All posts by George Haloulakos

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 ROI OF THE B-2 SPIRIT STEALTH BOMBER -A Transformative and Impactful Public Private Partnership-

By George A. Haloulakos, CFA, MBA

George A. Haloulakos, CFA, is a university instructor, author and entrepreneur. His published works utilize aviation as a teaching tool for Finance, Game Theory, History and Strategy.


The Northrop B-2 Spirit Stealth Bomber is one of the most transformative and impactful Public Private Partnerships (PPP) since the Apollo Manned Moon Mission. This article utilizes Finance to quantify the total economic impact of the B-2 in terms of ROI (Return on Investment). Contributions and spin-off benefits arising from or associated with the B-2 demonstrate how this game-changing capital asset has altered national defense policy, the political economy and military technology. The B-2’s multi-decade legacy

bridging the 20th and 21st centuries casts a long shadow that warrants our appreciation in this unique economic reappraisal.

NOTE: This research article is based on the author’s longtime experience as a Special Situations Analyst (“Buy” side and “Sell” side), subject expert in Finance and later as a published author on military aviation. As such, insights offered here are largely based on primary research by the author supplemented by other authoritative sources listed in both the text and References section of this article.

This article is organized as follows: First, we present our observations derived from evaluating the total economic return on the B-2 Spirit that takes into account both quantitative and qualitative considerations. Second, is a review of basic Finance principles used in analyzing the B-2 Spirit as a capital asset deployed as a Public Private Partnership (PPP). Finally, we make the case on how the B-2 has been a transformative and impactful project in a variety of venues.


> As a Public Private Partnership, the B-2 Spirit generated economic added-value 3-times greater than its cost thereby yielding a net return 2-times the original investment. Concurrently, the jobs connected with the B-2 project created a 2.7 fold increase in employment. Such spending and employment multipliers are consistent with other historic aerospace capital projects, notably the Apollo manned mission.

> The B-2 Spirit was a game-changing asset in terms of national defense policy, resource management and the structure of military/aerospace industry. Northrop was transformed from a respectable company into a global brand while increasing in equity value by 5-fold in the 1981-2020 time frame.

> The changes in the aforementioned venues have altered the metrics used in evaluating the worthiness of military capital assets thereby impacting the public perceptions and/or appreciation of projects like the B-2 Spirit.


Production and deployment of the B-2 Spirit was a major technology driver for the US aerospace industry with further advances in computers, software, composite materials and precision guided munitions. Much like the Apollo manned spacecraft program of the 1960s, there were enormous spin-off benefits for civil, commercial and personal applications in new materials, telecommunications, medical technology, engineering, science and other such related areas.

One example is further advancement in computers associated with the design, development, testing, production and deployment of the B-2. Computer technology has been an integral part of America’s economic expansion since the early 1980s because of the enormous productivity that cascaded throughout the economy from increased computer applications in both the consumer and industrial sectors. Another example is how B-2 related design and development work has been a process driver for other major military and commercial aircraft programs. Due to its “flying wing” design, there were control and stabilization difficulties that required “fly by wire” and “computer generated artificial stability” technologies developed for the B-2 that were also transferrable to other aircraft that helped improve safety and operating efficiency.

How did these aforementioned “qualitative” benefits translate into added-value? Using Finance formulas developed from doing investment research and valuation of publicly traded military/aerospace companies, we can estimate added-value in terms of income/spending and employment.

> Income/Spending Multiplier

The income/spending multiplier is mathematically expressed as:

1 / (1-MPC), where MPC stands for Marginal Propensity to Consume (explained further in the ensuing paragraphs).

With the military/aerospace sector, the historic average MPC we have observed is 0.667. This yields an Income/Spending Multipier of 3.

This is arrived at by: 1 / (1-0.667) = 1 / 0.333 = 3

With the final cost of the B-2 program estimated at $45 billion, the implied added-value in terms of income/spending would be $135 billion. This is arrived at by multiplying ($45 billion) x 3 = $135 billion.

Since a 3x multiplier applied to a final cost of $45 billion yields gross added-value of $135 billion, this 3-fold increase translates into a Return on Investment (ROI) of 200% or a Net Added-value of $90 billion. This is arrived with a 2-step process.

Step 1: Calculating ROI in Decimal Form

ROI = [(Added-value) – (Final Cost)] / [Final Cost)]

ROI = [$135 billion – $45 billion] / [$45 billion]

ROI = [$90 billion] / [$45 billion]

ROI = 2.00

Step 2: Converting ROI into Percentage Form

An ROI of 2.00 translates into 200% (which is calculated by multiplying the decimal value x 100%, or (2.00) x (100%) = 200%

> Employment Multiplier

With the military/aerospace sector, the historic average employment multiplier we have observed is 2.7 times. In other words, for every 1,000 aerospace jobs created, this has the effect of generating an additional 2,700 jobs as part of the supply chain and/or infrastructure. In early 1987, the B-2 program as whole employed 40,000 workers throughout the USA. On this basis, and using the aforementioned 2.7 employment multiplier, this implies that the B-2 Spirit program created total employment of 108,000 workers. This is arrived at by multiplying (40,000) x (2.7) = 108,000

Moreover, these are high-income jobs. In the preceding section we noted that such jobs had a Marginal Propensity to Consume of 0.667 which means such workers on average would spend approximately 0.667 out of every one dollar (US$) thereby creating an income/spending multiplier of 3. Thus, we have quantified that the B-2 Spirit created a 3-fold return as measured by income and 2.7 times increase in employment. But these are just numbers. While they quantify added-value in Finance terms, we have also highlighted the

corresponding qualitative benefits arising from the B-2 Spirit that have continued to yield forth positive returns by advancing the frontiers of knowledge and human progress in the same tradition associated with the Apollo manned moon mission of the 1960s. Estimating a monetary value for such benefits would further increase the added-value in Finance terms.


