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THE PRESENT ENVIRONMENT 58 Although U.S. manufacturers have always considered the interest of these customers, they must give them higher priority in the future, especially in launching new designs. The subject of subsidies, and especially concessionary financing arrangements that are intended to influence purchasing decisions will be discussed in detail in Chapter 3. An explanatory comment is needed regarding the effect of exchange rates on the competitive position of U.S. manufacturers. The impact of a strong dollar on exports of aircraft is much less significant than one might postulate. Although in general a weaker dollar would no doubt be advantageous, two factors limit its effect. Most important is the commitment of foreign governments, and especially Airbus Industrie, to establish a position in world markets. The panel members actively involved in export sales believe strongly that Airbus will price competitively, irrespective of exchange rates. In other words, if the dollar weakened, Airbus prices (which are denominated in dollars) would simply be adjusted to compensate for the improved position of U.S. exporters. The significant U.S. content in virtually all foreign-built aircraft also dilutes the effect of a weakened dollarâforeign manufacturers must pay more in local currency for U.S. imports. ESCALATING RISK The development and introduction of a new aircraft has always loomed as a major undertaking. In the United States, the time from basic program commitment to certification and delivery for a large transport is four to six years, and a direct continuous outflow of cash totaling $4 to $6 billion is required before significant inflow of funds occurs (Figure 2-9). Recovery of the investment often requires 10 to 15 years. It may take decades if sales are slow or if the market demands derivative models. The engine manufacturer risks an additional $1.5 to $2 billion in developing a new engine over a six-year period. It is a risky business. Justification of a new program has always required significant new technology, associated performance gains, and a defined market that can confirm the design goals and the necessary minimum volume of production. Competitive pressure may force commitment to variants of the design before delivery of the first basic model, making normal investment and risk still greater. "Betting the company" has been a frequent situation even for the largest companies. Today, a combination of circumstances tends to increase risk still further. It includes a less predictable jet transport market, partially due to airline deregulation; an airline economic climate that demands maximum technical advancement, but also makes
THE PRESENT ENVIRONMENT 59 the financial ability to pay for what has been ordered less certain; and the escalation in product liability awards that is affecting all of industry. In addition, concurrent investments required for equipment and training, and for productivity improvement, may approach the development cost itself. And as noted earlier, strong foreign competition is emerging. Figure 2-9 Typical Cash Flow Curve for Large Transport Aircraft Program Source: International Competition in the Production and Marketing of Commercial Aircraft, Boeing Company, March 1982. Based on curve from "Long Range Needs of Aviation," a report of the Aviation Advisory Commission, January 1983. The use of new technology is an essential element of the total risk taken in the development of a new commercial aircraft. An advance in the state of the art is essential to be competitive, but if added performance is not achieved, or the advance is not cost-effective for the customer, or the product is delayed because of the new technical concept, additional costs are incurred and a share of the market may be lost. The risk is compounded by the need to make an early assumption about market share in establishing initial pricing. Any loss of aircraft performance or late aircraft delivery could reduce market share, precluding financial success. An example of such a risk was the desire to achieve the weight saving and efficiency afforded by composite materials on the fan of the Rolls Royce RB-211 for the Lockheed L-1011. In the early
THE PRESENT ENVIRONMENT 60 1970s the failure of this new fan and the necessary use of a backup titanium fan, with weight and balance changes to the aircraft, affected costs and schedules adversely. The change so perturbed the engine program that the Rolls Royce Company was subjected to financial reorganization. The impact on Lockheed included a forced hiatus in sales activity and near bankruptcy. Afterwards, the L-1011 program did not achieve sufficient sales and had to be terminated early because profitable future production levels could not be predicted. Technical risk was obviously not the sole reason for Lockheed's L-1011 financial straits and program termination. The L-1011 was in head-to-head competition with an almost identical transport, the McDonnell Douglas DC-10. The ensuing competition forced unrealistic pricing levels on both airplanes. In addition, the worldwide recession so reduced the projected total market, and therefore both production rates, that pricing became even more unrealistic. Nevertheless, the failure to achieve a planned technical advance was a contributing factor in what eventually became a major financial loss for Lockheed. The experience of the Canadair Challenger business jet illustrates the cost of delays associated with increases in weight and problems of engine performance that arose during development. Cancellation of orders and lost sales have resulted, requiring large additional capital investments that may never be recovered from sales.11 Conversely, failure to incorporate new technology can result in a vehicle that is not competitive and as a consequence cannot be successful. This situation is further exacerbated by the long time periods involved in design, development, and production. Deregulation in the United States and the trend toward greater competition in foreign markets is causing restructuring of many airlines and worldwide experimentation with service, schedules, and routes and fare mix. The result is greater uncertainty regarding new product requirements, as well as decreasing prospects for large-volume sales of any one aircraft type. In order to satisfy certification agencies and reduce their own potential for liability, airlines and aircraft manufacturers are incurring major additional front- end costs to "prove" a technology before it is introduced. In many respects the aviation industry is encountering, in magnified form, growing public requirements for utmost safety in all products. Members of the Airbus Industrie consortium have stated12 that they place great emphasis on the risk associated with airplane development and manufacture. This consideration played an important role in forming the consortium and in its decision to incorporate only proven technology in the A300.
