Airline Cost Of Goods Purchased (COGP)

Price + Efficiency+ Cost Of Change = Deal

A long time ago  an accounting office far far away there was Cost Of Goods Sold (COGS). The COGS book was fat with definitions, calculations, and documentation for transactions going out the doors from a business. But what about goods coming in the door, what is its costs?

The COGS model had variable and fixed costs, break-even points and a vast sundry of accounting adjustments to arrive at what it cost when a product is sold. The balance purchase price of a product sold minis the COGS can be summarized as raw profit. The profit at this point is just a starting number for all other accounting manipulations from that profit dollar.

This story is not about Cost of Goods Sold but about airline fleet building and its operational success. There are two manufacturers pursuing an airline for business. Manufacturer A and Manufacturer B from this point forward noted as MA and MB. The customer is a dual fleet operator for 80% of its fleet comprising its larger aircraft. The airline customer also ties up 95% of its resources servicing, buying, and operating the larger aircraftfor its own flying customer base.

The marketing team of both manufacturers have set its bottom line price for its sales team. Bottom line price includes service support and added value product offerings. Some airline customers operate a dual brand fleet strategy buying both MA and MB aircraft in an effort for leveraging the manufacturer into lower prices on future purchases. However, dual fleets have a cost added to its operation when separate resources are required for having MA and MB in its fleet. The most efficient airlines often seek a strategy of one using manufacturer only for its fleet, reducing operational redundancies found in a two fleet scheme.

Therefore, an airline must make up those inefficiencies found in dual fleet operation from leveraging a low ball purchase price from each competing manufacturer. The low purchase price would support having a dual fleet brand inefficiency. Costs are found when hiring dual trained employees and  carrying two parts bins for its fleet of aircraft. It get messy doing two fleet types under the best of conditions and requires manufacturer involvement to keep the airline's ball rolling. Price and operational efficiency must balance one another. Being a more efficient airplane than the competing maker is sometimes not enough of a reason for buying product "MA" or "MB"

The cost of change can be illustrated by the degree of change management required when making its fleet either into a dual manufacturer fleet or going to a one manufacturer fleet. The selling manufacturer wanting an exclusive take-over of a dual manufacturer airline must make a deal "the airline can't refuse", and then it must assist that airline during its phase of gaining expertise with the aircraft for a period of time, Otherwise the cost of change becomes too expensive and risky for the airline customer.

The final balance from a COGP is the deal, as the deal must address each of the the above categories of price, efficiency and change. The cost of passenger retention is a big issue for an airline whether it can keep its own paying customers happy with a newly delivered aircraft. Both manufacturers have to attack the Passenger Quotient (PQ is a passenger preference for travel) of this problem differently in order to overcome airplane preference. There are those who love MA and then there are those who love MB.  It must sell to the airline how its Passenger Quotient is better than the other.

Sometimes Price, Efficiency and Change outweigh any PQ considerations. The airline can fill airplanes with the locations it can go to rather than having 30" of pitch vs. 31" of pitch. Passengers will go where the airline can take them and the price of added inches is too expensive for the average passenger seeking a $199 ticket.   

An airline has a lot to think about before buying its next great airplane.

20 Hrs Is Easily Possible Until...

You add luggage and passengers. Boeing did it when it tested the 787 going around the world during December 2011 with its ZA006. The round the world flight had a crew of twelve pilots and engineers. It took a total time of 42 hours and 27 minutes including the two hour refuel stop at Dhaka  Bangladesh.

Boeing demonstrated it could fly for twenty hours and 10,337 miles on one 787-8 configured aircraft having 12 people on-board.

Remember it was 2011 before the next improved GE or Rolls were hung on its 787 wings. It was long before the first 787-9 dropped in and don't forget the proposed 777-8X long range flyer was only a pipe dream at that time. 

Qantas has thrown down the gauntlet in front of Boeing and Airbus who are expected to come up with a 20 hr flying time solution with its 7** and A350 offering. Boeing responded with a "we are working on it" response. Airbus is also doing the same, but without any public proclamation. 

Wikipedia: Boeing was also studying an ultra long-range replacement for the 777-200LR, conceptually dubbed the 777-8LX, which would share the −9X's fuel capacity and gross weight. Its range will be 9,480 nmi (10,910 mi; 17,560 km) compared to 9,395 nmi (10,812 mi; 17,400 km) for the −200LR.

