Monthly Archives: February 2015

Boeing 787 recurring costs vs. recurring income

Few days ago I was discussing with some commenters on the blog of aviation analyst Scott Hamilton (Leeham News and Comment) about the recurring costs Boeing may be experiencing in the 787 program at the moment.

I used in the discussion the analysis I had made of the learning curve Boeing has experienced in the last 2 years according to cost reductions reported by its CFO, Greg Smith. See a post I wrote about it here. The result I reached is that lately they achieved a 87%. With information disclosed last year, the figure I arrived for 2013 was ~84%, see the post here. However, in the calculation to obtain the learning curve experience the actual costs are not needed, it is sufficient to know cost reductions achieved (reported) between given units.

However, when in 2011 I wrote a series of posts (1) about Boeing 787 break even, I did try to estimate what the cost of the first production units were using published information at the time. At that time it was disclosed that Boeing had about 18bn\$ of work in process (WIP) and a number of aircraft in different stages of production. Reported average costs ranged from 250m\$ to 400m\$. I made some simple assumptions and arrived at an average cost of 310m\$ for the first ~60 units.

The next step is to accommodate those average costs into a learning curve profile. The steeper the curve (75%) the more expensive the first unit would have been. Since in 2013 the calculated curve was a 84%, I obtain that the first must have been around 650m\$ (2). From then on, I apply the mentioned 84% through end 2013. Then I switch to a 87% curve (slower learning) following the reported figures from Greg Smith.

This discussion so far gives an idea of how to estimate the recurring costs. At the end of 2014 this figure is estimated around 180m\$.

In order to know by when Boeing will turn the production of 787s into something profitable, we first need to know by when the recurring costs will be lower than the recurring income. The latter is estimated from the information about prices (published by Boeing here) and discounts applied (estimated in other blog posts, see the last update for 2014).

Boeing list price for the 787-8 in 2014 was 218.3M\$.

These list prices are, however, increased almost on a yearly basis by Boeing. Sometimes very steeply (+11.4% in 2010, from 2008) and other times more moderately (+2.4% in 2013 vs. 2012). Going into the future I assumed this increase to be constant and about equal to 2014′ increase, 3%.

On the other hand, Boeing applies some discounts to its customers. These are never disclosed. Some are reported by some sources. What I do is to try to estimate an average discount from reported information. See a detailed calculation here. The latest figure that I arrived at was about 47%. Going into the future I assumed this discount to remain constant. You can see here the recent evolution of discounted 787-8 prices.

With all these ingredients, the only thing left is to plot together the recurring costs and recurring income:

787 recurring cost vs. recurring income evolution.

As you can see recurring costs may be lower than recurring income at the end of 2019.

This will truly depend on the learning curve achieved, the number of units produced (3) and the pricing power Boeing manages to have. If the learning is steeper, the date will be sooner. If the ramp up is higher, the date will be sooner. If the discounts are lower or the list prices increased more, the date will be sooner. In any other case, either 2019 or beyond.

(1) See the complete series here: “Will Boeing 787 ever break-even?“, “More on Boeing 787 break even” and “787 Break Even for Dummies“.

(2) We will never know that figure. I wonder whether this is even known or registered (if not deleted and forgotten) within Boeing.

(3) For the numbers of units built I based the model in reported information that the ramp up to 12 aircraft per month is expected for 2016. I assumed that in 2015 they are at somewhere between 10 and 12 aircraft per month.

Filed under Aerospace & Defence

Boeing list prices increases vs. discounts increases (update for 2014)

In a previous post I updated the estimate of what is the average discount Boeing applies when selling its commercial airplanes using 2014 data of list prices, deliveries and reported revenues. The figure I came up with was a 47% discount. I included the following graphic showing the discount evolution:

Boeing Average Discount Evolution, through 2014.

Last year, seeing the increasing trend of average discount together with knowing the fact that Boeing regularly increases list prices triggered the following question: Have Boeing airplane discounted prices increased, decreased or stayed constant in the recent years? I set out to answer this question using the estimated average discount of each year (1) from the graphic above.

The Boeing list prices (LP) (2) can be found here. I have been recording those prices for years and thus have a table with the evolution of list prices for each model year by year. The following step is to apply the average discount estimated for each year to then-year list prices, to get the estimated discounted prices (EDP) (2) per model. Thus, a table can be built for the last 6 years.

You can find below the result for the best-selling aircraft during previous years: 737-800, 737-900ER, 777-300ER and 787-8. Together these 4 models amounted to over 640 deliveries in 2014 or 89% of the total 723 airplanes Boeing delivered in 2014.

Boeing List and discount Prices evolution table, 2008-2014.

In the table above I included in black figures what have been Boeing list prices of these models in the past years (as reported in their website) while I marked in blue the figures which are estimated, using as a departure point the calculated averages discounts per year (also included in blue in the table). I included as well the list prices year-on-year change as a % of the previous year list prices, per model.

The average list price increase included at the bottom line is computed with the information of all Boeing models (19 in 2008 and 20 in 2014, though different ones (e.g. last year addition of 777-8X and 777-9X), a total of 26 different models along this period), not only the 4 included in this table.

You may see in the table above that after not increasing prices in 2009, Boeing has steadily increased them in 2010 (6.3%), 2011 (4.7%), 2012 (6.7%), 2013 (1.9%) and 2014 (3.1%). However, if you take a look at the blue figures in the same table you will notice that prices of 2014 are between 2010 and 2011 price levels for all 4 models! That is, the widely announced yearly list prices increase has been yearly offset by a discreet (not-announced) increase in the discounts applied to the sales of airplanes. Thus, the pricing power of Boeing has remained barely constant during the last 5 years. You may see it better in the graphic below:

Boeing List & discount Prices evolution graphic vs. inflation in USA (through 2014).

