Guarantees, commitments and marketing claims

March 25, 2015: When the early Boeing 787-8s emerged overweight and falling short of the marketing claims, Boeing said that nonetheless the fuel burn and performance guarantees to customers would be met.

When we revealed the first flight test performance results for the Bombardier CSeries, BBD acknowledged fuel burn and noise results were better than guarantees and meeting the “brochure” numbers.

With questions raised over the CFM LEAP-1B fuel burn at this stage of development, Boeing responded by saying it will meet customer “commitments.”

What does all this jargon mean? We interview a Marketing Executive, experienced in aircraft evaluations to find out.

The marketing executive remains anonymous. He said:

There are generally two levels for performance data in discussions between an OEM and an airline evaluating fleet options.

The first is what we would call “nominal” or “brochure”. These are the headline numbers that are generally used in brochures and which get shared with customers in typical route evaluations and marketing studies. These figures are in fact meant to represent the average aircraft at delivery. Although they are considered the best numbers to demonstrate the value of the aircraft, they are not necessarily overly aggressive.

The “guarantee” figures include margins that the OEMs include in order to account for, and protect against, any variations in build for individual aircraft. The guarantee margin is usually the cumulative effect of potential variations on empty weight, engine performance (there is also a “nominal” and “guarantee” SFC that the engine manufacturer contractually owes the airframe manufacturer) and aerodynamic drag (i.e. how clean and “straight” the airframe is). Different programs will have different margins and there is not necessarily an industry standard. To give you a range, I would expect margins of a key point such as fuel burn to be anywhere from 5% to 1% depending on the maturity of the airframe/engine combination. Furthermore, Performance Guarantees can be offered for any parameter of importance to the airline’s business case: for example: take-off or landing field length, max cruise speed, empty weight, max. range, noise levels, etc… and the percentage can be different for each of these.

Because airlines will seek rectification and financial penalties attached to missing a guarantee point, the guarantee margin can be a point of negotiation and there are many different formulas that can be considered to ensure the airframe OEM and airline customers each protect their interests.

We also spoke with another person familiar with procedures by Airbus and Boeing. He reports:

Usually, a sales director works them out with revenue management (same team that does pricing) because Boeing will often try to negotiate higher pricing in exchange for improved guarantees. Airbus generally doesn’t tie the two as tightly, which is a growing point of frustration for [Boeing] sales teams.

Thus, it appears that the OEMs, parsing words carefully, can make accurate claims despite conflicting information to marketing statements.

11 Comments on “Guarantees, commitments and marketing claims

  1. What remarkable is that much of the communication A & B do is on efficiency, calculated per seat. With fully unrealistic seatspecs/ charts to boost the per seat numbers.

    While being on the other side of the table, I cannot remember ever haven taken these OEM figures/ numbers into consideration. Never saw them. Obvious a different target group.

    An airline simply asks their specialists departments for seat/ cabin specs, now and in the future, do studies (LOPA’s), come back with resulting seatcounts for various types, cargo requirements and does a series of network simulations with different fleet mixes and growth scenarios. Determine total costs. Then the best fleet mix / aircrafttypes come out.

    • @keesje I agree that the cost per seat thing confuses the heck out of me. Wouldn’t it be better to just give the plane’s specs. And then the airlines can secretly come up with their seating (whatever they thing makes them conpetitive): all first class, 50/50, all sardine class or whatever in between? The per seat specs almost makes people have to deconstruct the number to reconstruct their cabins to come up with other numbers? Or do arilines have to tell Airbus and/or Boeing their plans (potential leak earlier on in the planning) to come up with numbers? I’m betting that, in reality, both number are available (per plane and per seat) and then Airbus and Boeing just end up playing with the numbers on a “per seat” marketing campaign. I hate marketing, I like the real numbers 😉 I guess I should ask marketing: I want a plane with ONE SEAT, give me the numbers 😉

      • pgangloff, it what I said. The airlines do not pay attention. They ask the OEM the CAD cabin drawings and have their engineering, crew, catering and marketing departments come up with a current spec and future spec cabins. Like those folks have been doing for decades. Regardless of what Airbus/ Boeing says. Then there are the fleet analist, engine MRO specialists, flight services, revenue management etc that have their say. The bigger airlines have dozens of specialists with decades of experience, the fleet managers take their estimations as base for negotiations.

    • Reminds me of Douglas fudging on pitch in trying to sell the DC-10.

      Boeing got wind of that and showed up with a drawing saying they could get [surprising number] of seats in a 747SP – tongue firmly in cheek, they made the point.

