Commercialisation of General Aviation Designs of Aircraft (DAPCA) IV model and calibrate results to the general aviation experience Consider Cabin Height & Max MPH 15 Value from our

Commercialisation of General Aviation Designs

Doug Howarth

Royal Aeronautical Society

General Aviation Conference November 23, 2010

2

Commercialisation of GA Designs

• Conditions for Success – Price > Cost

– Quantity Produced > Breakeven Point

• Economic Factors – Demand

• All Civil Aircraft

• General Aviation Aircraft

– Value • Desired Attributes

• Quantifying these Attributes

– Cost • Recurring Cost as a function of size and speed

• Cost vs. Value vs. Demand

Consider the Fixed-Wing Civil Aircraft Market

3

Observation GrdTot Price2009 MxCrsMPH 2ClsPass RangeM CabH Engs MaxAlt BalFL

1 193 115800000 542 298 4600 8.333 2 40000 7651

2 151 59050000 542 107 3680 7.380 2 39800 5479

3 2328 70300000 542 124 4255 7.382 2 39800 5643

4 4174 76900000 542 150 3450 7.382 2 39800 7155

5 1257 90250000 542 185 3508 7.382 2 39800 7285

6 894 180900000 568 293 7763 7.642 2 41000 8300

7 659 200800000 568 335 6498 7.642 2 41000 8250

8 492 215500000 568 335 8510 7.642 4 41100 9900

9 63 237050000 568 359 10350 7.642 4 41100 10250

10 193 249350000 568 419 9085 7.642 4 41100 10300

11 75 269600000 562 412 9189 7.800 2 42980 9500

12 213 327350000 588 604 9430 8.563 4 43000 9800

13 156 40200000 504 106 1645 7.080 2 37000 5750

14 69 55000000 542 108 3508 7.217 2 41000 5890

15 1513 64000000 542 128 3870 7.217 2 41000 5500

16 3022 76750000 542 160 3519 7.217 2 41000 7570

138

Observations

15 Variables

Qty-Price Points

This Data Permits Demand Analysis

4

$100,000

$1,000,000

$10,000,000

$100,000,000

$1,000,000,000

10 100 1,000 10,000 100,000 1,000,000 10,000,000

2009$/Unit

Units

Commercial Fixed Wing Aircraft Demand

(Current models' sales to date + projected sales to 2015)

Here are the

138 Qty-Price

Points of the

entire market

Fixed Wing Price

= 2E+14 * Qty-1.702

R² = 0.9512

$100,000

$1,000,000

$10,000,000

$100,000,000

$1,000,000,000

10 100 1,000 10,000 100,000 1,000,000 10,000,000

2009$/Unit

Units

Commercial Fixed Wing Aircraft Demand

(Current models' sales to date + projected sales to 2015)

Separate the

Points into Bins

Separate into

sub-markets

Business Aircraft Price

= 6E+12* Qty-1.54

R² = 0.957

General

Aviation Price =

3E+08 * Qty-0.622

R² = 0.992

Regional Aircraft Price

= 2E+10 * Qty-0.929

R² = 0.956

Airliner Price =

2E+10 * Qty-0.606

R² = 0.987

Fixed Wing Price

= 2E+14* Qty-1.702

R² = 0.9512

$100,000

$1,000,000

$10,000,000

$100,000,000

$1,000,000,000

10 100 1,000 10,000 100,000 1,000,000 10,000,000

2009$/Unit

Units

Commercial Fixed Wing Aircraft Demand

(Current models' sales to date + projected sales to 2015)

This Method Allows us to place all of the Fixed-

Wing Civil Aircraft into the same Context

Here is the General Aviation Market

5

Paul Samuelson claimed that “Equilibrium must be at the intersection

point of the supply & demand…the only price that can last.”

But the market supports dozens of prices…What holds them up?

