March 2, 2013 · 8:00 am

KC-46 EMD contract 101

The US Government Accountability Office (GAO) has recently published a report about the KC-46 Tanker Aircraft [PDF, 1.2 MB]. In it the GAO reviews the situation of the program, measures introduced, costs, technology development, etc. In the first page it summarizes:

“The KC-46 program 2012 estimates for cost, schedule, and performance are virtually the same as last year’s, with the contractor running very close to the planned budget and schedule”.

On the technical side it points to several challenges: flight test plan, completion of engineering drawings, relocation of personnel and facilities related to defense equipment, etc.

However, in this post I wanted to focus only on the costs and contractual sides of the program, given the amount of articles that we could read about it during the past year. Several news have reported about the cost overruns in the program and about how these were to be born by Boeing.

The last time I read about the topic, the reported overrun was of about 1.2bn$ on a 4.4bn$ contract, out of which ~500M$ would be born by USAF and the remaining 700 M$ by Boeing (see articles from Bloomberg, Aviation Week, The Seattle Times…).

But, where do these figures come from?

One of the many things I like of the USA is the transparency in making lots of information and data available to the public, for example, budgeting information of the Air Force, GAO’s assessments, hearings at the Senate and House of Representatives Committees, etc. Thus, you can find:

Contractual framework

From the USAF budgeting material, page 675, under the paragraph “E. Acquisition Strategy“, the explanation of the different contracts structure for the KC-X program (the name of the program prior to the contract award) can be found:

“The KC-46 program released a final Request for Proposal (RFP) on 24 Feb 2010, and entered source selection on 9 Jul 2010. The KC-46 program held a Milestone B Defense Acquisition Board (DAB) on 23 Feb 2011, received approval to enter EMD from OSD AT&L on 24 Feb 2011, and awarded the KC-46 contract to Boeing on 24 Feb 2011 to develop and procure 179 KC-46 aircraft. The KC-46 contract procurement was conducted via a full and open competition per Federal Acquisition Regulation (FAR) Part 15, and resulted in a FY 2011 EMD Fixed Price Incentive Firm (FPIF) contract. The EMD phase will develop, build, and test four KC-46 aircraft, and will qualify receiver aircraft.

Production will begin in FY 2015 with two Low-Rate Initial Production (LRIP) lots (Firm Fixed Priced (FFP)) and then Full-Rate Production (FRP) options (FFP with Not to Exceed (NTE) + Economic Price Adjustment (EPA)). The LRIP and FRP options will be exercised following successful completion of Operational Assessments (OAs) for the LRIP decisions, and a successful completion of Initial Operational Test and Evaluation (IOT&E) for the FRP decision.”

Thus, so far only the Engineering Manufacturing and Development (EMD) contract  phase has been contracted, on February 24th Feb 2011 (you can see Boeing and DoD press releases).

Cost Assessment by GAO:

From the Government Accountability Office (GAO) assessment of the program, referred above:

“The current development cost estimate of $7.2 billion as reported in October 2012 includes $4.9 billion for the aircraft development contract and 4 test aircraft, $0.3 billion for the aircrew and maintenance training systems, and $2 billion for other government costs to include program office support, government test and evaluation support, contract performance risk, and other development risks associated with the aircraft and training systems. […]

Through December 2012, Boeing has accomplished approximately $1.4 billion (28 percent) in development work and has more than $3.5 billion (72 percent) in estimated work to go over the next 5 years. […]

Barring any changes to KC-46 requirements by the Air Force, the contract specifies a target price of $4.4 billion and a ceiling price of $4.9 billion at which point Boeing must assume responsibility for all additional costs. […]”

See the table below showing Air Force and Boeing contract amounts and estimates:

KC-46 EMD Contract & Estimates.

KC-46 EMD Contract & Estimates (Source: GAO).

