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Part 3 in a series featuring interviews with members of the technical advisory group who worked with the ICCT on our cost assessment of near- and mid-term technologies to improve new aircraft fuel efficiency. The aim of the series is to highlight the potential fuel-burn benefits of "clean-sheet" aircraft designs, to give a sense of how they influence the fuel efficiency trends in general, the risks that come with them, and, most importantly, what might be done to encourage them.
Richard Golaszewski is executive vice-president of GRA, Incorporated., a consulting firm with private-sector and public-sector clients that specializes in economic, financial, and safety issues affecting airlines, airports, air traffic service providers and aircraft manufacturers in the U.S. and internationally. He has four decades of experience in the economics of aircraft technology and has provided his expertise to NASA, FAA, and the Department of Defense, to mention a few.
I interviewed him via email about what a successful clean-sheet aircraft program looks like—from research and development to sales, what made it successful, and what makes sense for manufacturers and airlines today to repeat that success. The transcript below has been lightly edited for length and clarity.
ICCT: Our best projections of the fuel-efficiency trends for new commercial jet aircraft are that improvements in aircraft fuel efficiency coming over the next decade will be only about one-half the technology potential. Why?
RG: There are two ways to look at this. Fleet turnover is low, and it is likely that it makes economic sense to bundle some of these improvements into new variants (either a derivative of existing aircraft/engine model or a clean sheet new design), both in terms of cost and pricing to recover costs. Also, while a technology may exist, there also is the need to reduce the risks of employing it, which takes time and money. New commercial aircraft programs are risky, and require large financial commitments that can materially affect shareholder value.
You will get benefits earlier in time and with considerably less risk by developing a derivative of an existing (and proven) aircraft. The benefits are not as large as with a clean sheet design, but a derivative aircraft will likely cost less to produce. A clean sheet design comes into play when it is no longer possible to get meaningful improvements by modifying existing designs or when an aircraft is needed to serve markets in different ways than is possible with existing or derivative designs.
ICCT: Risk is a major factor influencing aircraft technology development. What do you see as the role of government in promoting innovation towards better aircraft efficiency?
RG: Government needs to invest in high-risk technologies especially in the early stages, where the private sector cannot support the business case for investment due uncertainty of success, long time before payback, etc. Government can increase the readiness of the technology, but it is up to industry to use the technology in a derivative of an existing aircraft or a new aircraft design. Boeing recently discussed a “middle market” aircraft that will likely be a clean sheet design. Boeing’s current thinking is this would be a twin-aisle aircraft in the B-757/ B-767 size range (between A321 neo and A-330).
ICCT: How does that compare to the role of the private sector, especially since the government is absorbing the risk?
RG: The private sector makes commercial business decisions that provide enough of a return to shareholders to warrant their continued investments in the company. But it also needs to take research results and embody them in products because this is not the role of government.
ICCT: Beyond risk, how important is the relative access to capital by various parties (engine OEMs, aircraft OEMs, airlines, lessors) to explaining willingness to pay for more fuel-efficient aircraft and especially clean sheet designs? Would providing preferential incentives or financing for more fuel-efficient aircraft help overcome these barriers?
RG: Boeing and Airbus can access capital markets if they can justify the investment to their shareholders. But, a clean sheet design requires a high payoff to cover development costs and technology risk. This really becomes an issue of shareholder expectations and the potential impact of the clean sheet design on earnings and the firm’s stock price. I don’t think preferential incentives or financing would involve enough money to induce a clean sheet design, given the cost and risk to bring it to market. A clean sheet aircraft starts over on the production learning curve and competes with aircraft (both existing models and improved ones) that are well down this curve. A shift to the European model of repayable development grants might reduce risk to the manufacturer of a clean sheet design where the grants are repaid from future sales. This might spur new aircraft programs. Policies like this raise concerns about moral hazard, meaning that companies may engage in excessively risky behavior because someone else shoulders the burden of failure.
ICCT: What is an example of a successful clean sheet aircraft program in the past, and why was it successful?
RG: The A320 is good example, but the A320 being delivered today is very large improvement over an A320 first delivered in the late 1980’s. (There is a recent article on the 30-year history of the A320, which has become the aircraft program with the largest number sold after the 737.) The A320 introduced fly-by-wire to commercial airliners, which contributed to reduced weight. It had a new high bypass turbofan engines—the CFM-56 and the International Aero Engines (consortium of Pratt and Whitney, Rolls Royce and others) IAE V2500). It was successful because of new technology (fly by wire, flight envelope protection meant to keep the aircraft under control at all times by not allowing it to get into unusual attitudes, altitudes, etc, and high bypass engines among others) and favorable economics, and it sold at a relatively low price via big discounts. The A320 provided an effective competitor for Boeing once McDonnell Douglas was acquired. (Airlines had an interest in keeping two viable suppliers in the market.) In addition, its performance and capability have been continually improved over time. Airbus is now starting to deliver the A320neo, which is a substantial derivative. Airbus is offering a new engine choice for the A320neo, a geared turbofan from Pratt & Whitney which is designed to provide a substantial improvement in fuel efficiency. However, this engine has some problems related to being the first of a new type.
