Strategies in Enterprise Ecology:
Symbiotic Models for Commercial Aviation
as an Enterprise of Enterprises
Sgouris Sgouridis and Prof. Joseph Sussman
Engineering Systems Division
Massachusetts Institute of Technology
Research Presentation
LAI Conference
Cambridge, MD
April, 19th 2007
© 2007 Sgouris Sgouridis, Lean Aerospace Initiative, Massachusetts Institute of Technology
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Agenda
• Hypotheses
• Background
– Commercial Aviation Cycles
– Enterprises and business cycles
• A fframework:
k Enterprise
E t
i off Enterprises
E t
i
• Modeling
g Enterprise
p
of Enterprises
p
• Countercyclical strategies and
symbiosis
bi i
© 2007 Sgouris Sgouridis, Lean Aerospace Initiative, Massachusetts Institute of Technology
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Hypotheses
•
•
•
Cyclical instability characterizes the
Commercial Aviation EoE.
Cyclicality is costly to the industries
involved and society.
There are feasible strategies that can
dampen the cycles in a long
long-term
term
Pareto efficient manner.
© 2007 Sgouris Sgouridis, Lean Aerospace Initiative, Massachusetts Institute of Technology
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Business Cycles?
World Airlines Operating Results and Orders
7,000.00
900
700
5,000.00
500
3 000 00
3,000.00
300
1,000.00
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
-1,000.00
100
-100
-300
3 000 00
-3,000.00
Airline operating results
-500
Narrow body orders
-5,000.00
-7,000.00
Widebody orders
-700
-900
Shipbuilding in tons for Norwegian Ship Owners (1883-1913) [Source: Einarsen 1938]
© 2007 Sgouris Sgouridis, Lean Aerospace Initiative, Massachusetts Institute of Technology
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0
0.00
-1,000
-1,000.00
1975
© 2007 Sgouris Sgouridis, Lean Aerospace Initiative, Massachusetts Institute of Technology
1,000
-2,000
-2,000.00
-3,000.00
-3,000
-4,000.00
4,000.00
4 000
-4,000
-5,000.00
-5,000
-6,000.00
-6,000
5
2005
1,000.00
2005
2,000
2004
2,000.00
2004
3,000.00
2003
4,000.00
2003
2002
2002
2001
2001
2000
2000
1999
1999
1998
1998
1997
1997
1996
1996
1995
1995
1994
1994
1993
1993
1992
1992
1991
1991
1990
1990
1989
1989
1988
1988
1987
1987
1986
1986
1985
1985
1984
1984
1983
1983
1982
1982
1981
1981
1980
1980
1979
1979
1978
1978
1977
1977
1976
1976
4,000
300
Seat
Deliveries
NetProfit
300000
3,000
Seat
Orders
Seat
Orders
250
Narrow Delivered
Wide Delivered
200
250000
0
0
-50
Thousands
2004
2002
19
999
2000
19
998
19
997
1998
19
995
1996
19
996
19
993
1994
19
994
19
991
1992
19
992
19
989
1990
19
990
19
987
1988
19
988
19
985
1986
19
986
19
983
1984
19
984
19
981
1982
19
982
19
979
1980
19
980
19
977
1978
19
978
19
975
1976
19
976
19
973
1974
19
974
19
971
1972
19
972
1970
19
970
19
969
1968
19
968
19
967
19
966
1966
19
965
19
964
1964
19
963
19
962
1962
19
960
1960
19
961
35%
4,000
30%
3,500
25%
3,000
1975
1974
1974
1973
1973
1972
1972
1971
1971
1970
1970
1969
1969
1968
1968
1967
1967
1966
1966
1965
1965
1964
1964
1963
1963
1962
1962
1961
1961
1,000
5%
500
0%
0
-5%
1960
1960
Commercial Aviation Cyclicality (hi)Story
Global Demand for Air Travel in Billion RPKs
demand in RPK
global gdp
Poly. (demand in RPK)
20%
2,500
2,000
2
000
15%
1,500
10%
NetProfit
200000
150000
150
100000
100
50
50000
E
Endogenou
us
T
Triggers
Enabling Factors for Cyclicality in CA
Disruptive technologies
Jets, 2-pilot cockpit, fuel efficient designs, product families etc.
