Revolutionary Industrial Change in Air Transport:
Research and Strategic Application
Robert N. McGrath, Ph.D.
College of Business
Embry-Riddle Aeronautical University
600 S. Clyde Morris Blvd.
Daytona Beach, Florida 32114-3900
(386) 226-6703, fax -6696
(mcgrathm@erau.edu)
This first revision submitted to
International Journal of Innovation and Technology Management
July, 2004
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ABSTRACT
This paper summarizes and interprets several years of research that considered the
National Aeronautics and Space Administration’s assertion that the Small Aircraft
Transportation System (SATS) will become an economical alternative to automobile and airline
travel -- a radical paradigmatic shift. However, the literature suggests that revolutionary changes
to major techno-economic paradigms should not always be made in singular radical disruptions,
but rather, through the commercialization of technologies in series of market niches chosen
wisely. Therefore, hypothetical SATS aircraft cost and technical performance characteristics
were computer-modeled to simulate SATS in the corporate aviation environment, and in the air
taxi industry. Results of exploratory research based on these models are reviewed. From the
standpoint of traditional Strategic Management theory, implications are offered regarding the
successful incubation of this emerging industry.
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The National Aeronautics and Space Administration (NASA,) leading several coalitions
of public, private, and educational institutions, is investing millions of dollars to research and
demonstrate the feasibility of the Small Aircraft Transportation System (SATS) concept. “The
envisioned outcome is to improve travel between remote communities and transportation centers
in urban areas by utilizing a new generation of single-pilot light airplanes for personal and
business transportation between [sic] the nation’s 5,400 public use general aviation airports”
(“NASA Small,” 2000) ... “Burgeoning transportation demand will be dominated by the
increasing value of time during the information age, when human/intellectual capital replaces
physical capital as the basis for the creation of wealth. The new value of time makes doorstepto-destination speed the premium commodity during this new era” (Holmes, 1999.)
But scholarly research in Strategic Management and related fields suggests that the
successful development of a SATS mass-market should most likely be preceded by the
development of industrial and institutional markets (Utterback, 1994; Christensen, 1997; Afuah,
1998.) So, in a series of funded and independent exploratory studies conducted by the author,
NASA’s “hypothesis” was examined in the context of (a) corporate/business aviation and (b) the
air taxi industry. NASA itself has speculated that these will be likely early markets (“Southeast
SATSLab,” 2000; “NASA-led,” 2001.) This paper summarizes and interprets overall findings.
First, a theoretical interpretation of the situation is outlined. Second, results of research are
summarized. Third, the research is interpreted in light of theory, and the paper concludes.
SATS AND THEORIES OF EMERGING TECHNOLOGY-BASED INDUSTRIES
Most industries experience complex market, economic, and technological forces, and as a
result, the world does not always beat a path to a new technology (Porter, 1980, Foster, 1986,
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Tushman & Anderson, 1986.) Some major evolutionary forces are fairly predictable, though,
which help us generalize certain patterns that are likely to repeat in the SATS scenario.
On the whole it is correct to view SATS as a substitute technological paradigm (Porter,
1980.) The consumer benefits that SATS will deliver are already being delivered by other
transportation technologies - of course, with so much alleged room for improvement in speed
that a discontinuity, or revolution, is implied (Foster, 1986.) NASA’s use of door-to-door travel
time as a main metric of SATS’ viability illustrates this point.
Before proceeding, terms such as “revolutionary” (Foster, 1986,) “discontinuous”
(Tushman & Anderson, 1986,) and “radical” (Utterback, 1994) should be addressed. In the
literature, there is no universally applicable definition of these terms as they apply to
technological change or the paradigmatic change implied in the SATS vision. Loosely speaking,
a revolution, discontinuity, or radical change may occur in any or all of a technology, a firm, a
market, an industry, an economy, and so forth. Also, while the terms are very much related, they
are not synonymous. Their main use is to communicate degrees and foci of change in a relative
(though sometimes simplistic) sense, almost dichotomously in contrast with terms like
“evolutionary,” “continuous,” or “incremental,” respectively. This is how these terms are
applied in this paper. Also, it must be admitted that long-term revolutionary change can be
accomplished through a series of accumulated steps that seem individually incremental. Indeed,
noting this dynamic is part of the argument presented below.