However, there are other quotes for the 777X's range of 8,960 miles stated for the 777-8X and the 777-9X comes in within the 7,550 mile range.

The Qantas Challenge:

A fuel sipping flight may not fly at mach .85 as that  translates into 566 knots per hour. However, in an expected 20 hr flight with 300 passengers on board,the fuel sipping could be achieved traveling around mach .80 range or 534 knots per hour. Once again Boeing will look at tweaking a 777-8X engine performance using lean burn techniques with optimal engine output for a twenty hour flight. The Mach .80 version could or should  go 10,068 nautical miles in twenty hours. 

The 777-8X is listed with having a 365 passenger capability, but a Qantas super long range type from Boeing may only require around 300 seats thus diminishing its take-off weight significantly as any formula constraining distance includes fuel weight and passenger weights determining how long and how far an aircraft can fly. 

Having Airbus competing in the Qantas throw-down for a twenty hour flyer, Boeing may not have to sacrifice Jet engine performance where GE may already have a rabbit to pull out of its engine development hat. It could propose a tweaked GE9X engine as a one-off specialty engine offered as a  Boeing package to Qantas for the long haul it proposes.

What does Boeing have to over come? Airbus punching out another ULR A-350 for one. Going back to the Boeing, it starts with engine, folding wings extensions and then its own off-the-shelf technology for making a ready to deliver a 777QX passing within the Boeing assembly line. It can fly 20 hours as the 787 demonstrated in December 2011. Now it must find a way for flying 20 hrs with its passengers, additional fuel and luggage.

Airbus and Bombardier Didn't See It Coming

Boeing can go against the Airbus battle forward  as it combines with a Bombardier C series on its wing. 

The Airbus-Bombardier consortium does pose new problems for Boeing in the new world order of things. What Boeing can be doing is thinking way out of the box in a counter move. Give Embraer a big corporate hug. Boeing could form an alliance with Embraer with selected airplane types in the market place.

When Boeing talks to a potential customer relating to a fleet renewal order it could by agreement allow Embraer a share at the sales table as a "partner". The alliance would have conditions of course allowing both corporations autonomy much like an airline code share compact that exists today.

In this arrangement Boeing makes a 787-737 deal with a customer but allows an Embraer offer in on the talks only for regional aircraft. If Embraer goes it alone it would not be eligible for any Boeing sweeteners surrounding a potential deal. If Embraer has established a sales lead where bigger aircraft could be included with its regional Embraer order offer, then Boeing would be included for offering anything larger the Embraer's current line of aircraft.

The details of an alliance would fill reams of paper bundles within-the-making, but the legal dance would maintain corporate autonomy and allow each builder to operate in its own realm of airplane making. 

Embraer should align with Boeing as Airbus will now make Boeing pay in areas where it does not even make an airplane for commercial sale or operation. 

Additionally Embraer will have to battle Airbus sponsored programs alone. Simple as it seems, it is a complex arrangement for either maker which will enable both to efficiently negotiate with different customers' operational needs throughout the regional and intercontinental spaces each maker services.

Can 6,550 Miles and 287 Seats Do It For A-330 NEO Customers?

A big question for Airbus customers looms large for those who have already ordered 206 A-330-900 NEO's. The NEO is an under cut for the Boeing 787 Dreamliner as the NEO offers a cheaper per unit buy price. The program itself is teetering at this time as the many financial types weigh-in if selling  the A330-NEO can make money. 

Going forward, Airbus hopes to make money with this program but only 212 orders seem a bit tepid for those aspirations.

One of its major NEO customers who ordered 66 of the A330-900 NEO is taking a reality check on that order when it announced it was talking with Boeing about its Dreamliner suggesting a dumping of its order. When quickly doing the math, a cancellation this late in its developmental process would be a major blow to the NEO program and leave it with only 146 A330-900 "firmed" orders. The question then becomes why build it if after these last five years there are only 146 booked orders?

The Airbus A330-900 NEO is fighting for its life with the Air Asia renegotiation and mentioning Boeing in its latest re-think. Hawaiian Airline had ordered some (6) of its A-330-800 NEO, and is now worried that so few ordered for this type it will be a no show production and delivery for the Airline. It also is in talks with the Boeing 787 people. Hence, only 212 A-330 NEO's for both types have been ordered. 

