42 years ago this month, BAC and Sud Aviation (now Airbus) introduced the Concorde, our first supersonic commercial aircraft. The Concorde could fly from New York to London in 3.5-hours, compared to 7-hours on a typical flight today. It ferried passengers from 1976 to 2003 and for the past fifteen years, we’ve been without a supersonic transporter.
Earlier this year, Boom Supersonic raised a $33mm series A round led by 8VC to bring back supersonic commercial flight. As a former Boeing engineer and an airplane enthusiastic, I was very excited by the news. Personally, I would love to invest in a supersonic aircraft. However, in venture capital, we can’t invest in a company solely because we think the technology is inspiring. VC funds have a fiduciary responsibility to generate financial returns for its limited partners. To do this, VCs have a disciplined due diligence process that evaluates product capability, market size estimate, unit economic analysis, management team strength, etc.
Let’s revisit the Concorde and then I will walk through a unit economic calculation of Boom’s SST (supersonic transport).
Concorde — The Only Commercial Supersonic Transport
What I find amazing is we had supersonic commercial flight in the Concorde 42 years ago! A short 29 years after Chuck Yeager first broke the sound barrier, BAC and Sud Aviation (now Airbus) introduced the Concorde on January 21st, 1976. It represented the best of commercial engineering. Passengers would watch the aircraft speed tracker break Mach 1 and reach Mach 2. Most commercial airliners cruise at 35,000 feet; the Concorde would break 60,000 feet. At this altitude, you could see the curvature of the Earth on the horizon.
The economic and political landscape in the 1960s made this engineering marvel possible. The cold war climate and focus on technological innovation motivated the US, British, French, and Russian government to invest millions of dollars into SST research. Russia’s Tupolev Tu-144 became the first commercial aircraft to break Mach 2 but suffered a short life with only 55 passenger serviced flights. America’s Boeing 2707 SST was cancelled before it even reached the prototype stage. One winner emerged, the British and French joint developed Concorde. The Concorde enjoyed over twenty years of fame and success but at the turn of the century, disaster struck. On July 25th, 2000, Air France flight 4590 suffered a punctured tire, which exploded, and a piece of the rubber hit the fuel tank, causing a leak and fire. 113 people died in the incident and the aircraft was grounded for over a year. When the airplane was reinitiated in November 2001, the 9–11 attack on the World Trade Center caused the airline industry to plummet. In addition to these large-scale events, the Concorde faced challenges in its fundamentals.
“British Airways and Air France announced that they would retire their fleets of Concordes this year. The airlines cited declining passenger demand and steadily increasing costs of maintaining the fleet, which began service 27 years ago.” — New York Times, April 11, 2003
Six months later, Airbus retired the only commercial supersonic transport we had.
Framework for Venture Investing in Aircraft Technology
Timing matters. We’ve seen many tech innovations that failed because it came at the wrong time: SixDegrees.com (the original social network), the Palm Pilot (before the iPad), MapQuest (before Google Maps), and Motorola ROKR E1 (before the iPhone) to name a few. The same could be true of the SST; maybe the Concorde was ahead of its time and lacked the technology needed to make it economically viable.
Below is the unit economics framework I use to evaluate venture investments in aircraft technology.
Here, we will use Boom’s supersonic aircraft as the example. Note that I do not have any inside information on Boom Supersonic. I am using publicly available information to calculate the unit economics.
- Reference aircraft performance specs
As the only commercial supersonic aircraft we’ve ever had, the Concorde will be our reference point. British Airways website has a page dedicated to the Concorde. Here we learn several important facts:
· Fuel consumption: 5,638 imperial gallons (25,629 liters) per hour
· Flight crew: two pilots & one flight engineer
· Cabin crew: six flight attendants
Regulations no longer require the flight engineer onboard. 5,638 imperial gallons is equivalent to 6,771 US gallons; we will use the latter metric in our calculation. Key takeaway: Concorde burned 6,771 US gallons of fuel per hour of flight.
2. Pick a reference route
The Concorde was known to fly the New York to London route and Boom has advertised New York to London and San Francisco to Tokyo. So, we will focus on New York (JFK) to London Heathrow (LHR). This is a 3,000 nmi flight that takes 7–8 hours of flight time with a typical commercial aircraft. Key takeaway: Reference route is JFK to LHR.