In terms of the likelihood of widespread substitution of SATS for other technologies,
then, the issue is not whether SATS will be able to provide faster transportation - it is whether
SATS will deliver superior value. The value of a product or service can be measured as the
performance delivered per the cost incurred (Porter, 1980.) The substitutability of one (new,
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emerging, commercially unproven) technology for another (familiar, mature, widely accepted)
technology, can be assessed by comparing their relative values, or performance/price ratios.
The performance/price ratios of mature technologies are, almost by definition, very good.
First, due to phenomena such as economies of scale and scope, amortization of sunk costs over
long production runs, high asset utilization rates, and learning effects, years of
commercialization have made them economical, at least on a per-unit basis. Over time, as
technologies stabilize and designs standardize, firms gravitate to "rational" pricing strategies,
such as unit-cost-plus-margin.
Second, mature technologies are normally high-performing in ways that are valued by
consumers. And in sophisticated mass-markets, overall “performance” usually means a
multidimensional bundle of attributes. In transportation, for example, speed is bundled with
safety, reliability, comfort, etc. But maturity precludes much room for improvement in technical
performance. When the demand exists for radically improved performance, logic compels a
transition to new technology (Foster, 1986.)
Overall, potential substitute technologies typically do not unambiguously outperform
their mature rivals in their early stages of development, but contain the inherent potential to
outperform the mature technologies by wide margins in the long run. Here it is important to
note that “development” includes pre-commercialization stages, sometimes overlooked in
generic models of product life cycles (introduction-growth-maturity-decline.) In other words the
technology life cycle begins earlier than the classical marketing product life cycle. Any complex
technology has a gestation stage prior to commercialization, sometimes a very long one.
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In addition to being under-performing, new technologies are also typically costprohibitive, especially on a per-unit basis. This is partly because much R&D and other kinds of
costs have been sunk without generating any revenues in return. Early in the development of
new technologies, then, they usually do not present very good mass-market value. If rationally
priced (cost-based,) they are expensive and relatively under-performing. But again, unit costs of
new technologies can not ordinarily come down to levels that would make them competitive in
mass markets, until production volumes become large enough to reap ostensible scale/scope
economies, learning effects, etc.
At this point the reader should note the “Catch-22” being presented. A technology might
experience only the early part of its potential technology cycle (i.e., stopping prior to actual
commercialization,) if the price/performance “business case” never develops. To successfully
commercialize a truly revolutionary technology that faces a substitutability problem, and break
free of the Catch-22, it is often true that pricing decisions must be made independent of
production costs. Firms must price their products below unit production costs in order to achieve
key imperatives such as the development of crucial target niches.
In addition to early cost and performance problems, truly innovative technologies face
psychological barriers to acceptance by the mass-market (Tushman & Anderson, 1986; McGrath,
1996.) Before the mass-market can be really developed, lead users, who essentially constitute
big market experiments, typically need to be nurtured just to prove the viability of the product
concept, to experience and help resolve growing pains, and to suffer economic externalities with
which the mass-market has little patience (lower-than-acceptable reliability, difficulty getting
support services, etc.) Such niches include individuals who just like being the "first kid on the
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block" with a new technology, industrial customers which might value the new technology as
helping control costs or generate revenues, the military, and/or governments which might
subsidize a new technology for a variety of political, social and economic reasons. Such
pioneers are needed sometimes for decades, simply to provide the time, learning, production
volumes, and consumer feedback needed to make strides in improving the performance/price
ratio of the new technology.
SOME EXPLORATORY RESEARCH
To examine the related part of the NASA vision, studies were conducted from 1999 to
2003. While several were funded and responsive to contractual goals (McGrath & Prayudi,
2000; McGrath & Bonney, 2003,) others (McGrath, 2002) were conducted independently as
logical follow-on studies, of interest to the author because of their relevance to theory. This
section briefly summarizes the results, all of which have been peer-reviewed elsewhere.
SATS Baseline. In January of 2000 the author delivered to NASA a baseline study of the
Life Cycle Costs (LCC) of SATS aircraft (McGrath & Prayudi, 2000.) Life Cycle Costing is a
rigorous analytical technique adapted from systems engineering (Fabrycky & Blanchard, 1991.)
