Note: Aircraft photograph is from US Navy files and is in the public domain.
George A. Haloulakos, MBA, CFA, is a university instructor, author and entrepreneur [DBA Spartan Research and Consulting]. His published works utilize aviation as a teaching tool for Finance, Game Theory, History and Strategy.
The F-4 Phantom was a great military asset in both financial and strategic terms: High production volume, versatile air frame and proven performance record in combat. The enormous cash flow from the F-4 Phantom program enabled McDonnell to buy financially troubled Douglas Aircraft in the mid-1960s. The F-4 Phantom had the remarkable distinction of being in both the Blue Angels (F-4J) and Thunderbirds (F-4E).
The Financial Model: Strategy + Culture = Positive Returns
From a finance perspective, the F-4 Phantom can be viewed as a cash cow. Companies with a “cash-cow” (i.e., a self-financing product group or division that is a market share leader in its respective business and generates surplus cash) in its product portfolio are well positioned to earn above-average financial returns by funding new product development and expanding their overall sales. In the aviation field, where new aircraft programs require enormous sums of capital and very long lead times for development, this can be especially advantageous. The Phantom exemplified economy, efficiency and military prowess – a combination that has proved elusive for a variety of market participants over the years and still remains a challenge!
Since aircraft manufacturers are involved with large-scale, long-lived capital projects, there is also a need for a corporate culture that complements such a financial model. In the case of McDonnell there was a deeply ingrained parsimony that was legendary in an industry where companies typically would stake their entire financial position on the success or failure in launching a new aircraft program. Such parsimony would prove invaluable in securing long-term contracts from US military service branches and maintain financial viability in the midst of volatile and sometimes prolonged down cycles. Two other examples of McDonnell’s efficient and economical approach to financial management of large scale projects during the same era in which the Phantom was produced are: Mercury space capsule [two suborbital flights and four orbital missions] and the two-person Gemini spacecraft that followed [ten successful missions]. While financially important, the prestigious Mercury (1958-1963) and Gemini (1961-1966) projects were of relatively short duration versus the Phantom (1958-1981).
The designation “cash cow” – and its use in describing the F-4 Phantom — arises from the Growth Share Matrix developed by Bruce Henderson for the Boston Consulting Group in 1970. This analytical model is used to evaluate product lines or business groups within a corporate framework and make capital investment decisions based on the relationship of market share, growth and expected financial outcomes. The matrix classifies product or business groups into four quadrants based on their respective growth rates and relative market shares.
The Growth Share Matrix
Sources: Paine Webber, Boston Consulting Group
Typically, a balanced portfolio is comprised of a mix of cash cows, stars and wildcats (or question marks), while pets (or dogs) are either divested or avoided because of being viewed as cash-traps or financial sink-holes. In a balanced portfolio, the idea is for: “Cash cows” to generate funds to support future growth by financing the “stars” whose high growth and high share assure that future growth AND to convert or develop the “question marks” into “stars.” From a flow of funds perspective, cash flows from the lower left quadrant into both the upper left AND upper right quadrants.
The F-4 Phantom had market share leadership based on its service for the United States Air Force, United States Navy, United States Marine Corps plus the armed forces of 11 other nations. It was the only aircraft by both US flight demonstration teams: USAF Thunderbirds (F-4E) and US Navy Blue Angels (F-4J).
The Significance of Market Share
Higher relative market share implies higher cash generation. As a firm increases its physical output, the higher capacity utilization rate lowers unit costs due to higher absorption rate of fixed overhead. Lower unit costs that arise from economies of scale (i.e., a “learning curve” effect in which accumulated experience translates into increased efficiency) enables earnings to grow faster the higher the share. Market share of a firm’s brand is measured in relation to its largest competitor. Therefore if a brand has a 25% share and its largest competitor has the same, the inferred ratio is 1:1. However, if the largest competitor had a 75% share, the ratio would be 1:3 and this implies a relatively weak position. If the largest competitor had a 5% share, the ratio is 5:1 and this implies the firm’s brand is in a relatively strong position that may be reflected in earnings and cash flow. When used in practice, this scale is logarithmic.
The Significance of Growth
The Growth Share Matrix assumes that a higher growth rate indicates correspondingly high demands on investment. The cut-off point between high and low growth is usually 10% per annum. High growth is associated with either neutral or modestly negative cash flow as high investment is required to maintain competitive position. Low growth is associated with positive or surplus cash generation because a mature business theoretically has lower investment requirements to maintain its competitive position.
