jlg@lanl.ARPA (01/14/85)
> >From Burt Rutan, as good a spokesman for the "New Wave" as any: > "Part 23 is really just a minimum requirement. If you designed > an airplane just to meet the present Part 23, it would be a > very marginal airplane. The problem is not with the regulations; > the problem is with the...FAA... Nobody wants to sign anything > off... And the only way to solve that problem is to kill all the > lawyers." I think I read that interview. It seems like his full remarks were in favor of the PA proposal and that he thought it would help bring the cost of flight down (probably in the parts of the quote you left out). > OK. How much do YOU think that certification adds to the cost? > 10%? 25%? Half again? Doubles the cost? Triples? Quadruples? The main cost of certification is that it causes many GOOD new planes to be lost to the consumer because no manufacturer will take the financial risk that certification entails. Burt Rutan doesn't certify his planes because he knows he would have to sell 10,000 or more of them to recover the certification costs (or raise the price of his planes so that they really DON'T compete with the rest of the market). Certification costs are felt mainly by the lack of market competition they cause (prices have been known to fall in a competitive market). > Then if we take a "180-mph plane that will sell for $15,000 if the > Primary Aircraft proposal is adopted", and go ahead and certify it > NOW under the current Part 23, then that plane would sell for > about $60K, just HALF of what the competition sells for. Anyone > who could build such a plane and sell it, profitably, for $60,000 > would CLEAN UP! But I don't see anyone doing it. No one is doing it because a $15,000 kit involves less overhead to produce and has a higher volume (at least initially) than the $60,000 fully built plane. However, lower the cost of the fully built plane to $30,000 and you would probably cross that magic threshold which would make your product more profitable than the kit version. Remember that the $60,000 manufactured plane must still compete on the same market as the $15,000 kits (let's see, I buy a kit for $15,000, hire someone for $50 per hour to build it {about $5000 - $10000} for a total cost of $20,000 - $25,000 compared to the $60,000 from the manufacturer; but of course I don't get warranty, service agreements, etc. - gee, I wouldn't have to trouble myself with all this if the manufacturer only charged $30,000). > The following pricing analysis is in 1981 dollars, because it is based > on figures provided in the August 1, 1981 issue of Aviation Consumer > magazine in their interview with Rutan and review of the Long-EZE. > (The analysis is my own, not Rutan's nor Aviation Consumer's). > > $100,000 List price, fully-assembled and equipped Long-EZE, 1981 > -------- 1> 15,000 15% discount to purchaser, actual sales price $85,000 + tax 2> 10,000 10% dealer margin, wholesale price $75,000 3> 10,000 10% manufacturer's liability insurance 4> 20,000 20% factory overhead (rent, power, management, warranty, etc.) 5> 5,000 5% income tax on factory profit 6> 5,000 5% factory profit after tax 7> 10,000 10% labor costs, 1250 hours at $8/hour 8> 5,000 5% labor taxes and employee benefits (50% of labor costs) 9> 7,000 7% "full house" of gyros, radios, etc. at OEM price 10> 13,000 13% airframe parts, engine, propellor at OEM price > > Actually, the factory overhead would probably be higher than above, and > the 5% profit margin is really way too low for any significant growth. Actually, the factory overhead would probably be MUCH LOWER than the above, and I would be willing to admit a higher prifit margin (see below). Item 1 I don't pay anyway. Item 2 - 10% seems to be a reasonable dealer commission, but competition (if only there were some) might bring this down. Automobile dealers accept as low as 1-2% but their business is higher volume with stiffer competition. Item 3 - isn't that one of the things that the PA proposal will specifically reduce? Guess I'll have to go home and reread the whole proposal. Anyway, I'll use the 10% figure given for the sake of argument. Item 4 - $20,000 factory overhead for ONE PLANE?!? What are you planning to do - store it in its own hanger for a year before you sell it? How many planes do I wish to build per year (I'm building Rutan $15,000 kit planes for resale so I don't have ANY parts to manufacture)? I pick 1000. To build 1000 planes from kits on a yearly basis I need about 200 machinists (an overestimate but I'm trying to be fair). I also need about 4 acres for shops, inventory, and offices. So, I have: $400,000 - one time expense for shop tools. (This is $200 per employee for tools, and these are kit planes that people are supposed to be able to build at home with non-professional type tools. $400 per plane for the first year.) $50,000 - one time expense for land purchased outright. (This is a good average for industrial park land for the nation. $50 per plane for the first year.) $500,000 - one time expense for buildings, offices, etc.. (I'm really going ritzy here, I could just build a few cheap metal hangers. $500 per plane in first year.) $1,000,000 - per