken from some books
mentioned below:
Chandra, Prasanna (1980). Projects: Planning, Analysis, Financing, Implementation
and Review. Tata McGraw-Hill Publishing Company Ltd.
Damodaran, Aswath (1996). Investment Valuation. John Wiley & Sons, Inc.
B. Estimation of issues
To obtain appropriate result, some prudent assumptions were made wherever required.
Limitations of the Report:
Large-scale research was not possible due to constraints and restrictions posed by the course
requirements.
The research was limited to the information provide in the case.
In many cases, up to date information was not available.
Many procedural matters were conducted with the help of estimations and assumptions which
may also gave some sort of restrictions.
To maintain course requirement of not using information outside the case-provided, some parts of
the report are not in depth.
CHAPTER: 2
THR BOEING COMPANY2.1 Company Overview:
Boeing is an aircraft company. It was split into two primary segments:
Commercial airplanes and Integrated defense system.
Boeing had not introduced a new commercial aircraft since it rolled out the highly successful 777 in 1994. Later in the 1990s, however Boeing announced and then cancelled two new commercial-aircraft programs. The most prominent of those was the ‘Sonic Cruiser’ which promised to fly 15 percent to 20 percent faster than any commercial aircraft and bragged of a sleek and futuristic design. Unfortunately, after two years of developing the ‘Sonic Cruiser’, Boeing’s potential customers were sending the message that passengers were not willing to pay a premium price for a faster ride. Boeing was now long overdue to develop a product that would pull it out of its financial slump, as well as help it regain the commercial-aircraft sales that the company had lost over the years to airbus, its chief rival.
2.2 Historical Revenue Pattern:
The historical revenue pattern of the Boeing Company was
Revenue 2002 2001 2000
Commercial airplanes 28387 35056 31171
Integrated defense system 24957 22815 19963
Accounting eliminations and other 725 1047 187
Total 54069 58918 51321
In 2002, it was awarded $ 16.6 billion in defense contracts, second only to Lockheed Martin with $17.0 billion. In addition, while commercial- aircraft revenues had been falling, defense revenue had been rising. Analysts believed that Boeing was able to transfer significant amounts of technology from the defense R&D to the commercial- aircraft segment.
The commercial-aircraft segment produced and sold six main airframes designed to meet the needs of the short to long range markets:
The 717. 737 and 757 standard- body models, and The 747, 767 and 777 wide-body models.
As of December 31, 2002, Boeing had undelivered units under firm order for 1083 commercial air-craft and had a declining backlog of about $68 billion. For 2003, it projected 280 commercial-air-craft deliveries and expected between 275 and 300 in 2004. Boeing estimated that in 2003, the revenues for its commercial airplane segment would be approximately $22 billion, down from $28 billion in 2002. Recognizing the negative impact of the September 11th attack’s on commercial-aircraft demand, Boeing cut the production rates for 2002 in half in order to maintain profitability in that segments.
While Boeings earnings were down significantly from 2001 to 2002, most of this was the result of an accounting change (SFAS N0- 142). However, a drop in commercial- airplane deliveries from 527 in 2001 to 381 in 2002 also contributed to the decline.
2.3 Origins of the 7E7 Project of the Boeing:
The Boeing 7E7 is the super-efficient jet called the “Dreamliner”. The Boeing 7E7 would be capable of both short, domestic flights as well as long international hauls while carrying between 200 and 250 passengers. It would use 20 percent less fuel than existing planes of its projected size and be 10 percent cheaper to operate than Airbus’s A330-200. At a time when major airlines were struggling to turn a profit, less operating costs and long or short distance flexibility would be a very attractive package.
To make the plane more fuel efficient, the 7E7 would be the first commercial air-craft built primarily with carbon-reinforced material which was both stronger and lighter than the traditional aluminum. In addition Boeing promised greater fuel efficiency by using a more efficient engine. The use of composite materials would also reduce its manufacturing costs. The goal would be to design a plane with fewer components that could be assembled in 3 days as opposed to the current 20 days that it took to rivet together the Boeing 767. The use of composite materials had its risks also.
Composite materials were suspected as a contributory cause to a 2001 plane crash in NewYork and therefore would have to overcome regulatory scrutiny. Boeing would also have to change its production methods radically. The last time Boeing made a major production change was in 1997 in an effort to cut costs. Because the process was not smooth, it resulted in two production lines being shut down for 30 days and hundreds of missed airline deliveries.
The ability to produce a short and long distance aircraft would also have to overcome engineering obstructions. Building a plane that would do short hops in Asia and long trans- Atlantic flights would require two versions of the plane with different wingspans.
CHAPTER: 3
ECONOMY ANALYSIS
In 2003, the Economy of United States was in sharp contraction that depressed the market for aircrafts because of:
United States went to war against Iraq.
