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Future Aero Engine Designs (caught) between politics, fleet operations, commercial realities and technology Keynote Nico Buchholz Zürich January 18th, 2019
Future Aero Engine Designs(caught) between politics, fleet operations,
commercial realities and technology
Keynote Nico Buchholz
Zürich January 18th, 2019
General Overview
Next hour or so….
• The presenter –background or bias?
• Realities from theoperator perspective
• Provoking topics
• Outlook/challenges
Setting the scene
• The outlook 5̴% p.a. average
• Economic pressures and consolidation in the supply chain and the customer base
• Large OEMs may disrupt by changing their business model inclmore vertical integration
• Production rates will increase
• Electric and Hybrid propulsionchallenges; electrification maychange the landscape on/ofexisting players
• Digitalization as change agent? Solving problems but providingnew sources of revenue
• Politics may move from short term totruly addressing the environmental challenges in a holistic way rather thanpatchworking (focus only on noise orCO2 or particular dust or…)
• Aviation is expected to reduce its shareof total emissions despite the growth
• Several OEMs work on smarter ways toaddress mobility (drones,..)
But • Not focussed on specifics like blended
wing, coating, cooling material science, other concepts, aero interference, engine type,..
• Focus on fostering progress
• Aircraft– 1948: 2290– 1998: >15500– 2010: ̴ 20000– 2018: ̴24.000
• Passengers– 1948: 24 million– 1998: 1.5 billion– 2018: ̴ 4.3 billion
• Passenger journeys– 1945: 9 million– 1999: 1,5 billion– 2010: ̴ 2 billion– 2018: ??
History of
commercial aviation
Speed, range, size, safetyprovided economic leaps to foster
growth of the industry= safe affordability?!
Future of commercial
aviation
Experience
Environment
costProfit
??
Ambitions (example)
Boeing
Grow services
consolidate
Control life dataof the aircraft
Verticalintegration
UTC
Buying Tier1and TierX in the value
chain
Counterbalance the Airframe
OEM
Grow revenues
Othersincludingprevious
Investment in digital
IP Management and impact on
profitabilitythrough control
Steady rise ofM&A ca 20%
Supply chain
• Definition of game changing• Technology
• Business environment
• Lead times and planning “security”
Business influencing factors
• Unpredictable ? Complex?
– Ad hoc changes
– Disturbances
– Stable flow
– Ample planning time
– Mass production
– Simple processes
– collaborations
InventoryOptimizatio
n
Forecast
controlling
planning
sales
DigitizationSpare part
management(Image)
Holisticknowledge of
operation, stakeholders,..
Zero tolerance(technical, emotional,
commercial)
70% efficiency gain70% less CO2 emissions
In 40 years the Aviation Industry has achievedefficiency gains in the order of 70% and still counting*
Airframe
-30%
Year of Model Introduction
1950 1960 1970 1980 1990 2000
% o
f B
ase
(Fu
el E
ffic
ien
cy)
20
40
60
80
100
DC8 -30
DC8 -30
B707 -320
B707 -320
B707 -120DC8 -63
DC8 -61
B707 -120B
DC8 -61
DC8 -63
DC10 -30
B747 -100B747 -200
B747SP
B747 -100B B747 -200B
B747 -300
A310 -300
A300 -600R
A340 -300
B747 -400A330 -300
B777 -200
B777 -200
A330 -300
A340 -300
A300 -600R
B747 -400
A310 -300
B747 -300B747 -200B
B747 -100BB747SP
DC10 -30
B747 -200
B747 -100
Engine Savings
Contribution
Total Fuel Burnper Seat(Engine + Airframe)
Engine
-40%
Baseline
*: For competitive reasons no more models listed since 2000…
t
Ope
ratin
g C
ost
B727
DC-9
B737-300
MD-80
A320Fam
B737NG
All innovations and experience
from airline/MRO operations
transferred into new aircraft
1980 20001990 20XX1970
New technologies have delivered more efficient aircraft from platform to platform
??
Airliner evolutionary leaps –transportation efficiency gains so far
- now we start a new dimension addingcost and size
Today fleet decisions (should) follow a clear process, market requirement, environmental correctness and commercial business case
Today’s World
CAPEX & CVA – clear value added
Concise risk assessments
Linkage to company value proposition
Low seatmile cost with high performance / comfort / ecology / …
Sustainable
Market driven and flexible
…but what experience is the passenger after (business, holiday, shopping,..)
1950ies: Pilots
1960/70ies:
Engineers
1980ies: Commercial
(Marketing)
today: Economic-
ecologic awareness
Range =
OEWcost
+ PayloadRevenue & cost
= MZFW + Fuelcost
= MTOW
given variable
Useable Payload is determined by Aircraft Weight and Design
The Narrowbody Evolution …faster, further, larger
Payload [to]
Range [nm]
1967
1997
30 years
Pictures: Boeing
20 years
2017
20
15
10
5
B737MAX8
B737-100
20
15
10
5
B737-800
B737-100
….driven by engine technology/ material science
Operational topics (operators)
• Industrialization of production (building machines, aviation, airlines) – today similar volumes but hugecost differences in Aviation
• Design for standard production
• Maintenance cost now become delay cost (EU rules)
• Data quality and reliability (predictions) to drive thebusiness
• Price elasticity
• Unlimited/unconstrained operation at lowest cost….