3. Airplane improvements from reference date to today
Wikipedia page “Fuel economy in aircraft” summarized fuel efficiency of several commercial aircrafts, conveniently assuming a 3,000 nmi segment. B767–200ER (1984 EIS) could fly 72mph vs B787–8 (2011 EIS) could fly 104mpg; this represents a 44% improvement.
Better engines, improved aerodynamics, and composite materials have all contributed to a dramatic improvement in fuel efficiency over the past several decades. However, we can’t know how much better Boom’s fuel efficiency will be relative to the Concorde. In cases when we aren’t sure, a sensitivity analysis is valuable (see step 6). Key takeaway: Airplanes have improved ~44% since the 1980s.
4. Airline operating cost breakdown
In December 2017, the International Air Transport Association (IATA) released a study showing fuel as 17.3% of an airline’s operating cost. In 2018, IATA forecasts an increase to 18.9%. Fuel as a percentage of total operating cost is directly tied to the price of fuel. Boeing’s brochure material currently assumes a fuel price of $3 per gallon. We’ll start there and add a sensitivity around fuel price. Key takeaway: Fuel is current ~18% of airline operating cost.
5. Extrapolate new aircraft operating cost
If we assume Boom is 44% more fuel efficient than the Concorde, we can estimate Boom’s fuel cost. The Concorde burned 6,771 US gallons of fuel per hour of flight. The Concorde flew JFK-LHR in 3.5 hours at Mach 2. Boom claims it can complete the same journey in 3.25 hours at Mach 2.2; let’s assume they can achieve this.
Boom JFK-LHR fuel cost = (6,771 US gal/hour) * (3.25 hour) * ($3/gal) * (1–44% efficiency) = $36,970. If fuel is 18% of the operating cost, then Boom’s total operating cost on this route would be $205,387.
6. Estimate per seat price to breakeven
Boom claims their aircraft will hold 55 seats compared to the Concorde’s 100 seats. This could be a smart move because the Concorde had difficulty filling up 100 seats. Based on these estimates, assuming an airline sells all 55 seats, an airline would need to charge $3,734 per seat to breakeven. Boom claims its airliners can charge “about the same price as today’s business class tickets”. Virgin Atlantic Delta charge $6,800 roundtrip or $3,400 one way. It appears Boom’s unit economics are quite competitive with existing commercial airliners!
As mentioned before, there is a lot of uncertainty around fuel price and how much more fuel efficient Boom will be relative to the Concorde. Fuel prices are at record lows, so we will vary fuel price from $3 to $6 in increments of $0.5. We’re estimating fuel efficiency improvement of 44%, to be conservative, we will vary this from 30% to 50% in increments of 5%. Below is the sensitivity for Boom’s breakeven ticket prices:
At a glance, the unit economics look reasonable. Even with the improvements to engine, aerodynamics, and weight over the past 40 years, much of the economics depend on fuel price. While fuel price would also impact existing airliners, flying supersonic requires substantially more fuel.
I would conclude the unit economics make a viable business because airliners can charge more to arrive at a destination in half the time. How much more can they charge? That’s a question for the airlines. At this point, I would focus my due diligence in other categories, such as whether or not the management team has what it takes to execute this endeavor and how large the total addressable market is.
Venture Investing Requires Methodical Due Diligence
We’ve come a long way since Orville Wright first took flight in 1903. Since then, we’ve seen amazing flying machines such as Lockheed Martin’s SR-71 Blackbird and Boeing’s 747 Queen of the Sky. The blended wing body (BWB), supersonic transport, electric airplanes, vertical takeoff & landing (VTOL) vehicles are all possible aerospace innovations in the future. The BWB means an order of magnitude improvement in aerodynamics, SST means half the travel time, electric airplane means a greener future, and VTOL vehicles means less traffic congestion. These are all powerful visions that I would buy into.
But venture investing is more than investing in the vision. There are many questions to answer and challenges to overcome: complex business case, understanding market landscape, new tooling and manufacturing line, endless testing to ensure safety, and getting FAA certification just to name a few. At the end of the day, VC funds invest in early and growth stage companies with the expectation of generating financial returns down the line. While important, it takes a lot more than just vision to make money.
If you have any questions or thoughts, please comment. Or if you are working on anything in supply chain, manufacturing, or transportation, shoot me a note at alex@schematicventures.com