One version is a hybrid engineering-economic technique that models costs as dependent
variables, the independent variables being defined by characteristics of a technology. For
example, the nominal weight of any type of aircraft is known to be correlated with, and a
parametric predictor of, operating cost. Parametric modeling is often used early in the
development of a new technology.
In the SATS study, Life Cycle Costs were all costs incurred throughout a defined period
of aircraft acquisition, ownership and operation. The SATS LCC model envisaged aircraft to be
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evolutionary derivatives of commonplace General Aviation and Business Aviation aircraft, but
advanced enough to achieve important NASA goals such as improvements in fuel and
maintenance costs. Hypothetical aircraft were modeled as being governed by seven basic
parameters: most notably, the number of engines, the type of engines, and seating capacity.
Results and Implications. One basic observation was that the prices of SATS aircraft will
be major factors that determine the economic viability of the vision. It will cost millions of
dollars to operate even a “low-end” (low price, modest/poor relative performance) aircraft over a
normal period of ownership. Achieving unprecedented advancements will still fall short of
achieving cost and performance goals that would suggest large-scale substitution of aircraft for
autos in the mass market for personal transportation. It is more likely and perhaps essential for
SATS to first incubate in industrial or government niches. While disappointing to some aviation
enthusiasts, this conclusion was unsurprising in light of the literature. Two clear questions
emerged. First, since airplanes are so expensive relative to autos, how will considering the value
of personal time affect the SATS vision? Second, which niches are viable as SATS incubators,
theoretically necessary to develop the latent mass market?
SATS in the Corporate Aviation Industry. The author and several research assistants
conducted several literature reviews as to the economic valuation of personal time; absolutely no
results emerged. However, the value of employee time has long been a matter of accepted
Human Resources practices. For example, corporate aviation (organizations using “business
jets” etc.) and the National Business Aviation Association (NBAA) have long argued that one of
the advantages of a corporate flight department is its impact on employee time and productivity
(Castro, 1985.) This premise is related to NASA’s assertion that time will become the critical
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commodity in the “new economy.” Since the value of employee time can be respectably
evaluated, and since corporate aviation was already speculated as being a likely SATS incubator,
this scenario was opportune for study.
In the next series of studies, then, NBAA-sponsored software was used to calculate and
contrast the costs of traveling on SATS aircraft, airlines, and autos among various samples of
origin-destination city pairs. Stratified samples were taken on national and regional bases,
according to different versions of the SATS scenario. In addition to comparing trip costs on an
ordinary accounting basis, the software calculated the economic value of the amount of time
consumed by each corporate employee during a trip, using an estimation algorithm common in
Human Resource Management (“Travel$ense,” 1999.)
Results. In all studies the consideration of the value of time proved critical. To illustrate,
Figures 1 and 2 provide results of examining a random sample of trips in the United States, (1)
before and (2) after considering the value of time, given the choice of traveling by auto, airline,
or an advanced SATS-like, twin-engine turboprop aircraft (McGrath, 2002.) The metric depicted
on the vertical axis represents a ratio of door-to-door trip speed to trip cost, such that the higher
the ratio, the better. In Figure 2, then, the cost of employee time is included in the denominator.
One can easily see the importance of the value of time by comparing the two figures. They
imply that while time always costs money, it costs far less more money in the faster modes of
travel, helping the argument for corporate aviation and SATS. This appeared in all studies.
-------------------------------------------------Place Figures 1 and 2 about here.
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Another pattern that emerged in these studies is not shown in these figures. Advanced
versions of low-end aircraft generally appeared to be cost-competitive when time was
considered, because even they were much faster than any auto. High-end aircraft were much
more costly to buy than low-end aircraft (sometimes by a factor of ten) and therefore, were
nowhere near competitive in ordinary accounting terms. But after considering the value of time,
even high price-and-performance configurations often appeared to be good alternatives because
their superior airspeeds saved more time than all the other alternatives.
Assumptions about trip distances made a large difference, though, suggesting that SATS’
viability lies within a range of trips from about 200 to 500 miles. Within that range auto
effectiveness plummeted with distance, while SATS’ effectiveness gradually improved. Airline
fares were mostly determined by factors other than distance, as any experienced traveler knows
(note the scatter patterns in Figure 2.)
Implications. Overall, while these studies were exploratory and non-empirical, NASA’s
assertion about the economic viability of SATS received qualified support. Corporate aviation
may be a viable testing and maturation ground for SATS technologies and operational concepts.
