Product Feasibility Plan for Embraer ERJ-170/190 Regional Jet Coffee Maker

Abstract

XYZ Company (XYZ) is an aerospace parts manufacturer based in City, State, which specializes in appliance products for large commercial aviation and the US Department of Defense. XYZ has been in a growth phase since the 2001 aviation downturn, and now has a XX% market share of coffee maker sales for large commercial aviation, making it the number three supplier to this market segment. XYZ’s success in this market segment was a primary factor in the acquisition of XYZ in December 2008, by ABC, Inc. The acquisition has provided XYZ with greater financial resources to draw upon, and combining ABC’s and XYZ’s products has reshaped the playing field in aviation appliances, by narrowing the competition to a three company race – Competitor A, Competitor B and ABC-XYZ. All three companies now have similar sizes, roughly $X.XB to $X.XB market cap, and thus have similar resources to devote to improving their market share in the aviation appliance market.

Competitor A is firmly entrenched as the number one supplier to the aviation appliance market, due to a long history of OEM contracts and a high-quality, well-designed product line. As a result, Competitor A has a greater than XX% market share, and is able to charge a premium price for its products, making them vulnerable to competition from lower-cost providers. Competitor B is the next largest market share supplier to this market and has approximately a XX% market share, and competes with Competitor A on the basis of price, by offering a lower-quality product. ABC-XYZ (XYZ) has the smallest market share of the three companies, but has been very successful in applying it’s lowest-cost, high-quality approach to the large commercial aviation market segment, resulting in growth from X% to XX% market share during 2003 to 2008. XYZ has accomplished this primarily by aligning itself with airlines that employ the complementary low-cost business model, and developing strong relationships with airline personnel, including: buyers, PMA-coordinators, engineers, and maintenance personnel. XYZ feels strongly that through a combination of new financial resources and new products, and application of its proven business approach, it can overtake Competitor B and become the number two supplier to the aviation appliance market.

To enable its continued growth, XYZ has identified the Regional Jet coffee maker market segment as an attractive market segment that could aid XYZ in its goal of becoming the

number two supplier in aviation appliances. The Regional Jet market segment is dominated by two manufacturers – Bombardier and Embraer. XYZ has strong ties with several airlines that operate Embraer Regional Jets, and believes it can leverage these airline relationships to quickly enter the Embraer coffee maker market. Unfortunately, XYZ has only limited knowledge of this market, current products and the market potential, and needs more information to make an informed business decision of how to proceed with this product. This product feasibility plan will outline the recommended approach XYZ should use to effectively enter the Embraer coffee maker market for the ERJ-170/190 aircraft.

Strategic Objectives

The business objectives for the Embraer ERJ-170/190 coffee maker product is to secure an initial 36% market share of the existing fleet, and grow this by acquiring 24.8% of new deliveries for the next 8 years, while maintaining a net income greater than 25% of sales. Additionally, XYZ would like to use this product platform to establish itself as the highest-value coffee maker supplier to the growing regional jet market, and fill an empty category in XYZ’s aviation appliance product offering.

Target Customers

Launch Customer: Airline X – City, Country Yearly Sales Potential: 106 Units Primary Customers: Airline Z – City, Country Yearly Sales Potential: 72 Units Airline Y – City, Country Yearly Sales Potential: 72 Units Airline W – City, Country Yearly Sales Potential: 120 Units Secondary Customers: Airline V, Airline U, Airline T, Airline S, Airline R Combined Total Yearly Potential: 376 Units

Market Analysis

Cost challenges for airlines increasing. Products with lower purchase prices, and that decrease fuel usage have an increased competitive advantage in purchasing decisions.

Low-cost airline model is rapidly growing. The low-cost airline model aligns naturally with the XYZ marketing approach of low-cost, high-quality products.

Regional jet fleet will double in size over the next decade. Embraer is forecasted to be the market leader in this segment, capturing 40.1% of the new deliveries, and combining this growth with low competition for the coffee maker business, makes this market segment an attractive growth market.

FAA-PMA acceptance is increasing. FAA-PMA part cost advantage and widespread acceptance provides and attractive alternative for cost-conscious airlines.