The graphic shows the price evolution for each of the 4 airplane models selected, taking as a reference their list and estimated discounted prices in 2008 (indicated as 100%) and also the evolution of inflation in the USA (3) in purple, to reflect the evolution of real prices (i.e. accounting for inflation). List prices are shown with straight lines, versus dashed lines used for estimated prices. Each pair of prices for each aircraft is presented in the same color for easier identification. Some comments to the graphic:

• Through continuous increases, 2014 list prices were between 21% (737 and 777) and 31% (for the 787) higher than in 2008.
• However, due to increasing discounts from 38% in 2008 to 47% in 2014, the increase in list prices is almost entirely offset (especially for 737 and 777, just 4% above 2008 levels).
• 2014 discounted prices are below 2011 discounted prices for all models except 787.
• If compare the evolution of prices vs. the US inflation (general prices in 2014 being 10% higher than in 2008), we see that:
• Boeing actually lost pricing power in both the 737 and 777, which are cheaper in real (inflation-adjusted) discounted terms in 2014 than they were in 2008 (about 6% cheaper).
• Only the 787 has been able to keep up the pace of discount escalation and inflation.

(1) There is no way to know the real price and discount that Boeing applies in each sale, as it will depend from customer to customer (American Airlines -AMR- or Fedex) and from model to model (737-800 or 787-8). There where competition is tougher, discounts will be higher. However, the estimates I have made are an average of all Boeing aircraft sold in a given year.

(2) Both list prices (LP) and estimated discounted prices (EDP) are expressed in then-year dollars.

(3) US inflation series since 2008: -0.4% (2009), 1.6% (2010), 3.2% (2011), 2.1% (2012), 1.5% (2013) and 1.6% (2014).

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Boeing discounts detailed calculation, 2014 vs. 2013

Last years I have published in the blog  some posts (1) dedicated to show what was my estimate of the average discount Boeing applies to its commercial airplanes. I included in those posts the rationale used for the calculation. Find here the post related to the calculation of the discount based on 2014 data of Boeing Commercial Airplanes revenues, deliveries and list prices.

In 2014, I included in another post a simplified table (2) with the calculation comparing 2013 simplified result versus 2012. In this post I wanted to update that table with 2014 figures in comparison to those of 2013:

Boeing discount detailed simplified calculation: 2014 vs. 2013.

In the table above, you may find for both 2014 and 2013 Boeing reported deliveries per model and Boeing published list prices per model (3) and Boeing Commercial Airplanes reported revenues.

What is then estimated? Boeing Commercial Airplanes services revenues (these are deduced from financial reports reported information), Boeing Commercial Airplanes platforms revenues (derived from the previous figure) and the average discount; this is calculated from the difference between estimated BCA platforms revenues and what should have been that figure had the airplanes been sold at list prices.

Results: average discounts of 46.3% in 2014 and above 46.2% in 2013, though nearly the same.

(1) Find here what is becoming a “body of knowledge” on Boeing discounts: estimates calculated for 20142013201220112010 and 2009; a review of the French portal Challenges.fr of aircraft discounts prior to Le Bourget airshow of 2013; aBombardier’s CEO statement on what is known in the market as the Boeing discount; Boeing Commercial Airplanes president Ray Conner speaking about the more aggressive pricing they are being forced to offer.

(2) I refer to this table as “simplified” as it excludes from the calculation the potential influence on yearly revenues (note, not cash flow) of down payments linked to orders received in then-year versus orders received in previous years for aircraft delivered in then-year.

(3) Two assumptions are needed: 737-800A transfer prices from BCA to Boeing Defense Space & Security for the P-8 (for simplicity assumed to be the same as the 737-800 price) and for the 737-based business jets (for simplicity assumed to be the same as the 737-900ER).

Filed under Aerospace & Defence

Buenos días, Sevilla!

At the time this post is being published, two friends (Juan and Jose), my brother and I are about to start the Marathon of Sevilla.

To prepare this marathon I followed the same 16-week long training plan I used for the previous two marathons (Rotterdam and New York). However, the 1st day of the plan was on November 3rd, just the day after we completed New York marathon. Thus, I took a week of full rest and another 3 of almost no running, and I started following the plan at full throttle only from week 5, beginning of December.

From December till February 15th (when writing this post) I have completed over 616km (650km including those few in November) in 11 weeks, or about 56km per week. I have completed about 20 sessions of series training, I ran 9 long runs over 17km (6 of them over 27km, 2 over 33km), I did not take part in any race but during training sessions I managed to clock my 5th best time over 10km and my 2nd best time over 21.1km (half marathon). I am close to the fastest shape that I have been in the last year, and have no doubt followed the best training season so far.

Weekly mileage completed along the training plan for Sevilla.

In between, I switched training shoes, so I will run with shoes with less than 150km though more or less used to the shape of my feet.

Back to the race. We will cover the 42.195km by running all around Sevilla. This marathon will be somewhat special to us since it will be the first one we will be running together all of us in Spain. It will also be special as both my brother and I lived for a year in Sevilla while studying and working (not simultaneously though).