In an industry associated with long design, development and production cycles, the F-4 Phantom was a source of steady, stable cash flow due to market share leadership. Total Phantom production ran from 1958 – 1981 in which 5,195 units were built, thereby making it the most numerous US supersonic military aircraft. The foundation for the F-4 Phantom financial model was based on high production volume, a versatile air frame and ultimately a proven performance record in combat.
High Production Volume
The demand drivers for the F-4 Phantom that supported high unit output were its deployment in all major US military branches plus armed forces of 11 other nations, extensive use in the Vietnam War (air superiority, ground attack and aerial reconnaissance) and adaptability for multiple defense strategies. Total production of 5,195 units (5,057 by McDonnell Douglas and 138 in Japan by Mitsubishi) averaged 226 per year (or 19 per month) during its 1958-1981 production run. The production rate peaked at 72 per month in 1967 during the height of the Vietnam War. During 1966-1967 the production rate of the F-4 Phantom averaged 63 aircraft per month.
Peak production of the Phantom coincided with McDonnell acquiring financially troubled Douglas Aircraft during the 1965-1967 timeframe. This on-off-on acquisition was ultimately made doable by the Phantom serving as the “cash cow” in the McDonnell corporate business portfolio. From the perspective of Douglas Aircraft, this would be the financial “white knight” to fund its cash starved DC-9 commercial jet aircraft business.
Of the 5,195 Phantoms built, 2,874 went to the US Air Force, 1,264 to the US Navy and US Marine Corps with the remainder going to overseas nations. US production ceased in 1979 with the last US-built F-4 going to South Korea and the last Phantom (F-4EJ) built by Mitsubishi Heavy Industries delivered in 1981.
Versatile Air Frame
In terms of design the F-4 Phantom was a blend of sharp features and smooth lines: highly swept wings, streamlined and rounded fuselage, a nose extending out past the cockpit and an airframe capable of taking on 16,000 pounds of external ordnance under various hard-points under both the wings and fuselage. As a result of this design the manufacturer was able to build into the airframe specific equipment and technology required by different customers. The ability to fit new technology to the basic airframe while adjusting it to fit changing needs and mission requirements of its different users extended the useful life of the F-4 well into the 1990s. This versatility made possible the high production rate reflected in more than a dozen variants.
|F-4 Phantom Variants or Models||Explanatory or Annotative Comments|
|F-4A||Re-designation of F-4H1; several upgraded to F-4B standards|
|F-4B||All weather fighter developed for US Navy and Marine Corps|
|RF-4B||Photographic reconnaissance version of F-4 for Marine Corps|
|F-4C||Developed for US Air Force from F-4B|
|RF-4C||Reconnaissance version of F-4C for US Air Force, and then later used by Air Force Reserve and Air National Guard|
|F-4D||Featured upgraded weapons, radar and navigation instruments; extensively used in Vietnam War|
|F-4E||Designed for various US Air Force roles (close ground support and interdiction-interference); flown by USAF Thunderbirds|
|F-4EJ||F-4E version built in Japan under license (McDonnell Douglas)|
|F-4E(F)||Non-existent “concept” version to compete against the F-20 Tigershark that was eventually dropped; instead F-4F [stripped down F-4E] built for Federal Republic of Germany|
|RF-4E||F-4E reconnaissance version for Federal Republic of Germany|
|F-4G||F-4B version for US Navy with anti-submarine warfare (ASW) communications equipment|
|F-4G Wild Weasel II||Rebuilt F-4Es designed for attacking enemy radar/missile sites; predecessor to F-4G were interim EF-4C & EF-4D Wild Weasel I|
|F-4J||Interceptor version with ground attack capability for US Navy and Marine Corps; flown by US Navy Blue Angels|
|F-4K||F-4B version for British Royal Navy featuring improvements similar to J version but shorter|
|F-4M||Built for British Air Force; it is to F-4K what US Air Force F-4C is to US Navy F-4B|
|F-4N||Upgraded F-4B version for US Navy|
Source: “Tribute to the F4 Phantom II Aircraft and to the men and women who designed, built, maintained, supported and flew the F-4” – Created by Dr. Bill Smith, Major – USAF (Ret). Posted on website: http://www.freeairhvac.com/f4info.htm
To this list created by Dr. Bill Smith, I would also add the F-4S variant which featured an upgrade with leading edge maneuvering slats that provided more low speed control which was critical for carrier landings. In sum, the versatile airframe enabled the F-4 Phantom to be capable for operations from both land and sea-based origins: strike and reconnaissance, radar suppression and enemy aircraft interception.
