Creating Value Through Integration: Valuation Techniques for Commercial Aircraft Program Design

Valuation Techniques

for Commercial Aircraft

Program Design

January 31, 2002

Creating Value

Through Integration

Presented By:

Jacob Markish

PD Team/LAI

Aerospace

Initiative

Introduction

Ø

Adding value to the design process

Ø

Motivation of this research

Ø

Traditional conceptual design methods

Ø

Several insulated groups involved

Ø Engineering, cost estimating, marketing, etc.

Ø

Analyses are typically uncoupled, serial

Ø

Result: sub-optimization

Ø

Proposed improvement

Ø

A common representation of the system

Ø

Bringing together the stakeholders

Aerospace

Initiative

Outline

Ø

Objective: Design for Value

Ø

Approach: Build & Link 3 Models

✑

✎

Performance Model

✒

✎

Cost Model

✓✎

Revenue Model

Ø

Example 1: BWB

Ø

Future work: Flexibility & Uncertainty

Ø

Example 2: UCAV

Aerospace

Initiative

Objective: Design for Value

Ø

Create a quantitative analysis tool

Ø

Capabilities:

Ø

Technical trade studies

Ø

Program trade studies

Ø

Results:

Ø

Measure program value

Ø

Measure effects of flexibility & uncertainty

Aerospace

Initiative

Approach (1 of 2):

Construct 3 Models

Ø

Free-standing

Ø

Capable of integration

✑

✎

Performance

Ø

Product sizing and configuration

✒

✎

Cost

Ø

Product creation effort by the producer

✓✎

Revenue

Aerospace

Initiative

Approach (2 of 2):

Link the Models

Performance Model/

Configuration Optimizer

Product Configuration Database

Aircraft Types: a, b, c, … Manufacturing/ Development Cost Model Program Structure • Decision tree • Pricing strategy Demand Model Program Value

Aerospace

Initiative

Performance Model:

WingMOD

Ø

Multidisciplinary wing optimization code

Ø Developed at Stanford, Boeing Phantom Works

Ø Modified for application to Blended Wing Body aircraft

Ø

Inputs:

Ø Mission constraints

Ø Design constraints

Ø

Outputs:

Ø Minimum-weight airframe geometry

Ø Intermediate fidelity analyses

Ø Performance

Ø Weights & Balance

Ø Structural Loads

Ø Aerodynamics

Ø Stability & Control

Upper Deck Payload Area

Lower Deck Payload Area

Aerospace

Initiative

Cost Model:

Focus on Parts

Ø

Aircraft is broken down into modules

Ø Inner wing, outer wing, …

Ø Modules are classified by type

Ø Wing, Empennage, Fuselage, …

Ø

Cost per pound

specified for each module type

Ø Calibrated from existing cost models

Ø Modified by other factors

Ø Learning effects

Ø Commonality effects

Ø

Assembly & Integration: a separate “module”

Ø

2 cost categories: development & manufacturing

Aerospace

Initiative

Cost Model:

Development

Ø

Cashflow profiles based on beta curve:

Ø

Learning effects modeled

1 1

)

1

(

)

(

t

=

Kt

−

−

t

−

c

0 0.01 0.02 0.03 0.04 0.05 0.06 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 normalized time Support Tool Fab Tool Design ME Engineering

Aerospace

Initiative

Cost Model:

Manufacturing

Ø

Aircraft built

modules required

Ø

Modules database

Ø Records quantities, marginal costs

Ø Applies learning curve effect by module, not by aircraft

95% 95% 85% Support Materials Labor time

Aerospace

Initiative

Revenue Model:

Price

Ø

Assumption: market price based on

Range

Payload

Cash-related airplane operating cost (CAROC)

Ø

Regression model:

P

=

k

₁

(

Seats

)

+

k

₂

(

Range

)

−

f

(

CAROC

)

0 10 20 30 40 50 60 70 80 0 10 20 30 40 50 60 70 80 Actual price ($M) Estimated price ($M) y=x Airbus Boeing 0 20 40 60 80 100 120 140 160 0 20 40 60 80 100 120 140 160 Actual price ($M) Estimated price ($M) y=x Airbus Boeing

Aerospace

Initiative

Revenue Model:

Quantity

Ø

Demand forecasts

Ø

3 sources: Airbus; Boeing; Airline Monitor

Ø

Expected deliveries over 20 years

Ø

Arranged by airplane seat category

Ø

Given a new aircraft design:

Ø

Assign to a

seat category

Ø

Assume a

market share

Ø

Demand forecast

20-year production

potential

0 500 1000 1500 2000 2500 3000 3500 4000 100 125 150 175+ 200 250 300 350 400 500+ Seat Category Quantity Airbus Airline Monitor Boeing

Aerospace

Initiative

Example 1: BWB

Background

Ø

Blended Wing Body (BWB):

Ø Proposed new jet transport concept

Ø

Design and build 2 BWB variants:

Ø 450-seat, 250-seat

Ø

Consider 2 scenarios

“C o m m o n”

Ø BWB-250 variant shares fuselage bays; inner wings

Ø Reduced design time/cost

Ø Manufacturing cost savings (learning curve effect)

