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Lockheed's New Supersonic Jet: Can It Be Profitable?


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#1 Buffy

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Posted 02 December 2014 - 02:14 PM

Thanks to Shane Ferro (@shaneferro, Econ writer at @businessinsider) for the idea for this topic that was generated by a tweet-discussion we had this morning.

 

Lockheed is building a new supersonic jet, designed to fix many of the problems that prevented flying them across the US, targeted at the coast-to-coast market. The article talks about solving the noise abatement problem:

 

One challenge the Lockheed Martin engineers are facing is building a craft that can travel at supersonic speeds but not make sonic booms, which are created by objects traveling faster than 760 miles per hour, the speed of sound. The N+2 has one engine on the topside of the craft, and two under the wings, in a configuration designed to reduce noise.

"To achieve revolutionary reductions in supersonic transportation airport noise, a totally new kind of propulsion system is being developed," Michael Buonanno, Lockheed Martin's manager of the NASA N+2 program, told the Daily Mail. "We are also exploring new techniques for low noise jet exhaust, integrated fan noise suppression, airframe noise suppression and computer customized airport noise abatement."

Source: Crazy-looking jet would travel from NYC to L.A. in under 3 hours, Jessica Plautz, Mashable, Dec 2, 2014

 

...but they don't talk about some of the other key problems most notably, can it ever make any money when the Concorde never did?

 

Now to stop for a second to get sciency, the other big technical elephant in the room is that Supersonic jets fly higher and have engines that run much hotter and thus they are much, much more damaging to the Ozone Layer than regular jets (that do plenty of damage on their own). There's nothing to indicate Lockheed has done anything about this, so it'll be an interesting regulatory issue when the thing gets closer to market, but I'll leave that for another post.

 

Supersonic planes have a long history. In the 60s and 70s there was a race on to develop them that was heavily subsidized by government research contracts in the US, Europe and the Soviet Union. The US companies, principally Boeing and Lockheed, spent quite a bit of their own money on R&D to win what was really a government funded design competition with the Boeing 2707, winning out in in 1967. In 1971 though, government funding was cut, and with concerns about the Ozone Layer, sonic booms across the Midwest and general concerns about it's economic viability, Boeing had no way to carry on on it's own, and the program was shut down long before a real prototype was ever built.

 

This left the British/French Concorde and Soviet TU-144 to battle it out, both going into full production and commercial use. Now the Soviets--already having to really stretch funds with an economy that was well into it's long slow decline toward disintegration in the 1990s--did the project as a minor point of international prestige, but only produced 16 Tu-144's that in their lifetime only flew 55 scheduled passenger flights and only by Aeroflot the last being in 1978. The main issue with the Tu-144 was it's penchant for crashing or simply blowing up on the ground. It continued to be used into the 1980's for cargo and training for cosmonauts.

 

The Concorde ultimately was the only "commercially successful" Supersonic Transport (SST), and those air quotes are really required: the planes flown by British Airways and Air France pretty much exclusively ran at a loss during it's commercial lifespan (through 2003) in strict financial terms, but because the development costs were paid by the British and French governments and were not passed on to the airlines, they could ignore these. The common explanation for what ultimately killed it was the crash of the Air France Concorde in 2000 followed by a dramatic drop in demand after 9/11 (the first post-crash flight was actually on 9/11/2001), and increasing maintenance costs and other operational expenses.

 

It's that "other operational expenses" that's interesting though, and questions about a new SST's viability is strongly tied to concerns about the price of oil.

 

Now the thing about the Concorde and what apparently is the profile for the new SST is that they are by definition, "luxury travel":

  • The number of passengers they carry (100 and 80 respectively) is very small, and thus per flight fixed costs (pilots/crew, landing fees, etc) are higher per seat.
  • The amount of fuel per mile flown (and thus per seat) is significantly higher than a non-SS plane (start a Physics thread for that if you'd like).
  • The value to the customer is principally saving a few hours, which few people care about or are willing to pay much of a premium for.

These combine to ensure that these planes are "all First Class" configurations, costing multiples of 5-10 times what an economy seat on a 747 would cost.

 

Now the issue that was brought up in my Twitter conversation this morning was about "does the price of gas actually affect the economic viability of the SST?"

 

The short answer to that is "no in the short-term and yes in the long-term."

 

The interesting thing about luxury goods is that rich people don't pay much attention to price. They don't say "oh gosh, the Lamborghini is $50,000 more than the Porsche, so I'd better buy the Porsche." No, they buy the Lamborghini anyway because it looks cooler, or the Porsche because of course German engineering is superior. So if the price of oil goes up and the cost of a First Class seat goes up, they don't really care, they're still going to travel First Class. That is to say in economist lingo, "the demand curve for luxury goods is inelastic."

 

So in the short run, no gas prices going up aren't going to affect demand.