It will start in Isla de la Cartuja (where we studied at EOI) to go South towards Triana and Los Remedios. At km. 4 will turn left to take Av Republica Argentina just 4 blocks where our cousin lives. We’ll cross the river and turn left to go along the river for about 8km, passing Torre del Oro, La Maestranza (bullfighting arena), Av Torneo all the way to the Puente del Alamillo (we’ll be passing the cinemas we used to go, places where friends used to live, etc). At km. 14 we’ll pass by La Macarena, where Jaime used to live. Shortly after we’ll take Luis Montoto heading towards the hotel we normally stay when on business, where more friends used to live, etc. Then we’ll take Kansas City avenue to the North for another 2km. Shortly afterwards we’ll cross the half marathon mark.

The next 7 km will cover parts of the city I don’t know that well, therefore it will be perfect time to focus on the pace, drinking and eating. At km. 28 we’ll take Luis de Morales street, where I use to train when on business in Seville. At km. 32 we’ll pass by the football stadium of Betis and then take the Paseo de la Palmera for 2km until Parque de Maria Luisa and Plaza de España, two of the most beautiful spots of the city (which I also go by when training in Sevilla).

From then on, the last 6km I guess that are going to be overwhelming: the race will go through the very centre of the city (the University, the Cathedral (La Giralda), the city hall, Av Constitucion, Tetuan, Trajano, Alameda de Hercules), by then it will be about noon and more people will be on the streets cheering the runners. Hopefully, by then, we’ll still be in good shape, fighting for the objective and enjoying the experience.

This tour through the centre will end at the Puente de la Barqueta to cross the river and cover the last 2km in Cartuja before reaching the Olympic stadium where world athletics championship of 1999 took place.

And what will be my objective? Since I mentioned that I arrive at this race with the best training so far (as does my brother), we’ll depart trying to stay with the pacer of 3h30′ all along the way and thus clocking a time under that mark, which for me (and possible for Jaime) would be a personal best. The race is quite flat and if the day does not turn out too hot, the conditions should help us to achieve that goal.

To support us along the race we’ll count with the direct families (Inma, Luca, Andrea), extended family, friends that come from Madrid explicitly to cheer us (Elena, Maicol) and possibly some others we may see along the race.

To end this pre-race post I leave you with the traditional picture by Jaime:

Filed under Sports

Boeing commercial aircraft discounts (update for 2014)

Few days ago, Boeing released 2014 results [PDF, 838KB]. The company reported revenues of over 90.7bn\$ (59.99bn\$ for the Commercial Airplanes unit), 723 commercial deliveries and 1,432 net orders for its commercial aircraft. All these were widely reported by the media and mean a great year 2014 for Boeing (with increases in these metrics from 6 to 12%).

Last years, I wrote in some posts (1) what was my estimate of Boeing discounts: the relation between what is announced by the press, what appears in its list prices and sometimes as backlogs and what it is indeed computed into the profit and loss account. In this post I wanted to update, if necessary, the figure I calculated for the average discount of Boeing.

Most of the necessary information can be found in its website. Boeing list prices can be found here.

The number of gross and net orders (after cancellations) year by year can be found here.

Last year deliveries can be found in the report of financial results (or here). From there we can also deduce the figure of Boeing Commercial’s sales of services. That is not directly reported but can be deduced (all Boeing services-related sales are reported as well as Boeing Capital Corporation division and Boeing Defense’s “Global Services & Support” unit)

As in the previous years’ post:

• I needed to make one assumption: new orders come with a 3% down payment in the year of the booking, while the remaining cost I assumed that was paid on the year of delivery (for simplicity I didn’t consider more intermediate revenue recognition milestones linked to payments, the 3% figure was taken from the AIAA paper “A Hierarchical Aircraft Life Cycle Cost Analysis Model” by William J. Marx et al.). (2)

Having put all the figures together, the calculation is immediate. Boeing Commercial Aircraft revenues in 2014 (59.99bn\$) are the sum of:

• the discounted prices times the delivered aircraft in the year (including possible penalties from delays),
• less the down payment of the current year delivered aircraft, as the down payment was included in previous years results,
• plus the down payment of current year net orders (this year’s calculation includes 737 MAX and 777X orders),
• plus services revenues (about 0.7bn\$ from the commercial aircraft unit – calculated, not reported).

The discount figure that minimized errors last year was 47%. Using this figure, the error obtained this year in relation to Boeing Commercial Aircraft reported revenues is -0.2%. The best estimate for last years average discounts were: 47% for 2013, 45% for 2012, 41% for 2011, 39% for 2010 and 38% for 2009.

The updated figure (which minimize errors for 2014 down to -0.2%) for the discount for Boeing commercial aircraft is 47% (3).

Boeing Average Discount Evolution, through 2014.

The discounts seem to be stabilized around 45-47%.

This discount figures and their evolution reflect that Boeing’s list prices and their continuous increases cannot be enforced in the contracts nor in escalation formulas.

Final note: I received a comment suggesting to review whether the discounts are in effect on Boeing side or in the engine manufacturers side. Unless we had the information of actual contracts, there is no way to calculate that from published information. Nevertheless, whether Boeing or engine manufacturers, the fact is that there is discrepancy of up to 47% between what Boeing announces as their list prices for commercial aircraft and backlog figures (in volume) and what it actually receives as income (revenue).

(1) Find here what is becoming a “body of knowledge” on Boeing discounts: estimates calculated for 20132012, 2011, 2010 and 2009; a review of the French portal Challenges.fr of aircraft discounts prior to Le Bourget airshow of 2013; a Bombardier’s CEO statement on what is known in the market as the Boeing discount; Boeing Commercial Airplanes president Ray Conner speaking about the more aggressive pricing they are being forced to offer.

