How To Lose $1B

Irony is wasted on the stupid.
Oscar Wilde

In his 9/1/2021 article, Jon Hemmerdinger discovered Aerion, a company tied to its AS-2 supersonic business jet (C), was going to put its assets up for sale (E).  He further found Aerion had hired Development Specialists (DS) to manage the process, and DS had “not set a sale price, saying, ‘The market will tell them what their assets are worth.’”

I nearly choked on the irony – Now they knew market reactions counted.  They sure didn’t previously.

Had they studied their Demand Frontier (D) before they started, they would have known while there was a possibility of hitting their targeted sale figure of 300 units in a decade, those chances were slim.

The US Presidential Helicopter program had a similar fate, failing to realize its Demand limits (A, B), and lost over $4B. The USG sold it for parts at four cents on each dollar spent.

Aerion will sell intellectual property; its AS2 didn’t go into production.  Maybe they can get a dime on the dollar.  Based on their $4B development cost estimate, they likely spent $1B by the time they stopped.

Next time, model the market first.  It costs a tiny fraction of the losses suffered forgoing market analysis.

#hypernomics #innovation #technology #management #markets

Hypernomics Fund

“Price is what you pay, value is what you get” – Warren Buffett

In the last post, as we studied the Aerion AS2, we found out how
Hypernomics could help avoid losses.

Someone asked me how Hypernomics could be used to make money. A stock fund is one good example.

Value analysis is a critical component of this new discipline. As Mr. Buffett is quick to point out, we need to distinguish a product’s price versus its value. In today’s red-hot real estate market, an underpriced house would be sniffed out by anxious buyers quicker than a drunken gazelle tripping into a bar full of lions. Comparable sales of several homes sold down the street take care of that.

Stocks are more complex. With hundreds of financial metrics for each company and thousands of competitors, it is easy to get lost in all the data. Hypernomics sorts through that information to find and buy undervalued stocks.

Below are metrics comparing how we’ve done since we began trading with our algorithms nearly a year and a half ago, all growth-indexed from the same starting point beginning 2/20/2020.

This fund is not open to the public.

#hypernomics #stock #stockmarket #innovation #value #valueanalysis

Hypernomics 1, Funny Math 0

“Everybody funny, now you funny too” – George Thorogood

This is sad.

In December, I showed how the Aerion AS2, A, had a 1 in 40 chance of making its sales goal of 300 supersonic business jets at $120M in 10 years.

They shut down Friday.

Crucially, all 55 aircraft over $80M that sold over the ten years in Figure C were specially modified “green” airliners, based on long-standing Boeing and Airbus models. Each one requires only a few million added dollars in design and modifications, a tiny fraction of the AS-2’s estimated $4 billion development cost.

Aerion said that “in the current financial environment, it has proven hugely challenging to close on …large new capital requirements to finalize the transition of the AS2 into production.” That hints they are pointing to the pandemic as their primary dilemma.

But the low sales for the Concorde (B) reveal a more pervasive problem. Yes, it was worth every penny spent on it, as its buyers confirmed when they bought them. The issue for the Concorde then and the AS2 now is that there are not enough pennies to go around to make the optimistic sales goals each company set.

Demand analysis lets you know that before you spend $1B and find out the hard way.

#hypernomics #demand #market #aerionAS2

Worth Every Penny – Not Enough Pennies

There are several ways to sink a new project.  A common method is to ask potential customers about their willingness to buy an offering and then suppose some fraction of the resulting sum is viable.  In the 1960s, surveys indicated there was a market for 200-300 supersonic Concorde airliners.

They built 20.

Decades later, multiple companies are entering this market again. One of them, Aerion, is building its AS2 bizjet (A), selling for $120M.  Suppose we compile and analyze a dataset of all business aircraft that cruise at 400 MPH or more.  We’ll then find a production possibility curve for planes worth $120M as shown in B (that curve has an adjusted R^2 of 97.5%, a standard error of $10.1M, and P-values of 6.11E-43 and 1.02E-19 for Cabin Volume and Max MPH, respectively).  By this measure, the AS2, over ten standard deviations above the line, is worth every penny.

However, in C, we find that the market only supported 55 business aircraft worth $80M or more for a decade, up only slightly from a like study done for the same duration done five years earlier (with 46 planes over $80M).

Five years ago, Aerion announced an order for 20 units. They have the same number today.

#innovation #markets #future #economics

Real Demand Curves In Action

The rock star Meatloaf tells us that “Two out of three ain’t bad.”

But, when it comes to, say, selling your new supersonic jet, it can be.

One can adequately estimate a product’s Cost and Value (as a sustainable price for the first business jet to go over 1,000 miles per hour) only run afoul of its market’s Demand Frontier.

Below, we find Aerion offers a credible development Cost target for its supersonic AS2 (see A), and offline there is evidence its $120 million Price works for the market. Their problem lies with Demand. They forecast a market of 500 models, with 300 in a decade. But in the ten years studied in B, their forecast exceeded the limit of the Upper Demand Frontier (P-Value 4.91E-04). Five years later, in C, the Demand Frontier (P-Value 5.39E-05) shifted only slightly. As of January 2020, the company still only has the 20 orders they received in 2015. Currently, its chances of selling 300 units at $120 million in a decade are less than 25%.

COVID-19 or other forces may increase business jet demand, moving the Demand Frontier where Aerion would like it to be.

Failing that, the company likely got Cost and Price right, but missed Demand.

In business, two out of three is bad.

#demand #demandforecasting #marketanalysis #prices