The report from GAO offers the following graphic referring to what they call “management reserves“:

KC-46 EMD Management Reserves (Source: GAO)

KC-46 EMD Management Reserves (Source: GAO)

This graphic shows well the rate at which Boeing has been supposedly burning its margins. However, it does not reflect at all the nature of the issue, related to the type of contract this “Engineering Manufacturing and Development” (EMD) contract: a Fixed Price plus Incentive Firm type of contract (FPIF).

Fixed Price Incentive Firm contracts

It is not easy to find good literature online about these types of contracts. The Wikipedia for instance does not have yet an article on FPIF contracts, but only on the calculation of the Point of Total Assumption. However, you can find a couple of good sites with explanations and examples of FPIF contracts here and here [PDF from the US Army].

Some concepts that we need to bear in mind are (definitions from the link above):

Target Cost (TC): The initially negotiated figure for estimated contract costs and the point at which profit pivots.
Target Profit (TP): The initially negotiated profit at the target cos
Target Price: Target cost-plus the target profit.
Ceiling Price (CP): Stated as a percent of the target cost, this is the maximum price the government expects to pay. Once this amount is reached, the contractor pays all remaining costs for the original work.
Share Ratio (SR): The government/contractor sharing ratio for cost savings or cost overruns that will increase or decrease the actual profit. The government percentage is listed first and the terms used are “government share” and “contractor share.” For example, on an 80/20 share ratio, the government’s share is 80 percent and the contractor’s share is 20 percent.
Point of Total Assumption (PTA): The point where cost increases that exceed the target cost are no longer shared by the government according to the share ratio. At this point, the contractor’s profit is reduced one dollar for every additional dollar of cost. The PTA is calculated with the following formula. [thus, PTA = (Ceiling Price – Target Price)/Government Share + Target Cost]

Where can we get these figures for the KC-46 EMD contract? Some of them are referred to in the different reports and budgeting materials (explicitly or implicitly) and others can be found in the following letter from US Senator John McCain to the DoD from July, 15 2011 [PDF, 400 KB].

Thus for the KC-46 EMD contract we have:

  • Target Cost: 3.9 bn$.
  • Target Profit: 500 M$.
  • Target Price: 4.4 bn$
  • Ceiling Price: 4.9 bn$
  • Share Ratio: 60% / 40% (Government / Boeing).
  • Point of Total Assumption (calculated): ~4.73 bn$.

With this information we can produce the typical FPIF contract curve, which is the only thing which is missing in ALL the news, budgeting materials, GAO reports, etc., that I have read and is the most illustrative graphic to understand what is going to happen if the cost overruns keep piling and who is going to bear which amount of the cost from which point:

KC-46 EMD FPIF Contract.

KC-46 EMD FPIF Contract.

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March 1, 2013 · 8:00 am

Quiz: How loaded do US Air Force transport aircraft operate?

Let me share with you one funny quiz I did for some colleagues at the office:

On average, how loaded do US Air Force transport aircraft, C-130 Hercules and C-17 Globemaster, operate? (as a percentage of their maximum payload capacity: let’s take the figures reported by the US Air Force, ~16.5 tonnes for the C-130 -“maximum normal payload”-and 77.5 tonnes for the C-17)

Before continuing reading below, take your chance in the poll below, where I offer 4 possible responses: 3 from my colleagues’ responses to the quiz plus the correct one:

Background. Before posing the quiz to my colleagues we were commenting on a piece of news of an Antonov 124 which had landed in Spain to load some equipment weighing 1,000 kg. The An-124 reported payload capacity is 150 metric tonnes. For those not being number-crunchers: that means using the one of the biggest cargo aircraft to load it up to 0.7% of its capacity.

After having read this last paragraph you may have changed your opinion as to which is the correct answer to the quiz.

I based the correct result on a news release from the US Air Force dating from the beginning of 2007. At that time I was working in Airbus Military strategy where I would like to pick up any number related to aircraft and play with it (the hobby has stayed). That release offered figures US Central Command air transport operations, including operations Enduring Freedom (Afghanistan) and Iraqi Freedom. Find the results from that short number play:

US Air Force average loads (in tonnes) for C-130 and C-17 during 2005 and 2006.

