How much profit do companies make per fighter aircraft?

[legoboy]

I've been wondering how much money do aircraft companies make per fighter.

Also are they sold for premium prices to it's own country ?(That WOULD make sense).

Say a F-16 cost $20M for the U.S government. How much of this is profit that goes to the company.

Say if Taiwan orders a F-16. Does it also cost them $20M?

 

[Feanor]

Profit margins can range from as low as 7%, to as high as 200%, depending on the pricing, negotiations, the fighter in question, etc.

I don't know if the US has a two-tier system for prices, I know Russia does. There are internal prices, which don't allow a profit margin of over 30% (typically it's closer to 7-15%) and external prices where the profit margins can get ridiculous. Also close Russian allies (CSTO members) can purchase military equipment at internal prices.

 

[Gremlin29]

It's difficult to actually say for several reasons. To begin with, most people don't understand basic accounting practices, let alone more complex practices. In the US, it is difficult for a government contractor to actually "profit" more than 2%. US government contractors are required to to comply with the FAR's, Federal Acquisition Regulations. The contract mechanism coupled with FAR's makes it virtually impossible for a government contractor to make a "windfall" of profit. There are obvious exceptions but this is generally true the majority of the time.

 

[Feanor]

It's difficult to actually say for several reasons. To begin with, most people don't understand basic accounting practices, let alone more complex practices. In the US, it is difficult for a government contractor to actually "profit" more than 2%. US government contractors are required to to comply with the FAR's, Federal Acquisition Regulations. The contract mechanism coupled with FAR's makes it virtually impossible for a government contractor to make a "windfall" of profit. There are obvious exceptions but this is generally true the majority of the time.

If the profit margin is 2%, how do they manage to reinvest into upgrading production?

 

[Gremlin29]

If the profit margin is 2%, how do they manage to reinvest into upgrading production?

I'm not sure I completely understand what you mean by upgrading production. In the US, an upgrade would be a consumer driven need which would require an economic adjustment to the contract.

 

[StevoJH]

If the profit margin is 2%, how do they manage to reinvest into upgrading production?

Remember that most development costs get paid by whoever is purchasing the aircraft upfront.

Part of those development costs would probably include paying for all or part of the production infrastructure.

 

[Gremlin29]

Remember that most development costs get paid by whoever is purchasing the aircraft upfront.

Part of those development costs would probably include paying for all or part of the production infrastructure.

This is true to a certain extent however companies need to be careful about costing certain things into a project. If a pay application is submitted that includes the cost of a tool for example, techniclly the government has purchased the tool and it now belongs to them. In some cases they can and do require these items to be turned over to them at the end of a project. I'm not talking about hammers and nails, I'm talking about big ticket items.

I mentioned earlier the profit margins are smaller than folks would think. I'm talking about net profit, which is actual no kidding profit in the pocket. Gross profit is something entirely different, but has no real meaning in terms of how much money was actually earned without knowing what the overhead and other indirect costs were. In the billions of dollars contract world, the margins are quite small but even a 2% net profit from $60 billion is $1.2 billion, and that's alot of cash.

 

[NICO]

This is true to a certain extent however companies need to be careful about costing certain things into a project. If a pay application is submitted that includes the cost of a tool for example, techniclly the government has purchased the tool and it now belongs to them. In some cases they can and do require these items to be turned over to them at the end of a project. I'm not talking about hammers and nails, I'm talking about big ticket items.

I mentioned earlier the profit margins are smaller than folks would think. I'm talking about net profit, which is actual no kidding profit in the pocket. Gross profit is something entirely different, but has no real meaning in terms of how much money was actually earned without knowing what the overhead and other indirect costs were. In the billions of dollars contract world, the margins are quite small but even a 2% net profit from $60 billion is $1.2 billion, and that's alot of cash.

Thanks, interesting subject that is pretty much secret or company restricted info. I was always under the impression that profit was around 5% not 2%. Do you know if that would only apply when gvt buys a fighter but what about spare parts? Is the profit the same 2% on parts? What about if OEM assures maintenance/spare parts contract, are they still held to that 2%?

Yes, to what you are talking about in the earlier part. On the F136 program, GE/RR was told to stop working, well they did. Nothing belongs to them,engines,etc all belong to the gvt, lot of people don't realize that, GE/RR won't be allowed to continue working on it even if they wanted to.

 

[Gremlin29]

Thanks, interesting subject that is pretty much secret or company restricted info. I was always under the impression that profit was around 5% not 2%. Do you know if that would only apply when gvt buys a fighter but what about spare parts? Is the profit the same 2% on parts? What about if OEM assures maintenance/spare parts contract, are they still held to that 2%?

Yes, to what you are talking about in the earlier part. On the F136 program, GE/RR was told to stop working, well they did. Nothing belongs to them,engines,etc all belong to the gvt, lot of people don't realize that, GE/RR won't be allowed to continue working on it even if they wanted to.