Technical regulations
Noise abatement, stage 2,3,4 aircraft
Input shocks
Fuel prices, materials, interest rates
Demand shocks
Iraq war I, 9/11, SARS etc.
Reinvestment cycle
Intertemporal
substitution
Aircraft as large capital investment with limited but adjustable lifetime
Bullwhip in supply
chains, labor, and
inventory
Long lead times for both labor and capital.Irreversibility
Industry characteristics
Scale economies and large
g investment in upfront
p
R&D incentivize
airframe mfg. to promote their wares aggressively in short term
Low marginal costs for airlines
Market regulations
Deregulation combined with imperfect financing allows multiple
entrants.
Subsidies, bankruptcy protections, and national pride policies retain
players in weak markets
Decision-making
Bounded rationality and strategic optimism create overreaction by
multiple entrants.
Large number of decision makers.
Financing volatility
Debt and equity financing available in economic upturns lowers
barriers to entry BUT dries quickly in downturns increasing risk
of price wars.
Short-term returns can be overemphasized over long-term stability.
© 2007 Sgouris Sgouridis, Lean Aerospace Initiative, Massachusetts Institute of Technology
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Framework: the Commercial Aviation
Enterprise of Enterprises
Return
ent
Investme
Capital Markets
Revenue
e
Aircraftt
Flexibilitty
Passengers
and Shippers
Demand
Revenue
Safety
Regulations
Labor
Subsidies
Orders
Revenue
Fare
Capacity
Airlines
Airlines
Airlines
Defense
Stability
Revenue
Subsidies
Spillovers
Labor
Spillovers
Suppliers
pp
Price
Aircraft qualities
Airframe
Integrators
Labor
Defense
Modules
R&D
Aircraftt
Revenue
e
Leasing Companies
Economic
Activity
Government
© 2007 Sgouris Sgouridis, Lean Aerospace Initiative, Massachusetts Institute of Technology
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Narrowbody
y division
+
SDM CA EoE
Demand
Forecast
Revenues
+
Airframe
Airline industry
+
+ Profits
-
g A
Mfg.
Demand ?
+
+
Capacity
Additions
+ Expenses
Price
+
+
Demand
Narrowbody
Capacity
Utilization
Current
Capacity
-
+
+
Widebody division
Demand
Forecast
Revenues
+
+
+ Profits
Economic and
-
Demand ?
+
+ Expenses
Price
+
+
Capacity
Utilization
Narrowbody division
+
+
Capacity
Additions
-
Current
Capacity
external factors
+
Widebody
Demand
Forecast
Revenues
+
+
+ Profits
-
Airframe
Demand ?
Price
+
+
Mfg. B
+
+
+
Capacity
Additions
+ Expenses
Revenues
+
+
C
Capacity
it
Utilization
-
Current
Capacity
-
+
+
Expenses
+
Widebody division
Price
+
•
•
•
Based on H.B. Weil’s airline industry model (1996)
Developed further in collaboration with Jijun and Josh.
Using Anylogic
Profits
+
-
Demand
Demand
Forecast
?
Capacity
Utilization
© 2007 Sgouris Sgouridis, Lean Aerospace Initiative, Massachusetts Institute of Technology
+
+
Orders
-
Current
Capacity
+
8
SDM Calibration: Demand and Capacity
Period: 1984-2025
Green: Observed (until 2005, Data source: ATA)
Red: Simulated
© 2007 Sgouris Sgouridis, Lean Aerospace Initiative, Massachusetts Institute of Technology
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Strategy Experiments
1. Identify value functions of stakeholders
2. Quantify and weight value functions.
Formulate as mutliobjective optimization
3. Identify strategic alternatives
4. Identify future scenarios
and strategic bundles
to establish parameter values
5. Execute the model by varying the strategic bundles (inputs) across scenarios
6. Compare the results and select the strategic bundles with robust performance
7. Qualitatively study the implementability of each bundle
© 2007 Sgouris Sgouridis, Lean Aerospace Initiative, Massachusetts Institute of Technology
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1. Value propositions and Metrics
Stakeholder
Passenger/
Shi
Shipper
Carriers
Airframe Mfgs.
