Mid-term Exam 2022
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University of North Carolina, Chapel Hill *
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500
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Industrial Engineering
Date
Feb 20, 2024
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13
Uploaded by DrGuineaPigPerson625
1 Boom Overture The New Age of Supersonic Airliners? UNC Honor Code PLEDGE:
I have neither given nor received unauthorized aid on this, nor will I give nor receive unauthorized aid on this exam. INSTRUCTIONS: 1. This is an open book exam. 2. Please read the instructions carefully. 3. Write efficiently. If needed, you can attach photos/scans of additional supporting material (but unlikely needed). 4. There is some technical jargon for better understanding but it is most likely not needed for any of the answers. 5. The exam has 20 points in total with five parts worth 2-6 points each. One point should represent roughly 9 minutes. 6. The exam was designed to be finished in 3 hours
, you shouldn’t need more time. However, given the digital nature of it, you’ll have 4 hours to finish
the exam, e.g., to overcome any technical issues. There won’t be any exceptions/late submissions/etc.
2 Boom Overture – The New Age of Supersonic Airliners? Boom Technology Inc. (or Boom Supersonic) was founded in 2014 with the goal of bringing supersonic speed (traveling faster than the speed of sound) back to commercial aviation. Boom Supersonic is currently working on the “Boom Overture”, which has a proposed speed of Mach 1.7 and would carry about 75 passengers up to 8,000 km (5,000 miles). In 2020, Boom unveiled the “Baby Boom” (XB-1) demonstrator, for which flight testing is supposed to start in September 2022. The Boom Overture itself will be unveiled in 2025, hoping to achieve type certification in 2029 such that commercial flights could start as soon as 2030. However, there have been several delays in the past, with the original introduction date (announced in 2017) to be 2023. “Baby Boom” (XB-1) demonstrator Due to the supersonic boom created during flight, current regulations do not allow aircraft to fly supersonic speeds over land, only over water. As such, supersonic aircraft are mostly attractive for trans-Atlantic flights. Trans-Pacific flights are also attractive, but many must stop along the way to refuel. Below are a few examples of how a Mach 1.7 aircraft would reduce travel times: Boom Overture The last (and only one of two) supersonic airliner was the Concorde, which was retired in 2003, and it was notorious for not being profitable without sizeable government subsidies (a round-trip ticket price from New York City to London was about $13,000 in today’s prices) (see Appendix A for an overview of various aircraft). One key issue with supersonic travel is the lack of suitable engines which can achieve “supercruise”
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for commercial aircraft. Initially, Rolls Royce had worked with Boom on creating new engines, but they announced in August 2022 that they were no longer working on this project. Several other companies are working on supersonic commercial aircraft, but none seem to be nearly as advanced as Boom Supersonic. The Spike S-512, for example, offers a slightly greater range (7,100 miles) at a similar speed, but only has capacity for 18 passengers. However, it is unclear when it will be launched. Despite the high uncertainty and high price tag, many airlines have indicated an interest in supersonic flights. The Virgin Group was the first airline to have placed orders for 10 jets in March of 2016. This 1
Supercruise refers to supersonic flight (i.e., faster than the speed of sound or Mach 1) without the use of afterburners, which is very fuel inefficient. Route Flight time Boom Overture Current average flight time New York City to London 3.5 hrs 6.5 hrs Los Angeles to Sydney 8.5 hrs 14.5 hrs Paris to Montreal 3.45 hrs 7.15 hrs Tokyo to Seattle 4.5 hrs 8.30 hrs
3 was quickly followed by orders for aircraft by unidentified customers, 20 orders by Japan Airlines in 2017, 50 orders by United Airlines in 2021, and 60 orders in August of 2022 by American Airlines. Given the limited capacity of 65-80 passengers, Boom Overture will focus on business class seats only (see also Appendix C). They estimate that airlines could offer a round-trip from New York City to London for around $6,000, which would be in line with regular business class prices and would allow for profitable routes. However, industry observers were quick to point out two key issues: Business class tickets on the NYC-London route were rarely sold at the sticker price of $6,000, but often lower at $4,000 or even less. Secondly, business class seats on this route could often “lie flat” in that the seats could be converted into lie-flat beds. Boom Overture’s business class seats could not offer this feature but would be more comparable to older business class configurations. At the same time, the Overture could potentially offer substantially larger windows than any other aircraft (see below). A common concern with supersonic air travel is excessive use of kerosene and the environmental impact. Boom Supersonic announced that its Boom Overture will be capable of running completely on “Sustainable Aviation Fuel” and have zero net carbon emissions (SAF: aviation biofuel, which does not use food crops, prime agricultural land or freshwater), compared to current commercial aircraft which use only up to 50% SAF. However, it is unclear whether airports would even have sufficient SAF available as currently very few (e.g., Oslo Airport in Norway) have regular SAF supply. SAF’s share of aviation fuel is estimated to be less than 1% in 2022. More recently, the company announced to build the Boom Overture in a 400,000 square foot manufacturing facility in Greensboro, North Carolina, less than 50 miles west of Chapel Hill.