Today is a victory for Airbus that it lifted off on its first flight during 3 hours of flight testing and landed successfully. Much fanfare was made in the press for something that may be doomed if more Airbus orders are not acquired for the A-330 NEO and cancellations from both Air Asia and Hawaii Airlines occur.

The Boeing 2017 Orders Including Tentative

Boeing has a myriad  book of intents for the 787 family of aircraft during 2017. When considering those customer's who were quoted in the press with an 787 order, the listed intents awaiting order signing make Boeing look like its 14 a month production increase as a wise decision. The following are unsigned orders that have a likelihood of being signed before the end of the year. This does not include the Dubai airshow happening next month where more 787 orders may show up. The Chart includes those what if signatures during the remainder of 2017.

Egypt air for 6 787's

Malaysian Air for 8 787's

Turkish Air for 40 787's

CDB for 8 787-9's

Below in Fig 1: CAPA source data Paris Airshow Order,LOI and MOU total where some unfinished business remains.

Fig. 1

Fig. 2 Winging It Boeing Order Tally including recent news reports for pending orders using Boeing data and Winging It researching.

Does No One Play Chess At Boeing?

Can't help but think Boeing strategist saw the Airbus move as it swept in for a buck and bought another share of Bombardier thus taking control of its 6 billion Canadian dollar investment.  Did Airbus just "Castle" Bombardier's King. Or did Airbus slide its Queen across the board and Checkmate's Boeing's King?

Most good chess players think in moves three plays ahead and always consider an opponent's counter moves for each thought scenario during this process. Therefore, either Boeing is just plain slow or it has already considered this move and is just smiling. 

Airbus was forced to make its bishop take Boeing's queen just as it did when Boeing played its Queen of the skies move on the Airbus A-380 causing a decades long tie up of Airbus resources over its mega wide-body 500 passenger elephant.

So what just happened? Airbus is trying to undercut the Boeing 737 Max 700 model of aircraft so Boeing just lost a pawn for a buck. If the C series goes any larger than the 737 Max 700 it will infringe upon its own A-320 NEO. Boeing just lost the market for a an airplane class it doesn't even consider or build. Bombardier could have eroded Max sales at the bottom end and now Airbus can only trap the 737 Max 700 in this game unless Airbus needs Bombardier concepts of airplanes for making another NEO/NEO type for its for A-318-319's.

The news today says Airbus has made a move putting Boeing into checkmate danger. Boeing should be going four moves ahead in the "board game" against Airbus using its own data. Boeing won't down size its models to compete with the Bombardier/Airbus consortium. It will just reinvent for 2030 with an all new single aisle type. 

After-all, the Max was just a stop gap/knee jerk adjustment until it could conceive a whole new paper airplane using its vast secrets to do so. The next Boeing clean sheet single aisle is twelve years away from announcing and another 5-10 years after that from delivery. Boeing should deliver its first follow-on upscale after the Max by about the span of time during 2030-2040. Airbus will have dithered its $1 dollar investment for another 20 years, by then (i.e. 2040), the Airbus cadre of Boeing watchers, will have come up with another plan "B" in its play book of tripping up Boeing.

Boeing will have parlayed its "what the wide body really means" with its wing body project by 2040. Boeing has accomplished what it wanted with all this fuss it made over Bombardier, it moved Airbus to the skinny aisle class making Embraer nervous in the process with a loss of 7 points on the stock exchange in one day.

Airbus will make Bombardier wider while "borrowing it secret sauce" for its own purpose because that's what Airbus does is plan "B's" very well. 

What Was Winging It Thinking Five Years Ago?

Merry Christmas and What's Under The Tree. (Unwrapped Update 2012 Edition Revisited Link)

This is perhaps one of my old favorite blogs, since the beginning of this blogger's folly for Boeing's march through the Aviation Renaissance (AR). 

Ø A mention for the 797 was featured

Ø Folding Wing Tips just a dream

Ø A prediction for 2020 and the 777X was on target before the press could think of it. 

Ø And Christmas 2017 is coming in 70 days.

Winging It's AR unwrapped its magnificent obsession for an airplane called the 797.  It presumed it may be a 777X rendition but also hinted for an all new type back in 2012. 

Time bears out the truth and its looking like the NMA will be named the 797, giving Boeing more time to come up with a new naming (numbering) convention going forward which is an idea for another blog contribution.