      Besides how many lavatories and galleys, there’s fudging on seat pitch. So for example if the criteria is say 34″ (common way back) by shortening several rows to 33″ an extra row can be fitted. Douglas misled me – guess which company is not in business today?

      • Welcome to the world of sales.
        Guess whos 4 engine airliner designed in the 1950s is still flying commercially today.
        Confusion marketing is even more rampant now, as every one is selling services with different marketing points. No doubt ‘power by the hour’ contracts are written in jello-o as well

        • Boeing 707 four-engined airliners are still flying today, but may only be in military and military support service. (US military flies several on special missions, and private companies do contract refuelling for USN and US Marines. Some have been re-engined with PW JT8D-2xx series better known from MD-80 use, perhaps some with CFM-56s as done for many KC-135s.)
          Of course 747s are still flying today.
          I haven’t kept up on DC-8s, the original was of course developed in the days of Donald Douglas not McDonnell, I don’t know when the later DC-8s were built, I presume he was not involved when the DC-8s were re-engined with CFM-56s. (Re-engined DC-8 with the better wing seemed a great airplane, I had a neat test flight on one.)

          It’s a task for airplane purchasers and their consultants to get to an applesapples comparison. Talk is cheap, but sometimes it is just over-confidence. (Airbus’ chief pilot for A310 was very confident until a 5000 foot or runway at 2200 feet ASL was mentioned. Both it and the B767 were paper airplanes at that point, hence confidence in claims was a factor, preferably with guarantees offered. Airbus did have a tendency to get the airplane into service then do further testing to refine data for airfield performance.)

          A good manufacturer improves the product. Boeing did that with the 737-200 – the “Advanced” wing really helped short-field operations.

          And indeed one has to be careful with terminology. I know people who got caught not realizing that there were two aerodynamic versions of the B737-200, one has to read the FAA Type Certificate carefully to learn that then ask the aircraft operator which their airplane is. OTOH I had to explain to many people that for the particular system all 747 models through the -300 were aerodynamically the same. (Stretched upper deck did not affect that system. We didn’t need to look at the -400.)

  2. Yes, I had the same impression that the guarantees are kind of like “futures contracts” [WallStreet] especially when the plane is not yet ready. The farther the “in service” date is, the costlier this is for the airframer (lots of risk, lots of unknowns) and the cheaper it gets when they are “in service”. And, thanks to the author, we now know that these can be written like “futures contracts”, you can create derivatives on MTOW, airfield performance and whatever we can think of. Those offices [where people price these things] must be filled with people who are very well versed on futures contracts trading and pricing (beta and whatnot). Hopefully they don’t do like the subprime meltdown (create fancy derivitives contracts that nobody understood, get played by the clients and create a massive nightmare that nobody saw coming). I hope there’s a risk column somewhere in the financial results of Boeing, Airbus, BBD and Embraer. This is a huge risk. No matter how great the product is, that small office could bring down the company. Hopefully, also, there’s a max penatly in there (so that it doesn’t act like someone could “short sell” a 737 with the only goal of gambling that a plane doesn’t meet the specs). I hope nobody on WallStreet reads this, I might just be giving bad ideas on how to screw up our economy again… Anyway, great article, lots to think about 🙂

    • I jsut want to add: the airframers’ CEOs better understand these futures contracts and make sure they are checked, re-checked and re-re-checked independently. Each mistake could be VERY costly if not read very closely. In the subprime meltdown, it was clear that the CEOs of the WallStreet dirms had no idea what a CDO was and what impact it could have. Deer in headlights. A couple errors and this great company falls. One trader can kill 5B easy. And that’s the “smart” people on WallStreet. Imagine a little mistake like that. That’s more than the valuation of some companies (BBD=3.5B). And I’m not even speaking about “economic warfare”. It would be too easy to “plant” a couple of people that “play dumb” and “make costly mistakes”. Let’s not kid ourselves, money is more powerful than bombs (mostly). We can bring down nations with the price of oil (Russia) so bringing down a company is not *completely* science fiction.

      • Wall St can make much more money by moving aluminium ingots between warehouses.
        Commercial aircraft and airlines would be grounds for instant termination

  3. Another aspect not mentioned here is that it isn’t easy for a customer to prove that his particular airplane falls short of the performance guarantees. The OEM’s data is based on the performance of a calibrated airplane with calibrated engines flying in smooth air in a standard atmosphere’s temperatures and pressures.

    • Buy a car and try to achieve “sipping fuel” like the cars EuroCycle results seems to promise. Though people start to get irate and litigious on that topic.

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