Of course, more than one niche may be viable as a SATS incubator, so the next research question
was to address another, already articulated in NASA’s vision. There was one basic research
question, with many derivative questions. To this point in all studies, both by the author and
other researchers elsewhere, the unit of analysis was almost always either a technology (such as
an engine,) the airplane, or SATS as an entire infrastructure. This time, the viability of an air
taxi enterprise was questioned.
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SATS in the Air Taxi Industry. As studies progressed, they provided learning that
allowed greater focus. In coordination with other NASA studies, the next series examined a
specific but hypothetical private enterprise operating an air taxi business in a likely market
(McGrath & Bonney, 2003.) (Here “air taxi” is a loose term that describes on-demand service as
opposed to scheduled airline service, but because of the nature of this market, the air taxi
industry is highly fragmented and operators mostly employ small aircraft.) The enterprise could
easily fit into any of the regional settings being researched as likely future markets for SATS
(“North Carolina,” 2000.) An enterprise was envisaged with two strategic objectives: one,
enough capacity to exploit possible economies of scale; two, a “bare bones” level of investment
in sunk and fixed costs. The general strategy was one of unit cost minimization.
Three aircraft were modeled: a Beech Bonanza 33 (single piston engine, 4-seats), a Beech
King Air 200 (twin-engine turboprop, 8-seats,) and an Eclipse 500 (twin engine turbofan, 6seats.) The former two aircraft types had been available in general aviation for a decade or two,
and were aviation legacies with established cost and performance histories. As such, they were
chosen not because they were expected to be, or to evolve into, SATS aircraft, but because (in
addition to the availability of historical data) they represented aircraft configurations (size,
seating capacity, engine number and type, etc.) envisaged as likely SATS configurations.
The Eclipse, in contrast, was still in the developmental stage but was widely lauded as
being revolutionary in terms that befitted SATS scenarios (Lewison, 2002.) At the time of
writing, it was clear that advancements in small jet engines, lightweight construction materials,
avionics technologies adopted from the military and airline industries, computer aided design
technologies, manufacturing technologies, etc. were advancing individually and would converge
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to, at least, very much rejuvenate general and business aviation through technology (Holmes,
Durham & Tarry, 2004.) The downside, in contrast to studying the Bonanza and Beech aircraft,
was that there was no established cost and performance baseline. Altogether, the former two
aircraft could be thought of as evolutionary and the latter, revolutionary.
Simple cost predictions distanced aircraft one from the other, as their levels of
technological sophistication would suggest. The Bonanza (low end) was by far the least costly,
and the Eclipse (high end) was the most costly. More interesting were their relative cost
effectiveness figures under different sets of assumptions. In aviation, proven measures of cost
effectiveness include cost per mile, cost per seat mile, and cost per hour. Note that these
measures are analogous to ratios of performance and price, and are proxies for value.
Table 1 presents data at two levels of analysis, total Life Cycle Cost (LCC,) and Direct
Operating Cost (DOC). Total DOC is the same as total variable costs and is commonly (but
sometimes sub-optimally) used in aviation as the sole cost criterion in decision-making.
-------------------------------------------------Place Table 1 about here.
-------------------------------------------------On an LCC per mile and per hour basis, the Bonanza was always clearly superior,
followed by the Eclipse and the King Air. Margins were wider at the DOC level of analysis. On
a cost per seat mile basis, however, the margins between the Bonanza and the Eclipse
evaporated, while King Air improved relative to them both. In sum, high technology was costly
but sometimes, cost effective. Note that the value of passenger time was not even considered.
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But the above assumed perfect asset utilization. A critical metric in commercial aviation
is “load factor,” a measure of utilization generally determined as the percentage of available
seats filled by fare-paying passengers. When considering load factors progressively less than
100% (Table 2,) the Eclipse emerged as clearly superior, and the Bonanza emerged as clearly
inferior, even to the much more costly King Air.
-------------------------------------------------Place Table 2 about here.