US Air Force average loads (in tonnes) for C-130 and C-17 during 2005 and 2006.

If you do the math, you will immediately get the right answer: C-130 Hercules, 22% and C-17 Globemaster, 17%.

“What a waste of resources!” you may think. A former senior colleague pointed to that result: “You buy a Mercedes to travel with the family and baggage, then on a Sunday when having to go out to get some bread or any week day when you go alone to work… when you get to the garage and find a Mercedes… Guess which car you take?”

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February 21, 2013 · 8:00 am

Trailhounet (Gruissan)

Last weekend Luca and I went to Gruissan, a small village by the Mediterranean sea. I must say that in winter time it is not very lively (not by a night at least). One of the reasons for coming to Gruissan was to take part in the trail “Trailhounet” (18km), one of three races that would take during the weekend (the others covering distance of 25km and an ultra of 50km!).

 

Trailhounet circuit around Gruissan.

Trailhounet circuit around Gruissan.

I have often mentioned that running trails through the country side feels different from running on the asphalt of city streets. However, at some points the slopes in trails get too steep to run up, or too dangerous to go as fast as possible on the way down. This time, the circuit was covered to a great extent by small stones and rocks, this made it even more challenging and painful.

Profile of the race.

Profile of the race.

Let me share a couple of pictures from the start and the arrival:

Start line, using for the 1st time the new sweat band with the flag.

Start line, using for the 1st time the new sweat band with the flag.

Last sprint.

Last sprint.

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February 19, 2013 · 8:00 am

Skiing (Val Louron)

Before I took on skiing this year again, it had been already about 16 years without doing so! In the past weeks, Luca and I first went to Sain-Lary and then to Baqueira-Beret ski resorts. The experience was great, even if the weather was not the best.

This past weekend, we went to Val Louron with a group of co-workers. Val Louron is a small resort enclosed in the valley of the same name (which connects with Spain via Viella and where the Garonne river has its source). This time the weather was perfect, the views were impressive, the day was superb. This weekend I was reminded why I loved this sport so much years ago.

Skiing in Val Louron (France).

Skiing in Val Louron (France).

Map of Val Louron resort.

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February 17, 2013 · 10:00 am

Boeing 787 orders vs. cancellations

I read yesterday the first article about delays in 787 deliveries in 2013 due to the grounding of the fleet. With the investigation of the batteries issue taking already a month, it was evident that these delays were going to happen.

I have not yet read anything in the specialized or business press about cancellations. However, taking into account that when the 787 program started announcing 3-month delays from Q3 2007, cancellations started to pile, I guess that this time it will not be very different.

I checked the information of orders and cancellations from Boeing website.

Since 2004, Boeing has received a total of 1,112 787 orders. Out of these, 222 orders were later on cancelled; mostly between 2008 and 2012. Now there are still 890 firm orders (with about 50 of those aircraft already delivered). As a summary, find the graphic below:

Boeing 787 orders and cancellations

Boeing 787 orders and cancellations

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February 7, 2013 · 8:00 am

Boeing commercial aircraft discounts (update for 2012)

A week ago, Boeing released 2012 results [PDF, 223KB]. The company reported revenues of almost 81.7bn$, 601 commercial deliveries and 1,203 net orders for its commercial aircraft. All these were widely reported by the media and mean a great year 2012 for Boeing (with increases in these metrics from 20 to 30%).

Last years, I wrote in some posts 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 deduct the figure of Boeing Commercial’s sales of services. That is not directly reported but can be deducted (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 post of last year:

  • 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.). [1]

Having put all the figures together, the calculation is immediate. Boeing Commercial Aircraft revenues in 2012 (49,1bn$) 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 has been again a bit tricky as it included 737NG deliveries and 737 MAX orders),
  • plus services revenues (about 1.4bn$ from the commercial aircraft unit – calculated, not reported).

The discount figure that minimized errors last year was 41%. Using this figure, the error obtained this year in relation to Boeing Commercial Aircraft reported revenues is 7.5%, much too high. The best estimate for last years average discounts were: 41% for 2011, 39% for 2010 and 38% for 2009.