Positioning, Value Proposition (Benefits)

• Lower Part Price. Because of its 25% lower price than the nearest competitor, XYZ’s coffee maker will save customers $2900 to $7940 per aircraft per year. • Lower Weight Decreases Operational Costs. XYZ’s weight decrease of 3 lbs/plane over competitors’ products will decrease yearly fuel consumption by 508 gallons, saving operators $1010 per aircraft per year in fuel expenses. • Industry Leading Quality – XYZ leads the industry in product quality, as it is the only supplier that tests its coffee makers 100% to ensure they meet performance specifications, and has had zero in-service failures during the last decade. • Industry Leading Customer Service and Support – XYZ is “big enough to matter, and small enough to care”, and this is exemplified in our first class customer service and support via a combination of 24/7distributor support and XYZ direct relationships. Our distributors maintain inventories worldwide, and have parts available in 24hrs or less 95% of the time, ensuring AOG and maintenance downtime is avoided.

XYZ Product Features

• Increased Coffee Holding Capacity - Longer life for reduced operating cost. • Lighter Weight – Save fuel, for greener, lower-cost operations. • 100% functionally tested - Rest assured your customers are drinking the finest coffee possible, every time. • Superior Packaging – Parts arrive intact, allowing inventory levels to be minimized. • FAA-PMA Approved – FAA approval frees up engineering resources for other tasks.

Sales and Marketing Strategy

Airlines will buy the product from XYZ’s distributors AAA and BBB, and XYZ will guide and support sales activity via its internal sales staff. The Ascend database will be utilized to identify fleet ownership and to monitor fleet operational hours, and this information will be used to target airlines that XYZ has current relationships with and those with substantial fleets. Customers will be targeted, using a sales progression strategy that builds on early successes. After launching the product with Airline X in late 2009, sales will first focus on airlines with existing relationships, and then extend to new customers in 2011-2013.

A prototype of the product will be showcased by AAA at the 2009 Paris Air show, and actual product will be displayed by AAA at the 2010 Singapore Air show and London Air show to develop market awareness of the product. Leads for new customers will be generated via attendance in aviation purchasing and maintenance conferences including the ACPC and CCMA shows. Product training will be conducted with all sales personnel at AAA and BBB, as well as conducting co-visits to airlines for new sales, continuing the relationship based selling approach XYZ has successfully utilized in the large commercial aviation appliance market segment. Traditional collateral material will be available, including a product catalog, marketing brochures, data pack, and inclusion online at www.XYZ.com.

Financial/Business Case

Estimates are based on sales to Airline W, Airline Y, Airline Z and Airline X of 370 units in 2009, with unit sales increasing at a yearly rate of 15.4% a year for the period of 2010 to 2017. This is a conservative estimate, as it is based on applying XYZ’s historic growth rate in coffee maker sales for the period of 2002-2008 to new airplane deliveries only. At $4350 proposed retail price, forecasted sales revenue is $134,120 per month in 2010. Development costs for the product are estimated at $516,830, and capital equipment purchases required for product launch are estimated at $110,450. The product is projected to show profitability by September 2010, with a NPV of $2,352,350 using a conservative discount rate of 20%, and an IRR of 129%.

Competitive Products

XYZ’s product is unique in that it offers the best value for this application, as it has the lightest weight and price resulting in the lowest operating costs, and has the longest life and quality on par with the higher priced OEM product. Competitors for aftermarket sales are Competitor C (Competitor A) and Competitor B, with prices of $832 and $580, respectively. The closest competing product is the Competitor B coffee maker, as design and performance is similar, but XYZ’s quality and packaging is superior. The Competitor C coffee maker manufactured by Competitor A, is the market leader, due to its OEM status and higher quality components, but is vulnerable to lower cost competition. XYZ’s primary advantage will be it’s lower sales price and lower weight, which combine to reduce yearly operating costs of the Embraer ERJ-170/190 aircraft by $3910 to $8950.

Product Schedule

The product development schedule estimate is a development period lasting eight months, starting in May 2009 and concluding with FAA-PMA approval in December 2009. The schedule is achievable utilizing existing personnel, with a probability of on-time completion of 67% when compared to completion times of similar products in the last three years.

Conclusions & Recommendations

This product feasibility plan concludes that: 1. There is a sizeable market for the product, and customer alignment exists with XYZ’s high-value sales philosophy. 2. The product is extremely attractive financially – high NPV, rapid payback and not sensitive to discount rate. 3. XYZ can leverage its existing airline relationships to secure rapid product placement. 4. XYZ can offer a superior product, preventing price-only competition and the high-margin allows for profitability to be maintained if price does erode. 5. The product requires minimal capital equipment investment, decreasing investment risk, and improves utilization of existing assets.

Based on the conclusions reached during development of this feasibility plan, it is recommended that XYZ: 1. Fund this project and begin Development in May 2009. 2. Conduct full-blown marketing study to validate market potential, and improve market knowledge. 3. Develop detailed project schedule, identifying critical path and resource requirements to ensure launch deadline of January 1, 2010 is met.