Commercial Aircraft Pricing: Application of Lessons Learned

Abstract

The procurement of commercial items presents both opportunities and challenges for the Department of Defense. Among the challenges is the negotiation of fair and reasonable prices with suppliers where competitive sources are not relevant. This paper presents analyses to address this challenge for commercial aircraft that serve as the basis for military systems. Using insights from the economics literature on aspects of the commercial aircraft market, we develop estimating models for aircraft price that take into account both supply and demand drivers, across both aircraft models and time. These models are applied to the KC-46A airborne tanker program, prices of which are subject to negotiation. Other factors affecting the commercial aircraft market and aircraft used in these programs (Boeing variants) are also addressed. Lessons learned applicable to the general problem of negotiation of contracts for commercial items are enumerated.