Spasms of global terrorism offered shocking headlines.
A deadly illness called SARS resulted in global travel warnings.
The bursting of the technology bubble led to a significant decline in airplane orders.
For these reasons and also other reasons, airlines profit was the worst seen in generation. It is an incredible environment to launch a new airframe project.
During the next 20 years, Boeing expects that:
Over the long –term, cycles smooth out
GDP and international trade lowers fares
Network services improvements become paramount
Economies will grow annually by 3.2 percent
Air travel will continue its historic relationship with GDP by growing at an average annual rate of 5.1 percent.
CHAPTER: 4
INDUSTRY ANALYSIS
4.1 Industry Characteristics:
• In 2002, the large plane commercial-aircraft industry was dominated by two companies, Boeing & Airbus.
• Air-craft sales were subject to short-term, cyclical deviation.
• There was some predictability in sales. Sales would typically peak shortly after the introduction of the new aircraft and then fall.
• Historically Boeing was the leader in this commercial-aircraft industry.
• By a number of different measures Airbus became number one position in this commercial-aircraft industry.
• In 2002, Boeing received 176 commercial orders compared to Airbus received 233 commercial orders.
• In 2002, Boeing had 43 percent market share compared to Airbus which had 57 percent market share.
4.2 Industry Analysis on Porters 5 Forces Model
4.2.1 Rivalry Among Existing Company
• There exists increasing concentration of competition.
• The industry continues to have oligopolistic competition between two main companies, Boeing and Airbus.
• The industry is very capital intensive.
• Industry growth is low because of NewYork 9, 11th September attacks.
• Exit barrier is high.
4.2.2 Threat of New Entrants
• The industry is in contraction and has an excess capacity.
• Industry needs huge capital to start up.
• First mover advantage is present.
• Existing relationships between firms and customers in this industry make it difficult for new firms to enter.
• As composite materials were suspected as a contribution cause to a 2001 plane crash in NewYork, new entrant have to overcome strong regulatory scrutiny.
• So there is significant entry barriers
4.2.3 Threat of substitute product
• Threat of substitute product is high since United States has well organized railway service and available bus service.
• As Air travel is influenced by business cycle, customer confidence and exogenous events.
4.2.4 Bargaining Power of Suppliers
• Some suppliers’ service is critical to buyer’s perspective such as airline pilots.
• Number of suppliers is few.
4.2.5 Bargaining Power of Buyers
• Switching cost of the buyers is low.
• Availability of substitute products.
• Buyers are more price-sensitive.
Industry analysis of commercial-aircraft industry briefly showed by the following table:
Threat of New Entrants
Low
Significant entry barriers Huge capital &
development cost need First mover advantage is
present.
Bargaining power of Supplier
High
Geographical coverage
Concentration of buyers
Competitive Rivalry Moderate
Cyclical industry. Fixed to variable cost
is high. Customers’ switching
cost is low. Exit barrier.
Bargaining power of Buyer
High
Switching cost is low
Buyers are more price-sensitive.
Threat of Substitute Products High
Available substitute product.
CHAPTER: 5
COMPANY ANALYSIS 5.1 SWOT Analysis
5.1.1 Strength:
Less fuel cost through:
i) Carbon re-inforced material
ii) Efficient engine
Less operating and manufacturing cost through using Composite material
Long and short distance flexibility through Snap-on wing extension
Use of fewer component that reduce assembled time from 20 to 3 days
5.1.2 Weakness:
Use of composite material has its risk , contributory cause to a 2001 plane crash in New York.
Effort to cut cost although reduce production cost but may be the result of shutdown of several lines which hampered the plane deliveries.
5.1.3 Opportunity
There is a fresh market to replace mid-size planes based not only on lower operating costs but also could travel long distances
Flexibility would allow airlines to offer nonstop services on routes that required long-range planes
400 city pairs could be served efficiently on a nonstop basis by 7E7
Improvements for passengers like, wider aisles, lower cabin altitude increased cabin humidity would increase aircraft demand
Boeing can provide modern facilities into 7E7 aircraft like, in-fight entertainment, internet access, real-time airplane systems, structure health monitoring and crew connectivity.
5.1.4 Threats
Airbus can be a potential threat for Boeing it received significantly larger commercial orders than Boeing.
If Boeing face any uncertainty about the engineering to deliver cheaper fuel costs and range flexibility in a mid-size aircraft because of increasing significant building cost, there will be risk of its duplication by Airbus
Airbus had already generated new engine design for fuel efficiency.
5.2 Ratio Analysis
Financial ratio helps to understand the important economic characteristics of a firm.
