Winglets: Reducing Drag Textron Aviation unites Hawker®, Beechcraft® and Cessna®

Question

Winglets: Reducing Drag

Textron Aviation unites Hawker®, Beechcraft® and Cessna® brands, creating aviation's most iconic family of aircraft and the industry's broadest product portfolio and largest company-owned service network (Textron Aviation, 2016). The most noticeable feature to appear on airliners and smaller airplanes alike, since 2000, are winglets. These are wing tip extensions which reduce lift-induced drag, and provide extra lift (Larson, 2001). The original winglet design was by NASA Langley aeronautical engineer Richard Whitcomb during the 1973 oil crisis: most essentially, they reduce fuel consumption by reducing drag. One available brand of Winglets is estimated to reduce interference drag to provide a 4% fuel-burn reduction over long ranges. Thus, Winglets are now available as a standard production line option on many varieties of airplanes. Many well-known makers now utilize Winglets. For instance, Bombardier's Challenger 601 (first flown 1987), for instance, was one of the first aircraft with production-standard Winglets (Warwick, 2016).

Scenario

Assume that you are the project manager at Textron Aviation (TXT). Textron Aviation products include corporate and business, personal, and military aircraft. You have knowledge that in recent years most of Textron Aviation’s military products have, where possible, been outfitted with Winglets. Further, the design of these wing components has evolved to make them more efficient and maximize the fuel savings they provide. Textron Aviation flight operations manager reports finding that the addition of Winglets to an existing aircraft offers fuel savings of approximately 3% of the gas bill, or 150,000 gallons of jet fuel per year (Aviation Partners, Inc., n.d.). At a cost of $1.06 per gallon (which for simplicity, we will assume to be stable), this is a significant source of cost-reduction which accrues to the end user over the useful life of an aircraft. While the useful life of the corporate craft is 30 years, Textron's research indicates that clients typically use a 10-year planning horizon, at most.

QUESTION:

As Textron's production manager, you have been asked to offer an evaluation of the following:

If Textron chooses to discount these savings at a rate of 15% per year of useful life, considering only a 10 year planning horizon, what is the potential cost savings to the customer over the life of this plane? Evaluate the potential financial benefit to Textron of adding winglets to an existing corporate aircraft, if the cost to Textron of each winglet is $556,000 per craft, assuming that demand for corporate aircraft will allow Textron to increase the craft’s price by the full amount of the savings accruing to the customer (Aviation Partners Boeing, 2016).

Explanation / Answer

Annual savings in fuel are given as = 150000 gallons and in dollar terms = (150000*1.06) = $ 159000

At useful life of 10 years and discount rate of 15%, the present value of these savings are - we use the pv of annuity formula : PV = Periodic cash flow * [1 - (1+r)-t]/r ; where r is the relevant discount rate (15% here) and t is the time period (10 years). Solving we get:

PV of savings = 159000 * [1-(1+15%)-10]/15% = $797,984.20

Potential life savings in nominal terms = 159000 * 10 = $ 1,590,000 and the pv of the life savings is $ 797,984.20

SInce the company can increase the price by full amount of the savings (pv savings), the net benefit will be (797984.20 - 556000) = $ 241,984.20

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