Leeham News and Analysis
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Leeham News and Analysis
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Bjorn’s Corner: New aircraft technologies. Part 40. The initial production crisis
By Bjorn Fehrm
December 01, 2023, ©. Leeham News: We are discussing the different phases of an airliner development program. After covering Conceptual, Preliminary, and Detailed design, the manufacturing of prototypes, and their roles in flight tests, we now look at Production.
Last week, we explained why the focus on the production phase has increased for recent and future projects. Now we go deeper into why the production phase and how it runs is so important.
Figure 1. The development plan for a new airliner. Source: Leeham Co.
The business plan of an airliner
When an aircraft OEM makes a decision to develop a new airliner, the decision is based on the market outlook and economics of the aircraft outlined in a business plan for the program.
In the business plan, typically:
- Estimated development time and costs are detailed.
- The production cost over time for the aircraft is estimated.
- The market size for the aircraft and its expected net sale price over time is presented.
- The aftermarket costs for support are calculated, and the revenue from support and maintenance contracts are estimated.
The business plan presents how the initial costs of the program shall be covered over time by the difference between production and support costs and the revenue from sales of aircraft and sales of support services and spare parts.
An essential part of an aircraft’s business plan is the production cost and how this varies over time. This is a science that is poorly understood in the industry, especially by upstarts or OEMs that lack experience from previous programs of the type and size they now venture on.
The production cost versus sale revenue dilemma
As discussed in the series, a new airliner consists of millions of parts where at least a few hundred thousand are uniquely designed and produced for the project.
All these new parts will run through a learning curve, where, gradually, the organization, whether a supplier or the OEM, will mature the way the part is produced and installed in the aircraft.
Each part of an aircraft, like structure, systems, electronics, or cabin items, follows its own learning curve. The classical cost evolution curve for structural components and assemblies is the 85% curve. It says that for each doubling of the production volume, the part has a cost down of 15%.
Figure 2 shows a typical learning curve (blue curve) for a new aircraft as calculated in our Aircraft Performance and Cost Model (APCM). The production cost over time is the sum of the main building blocks of an airliner and the cost of integrating these at the Final Assembly Line (FAL).
The curve represents a project that is going very well, with no hiccups or redesigns forced on the initial production of the aircraft, only minor adjustments of parts for better fit and easier integration into the aircraft.
Figure 2. The production cost versus net sales price of a new airliner over time. Source: Leeham Co.
Also shown is the typical revenue an OEM receives for a new airliner over time (the red curve). The initial revenue per aircraft is lower as an OEM needs to offer special pricing for the launch and early customers so that the market perceives sales is going well. it makes the market view the program as a success.
If this initial sale is not successful, the program runs the risk of being perceived as a dud, and customers will shy the program as no one wants to sit with flopped aircraft in their fleets and books.
The liquidity crunch of new aircraft programs
For new aircraft programs, investment discussions are focused on the cost of developing and certifying the aircraft. A typical sum for a new aircraft of the type we discuss would be $10bn.
Typically, this development and certification take a bit longer than planned, so the sum exceeds what’s in the business plan. How much is dependent on how smooth the development phase was (we have yet to see a civil airliner project that hits its development cost targets).
The problem is now that the initial production phase of a new airliner also costs money, big money.
The combined effect of the 250% to 300% excess cost of the first units, together with the special pricing to so-called Marquee customers, means we have a continued drain of liquidity of the project until several hundred aircraft have been produced (the yellow area in Figure 2). This is poorly understood, and the effect on liquidity is chronically underestimated in the industry.
If one studies failed airliner projects, one will see that these normally don’t fail during development but during the initial production of the aircraft. Numerous are the projects that fail after a hundred or two hundred aircraft were sold into the market.
The reason is the strains put on the project by increased development costs and the underestimation of the continued liquidity drain the program incurs years after production and sales of aircraft have started.
We will discuss this critical phase of a new airliner program in more detail in subsequent Corners. Today’s article shows the overall picture and why the initial production phase is perhaps the most critical phase of a new aircraft program.