(2) Three years ago, I received a comment from the analyst Scott Hamilton on the level of downpayments. He mentioned they could reach up to 30%. I tried this time to compute the calculation using that input, though the figures of discounts to be applied each year to minimize errors would have to be even higher, close to 60% (!), thus I stayed with the 3% used in the above-mentioned published paper to stay on the conservative side. On the contrary, if we assume that downpayments have no influence in the revenue recognition (as another comment indicated last year), but only in the cash flow, the discount figure would slightly decrease (about 1%). The issue is not so much the size of the downpayments, whereas how much of those, if any, are recognised as revenues.

(3) I find this trend of continuous increases in Boeing discounts in line with bothChallenges.fr report and Ray Conner’s mentions of aggressive pricing last year, both referred to in note (1).

Filed under Aerospace & Defence

Boeing 787 orders, cancellations, deliveries & backlog through 2014

The year 2014 seems to have been another complex for the Boeing 787 program.

There were no major operational hick-ups such as the 2013 grounding of the fleet due to the lithium-ion batteries heat runaway issues, but commercially just 65 new orders were received (main ones from Air Europa and ANA) with up to 24 cancellations. Production ramped up to 112 deliveries (almost double than 2013’s 63). This increase is positive in relation to revenue recognition and cash inflow, however the cost per unit enjoyed a lower improvement than expected. As a result of previous figures, the so-called book-to-bill on the program was below 0.6, making the backlog to shrink slightly (leaving it practically at the same level since 2007).

An image is worth a thousands words:

787 orders, cancellations, deliveries and backlog through 2014.

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My charities for 2015 are…

“If you’re in the luckiest one per cent of humanity, you owe it to the rest of humanity to think about the other 99 per cent.” Warren Buffett

If there is a blog post that I am looking forward to write each year is this one. Few things can give you more pleasure than helping others. And in doing so I try to be as public and noisy as I can,  hoping that I may serve the causes I contribute to also from the awareness point of view.

I know that between 100 and 200 of you will read this blog post. I bet with any of you that at least 50% of you will be compelled to take a look at some of these organisations below, 10% of you will consider making a donation. Do you dare thinking that 1% of you won’t actually make such donation?

Let’s go and see the different causes I decided to support in this 2015 (1):

Kiva, Médecins Sans Frontières, Oxfam, Slavery International, Wikipedia, Fundacion Hombres Nuevos, Gapminder, Fundacion Khanimambo, American Association for Cancer Research Foundation and the new addition of 2015 Avocats Sans Frontières… those are the causes I decided to support this year. If not one of those, I am sure that you will be able to find one which resonates with you. Do yourself a favour and contribute to it. It can be just 25\$, the cost of diner at a restaurant. You’ll feel much better.

“No one has ever become poor by giving.” Anne Frank, diary of Anne Frank

(1) You may check out similar posts I wrote about contributions to NGOs in 20142013 and 2012.

Theoretical exam for PPL(A) under Part FCL in France

Certificat d’aptitude.

Today I received the letter informing me that I had passed the épreuve spécifique of the exam for obtaining the PPL(A) under Part FCL.

It was the second attempt I took for this part. I got 68 multiple-choice questions right out of 72; the minimum required to pass being 54 (75%), whereas in the previous attempt I had gotten right 51, short of 3. Sure, this time I studied a bit more and practiced more with tests. However, I wanted to share in this post, as a tip, what I understand it was the key difference: Chez Gigli.

For the first exams I took, back in November I based my study in the manual edited by Cepadues and a book including 700 exam questions with the explanations of the correct responses. This worked relatively well. However, the version of the book I had dated from before Part FCL was introduced (replacing JAR FCL) and thus the topics are organized in 5 exams (vs. the current two).

PPL exam questions book by Cepadues.

For the second attempt I bought a 1-month access to Chez Gigli as my instructor had recommended years ago and my friend Rapha had mentioned, too. The cost of the book from Cepadues is ~25€, whereas the 1-month access to Chez Gigli costs 20€, for longer time more, though there are discounts (life-long access being 90€).

However, the way Chez Gigli is organized is terrific. You can record your previous results, focus on and review the questions you got wrong, practice only among questions you never saw before, focus on actual exam questions, last year questions, etc. You can see the progress of your scores per topic. Your tests are timed. Explanations of the correct answers are very good and there is a forum per each question so students can ask doubts or further clarifications. It is way more powerful than a book. And you notice it as long as you get to see all the questions, focus on your mistakes and correct them. You get in a matter of days from scores of 70% to 95-100%.

Scores’ dashboard in Chez Gigli website.

While I was doing the last exam I felt way more comfortable. In most of the questions I didn’t even need to think. Just in a few of them I had some doubts between a couple of answers. I completed the exam way faster than needed, more relaxed and the result, 94.4%, was a success, as the practice had gone. Thus, if you are in France preparing to get your PPL, do not give it a thought: sign for a subscription to the website.

Filed under Aerospace & Defence

Learning Curves: Boeing 787 case (from Dec 2012 to Dec 2014)

Last year, I wrote in a couple of posts an introduction to the concept of the learning curve and provided a the case of the Boeing 787 in 2013 (based on figures disclosed by Boeing CFO, Greg Smith). In the first of those posts, I discussed that:

Boeing does not disclose outright what is the actual learning curve it is achieving in its program. Nevertheless, in its investor relations conferences it provides information here and there of cost savings achieved, etc. This can be interpreted as derived from learning curve effects, and would permit to build a model, even if based on scarce information.