year management costs (president $150,000 3 vice presidents (sales, purchasing, construc- tion) $125,000 each. plus secretaries, comtroller, foremen, etc.. $1000 per plane) $1,000,000 - per year incidentals (interest on unused parts, interest on unsold inventory, property taxes, sales, travel, etc.. $1000 per plane) $3,000 - per plane warranty expense (I have no idea what type of warranty is offered on new aircraft, but I'll bet it doesn't cost the manufacturer more than a small percentage of the cost of the plane. At least not on average, a lemon may cost quite a lot, but most planes are probably like most cars, nothing goes wrong during the warranty period.) So the total for item four is about $5,000 per plane or $6,000 per plane for the first year or so. Note that I purchased the land, buildings, and tools outright, I could have borrowed on them to spread out the one time expenses. Also note that I overspent on everything. Item 5 and 6 - Call it 15% for both profit and taxes on the profit. This is more than the 5% each given above. Now, should I reinvest the profit, or pay a dividend to the stockholders. Reinvestment could bring down construction costs further, or I could diversify and start building more than one model of aircraft. A dividend could keep my stock value high and give me a better financial base to borrow operating expenses from. I mention this because both tactics could allow me to lower the prices on the end product sometime in the future. Item 7 - seems a bit high - most kits advertise only a few hundred hours construction time and I can't believe that mass production techniques won't be applied even for relatively small production volumes. Of course, when an add says 100 hours to construct that may just be advertising hype, but I can't believe the add is off by a factor of 12 1/2! Furthermore, since all the percentages above number 7 are multiples of this inflated figure I don't really trust the math. Let's call it 400 hours at $15 per hour. The total is $6,000 per plane. (Still extremely over-estimated, but I'm being fair.) Item 8 - $3,000 = 50% of labor costs - you said it! Item 9 and 10 - call it $20,000 for the whole thing ($15,000 for kit, $5,000 for avionics - if they want more avionics they pay for 'options' just like everywhere else. Note that because of all the percentage mark-ups on this list, it would probably be cheaper for the end user to buy all his instruments retail anyway. (Suppose I get a 20% OEM discount on a $1000 instrument. So it costs me $800. I then charge 15% (taxes and profit) plus 10% (manufacturers liability) plus 10% dealer profit = about $1100. This is $100 more than the end user would pay retail!) Now I haven't totalled this yet myself, I've just put in what seems reasonable for a high-end type two place aircraft. 9 & 10 $20,000 Parts 8 $ 3,000 labor incidentals 7 $ 6,000 labor 5 & 6 $ 4,500 about 15% of sum of above: profit and taxes 4 $ 6,000 call it the first year: overhead 3 $ 4,000 about 10% of sum of above: manufacturers liability 2 $ 4,500 about 10% of sum of above: dealer profit 1 $ 0 I can talk the dealer down: ammount above the dealers profit -------- $48,000 Hmm... looks better than your Mooney 201 already! And even with lots of overestimates it's still cheaper than the $85,000 mentioned before by 44% no less! I think less exagerated numbers come to about $31,000 per plane. (Note: all 'about x%' in the above calculations were rounds up from the actual value.) Now lets add the certification cost: what is it these days? $10 - $50 million? I seem to remember that Lear Fan had spent over $100 million for certification - which it hasn't got yet. Let's underestimate certification costs and call it $10 million. Now, until we can sell the plane, we must pay interest on this $10 million investment. By the time we are selling planes (5 or 6 years after we begin certification process) this combined investment plus interest is probably about $20 million (remember, we must build the plant and hire at least a skeleton staff in order to build the prototypes for the certification runs). Now if we add 5% to the price of the planes in order to recover the certification costs, we will have to sell about 10,000 units to break even (actually more since this debt is costing interest even during production). But this is ten years of production before we get out of the red! Will we still be able to sell 1000 planes per year 16 years from now (10 years production plus 6 years certification time)? What if some competitor comes out with a better line just two or three years after we begin full production? If certification were faster and cheaper we could make such decisions more easily, but as it is this looks much too risky and long term to attract many investors. > DeVore Aviation is working on developing a new low-cost 2-seat > trainer, using method 1. They are developing a new, very small > engine which they can get for less than the usual O-235. They > hope to sell the plane factory-built for $20K. This looks like a counter-example to Mr Pardee's original calculation. In particular, if they are planning to sell the plane retail for $20k, then their factory overhead costs