The updated figure (which minimize errors for 2012 down to 0.4%) for the discount for Boeing commercial aircraft is 45% [2].

The explanation I can find for that increase shall be linked the built-in penalties for 787 (net orders for 2012 being -12 a/c) and 747 delays (1 single net order) into revenues plus the launch of a new aircraft, 737 MAX (forced by A320neo sales success in 2011).

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[1] Two 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, over 50% (!), thus I stayed with the 3% used in the above-mentioned published paper to stay on the conservative side.

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February 5, 2013 · 8:00 am

Certificate from Stanford Venture Lab

In a previous post I discussed about online education. Among the final reflections that I shared, one was about the certificates:

Certificates: all three courses are not official Stanford courses, though the instructors send a “Statement of Accomplishment” after satisfactory performance and completion of the course. I guess that with time more institutions will go towards this model. I even think that official certificates will be delivered for these kind of online education.

I have started to receive the certificates from those courses that I completed. The first one in arriving was from “A Crash Course on Creativity“. Note that in fact it is called “Certificate of Accomplishment”, not being an official certificate from Stanford:

Statement of Accomplishment of "A Crash Course on Creativity", Stanford Venture Lab.

Statement of Accomplishment of “A Crash Course on Creativity”, Stanford University Venture Lab.

You may note the remark at the bottom of the certificate:

PLEASE NOTE: SOME ONLINE COURSES MAY DRAW ON MATERIAL FROM COURSES TAUGHT ON CAMPUS BUT THEY ARE NOT EQUIVALENT TO ON-CAMPUS COURSES. THIS STATEMENT DOES NOT AFFIRM THAT THIS STUDENT WAS ENROLLED AS A STUDENT AT STANFORD UNIVERSITY IN ANY WAY. IT DOES NOT CONFER A STANFORD UNIVERSITY GRADE, COURSE CREDIT OR DEGREE, AND IT DOES NOT VERIFY THE IDENTITY OF THE STUDENT.

Some more questions to debate:

  • Would that stop you from taking a course?
  • If you had not completed some other studies before: would you go for these courses? Would you build your student records based on this kind of certificates?
  • If you were an employer: would you recruit somebody which key skill was acquired through such kind of course? (“it does not verify the identity of the student”)
  • …

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February 3, 2013 · 11:00 am

Athletic World Records vs. my times (speed vs. distance in log plot)

Two weeks ago I published a post where I showed a graphic of the different world records in athletics with the speeds and paces.

I received a comment from Uwe, a reader of the blog, suggesting to plot it using a logarithmic scale. At first, I wanted to show how the long distance runners could almost keep a speed (between 20.5 and 23.8 km/h) for distances from 5 kilometres to 42, a marathon. However, Uwe convinced me to make the plot and here it is:

Athletics World Records vs. my times (speed) - logarithmic scale for the distances

Athletics World Records vs. my times (speed) – logarithmic scale for the distances.

In this view, what it is interesting is to appreciate the different slops of the lines connecting the different records. There you can see how:

  • 100m and 200m races are fully anaerobic where Usain Bolt is capable of maintaining an average speed of above 37.5 km/h. You can see in the explanation in the Wikipedia how these two races (both lasting below ~30 seconds) use as energy source high energy phosphates.
  • races from 400m to 1 km are still a high intensity activity, with some anaerobic component, though another energy source enters into play: anaerobic glycolisis. And as we have heard often in descriptions about 400m races, the consequence of rapid glucose breakdown is the formation of lactic acid.
  • from then (1.5 or 2km) on (up to 42km) professional runners are able to keep a high speed out of aerobic metabolism (using adenosine triphosphate, ATP). Of course, speed decreases with distance, but from the 26.2 km/h of a 1,500m to the 20.5 km/h of a marathon the speed decrease is of -22% for a race 28 times longer!
  • for ultramarathons (over 42k) speed starts decreasing at a higher pace, though Wikipedia only offered the 100k time. Probably more data can be found in the web to try to find with more accuracy up to which distance the long distance stable pace could be maintained.

