Emerging Business Models in Aerospace
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Virgin Galactic - June 2005
by Pilar Alegre, Patti Spitler, and David Wells
Executive Summary
Virgin Galactic, a division of Virgin Group, is a leading company in the Suborbital Reusable Launch Vehicle (SRLV) industry. The Office of Commercial Space Transportation of the FAA licenses and regulates all space activity within the U.S.A. Virgin Galactic, along with two other companies, has taken advantage of the new regulation and has filed for and received the required permits to provide suborbital space tourism. Virgin Galactic is considered to be a first mover in this field.
Virgin Galactic is planning on having its first launch to take customers into space in the year 2008. These customers, according to the research done by the Futron Corporation for NASA fall in a very specific range of people in the U.S.: millionaires that are employed full-time (61%), are married (100%), are mostly men (94%) and with an average age around 54. There is an estimated 5.6 million people that fall within the first requirement of being able to pay for the flight. Of these, only 10% have an interest in space flight and it is estimated that 10% of these will actually take a flight into space. This gives us a potential 56,000 customers eager to fly into space and can afford it. Virgin Galactic is planning on sending 600 of these customers a year into space.
The two other companies that have filed for and received permits are Space Adventures and Incredible Adventures. The latter has been around for a while and is currently providing customers with other tours. Virgin Galactic’s primary advantage over these competitors is its plan to offer more than just the space flight. It plans on offering a full first-class vacation, along with the training and medical testing needed for the flight for a cost of $200,000. To be able to offer all this, Virgin Galactic is relying on its sister companies in the Virgin Group.
The sister companies along with Virgin Galactic’s space ship supplier, Scaled Composites present a strong set of complementary services and support. Today, the Virgin Group has a strong presence in the aviation industry (i.e., Virgin Atlantic) and Virgin Galactic is planning on using it to provide transportation for the customer to and from the resort being built. The Virgin Group also is providing the financing needed for the initial investment ($150 million) and all the media, advertising, and publications needed for the venture.
This paper presents four different cash flow projections. These projections are based on a 17.6% cost of capital and uses two different variables to determine the four cases. These variables are based on the variable costs and if a 10% down payment is required or not. In the most optimistic case, which is still fairly conservative, we show a net present value of almost $4 million from the 10 year cash.
With an 18% internal rate of return, this project is a good fit for Virgin Galactic and keeps the name of Virgin in the minds of its customers as an innovative group of companies.
Full Report:
http://www.geocities.com/innovating_competitively/aerospace/Virgin-Galactic.pdf
Crane Aerospace's Airweighs - June 2005
by Michael Bowerman, Jermaine Sailsman, Aja Simpson, and Zach Thompson
Executive Summary
Towards the end of this decade, airline companies will face intense competition as attempts to retain market positioning within the Aerospace and Defense industry are fought. In order to overcome the daunting challenges that are foreshadowed, airlines must locate and leverage avenues of cost reduction and equipment maximization. Airlines that dismiss industry warnings have a high probability of failure. This pessimistic reality has forced the emergence of companies that create innovative products for aircraft in an effort to mitigate potential risk. One product that is predicted to reduce some firm uncertainty is AirWeighs – a weight and balance system of Crane Aerospace and Electronics (Crane).
Unlike the current method of aircraft weighing and balancing, the AirWeighs system provides the flexibility of accurately measuring weight and load distribution on-demand. The benefits of this include cost reductions (fuel efficiency) and maximum equipment utilization (aircraft space). It is projected that the usage of the AirWeighs system could increase the operational envelope of an aircraft by as much as 42% and decrease gate turn-around times up to five minutes.
Currently, Crane possesses an ideal strategic window of opportunity to capture a superior market position. There are no direct competitors in the target market for the type of patented technology that is being launched. Consequently, if Crane were to release the AirWeighs system, a preemptive advantage to market would exist in its favor. Beyond consumer perceptions, Crane would have the opportunity to establish strong distribution partnerships, access to raw input components and the benefit of being the learning curve leader. This latter advantage, coupled with a patent protected product, creates both a run and block strategy that would keep Crane’s competitive position strong.
The market segments that are being considered as possible areas of profitability (commercial, private, military) have an average projected demand of 450 units, which coupled with other avenues of revenue (training, after sales maintenance, warranty), would elicit a total average annual revenue stream of $26 million. While an upper and lower demand threshold would produce variations of this figure, it is most applicable when considering several possible business drivers (substitutions, complements, suppliers, customers, macro environment).