-------------------------------------------------However, these observations are somewhat hypothetical to the reality that the
entrepreneur will not be able to dictate market share, fully utilizing any aircraft chosen regardless
of its seating capacity. In other words, regardless (for the most part) of which aircraft is
employed, the same number of passengers per flight (on average) can be assumed to seek the
service. For example, if the business served an average of exactly three passengers per flight
(not counting one pilot,) the relevant DOC figures from Table 2 would be .22 for the Bonanza,
.45 for the Eclipse, and the (horrible) figure for the King Air does not even appear in the Table.
So while a fully utilized Eclipse was measured to be as cost-effective as a fully utilized Bonanza,
under-utilization can be economically catastrophic to the entrepreneur’s business case.
Another view of asset utilization was obtained through sensitivity analysis, by varying
the amount of trips, given the overall scale of the operation assumed at the outset. Figure 3
illustrates the results, showing the important impact of aircraft utilization (trip distance) on unit
costs (cost per mile.)
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-------------------------------------------------Place Figure 3 about here.
-------------------------------------------------Implications. These results implied that it will be crucial to the operating margins of a
SATS-like air taxi enterprise to align its overall capacity with market demand. Establishing an
enterprise of an economical scale will be as important as maintaining high asset utilization at that
scale. If the starting assumptions had been different, they may have determined an operation of
a different scale. The question is whether at the establishment of the operation, which scale
would be more economical on a unit-cost basis. If a large operation showed lower unit costs
than a small operation, then an economy of scale would be said to exist. One problem is that this
phenomenon is too often assumed to be automatic, but it is not. The crushing overhead suffered
by many large airlines, for example, suggests that there are some diseconomies of scale at work.
Furthermore, economies in some unit costs can co-exist with diseconomies in others. This is
basic economics but implications for SATS are less obvious.
Assuming the presence of an extensive and efficient infrastructure of SATS-like services
and facilities, it is possible that greater economies may be found in larger enterprises than the
one modeled. But without adequate infrastructure, the firm would have to invest in some
services itself, perhaps ruining the overall cost structure of the firm. Widespread availability of
maintenance services is an example. These points are important to the business case of any
SATS-based enterprise but pursuing them was outside the scope of the air taxi studies.
Overall Research Implications. Altogether, these studies implied that if historical
industry/technology patterns repeat themselves, strategies can be envisioned to guide progress in
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SATS. The examples from the research illustrate the kind of inefficiencies (e.g., aircraft seating
capacity or overall fleet capacity mismatched to demand, lack of infrastructure, poor
combinations of performance and price) that institutional market niches can help rationalize,
illuminating and then reducing technological and related economic uncertainties en route to the
development of a mass market.
It should be noted that the line of research described above was accomplished somewhat
independently of the research of others, which were investigating issues related to airports and
airport systems, the impact on the airline industry, the impact on the capacity of the national
airspace in general, specific technologies, regional and national macroeconomic impacts, and so
forth. Many questions were still open at the time of writing. Results of other studies would
clarify the research questions that would guide the continuation of the line of research being
discussed here.
STRATEGIC INTERPRETATIONS AND IMPLICATIONS
Substitute technologies like SATS do not create new industries as much as they
restructure existing industries. Door-to-door transportation is already the consumer function
delivered by several technology paradigms. Theoretically, transportation can even be substituted
by something more fundamental, like communication. Regardless, industry/technology history
suggests that paradigmatic change should be attempted carefully and sequentially, identifying
and attacking the most opportune market niches first, in ways that lend themselves to progressive
substitution in subsequent niches.
Again, determinants of substitution include relative performance and relative price,
together determining relative value. The studies captured the same idea in the calculation of
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cost-effectiveness metrics such as cost per passenger. In the SATS scenario, it would seem that
improvements should be pursued in both areas. However, appreciating the full breadth of these
terms includes some important subtleties that “go beyond the numbers,” and some are counterintuitive. The following discussion provides a few illustrations.
Performance. At the time of writing SATS-related technologies truly were advancing
rapidly. If their progression were to be managed in a coordinated fashion, their collective
performance would probably synergize in ways that would create a new era in aviation
transportation. This paper, of course, is more focused on the SATS vision than on aviation in
general. The signals being sent that SATS aircraft would take some time to develop and mature,
were being coupled with signals that the performance of subsequent generations of aircraft
would be significantly better. The mass-market often acts on such signals by adopting a “wait
and see” posture, pending results of trials (such as consumer experiences with air taxi services.)
If a trial fails in the eyes of the mass market, this can “poison the well.” Thus progress in
technological performance can have multifaceted implications.