This year again, let me quote again one of those excerpts from Boeing executives in order to update the exercise:

On the 787-8, we’ve seen a decline in unit cost of approximately 30% over the last 175 deliveries and on 787-9, we’ve seen declines of 20% since the first delivery. Based on this progress, our production schedule and planned productivity investments, we continue to expect the 787 to be cash positive during 2015 and we still anticipate deferred production to decline shortly after we’ve achieved the 12 per month production rate in 2016. No change to these fundamental milestones.” Greg Smith, Boeing EVP – CFO at Q4 2014 Earnings Conference

As I mentioned last year, to the avid reader, and knowledgeable and savvy analyst, this paragraph is enough to deduce an actual learning curve achieved by the 787 for each aircraft model, provided that information reported by Boeing CFO, Greg Smith, was accurate.

Through the end of 2014, Boeing had delivered 212 787-8 and 10 787-9. The 787-9 were all delivered in 2014. The 212 787-8 were delivered as follows:

• 2011: 3 aircraft.
• 2012: 44 a/c.
• 2013: 63 a/c.
• 2014: 102 a/c.

Greg Smith is mentioning a cost reduction of 30% over the last 175 deliveries. As he was talking at the 2014 earnings call, we can safely assume that the figures were put up for him using deliveries and costs only through the end 2014 (and not counting info from January 2015 deliveries). That means that the cost improvements are measured theoretically from the aircraft 37th through the 212th (175). You can extract a report from Boeing website of the complete 787 deliveries here. I did it. Analysing it you see that between the beginning of December 2012 and the end of December 2014 176 787-8 were delivered (1).

Thus, the exercise to find out what learning curve Boeing achieved during that time span is as simple as to see what learning curve yields an “approximately 30% unit cost improvement” from the unit 36th (2) to the unit 212th. The beauty is that we do not even need to know the initial unit cost to perform the calculation, as the relative improvements in terms of percentages are independent of the starting point. All the information has indeed been provided by Boeing.

As I did in the blog post of the last year, in this first graph below I just plotted some generic learning curves, from 95% to 75%. This form of representation provides a good view of how learning is intense at the beginning of the production process and it stabilizes later on. It also shows well how learning is more intense and cost reductions are bigger for a 75% curve than for a 95% curve.

Generic learning curves.

However, in the previous curves it is difficult to distinguish the 36th and the 212th units which are needed for the calculation. Thus, I plotted the same curves in a log scale for the numbers of units produced in the graphic below:

Boeing 787 learning curve over 176 units through Dec 2014 calculation, delta unit cost between 36th & 212th units.

In this second graphic I added the information of what relative cost reduction is achieved between the 36th and the 212th units for each of the curves (3).

To make sure that readers are not lost, let’s take the 87% curve (in red). Following that curve, the unit cost of the 36th unit produced is a 48.7% of the 1st unit cost, whereas the unit cost for the 212th unit produced is a 34.1% of the 1st unit cost. The difference is then 48.7% – 34.1% = 14.6%, which represents a 30.0% cost reduction from the 36th unit cost. If you follow the same calculation for each of the curves, you will obtain the following unit cost improvements between 36th and 212th units:

• 95% curve: -12.3% unit cost improvement
• 90% curve: -23.6% unit cost improvement
• 87% curve: -30.0% unit cost improvement
• 85% curve: -34.0% unit cost improvement
• 80% curve: -43.5% unit cost improvement
• 75% curve: -52.1% unit cost improvement

Thus, from the information provided by Boeing of units delivered and unit cost improvement (“approximately 30%″, Greg Smith) we can deduce that from December 2012 through December 2014 the average learning curve that the 787 program has achieved is about 87%. Thus, in line with aerospace average indicated by NASA (85%), or in line with the reported 84% achieved in the 777. Though a bit lower than that calculated for 2013 (see here last year’s post). We can interpret that mismatch as either as a minimum error inherent of these estimates (85% vs. 87%) or that indeed the rate of improvement has somehow slowed down in 2014 in comparison to 2013.

Had Boeing been able to achieve effectively a 85% curve in the last 175 deliveries, bear no doubt that the message from Greg Smith would have been along the lines of an approximate 35% cost reduction (being the mathematical result 34%), instead of the reported 30%.

All these numbers refer to the 787-8. Now, remember that Boeing CFO also indicated that “on 787-9, we’ve seen declines of 20% since the first delivery”.

Here, the calculation that needs to be done is the same. 787-9 deliveries started in 2014. If we assume that Greg’s comment referred only to 2014 deliveries (not 2015 ones), then the calculation must be made on 10 787-9 delivered between June and December 2014.  Here the learning curve obtained is a 93.5% ~87-88% (5) (6).

(1) I guess Greg Smith rounded to 175, but his “decline in unit cost of approximately 30% over the last 175 deliveries” refers to actually some fixed internal monthly reports and is based on 176 deliveries (not 175). (4)

(2) Taking into account the note (1), I will use 176 aircraft and deliveries from the 36th aircraft through the 212th.

(3) Bear in mind what a relative cost reduction is in contrast to the fact of relative costs represented in the vertical axis as percentages of the initial cost (100%).

(4) The taking of 175 instead of 176 aircraft practically does not change the result. For the same 87% curve the calculated cost reduction in one case is 30% and in the other 29.6%.

(5) This is in line with the slow down of the learning curve for the 787-8 comparing 2013 result with the result along the time span December 2012-December 2014.

(6) I initially calculated 93.5% as a result of a 20% cost reduction between the 1st and 10th units produced. However, as Matt B pointed, the first 3 787-9 have not been delivered (though they are units produced from which there was a learning effect). When you calculate what is the result for a 20% cost reduction between units 4th and 13th (the first 10 delivered), you get a curve between 87-88%, more or less the same one than for 787-8. Thus, it seems than at the beginning of the 787-8 production they went along a 85% curve that has slowed to a 87% for both models.