• PMA
Realities OEM (Airframe/Engine) vs Airline
Development
PriceEngine Airframe
Cost of MaintenanceEngine Airframe
Life cycle
+
-
Plan Buy Fly
Engines: Majority of margin generated by future spare
parts sale, i.e.normally customer acts (if not
careful) like a bank providing a loan
Airframe: Balanced cash flow
25 years
Remarks:
• 500 NM Mission
• 150 Seats
(both aircraft)
EIS: 1963/68
B727-200adv A320-200
EIS: 1988
S COC-Change:= - 25% (Trip-
and Unitcost)
• 2- vs. 3-Man Cockpit - 23%
• Fuel-Consumption-Reduction - 39%
• Maintenance - 20%
• Fees (weight & noise) - 21%
Major improvements:
A perspective on today‘s definition of „Game Changing“
Leveraging technology: 1963-1988 „produced“ 25% COC
improvement, The NEO/MAX "only" achieves less than half of this
Sources: Lufthansa Fleet Management 2013 & European Business School
The Airline
Overhe
ads Sales
Flight crew
Fuel
Maintenance
Cabin crew
Training
Passenger handling
Aircraft handling
Navigation charges
Commissions
Passenger services
Depreciation
Interest
Insurance
Crew a
llowance
s
Costs predictably happen…Revenues are more
volatile: costs...and technology
Environmental charges
…and which drive competitive positioning related to the aircraft
…noise, weight and technology are the key drivers
Cash-cost still dominate but all cost elements growCOC are technology driven
Cash Operating Cost (COC)
Capital Cost
Invest per seat has increasedby about 30% over 20 yearsthus neutralising many cash cost benefits
100%
120%
20001989 2009
135%
Year
This trend is accelerating as OEMs• require funding for futuretechnology/research• get pressure from the financecommunity/investors• want to take part in operator benefitsthrough „value pricing“This also drives new busines models foroperators & OEMs
Other industries do better!?Example from consumer goods
Squaring the circle from the airline ops view
Plus
Determine a low complexity fleet,
market driven multiple aircraft
sizes offering high flexibility in
operation and performance while
being state of the (technical) art
and sustainable highly economical
with the smallest possible
environmental impact and a
positive passenger experience.
Conflicting Interests
Homogeneous fleet vs Operational flexibility
Economies of Scale vs Product differentiation
Fleet commonality vs Risk mitigation/-spread
Innovative aircraft vs Low capital expenditure
Fast airport turnaround vs economies of scale
Source: EBS, WHU lecturing material, Lufthansa Fleetmanagement
Co
st/S
KO
Size
Co
st/S
KO
Size
Size200 300 400 500 Size250
300
400
500
PA
X a
nd
bre
ake
ven
PA
X a
nd
bre
ake
ven
danger of uncontrolled yield errosion; market growth necessary to achieve
"unit cost"
with introduction of "new A/C technologies" no inherent growthnecessary to retain unit cost level
traditional Situation starting 2018
Due to different product life cycles there will be an era without
economies of scale starting now (example long haul)
Sources: Buchholz, Lufthansa Fleet Management 2013 & European Business School
Economies of scale and customer needs – the reality!RELATIVE COST POSITIONS
THEN AND TOMORROW
ALL DATA IS THERE SINCE LONG …..EVALUATEOR CONCLUDE
• The challenge of changing algorithms…..
• Smaller lower cost aircraft paired with more airports triggered a change in network structures
0
50
100
150Range
noise
seat mile cost
profit per
flight
trip cost
500 seater 300 seater
Trip cost = risk
Seat
mile
cost
= re
war
d
better
better
future
Aircraft size increasing
FRA ¤
Feeder:
ca. 65%
50 Origins
1. HAM 26. BSL
2. LIS 27. BUD
3. LIN 28. STR
4. MUC 29. WAW
5. DUS 30. ZAG
6. MAD 31. FMO
7. OSL 32. GOT
8. BRE 33. GRU
9. BRU 34. LEJ
10. CPH 35. LYS
11. MAN 36. VLC
12. BLQ 37. AGB
13. TXL 38. ARN
14. CDG 39. CGN
15. FCO 40. EZE
16. LHR 41. FLR
17. LED 42. HDB
18. NUE 43. HEL
19. AMS 44. KBP
20. ATH 45. OPO
21. HAJ 46. PAD
22. VCE 47. SZG
23. ZRH 48. VIE
24. BCN 49. VNO
25. BHX 50. XER
Transfer:ca. 10%> 5 Destinations
a typical LH-flight from FRA-HKG
¤
HKG
A typical LH intercontinental flight transports >>50% transfer passengers, coming from all over Europe
Source: Lufthansa Fleetmanagement, 2013
Some evaluation points…………
Performance Data
Range, Speed, Take-off and Landing
Capabilities
Cash Operating Cost
Fuel, Fees, Maintenance, Emission Cost
Technology and flexibility
Environmental issues
Noise-, CO2´- and pollution emission
Cabin Product
Cabin comfort, seat width
Fleet Strategy
Industry Politics
Risk assessment
Assessment of competitors
Infrastructure issues
Sources: Lufthansa Fleet Management 2013 & European Business School
Size / payload
Range
Speed
Belly-Volume
T/O performance
Noise and emissions
Passenger comfort
Infrastructure at airports
$ Purchase price
$ Value keeping, residual value
$ Empty weight
$ Crewing
$ Fuel burn
$ Maintenance cost
$ Fleet commonality
$ Product support available
Red: denotes directly engine related
16%13% -6 --10 %
11 - 14% 10 - 13%
Airlines
Leasing
Catering
A/C-OEM
GroundHandling
< 3 competitors
at deregulated
airportsMargins:
Hurdle
for Financial Investment
irlineMROSupp-lier
-5 - +3%
OEM-MROSupp-lier
8 - 18%
...