Performance Signals. The management of signals becomes important. For example, the
mass market is interested in which organizations will endure the test of time; i.e., which
organizations will still be around when the mass market engages with gusto. Proactive signaling
can help improve perceptions regarding risks. Means include disseminating information lauding
technological advances, plant openings and expanded production capacities, public and private
resource investments, interfirm collaborations, etc. The long-term availability of a product is
inversely related to the perception of the likelihood of consumer abandonment; so through
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intentional or inadvertent signals, mass markets generally become wise as to which organizations
are committed, and which are not.
Buyer Orientations. As implied, buyers' technological orientations matter, and these
orientations can differ from one niche to another. Some types of buyers simply enjoy being
technologically adventurous and are both capable and willing to perform, or at least participate
in, new product introduction and de-bugging. Adventure can, in itself, be a “performance”
attribute to such buyers. To buyers who have an optimistic sense of technological evolution,
attempts to develop SATS might seem like a string of necessary experiments, and that success is
not only inevitable, but that it is imminent. Aviation enthusiasts may even be irrationally biased
in favor of SATS. In this category one might include some potential air taxi entrepreneurs.
In contrast, practically by definition mass market consumers do not view themselves as
willing participants in grand social experiments that may balk at their expense. In particular, the
mass market is sensitive to the risk of choosing technologies that will lose “standards wars”
(Grant, 2003.) In the studies, for example, each of the numerous possible permutations of engine
types, number of engines, and passenger capacity represents a potential design standard, or
“dominant design” (Tushman & Anderson, 1986.) It is common for newly developing markets
to experience periods of rapid growth once such uncertainties become settled. This is especially
true in transitions from institutional and industrial markets to mass markets, such as the
hypothetical transition from corporate aviation and air taxi to the mass market. But though the
establishment of any particular technological standard will be to the benefit of manufacturers
prepared to deliver that standard, it will be equally to the detriment of proprietors of noncomplementary technologies. This can result in a desperate “winner take all” situation. To put it
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mildly, conflicts of interest will make it difficult for all SATS players to maintain one voice on
all issues. While signals should be interpreted according to the vested interests of the signalers,
however, the mass market is sometimes malleable (McGrath, 1996.) To be blunt, the best
technologies do not always win; sometimes the most persuasive argument wins.
Infrastructure. On a grander scale, it would not be part of a wise national industrial
policy to expect society to make more than one significant technological transition, so the
optimal (standards-based) technological trajectory should be carefully identified as soon as
possible, and developed in a coordinated but legal way. Perhaps it is naive to expect practicing
managers to strategize so cooperatively and so far in advance, or to suggest that even the experts
(including academics!) can identify the optimal trajectory in so complex a scenario. Regardless,
all must realize that standardization signals are some of the most powerful that will ever be sent.
Alternative Technologies. Also, the world will not hold still for SATS. The markets in
question will evaluate the SATS paradigm as a substitute for developments in automobile,
regional airline, rail, and even communication infrastructures. So it seems imperative that SATS
technologies not only evolve convincingly, but that they evolve faster than alternative
technologies in their abilities to deliver the valued performance. The studies did not consider
this.
Price. “Price” includes more than the simple purchase price – it includes, for example, all
monetary flows reflective of changes in comparable products over a relevant time frame, the
effects of discounts, rebates, free ancillary products and services, and so forth (Porter, 1980.) In
a broader sense it can also include switching costs, especially if switching costs are unavoidable
results of a decision to purchase. In this regard, the total LCC view was appropriate in the
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studies reviewed. More intriguing, of course, is the effective price discount hypothesized by the
offsetting value of time. But first and foremost, the studies did indicate that the basic “sticker
prices” of aircraft will be formidable barriers to substitution in the mass market.
Price Signals. In free enterprise economies, price is a powerful signal. In a world of
“perfect” information (where all relevant decision-making information is available and
information search is costless,) prices should equilibrate where they accurately reflect economic
value. But the world is not characterized by perfect information - economic rationality is
bounded, and information search is not free. Potential consumers must incur costs of discovering
the “right” price of SATS technology, and/or interpret the signals.