Although Crane is currently dealing with asbestos litigation and environmental issues, its overall financial health is positive. Crane’s market risk (ß1.13) is slightly above average. Additionally, it is expected that the gross profit and operating margins will be, respectively, 16.87% and 7.24% with an ROI factor of 5.08%. Thus based on the analysis of the firm, strategies, market scope and financial forecasts herein, Crane is in a prime position to release the AirWeighs system.
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Boeing's Tanker Lease - June 2005
by Eric Dunn, Dustin
McGlothen, Michael Newton, and Douglas Vutai
Executive Summary
The leasing of commercial passenger aircraft to the airline industry has been commonplace for years. As the annual defense budgets are diminished, due to increased costs of the wars in Iraq and Afghanistan, the need for flexibility and lower up front costs have become true drivers in the military’s procurement process. The days of flowing billions of dollars into unproven programs are over. The Department of Defense (DoD) needs flexible and proven capabilities at prices that relieve some of the pressure on shrinking annual budgets.
Dominance in the air has never been more crucial than it is today. With that said, the best chance the enemy has at destroying the aircraft is during the vulnerable takeoffs and landings. In order to minimize the vulnerability of the aircraft, the Air Force has moved the frequent burden of refueling it’s fighters to the skies. The United States Air Force (USAF) has a fleet of airborne refueling tankers with an average age of 43 years. These aircraft often spend more time in the hangar receiving maintenance and mission critical updates than they spend in the air.
The fleet of refueling tankers currently consists of 544 KC-135E’s and 59 KC10’s. These aircraft, many of which were built more than 50 yrs ago, are relied on heavily. Under a direct buy procurement process, it would take as long as 19 years to replace just 20% of the tanker fleet. During this period, should one KC-135 be lost to a corrosion related cause, the entire fleet could be grounded, severely crippling the AF’s ability to execute missions around the world.
As the US deficit continues to grow and annual budgets continue to shrink, now is the time to lock in a commercial-derivative aircraft leasing arrangement with the USAF. This leasing agreement will be highly beneficial to both sides of the deal.
The USAF receives more proven capability in a shorter amount of time and for less up front
costs. Also, by leasing new aircraft with the latest technology, the AF will be able to do more with less. The 767 tanker is capable of holding more fuel, than the current tankers and is also able to use both the drogue and boom type of refueling connection in the same mission. In addition to this, the AF will also receive what all of the DoD covets the most…”flexibility”. If the need for these aircraft dissipates in the future, the AF can decline to exercise the buy option when the leasing contract is up. This could potentially save the AF from housing and maintaining expensive aircraft it doesn’t need.
The upside for Boeing is equally as great. This leasing agreement will provide Boeing a lucrative new revenue stream off an airframe they have been manufacturing for more than 30 years. The anticipated profitability of leasing these aircraft to the USAF is 250% higher than what they would expect to recover off of a direct sale. This addition to Boeing’s portfolio is just what they need to stabilize their position in the industry and begin the slow climb back to the top.
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GE-Honda Aero Engines - June 2005
by James King, Regina
Smith-Ste. Marie, Donald Sorrells, and Tonya Wright
Executive Summary
Within the next few years, the very light jet (VLJ) engine market is expected to grow to $1.5 billion annually, with an approximate 3,000 engine units being sold a year. General Electric and the Honda Motor Company plan to take advantage of this expected growth. Together they have formed GE Honda Aero Engines LLC, a joint venture with plans to introduce the new HF118 VLJ turbofan engine in 2007. GE Honda Aero fully expects to be able to capture at least 200 of the 3,000 engines being sold annually within the first year, leading to annual revenue of approximately $60 million.
Honda developed the HF118 over the last 18 years, and has partnered up with GE in order to gain from its experience in manufacturing, marketing, and passing regulatory procedures regarding jet engines. Together they will overcome the weaknesses of the newly created company by joining together and building upon their individual historical strengths. The HF118 offers superior customer value by virtue of being smaller, lighter weight, lower cost, more efficient, and requiring 40 percent less fuel than competing engines. These benefits will make the engine more attractive to the airframe manufactures GE Honda Aero and will allow the end consumers to save money on fuel, and gain more cabin space within their VLJ. GE Honda Aero also plans to sell the HF118 at a lower cost than competing engines, allowing them to be a cost leader within the market. This should ensure their capability to capture a large market share, and help them to create higher barriers of entry into the VLJ engine market.