Often is it the first stretch and ER model that saves the program (like 767-300ER, 777-300ER, A330-300…)
A330-300 is not a stretch, but the base A330 model. It was the shrink, the A330-200 that was most successful. The B777-200ER was also very successful on its own, killing both the MD-11 and the A340.
I don’t think its a stretch (pun not intended but no ignored) that the A330 was a stretch of the A300.
While the passenger version was a mild success, the freighter version fleshed that out to a success (along with the various A310s built)
As I recall, the A300F was built into the early 2000s.
Yes, the A330 has the same fuselage diameter of the A300 to fit LD3’s upstairs and downstairs. The A330 gained MTOW and range and having 3 engine options was a sales benefit. The A330neo should have got a new fully carbon wing and Al-Li fuselage to reduce mass to be more competetive against the 787-9. Still it would have got a higher sticker price. Would be interesting to read the Airbus internal discussions at the times.
A340 and A330 were a single development process introducing FBW and a new much bigger wing. ( A340-200, A340-300, A330-300 ) comonality must be in the high 90ties.
The -200 was introduced when MTOW boosts, slightly shorter fuselage and enabling the center tank ( as on the A340 ) exceeded some magic range demarcation.
Today with the NEO engines and aero tweeks the -300 overlays the -200 capabilities.
Granted, learning curve is not well understood, however, some things are clear.
First, a problem-solving culture will improve the learning curve. A cost-cutting culture will reduce capital expenditures, which means less funding for productivity improvements.
A problem-solving culture will provide training, try to recognize and solve problems upstream, invest in products and processes, and empower workers who understand everything about learning curve.
A cost-cutting culture is frequently surprised by problems, responds slowly, and guards resources for the benefit of shareholders, who know nothing about learning curve.
To the extent that executives lack experience and judgment or they regard their products as “mature,” they will manage through cost-cutting. To the extent they understand complex heavily engineered products and see their business as performance-driven, they will encourage a problem-solving culture.
Thanks for this fine comment.
Agreed, well put.
What should be added is also the safety culture aspect that when you do cost cutting and break up mfg secions to distance areas from where you are producing the aircraft, you wreck that communications as well as the igrnoe the issues.
One example is the 787 in Charleston. When the 787-10 was coming on line the manager decided to lay off tre cntrat workers (indepent workers who are not company emplyes).
We don’t need them for 3 months, lay them off and we will hire back what we need.
The manager in his stupidity and wanting to prove he to successfully saves money (not) failed to realize (or did not care) the contract workers were the glue that was holding the Charleston site together as the other workers did not have that background of experience.
Huge cost hit and it was not until the failed work started to hit Everett (the line was still open there) and it hit the news that it was, uhhhhhh, oooops.
I saw a lot of that in my working career. In my case it was looking at Corporate stove pipes and it did not matter what you did to the company, it was all about shifting costs to someone else even if that caused a larger loss. I called it (polite version) the heck with you and the horray for me.
I saw one manager repeatedly denied a move he kept trying to make (rare case that the CEO knew the guy was lying). He was not chastised or terminated, his proposal was just sidelined.
That is the kind of cost that profits at all costs incurs.
That puts the 787 and the BBD C series in a nutshell.
It cost money to do cost reduction correctly. As the configuration settls you can invest in more and better machinery/tooling to automate more and get better precision. Normally purchasing is divided into one team getting the first bits for instrumentation/testing flight test in time then the much bigger team works to reduce cost on each bit with a mix of suppliers and as flight testing verify design margins those can be used to reduce mass and cost. Hence any suppliers survival is a combination of cost, mass, precision and meeting all specs as they invest in tons of staff to meet its goals. Wartime is a bit different where increasing production volumes is a major factor.
When money was free there was a unique opportunity for not only incumbents but new entrants to have a go. The window for new airliner programmes has now closed. I don’t think we will see any new types launched in our lifetimes.
Derivatives will come. You have the 777-series, C919 to make a family and improve its payload/range, B787F/A350F cargo aircraft and Airbus in principle promising a new hydrogen burning ATR in the 2030’s. The the UAM’s will produce “shells” fitted with Honeywell or equivalent complete system to do city hopping.