Proven Performance Record in Combat
The F-4 Phantom was a Cold War aircraft that served in a number of “hot” combat zones from the 1960s into the early 1990s. Its versatile airframe enabled it to be an effective military asset during a turbulent era.
During the Vietnam War while flying primarily in a fighter/interceptor role, US Navy F-4 Phantoms shot down 40 enemy aircraft while losing 5 of their own. Sixty six US Navy F-4s were lost to enemy missiles and ground fire. The US Marine Corps flew F-4s from both land bases and carriers; in ground support missions USMC F-4s achieved three kills while losing 75 aircraft, largely to ground fire. The US Air Force was the largest user of F-4s in Vietnam as they fulfilled both air superiority and ground support roles. The USAF shot down 107.5 enemy aircraft while losing a total of 528 F-4s (all types) – mostly to anti-aircraft fire or surface-to-air missiles (SAMs).
As the Vietnam War intensified during 1965, the F-4E with its powerful J79-GE-17 engines and internally-mounted M61A1 20-mm cannon plus superior pilot training made a formidable combination in establishing a 2.5-to-1 kill advantage over North Vietnamese MiG-17, MiG-19 and MiG-21 fighters. This combat record helped make the F-4E variant a “star” in the Phantom portfolio as 1,397 were produced (27% of total output) and it was the model flown by the USAF Thunderbirds. During the Vietnam War the five pilots credited with “ace” status (2 US Navy and 3 USAF) all flew the F-4 Phantom.
The F-4G Wild Weasel V and RF-4C variants were used in Operation Desert Shield/Storm (1990-1991): the F-4G in suppressing Iraqi air defenses and the RF-4C in gathering valuable intelligence. One of each type was lost during this military operation, one to ground fire and the other in an accident.
As noted earlier, the F-4 Phantom was extensively used by the armed forces of 11 other nations. Most notable was its extensive service with Israel. Israeli F-4s achieved 116 air-to-air kills against Egyptian and Syrian air forces beginning in 1969 during the War of Attrition. The valor of Israeli F-4 pilots was especially evident in a single engagement on the first day of the Yom Kippur War (1973) versus 28 Egyptian MiGs attacking Ofir Air Base: only two Phantoms scrambled in defense but they shot down seven enemy aircraft! During these war campaigns the primary target – and most deadly adversary – for Israeli F-4 Phantoms were Arab surface-to-air missile (SAM) batteries. These SAMs accounted for the majority of Israeli Phantoms lost in action.
By the Numbers: A Winning Financial Model
The F-4 Phantom was a winner in combat and a financial bonanza for its manufacturer. To put this into perspective, the following matrix deconstructs estimated profit margin in relation to estimated unit cost and production volume scenarios.
|Financial Metrics (E)||Low Volume||Average Volume||High Volume|
|Average Selling Price||$2.8 million||$2.8 million||$2.8 million|
|Unit Cost||$2.4 million||$2.2 million||$2 million|
|Operating Profit / Unit||$0.4 million||$0.6 million||$0.8 million|
|Op Profit Margin||14%||21%||29%|
Sources: (a) Spartan Research – Aerospace Industry Files (1976-2016);
Explanatory notes: (a) 1965 US$ Dollars (b) Low unit output =12 units or less per month, Average unit output = 19 units per month, High Unit Output = 30 units or more per month; (c) Op Profit = Average Selling Price – Unit Cost; (d) Op Profit Margin = Op Profit/Average Selling Price; (e) Progression of unit costs from low to average to high unit output levels reflect “learning curve” effects.
When the manufacturing output rate was running at more than 60 units per month during 1966-1967 (or at twice the “high volume” rate in this model), the estimated op profit margin was 40%, for an implied operating profit of greater than $1 million per aircraft when running at peak monthly output.
The financial model shown above illustrates how the F-4 Phantom was solidly profitable at its low run rate, respectable to very good at an average production rate and excellent at high volume output. The ability to achieve such financial returns is a testimony to the parsimonious McDonnell corporate culture noted for its zealous drive for efficiency. At its peak monthly production rate in the mid-1960s the F-4 Phantom was a “cash cow” generating estimated operating profit in excess of $1 million per aircraft, thereby enabling McDonnell to acquire Douglas Aircraft and eventually shore up the commercial aircraft maker’s cash-starved DC-9 program during that window of opportunity.
Lessons in Finance from the F-4 Phantom
Finance explains how capital is employed to create added-value and is the language of business. The F-4 Phantom is an excellent example of a financially successful military/aerospace capital project. With such capital projects, Return on Investment (ROI) is a function of Economy, Efficiency and Execution. Using mathematical terms this can be expressed with the equation:
ROI = f (Economy, Efficiency, Execution)
How ROI is determined by these three elements can be explained as follows.
