Abstract
Before proceeding to the main case studies, McCurdy pauses to describe the manner in which corporate executives make investment decisions. McCurdy uses the case of the Boeing 707 jetliner to illustrate how executives determine that a proposed initiative “meets corporate margins.” The history also shows how the presence of a related government contract—in this instance the KC-135 Stratotanker—significantly changes the probability of financial success.
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- 1.
The Boeing Company, Annual Report 1952: 22–23. Corporate executives reported that the industry average for aircraft manufacturers was 2 percent; the corporate average for Boeing that year was 1.9 percent.
- 2.
The company’s margin of return based on gross revenues is set at 10 percent for the purpose of this illustration. The actual figures are 11 percent for commercial aircraft and 10 percent for military and space sales. See Greg McFarlane, “How Boeing Makes its Money,” <Investopedia.com> (March 27, 2015) (accessed September 7, 2016).
- 3.
Industry watchers estimated that the Boeing Company actually spent nearly three times that amount developing the Dreamliner. Sources include: Boeing, “Our Company, About Boeing Commercial Airplanes,” (2017) <boeing.com> (accessed January 27, 2017); Boeing, “787 Model Summary,” (December 31, 2016) <active.boeing.com> (accessed January 27, 2017); Christopher Drew and Jad Mouswad, “New Problems With Boeing 787 Revive Concerns,” New York Times (December 10, 2012); Jon Ostrower, “Boeing’s Key Mission: Cut Dreamliner Cost,” Wall Street Journal (January 7, 2014); Paul Ausick, “Why a Boeing 787-9 Dreamliner Costs $250 Million,” 24/7 Wall Street (June 17, 2014) <247wallst.com> (accessed October 5, 2016); Robert Schmidt, “Boeing to Face SEC Probe of Dreamliner and 747 Accounting,” Bloomberg (February 11, 2016) <Bloomberg.com> (accessed September 7, 2016); Chris Bryant, “Boeing’s $32 Billion Accounting Question,” Bloomberg (April 14, 2016) <bloomberg.com> (accessed September 7, 2016); Alwyn Scott, “Boeing looks at pricey titanium in bid to stem 787 losses,” Reuters (July 24, 2015) <reuters.com> (accessed April 14, 2017); Dominic Gates, “Boeing churns out cash as 737, 787 production runs smoothly,” Seattle Times (July 26, 2017).
- 4.
See “The Selling of the 707,” Fortune (October 1957); reprinted October 30, 2011, and George Haloulakos, “The Boeing Company: A Case Study on Betting It All,” June 17, 2013, <businessthinker.com> (accessed June 29, 2019).
- 5.
This particular scenario is based on $35 million in outlays spread over the first six years of the project skewed toward the early years followed by 15 years of sales in the form of a bell-shaped curve, totaling 1000 aircraft with a constant return of $90,000 in profit (2 percent) for each aircraft sold. At a 10 percent discount rate, the outlays total $29.7 million in their present value while the profits total $29.9 million in present value. Financial analysts generally calculate returns over a range of assumptions.
- 6.
The U.S. Air Force reported that each KC-135A cost the government $39.6 million in the inflation-adjusted value of 1998 dollars. That is roughly equivalent to the sale price of the Boeing 707. Boeing executives reduced cost outlays by leasing government assembly plants and tools needed to produce the airplane. Boeing built 820 KC-135A stratotankers for the U.S. Air Force, 88 of which were modified for other purposes. See U.S. Air Force, KC-135 Stratotanker, May 14, 2018 <www.af.mil/About-Us/Fact-Sheets> (accessed June 29, 2019).
- 7.
The tanker project had the added advantage that it occurred first and faster than the commercial venture, hence with lower investment costs. Boeing produced the first KC-135 in 1956 and completed the 800-plus plane production run in 1965.
- 8.
The figure of 803 units is taken from Walter J. Boyne, “Airpower Classics: KC-135 Stratotanker,” Air Force (February 2012): 104. The American Aviation Historical Society reports that Boeing built 820 units. American Aviation Historical Society, “Boeing KC-135 Celebrates 50 Years of Service” (2009) <aahs-online.org> (accessed April 21, 2017).
- 9.
The Boeing Company, We’re Boeing. The future is built here. 2018 Annual Report.
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McCurdy, H.E. (2019). How Corporate Executives Approach Business Decisions: Financial Planning for the Boeing 707 Jetliner. In: Financing the New Space Industry. Palgrave Studies in the History of Science and Technology. Palgrave Pivot, Cham. https://doi.org/10.1007/978-3-030-32292-2_4
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