GE Honda Aero’s primary revenue source will be from the sale of its jet engines, but it might also capture revenue from other sources such as after sales service and repair. There are moderate costs associated with this business model that allow EBIT (Earnings Before Interest and Taxes) to be projected at 11% of revenues. Risks involved with the business model are mostly dependent upon external factors, like the future inimitability of the technology and design, and the overall market emergence. Selling the HF118 directly to airframe manufacturers could endanger its inimitability if the manufacturer obtains any proprietary information or decides to practice backward vertical integration. One way to eliminate this would be to bundle the engine with the Honda Jet, a low cost VLJ body that Honda has been using to test the HF118. However, by selling to airframe manufacturers first, it will give GE Honda Aero a chance to build its reputation in the VLJ engine market, before making a leap to the jet market. To remain competitive, the company will have to remain a low cost provider with a differentiated product, which might result in the necessity of eventually bringing the Honda Jet to the market if the HF118 begins to lose its competitive advantage.
The chances of GE Honda Aero successfully competing in the VLJ engine market are very good. Offering a differentiated product satisfying unmet customer needs at a below average cost should ensure a quick growth in market share for the HF118. The company’s resources and experience coupled with the low selling price of the engine will allow it to raise the barriers of entry into the VLJ market and limit future competition. As the VLJ engine market continues to grow, it is our expectation that GE Honda Aero will become a market leader.
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Boeing’s 787 Dreamliner - June 2005
by Paul Brewer, Teresa Feeney, Chris Krolikowski, and Katharine Kuhns
Executive Summary
Following Boeing’s purchase of McDonnell-Douglas in the 1990s, Boeing briefly enjoyed a 70% market share of the large commercial airline product market. Today this advantage has dwindled to less than 50%, corresponding with the 2004 dethroning by EADS Airbus as the largest aviation manufacturer in the world. Boeing’s return as industry leader may very well lie in its successful execution and fielding of the 787 Dreamliner. Boeing sees the 787 as an opportunity to revive its sagging order backlog by delivering a product that both customers and passengers want, while at the same time generating value that shareholders demand.
The 787 targets a market that has been ignored for many years. While Boeing’s main competitor, Airbus, is pursuing the jumbo jet market, Boeing is attempting to focus on the midsize commercial airliner segment. Through its own market research, Boeing has discovered a demand for nearly 3,500 midsize aircraft worldwide over the next 20 years. Startup domestic carriers and well-established international carriers, alike, share the need for an extremely efficient aircraft that can fly extended distances.
Boeing shares the large commercial airliner market with only one other company, Airbus. The commercial airline industry as a whole has many barriers to entry. High start up costs, high overhead, high development costs, and the importance of brand name recognition are just a few of the boundaries that already exist. These barriers make it possible for Boeing to focus entirely on the midsize commercial market, ensuring a sizeable first-mover advantage.
The requirement for the 787 exists in the global airline market and Boeing can fill it. Following the events surrounding 9/11, carriers are now seeking out value, efficiency, and flexibility far more than they previously did in order to capture greater margins. The technological advances designed into the 787 Dreamliner work to achieve this goal. A greater dependence on integrated systems partnerships also lends itself to shaping Boeing’s business model into an innovative tool that is in step with global commerce that also reduces production costs and minimizes overall risk. Breakthrough technologies and increased engineering expertise become natural byproducts of this approach. The systems partners approach possesses vast potential to create value for all involved -- Boeing, its partners, and its customers.
The 787 will generate approximately $400B in revenues over a 20-year production period based upon sales of 3,500 and a price ranging between $114M and $120M per unit. By focusing on this abandoned product market, Boeing is hoping to secure substantial gains ahead of its chief competitor. Airbus’s fielding of the A380 places the two companies in stark contrast to each other. In the end, the decision on which path was correct will be determined by aircraft sales. Right now, it appears that Boeing is ahead with 235 orders, compared to Airbus’s 139.
The unveiling of the 787 is not just a typical “run of the mill” plane introduction – it is shifting the focus of the entire commercial airliner market. If successful, Boeing’s 787 will completely rejuvenate the company and change the direction of the entire commercial airliner market. The company’s innovative business model surrounding the development and release of the 787 has the potential to propel Boeing into leading the large commercial airline market once again.
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