I’m not sure of the A320 program’s overall finances in terms of shareholder value, cash flows and repayment of government launch aid; however, the sheer number of aircraft sold made the aircraft and Airbus a success.
ICCT: When a new OEM enters a new market segment, by definition they do so with a clean sheet design (e.g. A320, C-Series) with markedly better fuel efficiency than existing in-production aircraft. How might this influence incumbent manufacturers’ decisions to introduce a new type, either a clean sheet or derivative aircraft?
RG: Both of those aircraft offered substantial improvements over what was available in the market. The A320 filled in a size gap between 737 and 757, while C series is designed with capacity greater than large a RJ but smaller than newest versions of A320 and 737.
In the case of the A320, Boeing countered with greatly improved 737 with high bypass engines (CFM 56). As a derivative, the 737 had much lower development costs and was well down the production learning curve so it could be priced competitively. Boeing has added winglets for the 737 in recent years which further reduces fuel burn.
While very different in size and payload range, the C-series is somewhat like the 787 in terms of technology improvements over existing single aisle narrow body aircraft and the largest RJ’s. I expect that the reaction of incumbents like Boeing and Airbus will be to compete on price given that both designs (the 737 and A320) are well down the learning curve. The C-series is also facing competition from a large number of new aircraft models targeting same size range: the Russian MC-21 (150 to 212 seats), the Chinese Comac 919 (158 to 174 seats) and the Japanese MRJ (more of a regional jet with 76 to 88 seats). Russia has also introduced the Superjet 100 with 98 seats. However, these may not necessarily be better than the C-series; many of these programs are encountering delays in production or a need to fix problems. but will give the C-Series (and each other) lots of competition, which does not bode well for its commercial success.
ICCT: Some aircraft designs came with input from airlines, or even at their request. What do you think about this relationship between sellers and buyers?
RG: Airlines are not a monolith that decides as a group which aircraft manufacturers will bring to market. Today, required fuel efficiency is driven by two things—the price of fuel and the need to comply with emissions standards. I think we are past the era where one airline’s requirements will be sufficient to support the launch of a new aircraft. Sometimes fuel efficiency comes about from other policies. The phase out of stage 2 aircraft for noise reasons was really enabled by high bypass turbofan engines to reduce noise. These could provide needed thrust and were also more fuel efficient.
ICCT: So do you think that an emission standard that is stringent enough to push fuel-efficient technology is a good idea?
RG: As an economist, I would generally prefer tax or surcharge on emissions to a fixed standard. For example, we see that when fuel prices go up, the retirement of older aircraft accelerates. Another idea would be to apply pollution standards across sectors and to let a market develop for emission credits, irrespective of source. Auctioning emissions rights irrespective of source (e.g., aircraft, automobile, factory, etc.) would be the most economically efficient way to reduce emissions. An emissions credit market requires design and enforcement. However, society would be better off by getting the emissions reduction at the least cost.
ICCT: Earlier you mentioned fuel price is a key input into fleet planning and presumably investment planning by OEMs. How do you expect that today’s low fuel prices may impact either supply or demand for new clean sheet designs?
RG: I don’t think that temporary price variations in the oil market have large effects. Manufacturers and airlines look at the expected long-run price of fuel as well as future emissions standards when deciding to launch clean sheet aircraft. This is what led Boeing to launch the 787. Their market view was that people preferred non-stop flights to connecting ones. But this smaller aircraft had to have a high level of fuel efficiency to enable very long range flights. This required a relatively small twin-engine wide-body aircraft when compared to the 777 and A330. Airbus on the other hand believed that connecting people through mega-hubs was the way to go and launched the A380. Both aircraft models had considerable difficulties when introduced in that deliveries were delayed and some of the early production aircraft required substantial re-working. When there is a drop in fuel prices we do see some of the less efficient aircraft come out of retirement because they may only be economic when fuel prices are low.
ICCT: What do you think the US government can do better in pushing fuel-efficient technologies on US commercial aircraft?
RG: Governments act in several ways—one is via explicit fuel efficiency requirements similar to CAFE standards for automobiles and light trucks. Another way to do this is via a higher tax on fuel that would also provide incentives to use less fuel. Tradable emission credits (via an auction) offer the best solution, but setting up working emissions credit markets has been problematic. In addition, governments can invest in new technologies to increase fuel efficiency by developing more efficient aircraft designs, lighter weight materials and more fuel efficient engines. An often overlooked source is from the transfer of technology developed for military applications (lighter materials, ability run at higher temperatures, and better aerodynamic design tools, among others). Often when applied to commercial airliners these performance improvements can be taken in terms of increased fuel efficiency. Many also believe that some fuel efficiency gains could come from improving the ATC system.
I think big gains in the future will have to come from non-polluting or very low pollution propulsion systems for aircraft. This requires research and innovation. Another source could be innovative aircraft designs such as those currently being pursued by NASA.