It is widely assumed that SATS costs and hence, prices will drop over time because of
such dynamics as experience effects and learning curves. Similar to the effect noted above about
performance improvements, such “information” has the potential to delay (or at least confuse)
development of the mass-market. Rapidly changing prices - even, ironically, falling prices convey present economic risk. The mass-market is generally averse to buying items that may
become obsolete. It prefers to wait for other, smaller market niches (e.g., air taxi, business
aviation) to rationalize market inefficiencies, and then buy-in (literally and figuratively) once
prices stabilize.
Even if large opportunities for scale, learning and experience effects exist, unit
production costs are likely to be so high in the short term that industry profitability will be
negative for years. This will impose severe strains on investment communities, so only patient
capital should be pursued. SATS is presently a scenario structured for organizations with
significant willpower, stay power, market power, and financial power.
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Value. Again turning to the value of time (as an offset to price,) the obvious implication
for SATS is that the more dramatic the immediate time savings of traveling it provides, the more
likely substitution will occur – but more problematically, that the time saved must be consciously
and economically valued. This is relatively straightforward in industrial markets where time has
a dramatic impact on traditional accounting reports – i.e., where there is a tradition of valuing
employee time. The SATS movement should work to make this idea part of the popular
psychological calculus, not just a “rationalization.” Everyone knows that “time is money,” but
what is the economic value of someone’s personal time? The author has twice searched for, and
found virtually no literature on this subject. Much more research is needed.
Something that also looms important to product value is discretionary v. nondiscretionary income. Rich people have lots of discretionary income; poor people have very
little. The real value of a dollar – and the real price of a product -- varies to a consumer as a
function of its discretionary nature. Most mass-market consumers have some discretionary
income, but research is still needed that would confidently suggest that very many of them have
enough to allow the purchase of aircraft for any reason, let alone personal transportation.
Furthermore, this hypothetical segment must be so large that it can also accommodate the reality
that only a fraction of it will actually buy aircraft. It is the author’s opinion that the SATS vision
is often interpreted myopically as a broadening of the existing market for general aviation goods
and services, not the broader and more latent mass market for personal transportation over
distances of a few hundred miles. In other words what is often assumed to be the mass market
for SATS – general aviation enthusiasts – may be better thought of as an intermediary niche that
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must be nurtured en route to the development of the true mass market for personal and family
transportation. Research in price elasticities in all niches seems warranted.
Switching Costs. Next, switching costs are the one-time costs to a buyer of purchasing a
substitute rather than maintaining or replacing an original product. They do not represent a price
differential. Again, the LCC view implicitly includes switching costs, such as pilot training.
Switching costs of product substitution (autos to aircraft) are greater than the switching costs of
changing from one rival product (aircraft to aircraft) to another. This is because substitutes
provide similar kinds of consumer functionality but in technologically different ways. Subsidies
can lower switching costs. Ancillary equipment can be supplied, skills training can be freely
given, and sophisticated business planning assistance can be offered aimed at bringing overall
firm-level economic value out of SATS ownership. Guarantees, warranties, and confidence in
trade-in (or trade-up) values can be contractually established.
Industry Advocacy. On the whole, other advisable efforts include total-industry
promotion. Without being too specific and especially without making unsupportable promises,
the overall awareness of milestone accomplishments as well as general progress should be
continuously elevated in target segments and across society as a whole, crafted to describe how
SATS enhances overall lifestyles or improves overall business positions. More to the point,
members of the new industry will need to police their population for members who are
fraudulent or unduly opportunistic (as opposed to waiting for the free market and/or legal system
to cull them out,) because the overall reputation of the movement is fragile and politically
dependent. In a similar vein, some collaborative research and product development will likely be
essential for some time to come. It is clear that SATS requires truly synergistic combinations of
21
advanced technologies, so inter-and intra-industry spillovers will continue to be of immense
value.
Summary. To summarize, the SATS mass-market is assumed to be largely latent, here
meaning that consumers are not already aviators or especially aviation-minded. Information
search about the value of SATS within this segment is not as efficient as within the segment of
aviation enthusiasts. Risk has an immediate economic impact, regardless of whether or not the
feared phenomenon ever actually happens. The very risk that pessimists might be right, that
political resolve might collapse, and/or that technologies might not evolve and synergize in
expected ways, injects a risk that has a real economic impact on the present viability of the SATS
vision. Managing these risks can be partly accomplished through the strategic development of
successive market niches chosen based on performance/price substitution characteristics. The
studies reviewed here offer a glimpse into the learning that will continue to be necessary from
the strategic management perspective.
