The Dreamliner saga: What is the value of an inaugural flight?

Since my last post ten days ago all the 787 fleet has been grounded, but interesting facts about operating a 787 continue to emerge. Because airlines make a big deal of introducing the aircraft, they used creative techniques in order to keep the Dreamliner’s flights on schedule. Here is how WSJ describes it:

Launch customer All Nippon Airways Co. provides an example of the lengths to which airlines and Boeing have gone to keep 787 flights operating.

ANA’s inaugural flight from Seattle to Tokyo of one of its Dreamliners last October was delayed by 24 hours because of a faulty electronics cooling pump that has been a persistent problem for operators of the new jet.

With the twin-engine 787 stranded at the gate, ANA and Boeing officials trekked to the company’s nearby facilities to find a spare, according to a person familiar with the move. Boeing has since redesigned the pump.

Boeing spokesman Marc Birtel said the company continuously works with all its customers to keep aircraft in revenue service and said the plane maker worked with ANA to solve the issue with parts from its spares facilities.

United Continental Holdings Inc. has also resorted to creative measures. Worried about the 787’s reliability—which already prompted a delay in the start of service with the jet between Houston and Lagos, Nigeria—United had at least two of its six 787s on standby for the airline’s first trans-Pacific flight from Los Angeles to Tokyo, according to a person familiar with the planning.

The scheduled 787 left as planned, and two of the reserve planes flew back to Houston without passengers, according to the same person and flight-tracking website Flightaware.com.

United spokeswoman Megan McCarthy said repositioning empty aircraft isn’t uncommon, but wasn’t able to say specifically if the extra 787s in Los Angeles were in place to support the Tokyo flight.

Although the evidence is anecdotal, it shows how much airlines value an inaugural flight, in this case, United, Los Angeles to Tokyo. Suppose that with 95% probability an aircraft will have no issues, and there is a 5% chance that a flight-delaying problem will be discovered. Let’s not worry about revenues yet, just try to quantify losses from a potential delay for an inaugural flight and compare it with an ordinary flight.

Suppose for the sake of illustration that if an ordinary flight is delayed for a long time, the airline incurs a cost of $10000. This can happen with 5% probability, so the expected cost is $500. This is an acceptable level of losses. Now, consider an inaugural flight. Obviously, the stakes are higher, so if the flight is delayed the cost will be much greater. But by how much?

We know that United had at least 2 backup airplanes. If failures happen at random, and independently from each other, the probability that all three aircrafts will have a problem will be 0.05^3 or 0.000125. Suppose that the airline does not want to raise their expected loss threshold for the inaugural flight, i.e., they keep it at $500. Then the failure cost for an inaugural flight is 500/0.000125=4,000,000 or 400 times greater than for an ordinary flight.

A few caveats. Of course, failures are not necessarily independent. If a problem with a battery is discovered in one plane, chances are the other two might have it as well. But even after accounting for this correlation, the value of an inaugural flight is about 100 times more than a regular one.

Second, we assumed that the loss threshold is the same for both types of flights. One can argue about that, but it seems that reducing it for inaugural flights does not make much sense. In some way this is an accounting construct, representing the amount of losses an airline is willing to incur on average. On the other hand, if somehow the airline is willing to increase it, then the true cost of failure will be even greater.

Third, we assumed the probability of a serious, not weather or airport related delay to be equal to 5%. In terms of the consequences, this serious delay would equivalent to a cancellation. Interestingly, there is a paper on that. The cancellation rate in the US airline industry is around 2.5%, and the paper reports that many of them are not mechanical, but revenue related (think nearly empty flights). So 5% seems to be a reasonably conservative estimate.

 

 

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2 thoughts on “The Dreamliner saga: What is the value of an inaugural flight?

  1. More information came out today in the WSJ about the Lithium batteries , which is the distinguishing factor for the 787 Dreamliner with its higher power combined with its low density and space. The article goes on to explain the science, but I found it interesting that it’s not the use of the batteries that could cause the overheating, but simply overcharging it and causing “thermal runaway” of up to 570-750 degrees Fahrenheit. Seems like a big problem to overcome for Boeing and their engineers, as this story continues to unfold.

    http://online.wsj.com/article/SB10001424127887324624404578258031662137660.html?mod=WSJ_hps_MIDDLENexttoWhatsNewsThird

  2. After approximately three months, Boeing has appeared to finally solve its “Dreamliner Crisis.” As was previously posted above, Boeing has had serious quality management issues with its new 787 Dreamliner Model. The Dreamliner suffered from an electrical system error, which was caused by the planes lithium-ion-batteries. As a result, the Dreamliner was grounded for three months, causing a total of $600 Million in expenses. Several airlines have said they will seek compensation from Boeing, potentially adding to the plane maker’s losses. In addition to the tangible costs, Boeing’s reputation has been severely tarnished. The “Dreamliner Crisis” will definitely impair the companies ability to compete with its major competitors, including Airbus.

    As we have discussed in class, companies must find the appropriate tradeoff between Type 1 and Type 2 errors in order to balance between external and internal costs. Boeing competes in the aircraft manufacturing business, which has as high external costs as any other industry. Boeing cannot afford to make mistakes as people lives are dependent on their product. Therefore, and as it can be seen by the $600 million tangible costs in addition to their tarnished reputation, Boeing should have incurred more internal costs in order to avoid this crisis. Hopefully, Boeing Management will learn their lesson and be more willing to accept higher internal costs in order to prevent another “Dreamliner Crisis.”

    http://www.cncworld.tv/news/v_show/32853_Boeing_dreamliner_crisis_nears_end.shtml

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