TomB
Topic Author
Posts: 51
Joined: Sun Nov 12, 2006 10:17 pm

Airliner Cost Increases

Mon Nov 13, 2006 12:12 am

As background, I used to work in the Treasury Department of Eastern Air Lines in the early 1970's. Since we administered the financial provisions of the aircraft contracts and paid for the airplanes, I was very familiar with the cost of airplanes in 1972.

For example, in 1972, EAL was paying:

less than $5 million each for a DC-9-30
a Boeing 737-200 was less than $5 million
$7.6 million for a Boeing 727-200
less than $18 million for a Lockheed L1011-1
about $22.5 million for a Boeing 747-100.

Accordingly the Minneapolis Federal Reserve, the Consumer Price Index has increased 4.83 times from 1972 to 2006. What cost $1000 in 1972 will now cost $4,825 in 2006. For simplicity, let us say the Consumer Price Index increased 5 times in the last 34 years.

If we compare the price of today airliners, we see that they have gone up much faster than the Consumer Price Index. If we compare the 1972 airliner to the 2006 equivalent airliner, we see a big change in price.

DC-9-30 at less than $5 million to an Embraer E-190 at $35 million - a 7X price increase.

A L-1011-1 at less than $18 million to a Boeing 787-3 at $138 million (low end of Boeing list prices) - 7.67X price increase

A Boeing 7747-100 at $22.5 million to a Boeing 747-400 at $216 million - a 9.6X price increase.

Forum experts, please give me the reasons that airliner costs have been increasing at a rate far faster than inflation (as defined by the Consumer Price Index). I know that quality, efficiency and capability of airliners have increased over the past 34 years but why is that progress also accompanied by price increases far exceeding the rate of inflation?
 
dtwclipper
Posts: 6668
Joined: Wed Oct 29, 2003 3:17 am

RE: Airliner Cost Increases

Mon Nov 13, 2006 12:21 am

Quoting TomB (Thread starter):
Forum experts, please give me the reasons that airliner costs have been increasing at a rate far faster than inflation (as defined by the Consumer Price Index). I know that quality, efficiency and capability of airliners have increased over the past 34 years but why is that progress also accompanied by price increases far exceeding the rate of inflation?

I am no expert in the matter, however I would guess that increased saftey standards, inflight ammenities, electronics, and computers have all added to the costs of new Aircraft.

When we look at the technology incorporated in the DC-9-30 to that on a new 777 or A340 it's a trip back to the stone age.

Again, just an uneducated guess on my part.
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supa7E7
Posts: 1360
Joined: Fri Aug 27, 2004 2:05 am

RE: Airliner Cost Increases

Mon Nov 13, 2006 4:43 am

Doing a CPI comparison over such a long period - during which technology and productivity made quantum leaps - is problematic for such a small variation.

I guess you're saying it might be 50% off target. Maybe so. But that is well within the margin of error of the CPI.

Consider how much cheaper computers are today, 1,000 times cheaper. Televisions are MUCH cheaper than in 1972. Cars are probably cheaper too, while being much improved.

All these factors therefore require other things - college tuition, real estate, teacher salaries - to rise faster (9x let's say) so an average person's basket is still 4.8x higher than 1972. So I do not see any inconsistency in your numbers. They look fine.

Also, you admit you are comparing EAL "paid" figures to Boeing "list" prices. Maybe it is more fair to discount today's prices by 30% so your 1972 EAL numbers are a more relevant baseline.

To measure inflation (as apart from productivity), you must use equal products. But the 2006 Boeing is way better than a 1972 Boeing. Just like a new plasma TV is better than a 1972 TV. The 1972 model is worth next to nothing today, so in one sense, we have experienced deflation, not inflation. Equal money buys better stuff.

Leather jackets, real estate, corn meal, etc are better comparisons. Technology muddies the waters in this case.
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