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4 Part 1 (6 points = 54 minutes): Assessing the Potential Analyze Boom Supersonic’s opportunity of launching the Boom Overture using the 3Cs
. Note
: For each of the three sub-questions, please provide at least 3 substantive arguments and be specific. (a)
What strengths and weaknesses would the Boom Overture from Boom Supersonic have (Company)? Is Boom Supersonic a good company to launch such a product? [2 points] (b)
What value would consumers get from supersonic flight with the Boom Overture (Consumers)? Is this value likely to persist over time, or will competitors be able to neutralize it quickly? [2 points] (c)
What competition would Boom Supersonic face with the Overture (Competition)? In which aspects would the Boom Overture lose to its competition? [2 points] Part II (5 points = 45 minutes): Designing the Product Boom Overture can still substantially alter specific characteristics of its potentially supersonic jet. To better understand the importance of each product characteristic (attribute), they conducted a lot of market research. In this market research, they identified the following five attributes as the most important ones that can still be changed in the product design process: (1) cabin noise level, which refers how noisy the cabin is during flight on average, (II) maximum speed, reflecting how fast the aircraft can fly over the ocean, (III) leg room in its main cabin, (IV) whether the aircraft provides a lounge bar (see Appendix B), (V) the window size. The table below reports the results from a conjoint study among frequent business class fliers where the attributes, attribute levels, and associated utility levels are reported in columns 1 – 3. For your convenience, the production and costs of each attribute level are provided in column 4 (the cost values are not related to the conjoint study). Attribute Attribute Level (see Notes below table)
Utility Costs for Boom in million USD Cabin Noise Level High (85 dB) -6.5 20 Medium (72 dB) 2 25 Low (67 dB) 4.5 60 Maximum Speed 985 km/h (612 mph) -1 15 1,700 km/h (1,056 mph) 1 50 Bathrooms Regular bathrooms (industry average) -2.5 7.5 Large bathrooms (able to walk around) 1 10 “Spa-sized” (includes a shower) 1.5 12.5 Lounge on Board Yes 1.5 17.5 No -1.5 12.5 Window Size 150 square inches -0.5 10 200 square inches 0 15 400 square inches 0.5 20
5 Notes
: A low noise level (67 dB) is comparable to that of an Airbus A380. An average noise level (72 dB) is comparable to that of a Boeing 787 Dreamliner. A high noise level (85 dB) is comparable to that of a Concorde. 985 km/h makes it the fastest available commercial jet, comparable to a Cessna Citation X (980 km/h; 608 mph) and marginally faster than the Boeing 787 Dreamliner (956 km/h; 596 mph). A lounge on board would provide a bar, a (lounge) seating and dining area, separate from the main seats. A window size of 200 square inches is industry leading (Boeing 787 Dreamliner, see Appendix B). Assume Boom Overture needs to keep the total costs of these five attributes at or below $125m. Please show your calculations for all questions. (a)
Based on the Conjoint study, what does the “best” product (highest utility) look like [2 points]? (b)
Would you go ahead with this product? Or would you make slight adjustments? Why? What are the implications for the Boom Overture brand if you make these adjustments [2 points]? (c)
Further market research revealed that the average consumer would be willing to spend $100 per ticket to have a 400 square inch window rather than a 200 square inch window. How much more would they be willing to spend to have a lounge on board [1 point]? Part III (5 points = 45 minutes): Subscription for Airlines Boom Supersonic sees itself as disrupting the commercial aircraft market and is considering changing the traditional model of airlines purchasing aircraft from manufacturers. In this model, airlines typically purchase aircraft but have them serviced by the aircraft manufacturer (though slightly different models exist as well). Upgrades (e.g., engines), on the other hand, would only happen with a considerable delay, often many years after a new engine has been introduced. Instead, Boom Overture considers offering subscriptions for aircraft to airlines. With a subscription, an airline would receive a new aircraft every year. These aircraft would be either brand new or refurbished but feature the latest updates and upgrades (e.g., latest engines/turbines, an up-to-date cabin interior, latest avionics (electronic systems on aircraft)
). The average price for a Boom Overture is about $300m, while production costs (including R&D) are about $200m. Under a subscription model, they’d offer access to one aircraft for $20m per year. However, refurbishing and upgrading aircraft is expensive and needs to be covered by Boom as well. Regular upgrades and refurbishing are estimated to cost around $5m per year per aircraft, while engines need to be replaced every three years and is estimated to cost around $10m for all engines (i.e., $2.5m for each of the four engines). Moreover, structural aspects of the aircraft may need to be replaced before an aircraft is retired (the average life span of a Boom aircraft is estimated to be 25 years), but this is unclear as of yet. The company’s engineering team estimates that there is a 50% chance that structural parts need to be replaced, which would cost around $50m, and a 50% chance that this will not happen. Informal conversations with airlines have indicated substantial interest in a subscription model: many airlines are unsure about consumers’ lasting desire for such a jet and hence are hesitant to make a substantial investment in a Boom fleet. The market research team estimates that an average airline would subscribe to 20 aircraft and there’s a 20% chance that an airline will not renew its subscription from one year to the next. The sales team is comfortable with this churn rate if they are able to use their regular resources of about $20m per airline which is used to retain them. Assume a discount rate of 10%.