are clearly MUCH LESS than $20k per plane as estimated in his original breakdown - and this has NOTHING to do with the use of the cheaper engine (which should cost them more in factory overhead since they are developing it themselves). It also implies that their factory overhead is less than the $6,000 per plane that I overestimated as well. In fact it shows that most of my estimates are on the high side, just as I claimed. > DeVore hopes to begin certification sometime this year, and by the > way, DeVore is AGAINST the Primary Aircraft proposal. Of course they're against the PA!! They are contemplating spending all that money and time to certify under the present regs. Their future as a company is predicated upon the assumption than no other manufacturer will be able to enter the same market without paying the same exorbitant price. Suppose that two years after they certify and begin full production the PA goes into effect and all of their potential competitors are able to certify in one tenth the time and for one tenth the money. It would probably bankrupt them. > > No one wants a C-152 because everyone > > wants a Dragonfly instead! > > Naw, everyone wants a LearJet :-) I don't. But in view of the above, maybe what I want is a DeVore. ------------------------------------------------------------------------------ O dear Ophelia I am ill at these numbers: I have not the art to reckon my groans. - Hamlet (Act II, Sc. 2, Line 120) James Giles
doug@terak.UUCP (Doug Pardee) (01/17/85)
AT LAST! A response which takes some issue with some of the evidence that I've been dumping onto the net for weeks. I shall only address the questions regarding the basis for my numbers. > > From Burt Rutan, as good a spokesman for the "New Wave" as any: > > "Part 23 is really just a minimum requirement. If you designed > > an airplane just to meet the present Part 23, it would be a > > very marginal airplane. The problem is not with the regulations; > > the problem is with the...FAA... Nobody wants to sign anything > > off... And the only way to solve that problem is to kill all the > > lawyers." > > I think I read that interview. It seems like his full remarks were in > favor of the PA proposal and that he thought it would help bring the cost > of flight down (probably in the parts of the quote you left out). I wish I had the copy of the magazine here to quote verbatim, but I will assure you that the edited-out sections were simply redundant. It was something to the effect of "The problem is with the way that everybody in the FAA is scared to death they will be sued in case something goes wrong. Nobody wants to sign anything off because they're afraid they'll be held liable. And the only way to solve that problem is to kill all the lawyers." > Item 3 - isn't that one of the things that the PA proposal will > specifically reduce? Guess I'll have to go home and reread the whole > proposal. Anyway, I'll use the 10% figure given for the sake of argument. Item 3 (Manufacturer's liability insurance) is to cover lawsuits against the factory in the event of a crash. In 1980 GAMA stated that their members were paying 7% for liability insurance. Given the rash of HUGE settlements against GAMA members recently, I would guess that GAMA members are paying more than 7% now. In the case of a Rutan-type plane, I speculate that insurance will probably be higher than GAMA for 3 reasons: 1) no track record; 2) high injury and fatality rate in forced landings; 3) any radical design in any kind of product is a huge "SUE ME" sign. > Item 7 - seems a bit high - most kits advertise only a few hundred hours > construction time and I can't believe that mass production techniques won't > be applied even for relatively small production volumes. Of course, when > an add says 100 hours to construct that may just be advertising hype, but I > can't believe the add is off by a factor of 12 1/2! This figure was based on the time that Rutan's construction people stated that it took them to build Long-EZE's -- about 1300 hours. These are people experienced in the job, working with the same equipment that Rutan uses to build his concept planes. Aviation Consumer reported that they talked to a (a statistical sample of 1 :-) person building a Long-EZE, and he had over 2000 hours in it and didn't have any idea when he would be done. > Item 9 and 10 - call it $20,000 for the whole thing ($15,000 for kit, $5,000 > for avionics - if they want more avionics they pay for 'options' just > like everywhere else. Note that because of all the percentage mark-ups > on this list, it would probably be cheaper for the end user to buy all > his instruments retail anyway. First -- exactly right about buying instruments retail. My (small) point is that the same is true of current factory-built planes. You can buy a stripped Wichita Spam Can brand new for half of what it would cost fully equipped and upgrade it for a lot less than you saved. In the case of Cessna, their factory avionics are the laughing-stock of the industry, yet people still insist on buying their planes loaded with factory avionics. I can't explain it... -- Doug Pardee -- Terak Corp. -- !{hao,ihnp4,decvax}!noao!terak!doug