5.2.1 Liquidity ratio:
A liquidity ratio measures the extent to which the firm can service its immediate obligations in effect measuring firm’s ability to meet short run financial contingencies. The two commonly used liquidity ratios are:
The Current Ratios and
The Quick Ratios.
Liquidity Ratio 2001 2002Current Ratio 0.82 0.85Quick Ratio 0.45 0.54
In the case, the Boeing company has current ratio in 2001 and 2002 below the standard value of 1which indicates the company is not in sound liquid position and the quick ratio of 2001 and 2002, which is also below the standard value of 1. So according to the current and quick ratio, it is doubtful to conclude that the company can able to meet up all short term obligations.
5.2.2 Operating Efficiency ratios/Asset Management Ratios
The total asset turn over measures how well the firm uses its total assets.
Asset Mgt. Ratios 2001 2002Total Asset Turnover 1.19 1.03
The total asset turnover is 1.03 in 2002 which is lower than total asset turnover of 1.19 in 2001, which indicates the operating efficiency of the firm is not satisfactory. It is poor management to have a low relative asset turnover because tying up capital in an excess of assets relative to the needs of the firms.
5.2.3 Operating profitability ratio
Operating profitability ratio measures the operating performance of the firm
Operating profitability ratio measures the operating performance of the firm. The gross profit margin of the firm is 46.72% , operating profitability margin is 6.90% and net profit margin is 3.38%. the gross profit of the firm is satisfactoey but the operating profit margin and net profit magin of the firm is low which indicates the firm has a large number of operating expences so the firm has to concern about the operating expences.
5.2.5 Profitability Ratio
Profitability ratios measure the profits of the firm relative to sales, assets or equity. It is important to emphasize that profitability ratios describe the firms past profitability. Return on assets relates net income to total assets, it measures how profitably be the firm has used its assets. Return on equity indicates the rate of return earned on the book value of the owners equity
ROA of the firm is 4.43% And ROE is 9.20% .the ROE and ROA of the firm is low and is not satisfactory.
5.3.5 Growth rate ratio
Growth rate shows the growth prospect of the firm like the dividend growth, sales growth, earning growth and net income growth of the firm.the dividend growth of the firm is 10.80%,sales growth rate of the firm is 14.22%, EBIT growth rate is 10.96%, net income growth rate is 10.91%. the growth rate of the firm is consistent and quite satisfactory.
5.3 DuPont Analysis
Many of the financial ratios are related to each other because o the firms activities, assets and liabilities are interrelated. Thus it has become commonplace to bring together balance sheet and income statement activities into a formal system for analyzing a firms profitability. The DUPONT system of analysis is widely used by financial managers to assess a firms financial condition and examine the underlying determinants of its profitability. DuPONT is a systematic study of the financial ratios describing a firms financial condition.
ROA-
The ROA shows two determinants, that are-
How much the firm earns per doller of sales.Asset utilization or how many dollars of sales are generated by one dollar of assets.
DUPONT Analysis ( 3 Factors ) 2001 2002Net Profit AT/Sales 4.86% 0.91%Total Asset Turnover (Sales/TA) 118.82% 103.30%ROA 5.77% 0.94%Financial leverage(Assets/SE) 452.45% 680.12%
ROE 26.11% 6.39%
5.4 Sensitivity of ROE Analysis
1. Sensitivity to profit margin
When net profit margin decreases other things remaining constant, ROE also decreases in a extent of 81%. It doesnot indicate the negative relation rather extend to sensitivity.
Sensitivity to profit margin
YearNet Profit AT/Sales Sales/Total Assets ROA
Financial leverage(Assets/SE) ROE % change
2001 4.86% 118.82% 5.77% 452.45% 26.11%2002 0.91% 118.82% 1.08% 452.45% 4.89% -81.26%
Average -81.26%Dispersion #DIV/0!
2. Sensitivity to Asset Turnover
When total asset turnover decreases ROE decreases by extend of 13%. Total asset turnover is 13% sensitive of ROE.
Sensitivity to asset turnover
YearNet Profit AT/Sales Sales/Total Assets ROA
Financial leverage(Assets/SE) ROE % change
2001 4.86% 118.82% 5.77% 452.45% 26.11%2002 4.86% 103.30% 5.02% 452.45% 22.70% -13.07%
Average -13.07%Dispersion #DIV/0!
3. Sensitivity to leverage
When financial leverage increases then ROE also increases by extend of 50%. It is sensitive by 50%
Sensitivity to leverage
YearNet Profit AT/Sales
Sales/Total Assets ROA
Financial leverage(Assets/SE) ROE % change
2001 4.86% 118.82% 5.77% 452.45% 26.11%2002 4.86% 118.82% 5.77% 680.12% 39.24% 50.32%
Average 50.32%Dispersion #DIV/0!