Uwe, you were certainly right. This view offers another very interesting perspective to the game :-).

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February 1, 2013 · 8:00 am

Pregnant

Dear readers, I am pregnant!

Well, to be precise, it is Luca who is expecting a baby!

Stork bringing the baby to Toulouse (design by Jaime, future uncle).

Stork bringing the baby to Toulouse (design by Jaime, future uncle) (1).

If everything goes well, junior will enter into service by the beginning of August (I cannot guarantee that there won’t be delays…). Engineering and Programme Management (I) have done their job, now it’s up to Industrial and Delivery Centre (Luca) to complete the project (we swear that Procurement was not involved!).

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(1) Clarification for those not coming from Spain: the tradition there says that children are not only brought by a stork, but also that it brings them from Paris.

(2) We accept suggestions for the name, both female and male. Even more, we’re even thinking of setting up a contest; but please suggest a name only if you think it can top “Javier”.

(3) For those worried about the legal framework surrounding the coming child: we are already PACSed AND engaged…

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January 30, 2013 · 8:00 am

Daily cost of Boeing 787 fleet grounding? (number play)

I am following relatively closely the news related to the grounding of Boeing 787 world fleet due to the recent issues that 2 of the operating aircraft had in service. I was wondering how much could Boeing be penalised by this situation.

Then, a couple of days ago I started seeing estimates (up to 5bn$?!), so enjoying playing with numbers as I do, I wanted to make up my figures before reading the explanation I am looking for somewhere else. Let me share the number play with you.

I have read news pointing at a solution based on new batteries, which certification could extend until 2014! Well, hopefully it doesn’t take that long, but since we don’t know for how long the fleet is going to be grounded and we also don’t know what the final fix is going to be, what I am interested at this moment is in trying to guess the cost per day of the grounding of the fleet.

Let me explain the assumptions I am going to take and where do they come from:

  • aircraft grounded: 50 (Boeing deliveries).
  • average seating: 210-250 seats for -8 (a/c delivered) and 250-290 for -9 (seating numbers from Boeing; deliveries from Wikipedia).
  • revenue per passenger: here, instead of doing an extensive research, I based the calculation on a previous research made by Air Insight for a report about Air India potential claim for 787 delays (the article is from one year ago).
    • $234 per flight hour for first class (using a 75% load factor),
    • $136 per flight hour for business class (80%),
    • $67 per flight hour for economy class (85%).
  • seating per class: using the information from United as reported by SeatGuru for the
  • 787-8: 36 + 72 + 111 (1) (for a total of 219 pax).
  • flight hours per day: Air India was flying between 11 and 11.78 FH/day according to Air Insight. Ethiopian was said to be flying about 14 FH/day. I’ll take an average of 12 flight hours per day.

With all these assumptions, the daily cost of B787 grounded fleet is: ~12.3 millon dollars / day.

Partial results of the calculation are:

  • average revenue per flight hour, ~20,500$;
  • average daily revenue of a 787, ~245k$.

Taking into account that the fleet has been grounded for already 2 weeks, the cost so far is in excess of 170m$, not much compared to Boeing earnings (to be released today). But if the solution and certification process takes really until 2014, this cost would be in the order of 4.5bn$ (close to the 5bn$ figure pointed by Jefferies & Co. analyst).

Final remarks. Remember that this number play just tries to guess what is the revenue loss from not flying 787s. It doesn’t take into account the cost of fixing the problem, or whether the same routes are flown by other aircraft models and to what extent Boeing might or might not be penalised (in relation to revenue loss? profit loss?). This number play also does not take into account potential financial impact on further deliveries being postponed.

***

(1) Taking estimate of revenues and load factors from Air India and seating numbers from United already introduces some error.

Note: After completing this post, I saw the following similar estimate in Reuters published 2 weeks ago: 1.1m$ per day for a fleet of 17 a/c, the case of ANA.

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