I just looked at Boeing's financial statement as published on the internet for 2009 (they are a publicly traded company so it's not secret info) and they are showing a profit of 3.7% (+/- .10 ). Now reallize this includes military and civilian sales, and obviously includes much more than building airplanes.

Each division is likely to have it's own ratio's for overhead and so forth and I would fully expect the civilian side of the house to be making more profit than the government sales side of the house.

Additionally, multiple year contracts can and do experience profit margin fluctuations. In a perfect world the contract will maintain an even and predictable profit margin throughout it's life but that never happens as there are too many variables affecting costs involved.

 

[jack412]

I've been wondering how much money do aircraft companies make per fighter.
Say if Taiwan orders a F-16. Does it also cost them $20M?

normally it would cost them the $20m + foreign military sales (FMS) fee of less than 4%
If you google FMS, it should have all the info you need to get a handle on it

 

[Feanor]

I'm not sure I completely understand what you mean by upgrading production. In the US, an upgrade would be a consumer driven need which would require an economic adjustment to the contract.

Interesting. Russian defense plants are responsible for their own production facilities, etc. The customer only pays for the aircraft. When it comes to Russian internal prices, the cost of upgrading or modifying production lines is entirely on the producer. This could partially explain why Russian equipment is so much less expensive.

 

[Gremlin29]

Interesting. Russian defense plants are responsible for their own production facilities, etc. The customer only pays for the aircraft. When it comes to Russian internal prices, the cost of upgrading or modifying production lines is entirely on the producer. This could partially explain why Russian equipment is so much less expensive.

Okay I understand now, there were several ways for me to interpret your question. US contractors are responsible for their own facility as well. I will say that aircraft factories are not that impressive to see in action, like an auto plant is. They are basically made by hand, aircraft sit for days or weeks before moving to the next station. I don't believe there's that much in the way of production processes that can be improved upon using the latest high tech production process.

As far as Russian aircraft being less expensive, it may have to do with the way they look at TBO parts etc. For example, Mi17 parts have a TBO and a shelf life. I don't know if Russian fixed wing parts work the same way. It's a different approach from the US who has moved away from TBO parts, I would expect this would lower the out the door price for the finished aircraft because the parts that have an expiration date are going to be used more often than those that don't. It could be as simple as economy of scale.

 

[Feanor]

Okay I understand now, there were several ways for me to interpret your question. US contractors are responsible for their own facility as well. I will say that aircraft factories are not that impressive to see in action, like an auto plant is. They are basically made by hand, aircraft sit for days or weeks before moving to the next station. I don't believe there's that much in the way of production processes that can be improved upon using the latest high tech production process.

As far as Russian aircraft being less expensive, it may have to do with the way they look at TBO parts etc. For example, Mi17 parts have a TBO and a shelf life. I don't know if Russian fixed wing parts work the same way. It's a different approach from the US who has moved away from TBO parts, I would expect this would lower the out the door price for the finished aircraft because the parts that have an expiration date are going to be used more often than those that don't. It could be as simple as economy of scale.

In that situation the question remains. If the profitability of contracts is 2%, then how do they cover costs for modernizing production facilities? That isn't nearly enough for reinvestment.

 

[StevoJH]

In that situation the question remains. If the profitability of contracts is 2%, then how do they cover costs for modernizing production facilities? That isn't nearly enough for reinvestment.

It is if the things are basically hand built rather then using modern mass production techniques (I guess the volumes are just to low for mass production to be viable).

Is the hand build technique more or less conducive to increased build quality?

 

[Gremlin29]

In that situation the question remains. If the profitability of contracts is 2%, then how do they cover costs for modernizing production facilities? That isn't nearly enough for reinvestment.

My first question is, how much money do you think a manufacturer needs to spend on an annual basis for modernizing facilities? If we abandon for the moment that someone like Boeing has a commercial side and just for the sake of this topic I will use info from the web. According to my quick and dirty google here's Boeings P&L and balance sheet.

Boeing Co Financials: Profit & Loss, Balance Sheet, Key Facts & Figures

You can see that in 2009 the whole company's actual profit after the tax man was around 2%. That includes all revenue and as we know they have a commercial side which would typically make more. They've had better years and worse years. This is the aspect of big business that people just don't understand, how small the return on investment really is on a % basis but $1.3 Bil after taxes is ALOT of money. Again these facilities are not nearly as huge on an industrial scale basis as people think. When they shut down a line because the production is over, unlike an auto plant there's not much left inside the building. Things like machine shop machinery and so forth are factored long term into operating costs ie the machine has a projected life and a predictable devaluation, therefore it's operation can calculated to cost X dollars per hour and billed to the project that way.