- Economy – The key factor that made the F-4 economical was the extended useful life of the airframe. The longer an asset is in active use, the higher its Return on Investment. Given the enormous costs associated with designing, developing and producing an airframe, a longer useful life means costs can be spread over a longer time period. The long economic life of the F-4 Phantom compared to other Cold War fighters was due to a combination of its size or capacity, structure and its design that has made it a fungible asset [i.e. transferrable from one generation to the next]. Due to its structural design and strength the F-4 was more conducive to various upgrades / modificatons in the ensuing decades versus other fighters that had entered service at the same time.
- Efficiency – The lower the cost of a capital asset the greater its potential Return on Investment. While low cost in itself does not insure a successful investment, too high a cost guarantees failure. The ability to manufacture with little or no waste, achieve high quality output with modest or no rework and increase profit realization while boosting overall capacity reflects an efficient operation. This requires a parsimonious corporate culture that emphasizes cost containment and stringent controls. The F-4 Phantom program exemplified this and is a hallmark to the McDonnell aviation legacy.
- Execution – The F-4 Phantom was one of the largest post-World War II programs and broke 15 world aviation records during its service life. It was the first US Navy fighter to be adopted by the US Air Force and would serve as a template for the multi-use / multi-service airframe strategy still used today. The F-4 Phantom’s execution capability is best illustrated when contrasting it with iconic Allied World War II bombers. While classified as a fighter aircraft, the F-4 could carry a bomb load greater than the famed British Avro Lancaster [known for its “Dam Buster” missions] and the American B-29 Superfortress [which launched atomic bombs against Japan].
In both qualitative and quantitative terms, the F-4 Phantom generated not only a high Return on Investment for its manufacturer, but more importantly, for the armed forces of our nation and others during its distinguished service life.
Author’s Personal Note: A Special Remembrance of an F-4 Phantom Pilot
Col. Donald L. King (08/28/1933 – 05/14/1966) – USAF – flew the F-4C in combat during the Vietnam War and was shot down by a surface-to-air missile while on an armed reconnaissance mission. I have kept Col. King’s POW/MIA bracelet since the early 1970s. Initially classified as missing in action since search-and-rescue efforts were unable to locate aircraft and crew, eventually the Secretary of the Air Force approved Presumptive Finding of Death for Col. King (01/28/1979). Col. King was a test pilot and Russian language graduate from the US Navy’s language school (Monterey, CA). It is with profound gratitude and respect that this article is dedicated in his blessed memory.
 Sources: (a) Dr. V.E. Haloulakos – Engineer, Scientist & Lecturer – Interviews on June 1 & 14, 2016. (b) Spartan Research – Aerospace Industry Files.
 Web site: http://www.centennialofflight.net/essay/Aerospace/McDonnell/Aero31.htm
 Source: HIGH FLIGHT – Pages 16 -17 – by George Haloulakos. UC San Diego Bookstore Publishing Company, 2014.
 Source: HIGH FLIGHT. 2014. Page 18.
 Source: HIGH FLIGHT. 2014. Pages 18-19.
 Web site: http://www.fiddlersgreen.net/models/aircraft/McDonnell-Phantom.html
 Sources: Boeing Company and Mitsubishi Heavy Industries Archives.
 Web site: http://www.militaryfactory.com/aircraft/detail-page-2.asp?aircraft_id=24
 Source: Spartan Research – Aerospace Industry Files [Research Notes and Photographs].
 Source: Militaryfactory.com: web link: http://www.militaryfactory.com/aircraft/detail-page-2.asp?aircraft_id=24
 Source: “What Couldn’t the F-4 Phantom Do?” by Stephen Joiner; Air & Space, March 2015.
 Source: “Vietnam War: F-4 Phantom II” by Kennedy Hickman; Militaryhistory.about.com.
 Source: Aviastar.org; web link: http://www.aviastar.org/air/usa/mcdonnel_phantom.php
 Source: Hickman, Militaryhistory.about.com
 Source: Hickman, Militaryhistory.about.com
 Source: “The F-4 Phantom is a Great Fighter With a Bad Reputation” by Sebastien Roblin; Warisboring.com
 Sources: (a) Dr. V.E. Haloulakos – Engineer, Scientist & Lecturer – Interviews on June 1 & 14, 2016. (b) Spartan Research – Aerospace Industry Files.
 Source: “McDonnell Douglas F-4 Phantom II,” The Aviation History Online Museum.