Filed under Aerospace & Defence

Letters from Nikita Krushchev to John F. Kennedy during the Cuban Missile Crisis

Reading about the recent Munich Security Conference 2015, mainly focussed on the tensions over Ukraine and the clashes between Russia and the West, and within Western countries, namely Germany and the United States, I was reminded of the Cuban Missile Crisis of 1962, under the presidency of Kennedy.

During our last visit to the USA, we visited Boston and made a very enlightening visit to the Presidential Library of John F. Kennedy. Among other things, I was very much attracted to the section on the Missile Crisis, and I took sometime reading the letters exchanged between Soviet Union’s premier Nikita Krushchev and US president Kennedy. They can be found in the “Office of the Historian” of the US Department of State.

Seeing the image that Vladimir Putin enjoys today in the West, I can imagine the image that Krushchev must have had in the Western world at that time. I wanted to share in this post two of the letters that Krushchev sent to Kennedy during those tense days of October 1962. I found it interesting how the communication channel remained open in those moments. For each of the letters, I will share a picture of the letter (taken at the presidential library) and the transcript of the letter (from the USA Department of State site mentioned above) where the emphasis is mine.

Letter from Krushchev to Kennedy, October 24, 1962.

DEAR MR. PRESIDENT: I have received your letter of October 23, have studied it, and am answering you.

Just imagine, Mr. President, that we had presented you with the conditions of an ultimatum which you have presented us by your action. How would you have reacted to this? I think that you would have been indignant at such a step on our part. And this would have been understandable to us.

In presenting us with these conditions, you, Mr. President, have flung a challenge at us. Who asked you to do this? By what right did you do this? Our ties with the Republic of Cuba, like our relations with other states, regardless of what kind of states they may be, concern only the two countries between which these relations exist. And if we now speak of the quarantine to which your letter refers, a quarantine may be established, according to accepted international practice, only by agreement of states between themselves, and not by some third party. Quarantines exist, for example, on agricultural goods and products. But in this case the question is in no way one of quarantine, but rather of far more serious things, and you yourself understand this.

You, Mr. President, are not declaring a quarantine, but rather are setting forth an ultimatum and threatening that if we do not give in to your demands you will use force. Consider what you are saying! And you want to persuade me to agree to this! What would it mean to agree to these demands? It would mean guiding oneself in one’s relations with other countries not by reason, but by submitting to arbitrariness. You are no longer appealing to reason, but wish to intimidate us.

No, Mr. President, I cannot agree to this, and I think that in your own heart you recognize that I am correct. I am convinced that in my place you would act the same way.

Reference to the decision of the Organization of American States cannot in any way substantiate the demands now advanced by the United States. This Organization has absolutely no authority or basis for adopting decisions such as the one you speak of in your letter. Therefore, we do not recognize these decisions. International law exists and universally recognized norms of conduct exist. We firmly adhere to the principles of international law and observe strictly the norms which regulate navigation on the high seas, in international waters. We observe these norms and enjoy the rights recognized by all states.

You wish to compel us to renounce the rights that every sovereign state enjoys, you are trying to legislate in questions of international law, and you are violating the universally accepted norms of that law. And you are doing all this not only out of hatred for the Cuban people and its government, but also because of considerations of the election campaign in the United States. What morality, what law can justify such an approach by the American Government to international affairs? No such morality or law can be found, because the actions of the United States with regard to Cuba constitute outright banditry or, if you like, the folly of degenerate imperialism. Unfortunately, such folly can bring grave suffering to the peoples of all countries, and to no lesser degree to the American people themselves, since the United States has completely lost its former isolation with the advent of modern types of armament.

Therefore, Mr. President, if you coolly weigh the situation which has developed, not giving way to passions, you will understand that the Soviet Union cannot fail to reject the arbitrary demands of the United States. When you confront us with such conditions, try to put yourself in our place and consider how the United States would react to these conditions. I do not doubt that if someone attempted to dictate similar conditions to you—the United States—you would reject such an attempt. And we also say—no.

The Soviet Government considers that the violation of the freedom to use international waters and international air space is an act of aggression which pushes mankind toward the abyss of a world nuclear-missile war. Therefore, the Soviet Government cannot instruct the captains of Soviet vessels bound for Cuba to observe the orders of American naval forces blockading that Island. Our instructions to Soviet mariners are to observe strictly the universally accepted norms of navigation in international waters and not to retreat one step from them. And if the American side violates these rules, it must realize what responsibility will rest upon it in that case. Naturally we will not simply be bystanders with regard to piratical acts by American ships on the high seas. We will then be forced on our part to take the measures we consider necessary and adequate in order to protect our rights. We have everything necessary to do so.

Respectfully,

N. Khrushchev

Letter from Krushchev to Kennedy, October 26, 1962.

Dear Mr. President:

I have received your letter of October 25. From your letter, I got the feeling that you have some understanding of the situation which has developed and (some) sense of responsibility. I value this.

Now we have already publicly exchanged our evaluations of the events around Cuba and each of us has set forth his explanation and his understanding of these events. Consequently, I would judge that, apparently, a continuation of an exchange of opinions at such a distance, even in the form of secret letters, will hardly add anything to that which one side has already said to the other.

