By Bjorn Fehrm

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Introduction

March. 21, 2016, ©. Leeham Co: There is quite a lot of talk about what a new aircraft program like Boeing’s Middle of the Market (MOM) would cost the airframe OEM to develop. Typical quotes are “it would cost them at least  $10bn.” When saying this, the person implies this is the program’s load on the company’s liquidity for that aircraft program.

This is not correct and we will now go through why. It might be true that the development of the aircraft cost $10bn. But the trouble is, this is not the only cost that will hit the OEM for this aircraft program.

Cost that one normally does not think about when talking about new aircraft programs can double the cash burden on the OEM.  Here’s why.

Summary:

• What normally is labeled development cost is only to a part development.
• About half of the cost is used to develop and manufacture the aircraft’s production tooling.
• There is one major cost block that has been forgotten in a development cost discussion: initial production costs.
• The initial production costs not covered by customer payments can double the cash burden for a company.