 

But the key thing is that there are substitutes for what is basically little more than "faster air travel" all involving non-SST aircraft (giant sleeper "pods" in commercial airliners, private jets with complete privacy and private/custom service, etc.), and that's where there's a key structural issue with the SST that makes it uncompetitive in the long-term: that's that the simple physics of moving an object through the air requires far higher energy consumption the faster you go.

 

So the bottom line is that it's not so much the *price* of gas all by itself, but the fact that you've got to use far more gas per mile (and per seat), that drives up the cost *much faster* for the SST than for it's competitors.

 

As I said, in the short-term that's not going to have an effect, and if SST's and non-SST's had similar (even close) fuel efficiences you wouldn't see much change in the market, but since that fuel efficiency is so out of whack, as gas prices increase, the difference in fares will change at a geometric rate, and that *will* cause even the rich folks (and importantly the not-so-rich who save to partake of luxury when they can) to start to migrate to these other substitutes, which provide more amenities with which the "get there faster" just can't compete (Economists call this "a shift in the demand curve").

 

So because of this key differential in fuel efficiency in combination with the design limitations (gotta make that fuselage very slim and non-accomodating for luxury sleeper/teevee/laptop-friendly seats) and very long development cycles (to try to remedy that comfort issue), SST's have a very limited potential market. In the US, routes that would support this are very limited, encompassing mostly Los Angeles to New York, with more limited demand from cities like San Francisco, Chicago, Dallas, Boston, and Washington DC.

 

And because there's a limited potential market, it makes it really difficult for the aircraft manufacturer to recoup the R&D costs since they won't build as many.

 

And that means the airlines will have to pay more per seat for these planes, which means they'll have to charge even more for a plane ticket.

 

And that means fewer people will buy them in the long run.

 

Kind of a vicious cycle.

 

So as much as I'd really like to fly one (because they're cool, not because I really need to get to New York faster), I'm not hopeful about the future of SST's.

 

 

As scarce as truth is, the supply has always been in excess of the demand, :phones:
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#2 CraigD

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Posted 03 December 2014 - 06:13 PM

I don’t think a supersonic airliner (I prefer the anachronistic 1970s “SST”) needs to be profitable, just not be too unprofitable, because, like British Airways’ and Air France’s use of the Concorde, these exotic machines are primarily prestige makers – “poster planes” – for the airlines that fly them and aircraft companies and nations and international consortiums that build them.

The main thing, I think, that can retire, or prevent from every being built, bought and flown, a plane like the Concorde or Lockheed’s N+2 (not IMHO a good name, though I expect if Lockheed reaches the point of seriously planning to complete design and build them, they’d find a better one) is damage to its reputation as a technological wonder. Being an aged design can contribute to this, as can crashing. The Concorde was and did both in 2001.

Not being able to fly supersonically over populated land (which pretty much all land where an airliner has business flying is), the Concorde was locked out of the mostly over-land US market. If the N+2, with it marvelously computer modeled 100x (-20 dB) reduction in sonic boom pressure, can win approval for over land use, it could get the US market the Concorde missed, and be a prestige maker for Lockheed and a US Airline that flies it.

Assuming the N+2 can actually be built and flown in many or all of the major airline markets, its feasibility will, I think, be in how effectively it can differentiate airlines that have it from those who don’t in the eyes of customers booking flights – more often than not via price-comparing internet amalgamator services – on ordinary airliners. Will they spend $250 instead of $230, or accept a less preferred departure time or length, for a higher prestige brand?

It was a sad day for me when the Concorde was retired before I’d had a chance (or enough disposable cash) to ride in one. If a commercial SST flies again to anyplace I can justify going, I won’t miss the chance. I suspect I’m fairly representative of a technophilic, financially comfortable segment of the population who feels the same way, viewing a SST as a very high-end amusement ride. Together with the money-obsessed show-off segment, I’m hopeful that there’d be a reliable demand for a small number of SSTs (20 Concordes were built, so given it’s greater market reach, I’d hope for at least than many N-2s or similar).

#3 Buffy

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Posted 03 December 2014 - 06:29 PM

I don’t think a supersonic airliner (I prefer the anachronistic 1970s “SST”) needs to be profitable, just not be too unprofitable, because, like British Airways’ and Air France’s use of the Concorde, these exotic machines are primarily prestige makers – “poster planes” – for the airlines that fly them and aircraft companies and nations and international consortiums that build them.

 

I agree with this, and it is important to note that actually because they did not have to amortize any development costs, BA and Air France both did make money on them as long as they kept them filled, which they did pretty well until the crash and 9/11 dropped demand enough to mean a lot of flights were taking off half empty. Even then, had the demand recovered, they all needed significant renovation and upgrading and Airbus simply didn't want to do it any more, no matter how much Richard Branson was willing to offer them to do the work (the story about that behind the Concorde link in my previous post).

 

 

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