Price Post (3 of 3): Interesting break-even pricing analysis…

If you have been following commercial aviation during the past couple of years, no doubt you are familiar with the two big players…Boeing and Airbus. Boeing is currently developing the 787, previously called the 7E7 Dreamliner, and Airbus has recently entered flight test with their A380. These airplanes represent two very different philosophies toward the future of airline travel.

Boeing believes that customers want point to point (P2P) travel and the 787 is being designed with that concept in mind. P2P eliminates the hub connection. Airbus claims that larger passenger airplanes that fly between hubs will be the future of commercial air travel.

Airbus believes they can sell between 1,250 and 1,650 A380s over the next twenty years. Boeing sees the market for a large airplane like the A380 near 270. Needless to say, the contrast between each company’s assessment of the future marketplace and consumer needs (Pg. 6*) is extreme.

How do you work a pricing strategy for a program that will run more than twenty years and is extremely expensive? One approach is break-even pricing or target profit pricing. Our book (Pg. 321*) defines this as setting price to break even on the costs of making and marketing a product; or setting price to make a target profit.

Initially Airbus announced that 250 A380s would be the break-even point for the $10.7 billion program. Cost overruns have pushed the total over $12 billion and the new break-even point has been set at 300 airplanes. To compound matters further, Airbus has received almost $4 billion dollars in launch aid from various governments. These subsidies stipulate that the loans do not need to be repaid until the program reaches 40% of the total projected sales. Not a bad deal…if you’re Airbus. Boeing is seeking to resolve this discrepancy, but that’s for another blog post.

While the break-even concept is simple, subtract variable costs (engines, aluminum, avionics, etc.) from the selling price (airplane cost to the customer) and divide that number into the fixed costs (manufacturing facilities, engineering, management, etc.) and you will have the number of, in this case, A380s that Airbus must sell to break-even on the investment.

With cost overruns (almost $2 billion) and the fact that most new airplanes are discounted to facilitate initial sales, the 50 additional A380s sales required to get to the break-even point is not surprising…I wonder if it’s not more than that. Perhaps Airbus knows something that Boeing (and many of us) don’t know, but it certainly doesn’t appear that way…especially given the fact that they’ve only sold 144 A380s to date and they’re continuing to push new customer deliveries back.

Take a look a look at Randy Baseler's blog for more information.

*Principles of Marketing, Kotler & Armstrong, 11th Edition