ABSTRACT
When someone comes to me with a cost saving idea, I don’t immediately jump up and say yes. I ask: what’s the effect on the customer?
Herb Kelleher, Southwest Airlines
This chapter presents a detailed description and evaluation of the cost structure of the aviation industry. In-depth understanding of the cost structure
and accurate estimation is one of the most important functions of engineer economists. The accuracy of the cost estimation method plays a pivotal role in the financial sustainability of any company. Lockheed entered the commercial aircraft market in the early 1960s by producing their L-1011 TriStar. The new aircraft featured a twinaisle interior with a maximum of 400 passengers and a three-engine layout. Lockheed faced strong competition, first from the McDonnell Douglas DC-10, and later from the Boeing 747 aircraft (Philip, 1998). After producing about 250 aircraft, Lockheed withdrew from the commercial aircraft business due to inadequate demand and the cost overrun in 1984.1 The program did not earn back its development costs, and consequently Lockheed left the commercial airline industry after failing to properly estimate the production cost and the break-even number of aircraft sold.2
