Airbus New A350 Closes Gap With Boeing, Emirates Says
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smokejumper
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Tim Clark is difficult to predict. Like John Lehey, he seems to shoot from the hip and often says things that confuse the issue. I'm certain that he will do whatever is in the best interest of his airline and pick the "right" airplane. He (actually his analysts and engineers) will closely look at the competing designs and the life-cycle costs (initial acquisition, fuel, maintenance, spares, training, etc.) and pick the best option (for Emirates).
We do not know the costs of each design. The variable costs are more difficult for the manufacturer to ascertain than are the fixed costs. Many of these costs are for "out-of-house" items that are purchased from outside suppliers (wings, seats, engines, control systems, etc.). Many are from overseas suppliers and are subject to currency valuation swings. Also, since delivery is generally 4-8 years out, the time value of money, as well as changing currency valuations, play a big role.
The fixed costs, on the other hand, are generally better known and cotrolled. The land and buildings needed to produce the plane, the labor rates paid to engineers (designers) and overhead personnel, the design hours involved, etc. can be fairly accurately estimated.
The big trick is to combine these costs into a sales price. If the company decided it wants to amortize the fixed costs so that break-even is reached at the 400 plane level, you know how much to factor into the proposal for each unit. If the order is really important, the manufacturer may decide to reduce the fixed cost allocation to reduce the price per plane. This effectively raises the break-even point, but can reduce total costs by spreading the overhead burden over a large base. Eventually, all costs need to be recouped or a loss will result, but the proposal price has a lot of "wiggle" in it. The whole process is a giant balancing act!
It seems that the Boeing 787 may be sold out through 2012, but the A350 will not be available until 2014, so Boeing has some earlier slots available (and Boeing may add a second line). If Airbus wants to preserve its momentum, they need to do something, and price may be the way to break the log jam.
We do not know the costs of each design. The variable costs are more difficult for the manufacturer to ascertain than are the fixed costs. Many of these costs are for "out-of-house" items that are purchased from outside suppliers (wings, seats, engines, control systems, etc.). Many are from overseas suppliers and are subject to currency valuation swings. Also, since delivery is generally 4-8 years out, the time value of money, as well as changing currency valuations, play a big role.
The fixed costs, on the other hand, are generally better known and cotrolled. The land and buildings needed to produce the plane, the labor rates paid to engineers (designers) and overhead personnel, the design hours involved, etc. can be fairly accurately estimated.
The big trick is to combine these costs into a sales price. If the company decided it wants to amortize the fixed costs so that break-even is reached at the 400 plane level, you know how much to factor into the proposal for each unit. If the order is really important, the manufacturer may decide to reduce the fixed cost allocation to reduce the price per plane. This effectively raises the break-even point, but can reduce total costs by spreading the overhead burden over a large base. Eventually, all costs need to be recouped or a loss will result, but the proposal price has a lot of "wiggle" in it. The whole process is a giant balancing act!
It seems that the Boeing 787 may be sold out through 2012, but the A350 will not be available until 2014, so Boeing has some earlier slots available (and Boeing may add a second line). If Airbus wants to preserve its momentum, they need to do something, and price may be the way to break the log jam.