$100,000

$1,000,000

$10,000,000

1 10 100 1,000 10,000 100,000 1,000,000

2009$/Unit

Units

Total General Aviation Demand(Current Models purchased to date + projected sales to 2015)

Aggegrate Demand =3.25E+8 * Qty-0.622

R2 =0.922

Demand Frontier

We Might Seek Guidance Locally…

6

In the South

Cloisters of this,

the Main UCL

Building, We find

Jeremy Bentham's

Office

Jeremy

Bentham: 1748-

1832

Jeremy Bentham was a Utilitarian…

Utility Theory compared to Value Theory

7

Utility Theory Value Theory

Units Utils Dollars

Analysts Economists Consumers

Prices Set by Producers Consumers

Utilitarians explain value in terms of Utils, an amorphous unit

Value Theorists explain value in terms of Currency ($, £, €, etc.)

Vm = A1 * A2 * …Ax * ei

Where:

Vm = Market value of aircraft

Ai = contribution of ith attribute

ei = error term of the equation

Hypothesis: Aircraft Market pays for Attributes

Consider Price

compared to Speed

Regression yields…

Price = 0.000367 * MPH4.04

Other attributes add value

Price = 0.159 * MPH2.66 *

Pass0.684

Height is important, too

Price = 0.178 * MPH2.05*

Pass0.478 * Ht2.45

At Least 6 Attributes Contribute Value

5

6

7

8

9

5 6 7 8 9

Pre

dic

ted

Pri

ce 1

0x

Actual Price 10x

Actuals as X; Predicted as Y

Price = 0.000373 * MPH4.04

5

6

7

8

9

5 6 7 8 9

Pre

dic

ted

Pri

ce 1

0x

Actual Price 10x

Actuals as X; Predicted as Y

Price = 0.160 * MPH2.66 * Pass0.684

5

6

7

8

9

5 6 7 8 9

Pre

dic

ted

Pri

ce 1

0x

Actual Price 10x

Actuals as X; Predicted as Y

Price = 0.179 * MPH2.05

* Pass0.478 * Ht2.45

5

6

7

8

9

5 6 7 8 9

Pre

dic

ted

Pri

ce 1

0x

Actual Price 10x

Actuals as X; Predicted as Y

Price = 0.117 * MPH1.64 * Pass0.419 * Ht2.36 * R0.399

5

6

7

8

9

5 6 7 8 9

Pre

dic

ted

Pri

ce 1

0x

Actual Price 10x

Actuals as X; Predicted as Y

Price = 0.000144 * MPH0.678 * Pass0.478 * Ht2.42 * R0.390 * Alt1.18

5

6

7

8

9

5 6 7 8 9

Pre

dic

ted

Pri

ce 1

0x

Actual Price 10x

Actuals as X; Predicted as Y

Price = 0.000378 * MPH0.594 * Pass0.477

* Ht2.25 * R0.388 * Alt1.15 * Engs0.315

So, What is the Value of Speed?

10

As we added

terms, the

analysis reveals

that increasing

speed by 20%

results in < 20%

added value

And the added

terms reduced

our error term:

the six variable

equation is

particularly

useful

108.9%

62.4%

45.3%35.1%

13.1% 11.4%

0%

20%

40%

60%

80%

100%

120%

MPH MPH, Pass MPH, Pass, Ht MPH, Pass, Ht, R

MPH, Pass, Ht, R, Alt

MPH, Pass, Ht, R, Alt, Engs

Value of Mach 0.96/Mach 0.80

100.3%

37.7% 31.9% 27.6% 25.4% 24.8%

81.4%96.2% 97.0% 97.5% 98.0% 98.1%

0%

20%

40%

60%

80%

100%

MPH MPH, Pass MPH, Pass, Ht MPH, Pass, Ht, R

MPH, Pass, Ht, R, Alt

MPH, Pass, Ht, R, Alt, Engs

MAD (nearer 0 is better) and Adjusted R2 (nearer 1 is better)

A pair of Rivals Entered the Market

11

Eclipse 500:

Certified 2006 Cessna Mustang:

Certified 2006

09$ = 0.000373 * MPH0.590 * Pass0.477 * Ht2.25 * R0.388 * Alt1.15 * Engs0.316

<0.005 <0.0001 <0.0001 <0.0001 <0.0001 <0.02

5 Passengers

1295 Mile Range

4.17’ Cabin Ht

2 Engines

425 Max MPH

41000’ Max Alt

5 Passengers

1495 Mile Range

4.50’ Cabin Ht

2 Engines

391 Max MPH

41000’ Max Alt

Passenger/MPH Map Before 2006 Passenger/MPH Map After 2006

p-values

Price

09$

$1.1M

Est.