StevoJH in terms of quality the way military aircraft are built today ensures the quality is truely as good as it can be. Obviously there is some automation but it is actually machines doing what people can't do, or replacing a number of people (CNC machining) saving the company money. So yeah a big part of it is economy of scale, they just can't get there building 1 a day.

 

[Feanor]

NAPO required ~200 mil. to upgrade and refit production facilities, before they could start Su-34 production. That money came from a government industrial aid fund, because their own profit margins (7-30%) did not give them enough money for it. They've got a very small production facility.

Now you're talking about total annual reports. Meaning that the profit AFTER money has been subtracted for facilities. We were talking about added value, or markup, on the actual birds. Given what you said, it can't be 2%, if total company profitability is 2% because you have to consider overheads that aren't factored into the price of the aircraft but that would come out of the sales profit.

I have to ask how vertically integrated are these companies?

 

[moahunter]

It's difficult to actually say for several reasons. To begin with, most people don't understand basic accounting practices, let alone more complex practices. In the US, it is difficult for a government contractor to actually "profit" more than 2%.

I'm curious how you define profit here. Is it a net profit after financing costs, or perhaps even cost of capital returns for shareholders and debtors, or an operating margin level before those costs? 2% seems very low, not enough to make it worthwhile unless some of those below the line costs are included.

Traditionally military contracts have been cash cows for the private sector in the US. It has long been an argument of Airbus for example, that Boeing is effectively subsidized through the back door by the US taxpayer thanks to military contracts.

Another interesting consideration is that military contracts can help develop technology for civilian uses. The 707 is a very good example, its dominance was largely the result of the technology Boeing learned from military contracts. De Havilland as an example, wasn't as fortunate, their lack of experience on metal fatigue can be attributed to the Comet failures.

 

[Gremlin29]

Well here's how costs are built up:

Direct costs = actual dollars per hour paid to workers (this does not include labor fringe benefits, labor overhead etc), actual invoiced components be it raw materials or assemblies from subs, and so forth.

Indirect costs = labor fringe, labor overhead, , etc...things that aren't directly attributed to the job but still necessary/recquired.

Overhead = everything else that is a function of the company that can't be directly billed to the project. This would include the human resources department, the IT department, physical locations other than where the work is done etc. Overhead is going to be added as a % of revenue based on the companies projections of how much they will be spending on overhead that year, and how much revenue they expect. What it actually ends up being is going to be different than projected because it's based on best guesses and historicals.

The contract specifies what is, and what is not allowed to be charged towards indirects costs. This typically includes not being to include ALL of a companies operations overhead as a way to extrapolate overhead.

Fee: The fee is the profit % for direct and indirect costs. You don't profit from overhead. It's not unusual for the fee for directs and indirects to be different from each other ie a fee of 7% on direct costs and a fee of 5% on indirect costs.

For mega billion dollar contracts where there is more than one competitor, the fee is probably going to be tight, 3.97% maybe, 4.11%, or whatever%...that's up to the bidder.

Since you aren't profiting from a significant portion of the contract (overhead) your effective net profit is cut in half or.... around 2%.

I've seen gross profit margins of 14% or more on projects that were actually losing money. Gross profit is a misnomer to me, because people equate profit with cash in pocket, and gross profit is not that.

In any event, if you can't sleep tonight (or any other night) you can find the Federal Acquisition Regulations here: https://www.acquisition.gov/far/

I'm careful to be specific about this only because I've seen so many people counting money and they didn't understand how it actually worked. Most employees for instance actually think that if they are paid $10 per hour and a company charges $25 per hour for that employee, the company is "making" $15 per hour from their efforts. In reallity, that $10 per hour employee actually costs the company $20 per hour or more, and by the time all other costs are factored in that employee is only making the company pennies to the dollar.

Anyway to answer you more specifically Feanor, modernization is going to be at the cost of the contractor, that's just how it is however...... understand that physical plant upgrades (may be a new builidng, may just be upgrading the companies network hardware) are ammoratized and will be part of the operating costs that go into overhead.

So for you guys that understand some accounting principles, a typical fee for direct costs is going to be as I said previously based on competition and so forth. I would expect for a multi billion dollar contract the fee schedule to be in the 5% or less range.

 

[Tom Bryceland]

In situations where you are the only provider of services and where a clause is invoked to limit proffit margin. Companies start to get creative.

Property costs, Using wholy owned subsiduaries and sub contracting at higher rates, then the biggie "Contractors and Constants" , rental of equipment of that has been paid for many times over in other projects etc.

They might not get to show large margins in their bottom line, but be asured that the "Key Staff" are well looked after in terms of perks, allowances, etc etc all put through as expenses.

if you were to account for all of the above, im sure their margins would increase by a few percent at least.

 

[Feanor]

I see. So typical gross profit margins on a given contract will be 3.97-4.11%, and that the upgrades for production facilities are indirectly worked into the contract?