Suppose you had a modest hoard of cash and needed to fly somewhere—say, one-way from Moscow to La Paz. But you’re finicky. You get annoyed with seatmate small talk, like “. . . and what brought you to Russia?” You’d rather fly solo.
If you’ve got time, and don’t mind being holed up in the Moscow airport for a while, you might call a Boeing sales rep to order your own brand new twin-engine 777X jet to spirit you over to the Bolivian capital. That idea assumes, of course, that Boeing knows what to charge you. In fact, they don’t. “A final price tag has remained elusive,” according to a Wall Street Journal article, Boeing’s New Plane Is Hard to Price, July 30, 2013.
“The hard part . . . is the pricing part,” said John Plueger, president of Air Lease Corporation, a potential customer for the 777X, adding that Boeing “still has a lot of review to go yet” on its selling terms. Some in the industry think the 777X list price might approach $400 million, about $48 million more than Boeing’s current priciest model, the 747-8, which carries more passengers. But that plane also sports an additional pair of engines, and drinks JP-5 like a college freshman at a keg party.
Because fuel costs are the greatest single expense for an airline, the 777X has what some may consider an enviable selling proposition: it consumes 20% less fuel than its popular predecessor, the 777. According to Scott Fancher, Boeing vice president of airplane development, translating fuel efficiency gains into financial terms is necessary to find “an equitable way to reflect that value in the price of the airplane.” And that creates a thorny pricing conundrum, because as he says, “there are varying opinions of where fuel prices are going to go.”
The first 777X deliveries are expected around 2020, and the service life of the aircraft is 20 years. “OK, everyone get out a calculator! We’re going to do an ROI on this . . . Let’s start with the average price of jet fuel between 2020 and 2040 . . . Anyone?” After his staff plugs in that number, they can project the 777X’s maintenance costs, Boeing’s labor expenses, and the monetary value of reduced noise and emissions into the next three decades. By my estimate, the word if should appear in the resulting financial analysis no fewer than 4,822 times.
While I didn’t interview Mr. Fancher for this blog, l suspect what keeps him up at night are visages of extended complex project plans, like Barcelona’s Sagrada Familia, which began construction in 1882 and still employs hundreds of stone masons and other workers engaged in its ongoing completion. Back when the foundation was being poured, I wonder which values the managers entered in their planning ledger under the column heading, 2013 – hourly direct labor?
For managing its sales risks, Boeing has pricing options, including some it can copy from archrival Airbus. “In pricing its A320neo, [Airbus] shared the value of the single-aisle jet’s 15% fuel savings with airlines, effectively adding half the value of the savings as a premium to the price. That equates to $8.7 million more than the current generation A320, which lists for $91.5 million,” according to The Wall Street Journal article.
If tight petroleum supplies elevate fuel prices, taking that bet means Boeing’s profits could soar, and its execs could break out the bubbly in their Chicago headquarters. But it could also spell a global recession, which could doom future aircraft sales. “On second thought, we might not want to go there . . .” At least sales of antacid tablets are recession-proof.
Boeing’s pricing challenge isn’t unique. In IT and elsewhere, executives encounter the same issue: how to reflect customer value received in their prices when that value isn’t known, and can’t be reliably predicted? Let’s face it, business cases and ROI analyses are SWAG’s, at best.
Meanwhile, with Boeing’s first brand-spanking new 777X’s scheduled to roll down the company’s Everett, Washington, runway in just eight years, Boeing’s sales force already has order entry screens aglow for the 777X. Alas, as of now, the unit price field isn’t available, even for “management override.” What’s Boeing to do? There are no easy answers. For a technology as sexy as a state-of-the-art commercial jetliner, it seems cheesy to respond to a customer’s question about price with, “well, how much are you willing to pay?”
For the restaurant chain Panera Bread, though, that question isn’t facetious. The company announced a pay-what-you-can pricing model in economically depressed markets like Detroit and St. Louis. Panera provides a “suggested donation” to guide consumers. “Three years into the experiment, the company now is testing one pay-what-you-can item—turkey chili in a bread bowl—at for-profit St. Louis stores, in hopes the idea will expand to its 1,700 outlets,” Annie Gasparro wrote in The Wall Street Journal, June 5, 2013.
As Panera and Airbus illustrate, such pricing innovations don’t reduce risks. They redistribute them, much in the way a kindergartener smears finger paint on a poster board. “It’s beautiful, Dear! What is it?” The same question any executive should ask before jumping into a pay-what-you-can or pay-for-performance program.
Of course, pricing modern jetliners differs greatly from pricing a turkey chili bread bowl, but if you’re tied up in a situation with an indeterminate future for an indeterminate amount of time—like trying to find a way to get from Moscow to, well, somewhere else—having flexibility might come in quite handy.