Value

$2.9M

Result Cost>Price

Bankrupt

Start

Price 09$

$3.1M

Est. Value $3.4M

Result Price>

Cost

Strong

Sales

<0.0001

Implications for General Aviation Consider the Lancair ES

Textron purchased rights to

it; sold as Cessna 350/400 Cessna 350 Cessna 400TT

MPH 220 270

Passengers 4 4

Cabin Height 4.083 4.083

Range (miles) 1604 1438

Altitude (ft) 18000 25000

Engines 1 1

Market Value $565,500 $893,700

Price 2009$ $558,200 $644,500

Cessna 350 is well-priced;

the Cessna 400 could sell

for more

Cessna 400 is not the fastest 4 place plane

But its cabin is 4.5” > the Acclaim Type S

0

2

4

6

8

10

12

0 100 200 300 400

Pas

sen

gers

Cruise MPH

General Aviation MPH vs PassengersGen AviationCorvalis 350/400Acclaim Type S

0

1

2

3

0.0 2.0 4.0 6.0

No

. of

Engi

ne

s

Cabin Height (ft)

General Aviation Cabin Ht. vs Engines

General AviationCorvalis 350/400Acclaim Type S

Empty Weight from Cabin Height/Capacity

13

Plot Q400’s Ht/Pass

And the ATR-42’s

And the PA-32R’s

& 20 more planes

Add Empty Weight as a dimension Regress…

MEW = 101 * Pass0.689 * Ht1.50

R2 = 95.9%; MAD = 14.9%

Now we know how empty weight behaves

Solving for other Cost Elements…

14

Model Part Number H/P Price

O-235-C1 ENPL-9057 115 $35,717

IO-320-E2B ENPL-RT8862 160 $41,354

AEIO-360-A1A ENPL-RT8117 180 $48,197

LTIO-540-U2A ENPL-8998 350 $88,285

IO-720-B1B ENPL-9578 400 $111,874

Note: All data retrieved from:

http://www.piper-germany.de/pdf/

2009_AM_Engine_Price_List.pdf

Price = 262.5* HP+ 1825

R² = 0.983$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

0 100 200 300 400 500

20

09

Pri

ce

Horsepower

Lycoming Engine Cost vs HorsepowerHere we work

out the cost

for piston

engines…

turboprops

are more

expensive

The horsepower required is a

function of MPH and Cabin Ht HP = 0.000382 * MPH1.50 * Ht4.18

We take these results and run

them through the RAND

Development and Procurement

Costs of Aircraft (DAPCA) IV

model and calibrate results to the

general aviation experience

Consider Cabin Height & Max MPH

15

Value from

our 6

attribute

equation

Value vs.

recurring

cost of 1st

Unit

Value vs.

recurring

cost of 1st

& 500th

Units

Broader analysis entertains other dimensions

0 20,000 40,000 60,000Units

Demand Plane & Value Space Interact

16

The Demand Plane has two

dimensions, qty and currency

The Value Space has three axes,

Value Axis 1 (MPH), Value Axis 2

(Cabin Height) and currency

Value Spaces & Demand

Planes form 4D Systems

(V1,V2,$,Q) of ordered quads

with an origin of (0,0,0,0)

(0,0,0,0)

We can use a Demand Limit

to model a simulated design –

in this case we’ll use $750K

Demand Plane Value Space

Bounding Financial Opportunity Space We begin with our

previous limits

We add constraints

Section cuts indicate

possible configurations

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

4 4.5 5 5.5

Cu

rre

ncy

Cabin Height (ft)

Financial Catscan at 160 MPH

Value =Demand

4.61'

500 Unit Cost

1 Unit Cost

Demand

Value

Min Ht Max Ht

We solve for profit using

Financial Catscans

Exhaustive analysis requires examination

of all attribute combinations in all viable

market regions

18

Summary

• Several variables determine Value & Cost

• Value Space abuts the Demand Plane, forming a 4D system of positive numbers

• Viable General Aviation aircraft

– Must have their Value > Cost

– Are more likely to succeed if they distance themselves from competitors

• Financial Catscans

– Offer support in attribute decision analysis

– Are results from a broader sweep of market possibilities studying different attribute mixes