Capital
markets
Governments
Values
Availability of air travel
Affordability of air travel
Service of air travel
Economic/investment
return
Stability of return
Minimum time in
recession
Metrics
Average ASK/year
Undiscounted average fare
Frequency, amenities (load factors as proxy)
Economic Value Added (EVA: Op. Profit – Taxes – Cost of Capital)
Discounted to NPV
Standard deviation from trend
Average time with return less than target
Same as carriers
Combination of carriers
and airframe
manufacturers returns
maximized and stable
Availability of air travel
Returns of domestic
champions
Metrics above
Metrics above
Metrics above
© 2007 Sgouris Sgouridis, Lean Aerospace Initiative, Massachusetts Institute of Technology
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2. Value Functions in the CA EoE as Multiobjective
j
Optimization*
p
Stakeholder
Passenger/
Shipper
Carriers
Airframe Mfgs.
Capital
p
markets
Governments
Values
A il bilit off airi ttravell
Availability
Affordability of air travel
Service of air travel
Economic/investment
return
Stability of return
Minimum time in
recession
Combination of carriers
and airframe
manufacturers returns
maximized and stable
Availability of air travel
Returns of domestic
champions
* Anylogic
y og c & OptQuest use
tabu search algorithms to
perform the optimization
© 2007 Sgouris Sgouridis, Lean Aerospace Initiative, Massachusetts Institute of Technology
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3. Airline Potential Strategic Areas
Strategic Area
Desired effect
Leasing
Flexibility. Reduces fixed capacity costs.
Profit-sharing
programs
Flexibility. Reduces labor costs during hard times.
Good mix of ages in
the fleet
Flexibility. Old amortized aircraft can be retired or parked without
penalty on fixed costs.
Off-cyclical
Off
cyclical behavior
(buy low, sell high)
Bullwhip reduction
reduction. Individual airline bottom line boost.
boost
Steady ordering and
flexible retirement
Bullwhip reduction.
Long-term profit-based
planning
Bullwhip reduction. Compared to short-term profit-based vs. marketshare based planning.
Less aggressive
revenue managementt
Bullwhip reduction. Marginal costs of seats are not zero – holding off
price
i wars.
Mergers
Number of players. Consolidating capacity will increase market
power and reduce excessive capacity.
Tempered expectations Decision making.
making Reducing irrational exuberance.
exuberance
© 2007 Sgouris Sgouridis, Lean Aerospace Initiative, Massachusetts Institute of Technology
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3. Airframe Manufacturers Strategic Areas
Strategic Area
Desired Effect
Pricing
Bullwhip reduction. Pro-cyclical pricing vs. stable pricing.
Need based delivery: Auctioning production slots.
Ordering
Flexibility. Allowing family orders with specification of size later in time.
Flexibility
time
Order cancellation policies
Order vetting.
Standardize aircraft.design
Flexibility. Stronger second hand and leasing markets.
Facilitate quick post-manufacture customization (custom color schemes).
schemes)
Fly-by-the-hour aircraft
services.
Transformation from aircraft manufacturer to service provider:
Fly-by-the-hour aircraft services.
New aircraft family
release
l
titiming.
i
Cycle dampening. Follow the reinvestment cycle.
Production capacity
management.
Cycle dampening. Allow backlogs to build before new production facility is
established.
Capacity delivery lead
times.
Bullwhip reduction.
reduction Capacity effects are felt faster.
faster Capacity inflow is more
stable.
Flexible production.
Production and
development costs (lean
improvements)
Bullwhip reduction. Lower capacity costs and higher profit margins.
© 2007 Sgouris Sgouridis, Lean Aerospace Initiative, Massachusetts Institute of Technology
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Next Steps
• Formulate experiments (DOE)
• Run experiments
• Draw conclusions and consider the
implementability of the bundles of
strategic alternatives
© 2007 Sgouris Sgouridis, Lean Aerospace Initiative, Massachusetts Institute of Technology
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