LOCKHEED TRI STAR
Analysis & Recommendations

Toby Odenheim

10‐OCT‐2013

Executive Summary
With the L-1011 Tri Star program, Lockheed, well respected for military aircraft contracts, started to move into the civilian commercial aviation sector in direct competition with Airbus, McDonnell Douglas and Boeing. By 1971, having already invested $700 million in development costs, Lockheed was struggling with cash flow and sought $250 Million in federal loan guarantees, funding which was needed to complete development. Despite Lockheed’s assertion to the contrary, NPV analysis demonstrates that the project was never financially viable. However, given the sunk costs, Lockheed’s best option is to continue with production to minimize the project loss. Continuing to production yields an expected NPV loss of $584 million (assuming estimated sales of 210 aircraft) versus a loss of $900 million if production is scrapped outright.

Recommendations:
  Secure the needed $250 million in funding to complete R&D and move into production. Pursue every option possible to boost total sales, including o Adding an option to lease the aircraft rather than purchase outright. This could help more customers afford the L-1011 thereby driving up sales on reducing unit production costs. o Pursue possible sale of the L-1011 to military and (international) government buyers, rather than focuses exclusively on the commercial market. o Attempt to voluntarily boost the 25% deposit made 2 years in advance of delivery. Based on a 10% discount rate, obtaining $1.00 dollar today is equivalent to receiving $1.21 two years from now. Lockheed should incentivize customers to make larger prepayment by offer a single 10% discount on the deposit amounts in excess of 25%. If airlines have a lower cost of capital this may entice them to pay more upfront;