I think you will understand me correctly if you are really concerned about the welfare of the world. Everyone needs peace: both capitalists, if they have not lost their reason, and, still more, Communists, people who know how to value not only their own lives but, more than anything, the lives of the peoples. We, Communists, are against all wars between states in general and have been defending the cause of peace since we came into the world. We have always regarded war as a calamity, and not as a game nor as a means for the attainment of definite goals, nor, all the more, as a goal in itself. Our goals are clear, and the means to attain them is labor. War is our enemy and a calamity for all the peoples.

It is thus that we, Soviet people, and, together with US, other peoples as well, understand the questions of war and peace. I can, in any case, firmly say this for the peoples of the Socialist countries, as well as for all progressive people who want peace, happiness, and friendship among peoples.

I see, Mr. President, that you too are not devoid of a sense of anxiety for the fate of the world understanding, and of what war entails. What would a war give you? You are threatening us with war. But you well know that the very least which you would receive in reply would be that you would experience the same consequences as those which you sent us. And that must be clear to us, people invested with authority, trust, and responsibility. We must not succumb to intoxication and petty passions, regardless of whether elections are impending in this or that country, or not impending. These are all transient things, but if indeed war should break out, then it would not be in our power to stop it, for such is the logic of war. I have participated in two wars and know that war ends when it has rolled through cities and villages, everywhere sowing death and destruction.

In the name of the Soviet Government and the Soviet people, I assure you that your conclusions regarding offensive weapons on Cuba are groundless. It is apparent from what you have written me that our conceptions are different on this score, or rather, we have different estimates of these or those military means. Indeed, in reality, the same forms of weapons can have different interpretations.

You are a military man and, I hope, will understand me. Let us take for example a simple cannon. What sort of means is this: offensive or defensive? A cannon is a defensive means if it is set up to defend boundaries or a fortified area. But if one concentrates artillery, and adds to it the necessary number of troops, then the same cannons do become an offensive means, because they prepare and clear the way for infantry to attack. The same happens with missile-nuclear weapons as well, with any type of this weapon.

You are mistaken if you think that any of our means on Cuba are offensive. However, let us not quarrel now. It is apparent that I will not be able to convince you of this. But I say to you: You, Mr. President, are a military man and should understand: Can one attack, if one has on one’s territory even an enormous quantity of missiles of various effective radiuses and various power, but using only these means. These missiles are a means of extermination and destruction. But one cannot attack with these missiles, even nuclear missiles of a power of 100 megatons because only people, troops, can attack. Without people, any means however powerful cannot be offensive.

How can one, consequently, give such a completely incorrect interpretation as you are now giving, to the effect that some sort of means on Cuba are offensive. All the means located there, and I assure you of this, have a defensive character, are on Cuba solely for the purposes of defense, and we have sent them to Cuba at the request of the Cuban Government. You, however, say that these are offensive means.

But, Mr. President, do you really seriously think that Cuba can attack the United States and that even we together with Cuba can attack you from the territory of Cuba? Can you really think that way? How is it possible? We do not understand this. Has something so new appeared in military strategy that one can think that it is possible to attack thus. I say precisely attack, and not destroy, since barbarians, people who have lost their sense, destroy.

I believe that you have no basis to think this way. You can regard us with distrust, but, in any case, you can be calm in this regard, that we are of sound mind and understand perfectly well that if we attack you, you will respond the same way. But you too will receive the same that you hurl against us. And I think that you also understand this. My conversation with you in Vienna gives me the right to talk to you this way.

This indicates that we are normal people, that we correctly understand and correctly evaluate the situation. Consequently, how can we permit the incorrect actions which you ascribe to us? Only lunatics or suicides, who themselves want to perish and to destroy the whole world before they die, could do this. We, however, want to live and do not at all want to destroy your country. We want something quite different: To compete with your country on a peaceful basis. We quarrel with you, we have differences on ideological questions. But our view of the world consists in this, that ideological questions, as well as economic problems, should be solved not by military means, they must be solved on the basis of peaceful competition, i.e., as this is understood in capitalist society, on the basis of competition. We have proceeded and are proceeding from the fact that the peaceful co-existence of the two different social-political systems, now existing in the world, is necessary, that it is necessary to assure a stable peace. That is the sort of principle we hold.

You have now proclaimed piratical measures, which were employed in the Middle Ages, when ships proceeding in international waters were attacked, and you have called this “a quarantine” around Cuba. Our vessels, apparently, will soon enter the zone which your Navy is patrolling. I assure you that these vessels, now bound for Cuba, are carrying the most innocent peaceful cargoes. Do you really think that we only occupy ourselves with the carriage of so-called offensive weapons, atomic and hydrogen bombs? Although perhaps your military people imagine that these (cargoes) are some sort of special type of weapon, I assure you that they are the most ordinary peaceful products.

Consequently, Mr. President, let us show good sense. I assure you that on those ships, which are bound for Cuba, there are no weapons at all. The weapons which were necessary for the defense of Cuba are already there. I do not want to say that there were not any shipments of weapons at all. No, there were such shipments. But now Cuba has already received the necessary means of defense.

I don’t know whether you can understand me and believe me. But I should like to have you believe in yourself and to agree that one cannot give way to passions; it is necessary to control them. And in what direction are events now developing? If you stop the vessels, then, as you yourself know, that would be piracy. If we started to do that with regard to your ships, then you would also be as indignant as we and the whole world now are. One cannot give another interpretation to such actions, because one cannot legalize lawlessness. If this were permitted, then there would be no peace, there would also be no peaceful coexistence. We should then be forced to put into effect the necessary measures of a defensive character to protect our interests in accordance with international law. Why should this be done? To what would all this lead?