6 (a)
What is the annual margin (in $) that Boom Overture can expect in its subscription model [1 point]? (b)
What is the estimated customer lifetime value of an average airline [2 points]? Notes: Use the CLV equation for the CLV calculation ( (M-R)*((1+d)/(1+d-r) ) (c)
The management team considers increasing the price of the annual subscription to $30m but believes this would reduce the average airline’s fleet size from 20 to 15 aircraft. How does this affect the average CLV and would you recommend this higher price [1 point]? (d)
Alternatively, the management team considers increasing the sales team’s budget from $20m to $30m per airline to hopefully reduce the share of airlines that churn by 50%. How does this affect the average CLV and would you recommend this increased budget [1 point]? Part IV (2 points = 18 minutes): Positioning Boom Overture is unique aircraft along several dimensions: it is likely business class and/or first class only, it’s potentially supersonic, and it is planning on using sustainable aviation fuel only, resulting in net-
zero carbon emissions. (a)
Boom Overture is different on several aspects: the focus on business class/first class, the speed, and net-zero carbon emissions. Which aspect (pick one) would you highlight to airlines (who purchase/subscribe) and to consumers (who fly with it)? Would you highlight the same? Why? [2 points] Notes: See Appendix A for a comparison of various aircraft. Part V (2 points = 18 minutes): What else to build and offer? Next to the Boom Overture, Boom Sonic is considering building a second type of aircraft. Importantly, the engines/turbofans will already be available, which was a major obstacle for the Boom Overture. They mainly consider two options: (a) a larger long-range commercial passenger jet with a capacity of up to 200 seats. This would offer economy class seats next to business and first class seats, but be somewhat slower than the Overture at around 1,300 km/h (808 mph). This allows it to fly (at least over water) still considerably faster than other competitors but less so than the Overture. (b) a business jet to compete with, e.g., the Cessna Citation X, for up to 15 passengers with a top seed of about 2,200 km/h (1,367 mph), which makes it even faster than many combat aircraft such as the F-35A Lightning II (see Appendix A). (a)
Which aircraft would you recommend they should pursue? Discuss the advantages and disadvantages of both a larger long-range commercial jet and a supersonic business jet [2 points]. Notes: Argue qualitatively and quantitatively. You may want to use the information provided in Appendix D.
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7 Appendix A: Overview of aircraft Aircraft Picture Seats/PAX Speed Range Fuel per Seat F-35A 1 (military) 1,974 km/h (1,227 mph) 2,800 km (1,740 m) n/a Cessna Citation X 12 (business) 980 km/h (609 mph) 6,410 km (3,983 m) 21 mpg Gulfstream G800 19 (business) 980 km/h (609 mph) 15,000 km (9,321 m) 17 mpg Boeing 787 Dreamliner 440 (commercial) 956 km/h (594 mph) 11,910 km (7,400 m) 102 mpg Airbus A380 853 (commercial) 903 km/h (561 mph) 14,800 km (,9196 m) 74 mpg Concorde 120 (commercial) 2,180 km/h (1,355 mph) 7,200 km (4,474 m) 23 mpg
8 Appendix B: Visualizations of aircraft features Emirates Lounge Bar on its A380 aircraft Boeing 787 Dreamliner Windows
9 Appendix C: Impressions Boom Overture
Shown with a 400 square inch window
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10 Appendix D: Aircraft Industry Overview
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