What can be reflected upon after five years hence; a lot has happened when little has changed in the bigger picture. Boeing has made the 787-9 a smashing success and issued forth its 737 Max family adding a 737 Max 10. It also has developed the 787-10 with first customer production aircraft made but not delivered until flight testing of its first production models are complete.

What changed is the strategic footprint Boeing has achieved during the last five years. It confirmed orders for 531 of its 787's since January 2012 while Airbus booked about 406 for its A-350 family of aircraft. Boeing added two new members to its 787 aircraft family the 787-9  and the 787-10.  Airbus added its A-350 1000 to its family of wide bodies.

Boeing announced the Max and now has 3,902 Max aircraft on its books. Airbus, with an 11 month head start, has a big lead with over 5,202 A-320 NEO's ordered to date. However the announcement of the 737 Max 10 at Paris this last June has narrowed the Airbus lead by several hundred units. 

The 737 also promises to compete with its A-321 NEO in the order battle. The A-321 NEO is the primary reason Airbus has its lead over Boeing in the single aisle segment.

  

Alan Joyce, Best Practices and Qantas

Qantas airlines is about to receive its first 787-9. Alan Joyce has lead the Qantas survival in the highly competitive airline market. Back in 2009 Qantas canceled a boatload of 787's by moving some product to its subsidiary Jetstar and then promptly canceling its confirmed order book while maintaining 45 options. Qantas was in a dire position and being a Boeing star customer became a pipe dream at that time.

Great disappointment spread across Boeing's aspirations at the time. Since then, "countless" orders poured in for Boeing's 787 family of aircraft totaling about 1,300 large mid bodies ordered today.  Boeing got over Qantas stalling out over Everett, Wa.

Eight and a half years later, Qantas is about to receive its first 787-9 out of eight on order. In currently owns a fleet of 787-8's on its Jetstar fleet of eleven. Lucky for Qantas its 747's held together another eight years. The eight 787-9's it had ordered will now make Qantas a world player instead of looking like an old Pan Am travel folder. Somehow the lucky eight is in sight of China's lucky number.

There are two schools of strategy available from a Qantas position. The first is the industry norm, "Build it and they will come". The second is is "Best practices". Alan Joyce has taken the later. 

Back in the 1990's the term "best practices" was all the rage at business seminars. It could be defined, use the means that are proven to be the best for gaining success. Alan Joyce pulled Qantas up and over the mountain staying within its best practice. It took care of business first by never absorbing an enormous 787 Boeing order before it could fix its business model.

The best practice here was to keep old equipment like the 747, until squeezing out its last revenue dollar possible before an airplane failure could occur. Using paid for and depreciated equipment was cheaper than its fuel burn inefficiency. The cost of buying 787's in vast quantity would sink the Qantas financial ship. Alan Joyce had to make some hard decisions before becoming a Boeing star customer. It canceled its 787 order book, but held onto a significant number of options for future purchases. The future is now.

The first 787-9 arrives today out of eight booked. The future is also tomorrow as Qantas holds onto production slots with further 787-9 orders to be confirmed at its own pace. Alan Joyce choice by not building before they come is working out of a best business practices strategy. Making an idea work before scaling up is the theme. The only damage done to Qantas is some of its pride was bruised back in 2009. Now that its 747-400 are depreciated on the books sufficiently, the opportunity arises for the 787 fleet expansion. The only regret is Qantas had the position of being a world 787 leader when it would have started receiving its first 787-9's back in 2014 instead of 2017.

The best practice of growing an airline within its own available resources seams to have worked at the expense of some pride and a few routes lost. Late to the ball worked for Cinderella after all. The main thing is to make the main thing, the main thing! Alan Joyce best practices motto leads his charge. He is rebuilding Qantas into a world player one air frame at a time. 

The Qantas door has opened years late but is now able to learn from the 787 pioneers for what mistakes not to make. It kept its powder dry until seeing the green in the bank. The best practice was to wait until all the bugs were worked out of its fleet operations. Now Qantas can resume from 2009. It was not a lost opportunity but more of taking its turn after meticulous preparation. Building an airline empire when so few passengers may come was a recipe for disaster. Alan Joyce just wrote the book on business due diligence in the airline industry.

