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.
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