“P o i n t D e s i g n”

Ø BWB-250 variant is designed as all-new

Ø Reduced gross weight & fuel burn effects on cost & price

Aerospace

Initiative

Example 1: BWB

Setup

Ø

Analysis time horizon

20 years

Ø

Discount rate

9% per annum

Ø

Aircraft price inflation

2% per annum

Ø

Market share

50%

Ø

Demand growth

0% per annum

BWB-250 assumptions: -7.5% -C A R O -C -4.6% -T a k e o f f g r o s s w e i g h t --90% I n n e r w i n g d e s i g n t i m e / c o s t --90% F u s e l a g e d e s i g n t i m e / c o s t -25% -I n n e r w i n g w e i g h t -15% -F u s e l a g e w e i g h t P o i n t D e s i g n C o m m o n

Aerospace

Initiative

Example 1: BWB

Results—Cost Analysis

0 100000 200000 300000 400000 500000 600000 700000 800000 900000 0 50 100 150 200 time (months) Cashflow ($k) Non-recurring Cost Recurring Cost Revenue common

Aerospace

Initiative

Example 1: BWB

Results—Cost Analysis

0 100000 200000 300000 400000 500000 600000 700000 800000 900000 0 50 100 150 200 time (months) Cashflow ($k) Non-recurring Cost Recurring Cost Revenue Non-recurring Cost Recurring Cost Revenue common point design

Aerospace

Initiative

Example 1: BWB

Results—NPV Analysis

-10000000 -8000000 -6000000 -4000000 -2000000 0 2000000 4000000 6000000 8000000 0 50 100 150 200 time (months) Cumulative P.V. ($k) common

Aerospace

Initiative

Example 1: BWB

Results—NPV Analysis

-10000000 -8000000 -6000000 -4000000 -2000000 0 2000000 4000000 6000000 8000000 0 50 100 150 200 time (months) Cumulative P.V. ($k)

Aerospace

Initiative

Future Work:

Uncertainty & Flexibility

Ø

Uncertainty: “forecasts are always wrong”

Ø D e m a n d f o r a i r p l a n e s a s a s t o c h a s t i c p r o c e s s

Ø

Flexibility: ability to adjust to evolving conditions

Ø N o t a d d r e s s e d i n B W B e x a m p l e a b o v e

Ø

Traditional NPV analysis is insufficient

Ø A s s u m e s a l l d e c i s i o n s a r e m a d e u p - f r o n t Ø D e c i s i o n s c a n b e d e f e r r e d

Ø

Analysis options:

Ø “W h a t - i f” s c e n a r i o s Ø M o n t e C a r l o s i m u l a t i o n : n e e d d e c i s i o n r u l e s Ø D y n a m i c p r o g r a m m i n g : a p p l i c a t i o n t o R e a l O p t i o n s

Aerospace

Initiative

Example 2: UCAV

Background

Ø

Uninhabited Combat Air Vehicle

Ø E m e r g i n g w e a p o n s s y s t e m

Ø N u m e r o u s p o t e n t i a l u s e s

Ø

Design problem

Ø C r e a t e a m a x i m u m - v a l u e p r o d u c t

Ø U n c e r t a i n f u t u r e r e q u i r e m e n t s

Ø

Need to address system flexibility

Ø H o w t o d e s i g n f l e x i b i l i t y i n t o t h e s y s t e m ?

Ø H o w t o v a l u e f l e x i b i l i t y ?

Ø H o w m u c h f l e x i b i l i t y i s o p t i m a l ?

Aerospace

Initiative

Example 2: UCAV

Setup

Ø

Drivers of system value

W h a t i s t h e l i f e c y c l e c o s t ? W h a t i s t h e t a c t i c a l e f f e c t i v e n e s s ? Ø Technical design W h a t m i s s i o n s c a n b e p e r f o r m e d ? Ø Program design H o w i m p o r t a n t i s t h e m i s s i o n ?

Ø Threat environment as a stochastic process

Ø

Design to maximize value

Ø C o n s i d e r p o s s i b l e f u t u r e s c e n a r i o s

Ø C o n s t r u c t f r a m e w o r k t o t r a d e o f f c o s t , p e r f o r m a n c e , & f l e x i b i l i t y

Ø E x a m p l e s

Ø Modular design, LRUs

Ø Extra payload capacity / Extra endurance

Aerospace

Initiative

Summary

Ø

Design for value (not weight, or cost, or revenue)

Ø H o w t o i m p l e m e n t ?

Ø Quantitative analysis approach

Ø Qualitative design philosophy

Ø

BWB example

Ø N o n - o b v i o u s p r o g r a m d e s i g n d y n a m i c s Ø N o a n a l y s i s o f u n c e r t a i n t y & f l e x i b i l i t y

Ø

Future work

Ø D e c i s i o n t r e e a n a l y s i s / d y n a m i c p r o g r a m m i n g Ø D e s i g n i n g f o r a n u n c e r t a i n f u t u r e

Ø

UCAV example

Ø A p p r o a c h a p p l i e s t o m i l i t a r y p r o j e c t s