The 797 Unique-Ubiquitous and In The GAP 797

The Great Air Plane (aka GAP)  may be called the 797 and it will be incomparably unique. The gap is an airplane space void of any typical tubes flying east and west. Boeing is taking its time before announcing its gap filler aircraft. The A-321 NEO flies around the GAP edge in an endless circle leaving the 737 single aisle segment stumped. There is a 5,000 unit GAP capacity for no known or existing airplane. 

The Boeing company is taking its time for announcing a new class of aircraft. Probably because it took too long for a buying customers waiting for its 787 program. Ten years is a long time for holding airplane expectation after an announcement. Boeing is muting customer expectation when waiting by and already going forward with a mid body in secret steps. 

Announcing too early will drive customer nuts during a long wait. The wait has already started before announcing the aircraft but its development is on-going getting ahead of any impatient waiting like the 787 experienced.

A second point under consideration is that its chief competitor does not know how to counter something not yet publicly announced to all commercial aviation customers. The secret sauce: Boeing is waiting for milestones to be reached before announcing. The guarantee must be five year entry into service from date of market announcement. Additionally, the design deviates from the norm and all development stoppers are mitigated away from critical eyes. No bad press please. Boeing has its work cut out for making a timeline from its initial announcement to a five year entry into service deadline.

Boeing is also moving developmental operations in the vicinity of area 51 or somewhere near Burbank California for assembly. The Dream-lifter can and will move parts towards a quaint building near jack rabbits and sage brush. Every part of the mystery aircraft can be airlifted into an engineering/assembly area not found near Seattle, Wa. When the prototype flies comes an announcement to an Airshow near Paris. The newly created front office for the 797 can handle mail forwarding and phone calls coming into some Boeing rented space near the "Needle". The office answering machine answers every phone call with a " Welcome to the 797 program, please leave a message and we will return your call at the nearest time available" beeeep message sequence. 

The Seattle Times has assigned an aviation columnist to the project and offers sage opinions on a weekly basis. Winging It regurgitates any opinion as its standard issue.

If a 797 is needed by a customer, call Boeing's marketing arm, they are taking names and kicking tail.  

The whole idea is to choreograph an announcement where Boeing can deliver a unique aircraft in ubiquitous quantities before the competition can even read the blue print on such an aircraft. A five year window is needed for this operation using a ten year development run-up for the 797. The year 2019-2020 should allow time for a prototype and an announcement year in Paris. Boeing has learned it needs to jump the competition for any forward leaning ideas.

The Accretive Max

I am so glad this is not finals week at some University of higher learning. In some class whether its math, business, or science. A popularization of the word "accretive" would show up in a question.  The finals question may read this way.

What accretive example can be given from the aviation Industry?

Answer:

(a)The first accretive example is Boeing's 737 MAX. First there was the 737 Max -7 followed by the 737 Max 8, and then came the -nine after which came the -ten. It becomes "Accretive" with all its expansion of types, as it battles a competitor's enormous backlog of 5,202 A-320 NEO types ordered. As of September 30, 2017 Boeing has gained firm orders for its 737 Max family in a number of 3,902 units. The fastest accretive rise in Boeing's history for any of its vast airplane types ever made.

(b)Then the business school guy chimes in "wrong answer!" Boeing has made a clean switch going from its 737 NG to the 737 Max on the factory floor. It has already delivered 30 Max types while maintaining a high monthly production rate. The cash upside is incredible and the stock value is off the charts at this time by quickly going past the accretive position into hyper value drive.

(c)Not so fast the science guy chimes in, "while working with the physics of the problem it was discovered that the 737 NG could fly about 2,900 miles on an a full plane load of passengers and luggage into the wind. The accretive nature of the Max program has added passengers, luggage and can go 3,500 miles. This (me) science guy is catching a flight to the Hawaii observatory from the mainland on an Southwest Airline  737 Max 8 as proof of this concept."

Can that be done?

(d)The FAA guys have the accretive proposition for a Hawaiian flight under advisement. Its not a matter of if, it's a matter of when!

When all stories are compared with one another it was was 4-0 in favor the 737 Max was accretive and not just an excellent answer after a recent PW engine Airbus test flight. 

The correct test answer is: (b)

Accretive is the process of accretion, which is growth or increase by gradual addition, in finance and general nomenclature. An acquisition is considered accretive if it adds to the item's value or corporation's earnings per share. 

The business school answer using the 737 Max as an aviation example is the correct answer on this test.