supply chain margins – airlines generate cash
Source:
McKinsey 2001/2002
nécessaire.
16% 15%
6%
14% 13%
10%
30%
Aircraft
manufacturers
Leasing
companies
Airlines Airport
handling
services
Catering Airports GDS
ROCE normatif de la chaîne de valeur du transport aérien – Tous les acteurs, qui peuvent être des filiales des compagnies, se nourrissent de l’activité de transport.
Source:
McKinsey 2009
What is really driving Airlines?Influencing and Stakeholders
Fleet/engines/aircraft are just tools…
MarketNetwork
Economy ,Competiton
Passengers
consumer patterns
Population growth
ManufacturersTechnology
Aircraft
EnvironmentNoise
Emissions
ETS
ResearchFuture Technologies
Innovative Solutions
Mobility patterns
InfrastructureCongestion
AirlineBusiness Model
Fleet Strategy
Cost Structure
Risk
RegulationsOpen-Skies
Traffic Rights
• More electric / solar• Hi Integrated Systems & Big Data• Weight (20%) and reliability• Aero configuration close to 10% (shape
and morphing wing)• Speed, range• Additive manufacturing• Engines• ….
• « reinvent » flying• Passenger centric• ….
The road to success – decide on a the target…..Similar from wherever you look
Results
Inventory
Aftermarketparticipation
Working Capital
base pricingand
consumption
PaymerntTerms
Escalation
$$
Customer satisfaction(who is thecustomer)
Productivity
cost
Service quality
Supplierperformance
& quality
integrity
UNDERSTAND THE METRICS… …AND MORE
28
Everything is relative …. but life cycle counts10 years ago… still valid today even if on lower level
The easy summarydelivering on time on budget on promises within a long termglobal legal framework atlow cost and no environmentimpact
Conflictingvisions ?
emissions
Capacity(air, groun
d)
Industrial intrests
noise
Reasonablyclear
targets?
cost
reliability
Business model
Comfort,environ
ment Do wehave a clear
vision?
Business case
En gineering
Industrial politics
environment
Focus:
What do/did you expect from this session?
nswers
uestionsQ
Food for thought….:
Market forces? Benefits? Creativity? Conservatism?
During a presentation relating to the „Blendedwing body“ experts are shown a risk list whichthey acknowledge as possible showstopper:
• complex flight control architecture, severehydraulic requirements• large auxiliary power unit requirements• new class of engine installation• flight behaviour beyond stall• high floor angle on take-off and approach• acceptance by the flying public• performance at long-range• experience and database for new class ofconfiguration limited to military aircraft
•
But: This list is based on a Douglas Memo priorto launching the DC-8 in the 1950s questioningif this is an acceptable risk
Words of Wisdom? Focus!?!
Strategy equals execution. All the great ideas
and visions in the world are worthless if they
can't be implemented rapidly and efficiently. So
crucial is to build the link to make them
operational AND selling its benefits
We are at the forefront of technology (ABS,…) but
a “boutique” production system which has to
face fierce truly global competition – how do we
maintain this?
Thank you
Disclaimer and references
This presentation represents the presenters opinion based on his professional experience. This does also include forward-looking statements. For forward-looking statements there is risk that they may not be accurate. Readers are cautioned that plenty of factors may affect future growth, results, performanceand market behaviour. The forward-looking statements set forth herein reflect and are based on the presenters professional experience at the date of thispresentation and are subject to change after such date. The presenter expressly disclaims any intention, and assumes no obligation to update or revise anyforward-looking statements, whether as a result of new information, future events or otherwise. The forward-looking statements contained in thispresentation are expressly qualified by this cautionary statement.
Credits:Photos: Nico BuchholzChart illustrations: Nico Buchholz and charts created for an EBS lecture during his Lufthansa time; Lufthansa