5.5 Risk Analysis
5.5.1 Business Risk Analysis
Standard deviation is a widely used measurement of variability or diversity used in statistics and probability theory. It shows how much variation or "dispersion" there is from the "average" (Mean, or expected/budgeted value). A low standard deviation indicates that the data points tend to be very close to the mean, whereas high standard deviation indicates that the data are spread out over a large range of values.
The coefficient of variation (CV) is defined as the ratio of the standard deviation to the Mean .
Business Risk Factors
2001 20021. Sales Volatility
Total Revenues 58,198
54,069
Mean 56,134
STD 2,920
CV 0.05
2. Input Cost Volatility 2001 2002
Cost of Goods Sold & Operating expense 53,103
49,672
Mean 51,388
STD 2,426
CV 0.05
3. EBIT Volatility 2001 2002
EBIT 3,896
3,868
Mean 3,882
STD 20
CV 0.01
4. Net Income Volatility 2001 2002
Net Income 2,826.00
492.00
Mean 1,659
STD 1,650
CV 0.99
Both SD and CV measure the risk of a company. Higher the Standard Deviation means higher the risk of a company. And also higher the CV denotes higher the relative risk for the company. In our case, we got SD of Sales 2,920 and CV 0.05% which indicates variability is very low. On the other hand, SD of operating expense is 2,426 and CV .05% which indicates variability is very low.
5.5.2 Financial Risk Analysis
Degree of Operating Leverage:Operating Leverage is a measure of how sensitive net operating income is to percentage changes in sales. Operating leverage acts as a multiplier. If Operating leverage is high, a small percentage increase in sales can produce a much larger percentage increase in net operating income. The degree of operating leverage is a measure as a given level of change, of how a percentage change in sales volume will affects profit.
DOL 2001 2002% ∆ In EPS 0.00% -81.76%% ∆ In EBIT -0.72%% ∆ In revenue -7.09%
DOL 0.10
From the above table, we show that the Boeing’s Operating leverage is low, that is 0.96 which means the firms net operating income grows 1.60 times in expected years as fast as its sales growth. In others words, we can say that the net operating income of the firm will increase 160% as fast as its sales growth.
Leverage ratio:
Leverage ratios indicate to what extent the firm has financed its borrowings. This ratios focus on the firm’s financial structure.
Leverage Ratio 2001 20021. Debt Ratio 0.22 0.242. Debt-Equity Ratio 1.00 1.64
In 2001, the debt -equity ratio and the debt ratio of the firm is 1.00 and .22 respectively. In 2002, the debt-equity ratio and debt ratio of the firm is 1.64 and .24 respectively. The two ratios measures relative proportion of financing of creditors and owners. So from the leverage side it is satisfactory for the firm.
Coverage ratio
Coverage ratio measures how well the firm is covering its debt service demand that is interest expenses and cash demand of the firm.
Financial Risk Factors 2001 2002 Interest Coverage -5.99 -5.30
The time interest ratio of the firm is negative in both of the year which is not satisfactory for the firm. The firm has to improve this ratios.
5.5.3 Bankruptcy Risk Analysis
Z-Score Model
E.I.Altman developed a model publicly traded manufacturing model at the United State. The indicator variable Z is an overall measure of the default risk classification. This in turn depends on the values of the various financial ratio and the weighted importance of this ratio based on the past observe experience of defaulting versus non defaulting derived from a discriminate analysis model. Thus Altman Discriminate function (Credit Classification Model) takes the form:
Z= 1.2X1+1.4X2+3.3X3+0.6X4+1.0X5
Where,
X1=working capital/total assets ratio,
X2=Retained earnings/total assets ratio,
X3=EBIT/ total assets ratio,
X4= Market value of Equity/ Book value of long term debt ratio,
X5= Sales/ Total Assets ratio
Higher the value of Z lowers the default risk classification. Thus, low or negative value of Z may be evidence of a member of relatively high default risk class.
The Boeing Company
Particulars Coefficient 2001 2002
X1 Net Working capital / Total asset 1.20 -0.076 -0.056
X2 Retained earnings/ Total asset 1.40 0.293 0.272
X3 Earnings before interest and taxes/ Total asset 3.30 0.080 0.074
X4 Market value of equity/ book value of long term debt 0.60 0.616 0.310
X5 Sales/Total Assets 1.00 1.19 1.03
Z Altman Z Score 2.14 1.78
Comments Comments
good moderate
According to the Z score valuation of our case, we get Z value in 2001 is (2.14) which means The Boeing Company has low default risk and in 2002 Z value is (1.78) which means Boeing has moderate default risk. As risk of the company is lower so that the company can easily apply for the loan for implement their project proposal.