Let us normalize relations. We have received an appeal from the Acting Secretary General of the UN, U Thant, with his proposals. I have already answered him. His proposals come to this, that our side should not transport armaments of any kind to Cuba during a certain period of time, while negotiations are being conducted—and we are ready to enter such negotiations—and the other side should not undertake any sort of piratical actions against vessels engaged in navigation on the high seas. I consider these proposals reasonable. This would be a way out of the situation which has been created, which would give the peoples the possibility of breathing calmly. You have asked what happened, what evoked the delivery of weapons to Cuba? You have spoken about this to our Minister of Foreign Affairs. I will tell you frankly, Mr. President, what evoked it.

We were very grieved by the fact—I spoke about it in Vienna—that a landing took place, that an attack on Cuba was committed, as a result of which many Cubans perished. You yourself told me then that this had been a mistake. I respected that explanation. You repeated it to me several times, pointing out that not everybody occupying a high position would acknowledge his mistakes as you had done. I value such frankness. For my part, I told you that we too possess no less courage; we also acknowledged those mistakes which had been committed during the history of our state, and not only acknowledged, but sharply condemned them.

If you are really concerned about the peace and welfare of your people, and this is your responsibility as President, then I, as the Chairman of the Council of Ministers, am concerned for my people. Moreover, the preservation of world peace should be our joint concern, since if, under contemporary conditions, war should break out, it would be a war not only between the reciprocal claims, but a world wide cruel and destructive war.

Why have we proceeded to assist Cuba with military and economic aid? The answer is: We have proceeded to do so only for reasons of humanitarianism. At one time, our people itself had a revolution, when Russia was still a backward country. We were attacked then. We were the target of attack by many countries. The USA participated in that adventure. This has been recorded by participants in the aggression against our country. A whole book has been written about this by General Graves, who, at that time, commanded the US Expeditionary Corps. Graves called it “The American Adventure in Siberia.”

We know how difficult it is to accomplish a revolution and how difficult it is to reconstruct a country on new foundations. We sincerely sympathize with Cuba and the Cuban people, but we are not interfering in questions of domestic structure, we are not interfering in their affairs. The Soviet Union desires to help the Cubans build their life as they themselves wish and that others should not hinder them.

You once said that the United States was not preparing an invasion. But you also declared that you sympathized with the Cuban counter-revolutionary emigrants, that you support them and would help them to realize their plans against the present Government of Cuba. It is also not a secret to anyone that the threat of armed attack, aggression, has constantly hung, and continues to hang over Cuba. It was only this which impelled us to respond to the request of the Cuban Government to furnish it aid for the strengthening of the defensive capacity of this country.

If assurances were given by the President and the Government of the United States that the USA itself would not participate in an attack on Cuba and would restrain others from actions of this sort, if you would recall your fleet, this would immediately change everything. I am not speaking for Fidel Castro, but I think that he and the Government of Cuba, evidently, would declare demobilization and would appeal to the people to get down to peaceful labor. Then, too, the question of armaments would disappear, since, if there is no threat, then armaments are a burden for every people. Then too, the question of the destruction, not only of the armaments which you call offensive, but of all other armaments as well, would look different.

I spoke in the name of the Soviet Government in the United Nations and introduced a proposal for the disbandment of all armies and for the destruction of all armaments. How then can I now count on those armaments?

Armaments bring only disasters. When one accumulates them, this damages the economy, and if one puts them to use, then they destroy people on both sides. Consequently, only a madman can believe that armaments are the principal means in the life of society. No, they are an enforced loss of human energy, and what is more are for the destruction of man himself. If people do not show wisdom, then in the final analysis they will come to a clash, like blind moles, and then reciprocal extermination will begin.

Let us therefore show statesmanlike wisdom. I propose: We, for our part, will declare that our ships, bound for Cuba, will not carry any kind of armaments. You would declare that the United States will not invade Cuba with its forces and will not support any sort of forces which might intend to carry out an invasion of Cuba. Then the necessity for the presence of our military specialists in Cuba would disappear.

Mr. President, I appeal to you to weigh well what the aggressive, piratical actions, which you have declared the USA intends to carry out in international waters, would lead to. You yourself know that any sensible man simply cannot agree with this, cannot recognize your right to such actions.

If you did this as the first step towards the unleashing of war, well then, it is evident that nothing else is left to us but to accept this challenge of yours. If, however, you have not lost your self-control and sensibly conceive what this might lead to, then, Mr. President, we and you ought not now to pull on the ends of the rope in which you have tied the knot of war, because the more the two of us pull, the tighter that knot will be tied. And a moment may come when that knot will be tied so tight that even he who tied it will not have the strength to untie it, and then it will be necessary to cut that knot, and what that would mean is not for me to explain to you, because you yourself understand perfectly of what terrible forces our countries dispose.

Consequently, if there is no intention to tighten that knot and thereby to doom the world to the catastrophe of thermonuclear war, then let us not only relax the forces pulling on the ends of the rope, let us take measures to untie that knot. We are ready for this.

We welcome all forces which stand on positions of peace. Consequently, I expressed gratitude to Mr. Bertrand Russell, too, who manifests alarm and concern for the fate of the world, and I readily responded to the appeal of the Acting Secretary General of the UN, U Thant.

There, Mr. President, are my thoughts, which, if you agreed with them, could put an end to that tense situation which is disturbing all peoples.

These thoughts are dictated by a sincere desire to relieve the situation, to remove the threat of war.

Respectfully yours,

N. Khrushchev

October 26, 1962.

You may continue reading the letters on October 27, 1962, both from Krushchev and Kennedy, which commence to unravel the situation.