CONCLUSION
Much of the research described above was accomplished independently by the author,
guided by, but not wholly integrated with, other research which was investigating SATS’
macroeconomic impacts, regional and community impacts, emerging technologies to include
structures, aerodynamics, engines, avionics, and air traffic control concepts, airport
infrastructures, impacts on the natural environment, impacts on other industries such as the
airlines, and so forth. Overall learning about the future of SATS will thus probably develop
recursively, not linearly, as one “piece of the puzzle” is continuously added, informed by the
work of others and hopefully contributing in turn.
22
It should also be noted that at the time of writing, SATS was mostly a US concept, but
hypothetically, similar opportunities exist wherever it seems more viable to establish air-based
personal transportation than to expand a ground-based infrastructure. As a comparison, note that
nations with historically poor communications infrastructures are modernizing by establishing
cutting-edge wireless infrastructures. The general implication to all industries globally is that the
emergence of new and converging technologies presents both threats and opportunities relative
to existing paradigms.
NASA’s hypothesis that the economic value of an individual’s time will increase is
intuitively appealing. As such, the extant understanding of information-age economics deserves
expansion. The present studies were hamstrung by a lack of empirical research addressing the
value of time in transportation economics. The design of the studies were accordingly
exploratory and non-empirical. However, they do suggest that advanced general aviation and
corporate aviation technologies have feasible applications in near-term aviation transportation
niches. Whether successful commercialization in niches can be parlayed into realization of the
ultimate SATS vision is problematic but not impossible. This paper has merely suggested that
even when in a conceptual/visionary stage, it is not too early to begin mapping out firm-level
business strategies in a new industry, by using lessons learned from industrial history.
23
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25
Table 1. Cost-Effectiveness Measures ($.)
Bonanza 33 Eclipse 500 King Air 200
LCC per
Mile
Seat Mile
Hour
DOC per
Mile
Seat Mile
Hour
1.21
.30
227
1.87
.31
778
4.46
.56
1,412
.86
.22
161
1.34
.22
558
2.81
.35
889
26
Table 2. Cost ($) per Passenger Seat Mile Comparisons.
Bonanza Eclipse King Air
Life Cycle Cost per
Total seats
Total seats less crew
Total seats less crew less one empty seat
Total seats less crew less two empty seats
Direct Operating Cost per
Total seats
Total seats less crew
Total seats less crew less one empty seat
Total seats less crew less two empty seats
27
.30
.40
.60
1.21
.31
.37
.47
.62
.56
.64
.74
.89
.22
.29
.43
.86
.22
.27
.34
.45
.35
.40
.47
.56
2.00
1.80
1.60
Auto
Speed / Cost
1.40
1.20
1.00
0.80
SATS
0.60
0.40
Airline
0.20
52
8
54
9
56
9
59
0
60
0
51
0
50
0
46
8
45
5
44
9
41
3
37
4
37
1
36
8
36
1
35
3
30
8
29
9
28
7
27
8
25
7
23
2
20
9
18
7
18
0
16
8
11
8
0.00
8
52
9
54
9
56
0
59
0
60
Trip Distance
Figure 1. Trip Cost-Effectivness Without Considerng the Value of Traveler Time.
0.35
0.30
SATS
Speed / Cost
0.25
0.20
Airline
0.15
0.10
Auto
0.05
0.00
8
11
8
16
0
18
7
18
9
20
2
23
7
25
8
27
7
28
9
29
8
30
3
35
1
8
1
4
36
36
37
37
Trip Distance
3
41
9
44
5
45
8
46
0
50
Figure 2. Trip Cost-Effectiveness Considering the Value of Traveler Time.
28
0
51
Sensitivity of LCC per Mile to Trip Distance
7.00
6.34
6.00
5.09
Dollars per Mile
5.00
4.46
4.09
4.00
3.84
3.00
2.60
2.11
2.00
1.87
1.66
1.36
1.21
1.00
1.73
1.63
1.12
1.06
50
75
100
125
Percentage of Baseline Assumption
Bonanza
King Air
Eclipse
Figure 3. Sensitivity of Life Cycle Cost to Trip Distance.
29
150