The B-2 Spirit dramatically altered the landscape for national defense policy, resource management and the military/aerospace industry structure. Its highly advanced technologies created a capital asset with significantly greater firepower, survivability and accuracy that meant fewer bomber aircraft were required versus previous generations that had hundreds and even thousands of such assets on alert.

> Stronger National Defense

The B-2 Spirit strategic bomber provides an unmatched combination of heavy payload, long range and stealth on a single platform. Moreover, since it is one of the most survivable aircraft in the world, the B-2 is able to fulfill the necessary tasks for a successful strike mission: surprise, suppression and evasion. This is because the B-2 is able to reduce detection with its low observable technologies coupled with composite materials and aerodynamic flying wing design that gives the aircraft the ability to penetrate complex, sophisticated adversary defenses. As such, this puts the adversary’s high-value, heavily defended targets at risk since the B-2 can reach any point in the world within hours.

Here are few metrics that affirm the aforementioned capabilities. The B-2 Spirit can fly at high subsonic speed and reach an altitude exceeding 50,000 feet. Its intercontinental range enables the aircraft to fly 6,000 nautical miles without refueling and 10,000 nautical miles with a single refueling. With a two-person crew (a pilot and mission commander), the B-2 can deliver a payload of 20 tons with pinpoint accuracy.

In sum, from a defense policy perspective, the aforementioned characteristics enables the B-2 to offer increased efficiency, firepower and flexibility versus prior generation bomber aircraft. This enables the US Air Force to fulfill

strategic defense capabilities with fewer aircraft, thereby freeing up capital for other projects. The next section provides further clarification.

>Efficiency Gains in Resource/Asset Management

To fully appreciate how the B-2 Spirit has altered resource management, that, in turn, has affected both national defense and the political economy, it is worth reviewing how the advanced technologies of the B-2 have streamlined the resources required for combat missions. Our comparison will examine the number and type of aircraft required for Standard, Precision, Precision plus Stealth strike missions versus the B-2. In this comparison, Standard refers to conventional gravity bombs while Precision refers to laser guided bombs. Precision plus Stealth is the use of laser guided bombs with the Lockheed F-117 Nighthawk, a stealth attack aircraft that requires forward basing due to limited range (approximately 1,000 miles) and a much smaller payload versus a strategic bomber. The B-2 is Stealth, but unlike the F-117 has intercontinental range plus a very large payload.

Standard or conventional gravity bomb missions typically require 32 bombers (B-52 or B-1B), 16 escorts, 12 aircraft for suppression of adversary’s defenses and 12 refueling tankers. Precision strike missions require 16 bombers (B-1B or B-52), 16 escorts, 12 aircraft for suppression of adversary’s defenses and 11 refueling tankers. Precision plus Stealth uses 8 strike aircraft (F-117 Nighthawk) and 2 refueling tankers.

Note the numbers and use of different bomber aircraft to align the aircraft payload capabilities with the type of bomber weapons used for a strike mission. Also noteworthy is the absence of escort and suppression aircraft when Stealth is deployed.

In comparison, two B-2 Spirit stealth bombers can accomplish the SAME as each of these types of bomber groups described above! Since the B-2 has a significantly greater success rate in accuracy and survivability, this means fewer capital assets (human, physical and financial) are at risk while providing superior capabilities in projecting our nation’s firepower when needed. This staggering comparison is even more amazing when the B-2 combat record is examined with other US Air Force bomber aircraft

whose service life intersected with the B-2. [Source: Beyond the “Bomber”: The New Long-Range Sensor-Shooter Aircraft and United States National Security – The Value of Stealth chapter. By Lt Gen David A. Deptula – USAF (Ret) 2015.]

> B-2 Achieves Higher Success / Lower Risk Combat Record

For our purposes of “comparable analysis” we have utilized strategic jet bomber aircraft whose service lives have intersected during the past 50+ years. In this comparison we have included the B-52, B-1B and FB-111 as each of these bomber aircraft have service lives that have either dovetailed or intersected with the service life of the B-2.

B-2 Combat Performance in 1999 Balkans War

(1) The B-2 destroyed one-third of all Serbian targets in the first eight weeks of the war with just six (6) B-2s making non-stop global flights from Missouri to the Balkans with refueling.

(2) Over the course of the war, the B-2 flew just 50 out of 34,000 (or less than 0.15%) of the total sorties by NATO (North Atlantic Treaty Organization) strike aircraft, but hit 11% of the targets, including a crucial bridge over the Danube River in Serbia that had stymied all other NATO strike aircraft for two weeks!

The B-2 posted greater operating efficiency versus the B-1B in this same venue while using an equal number of aircraft. By comparison, six (6) B-1B aircraft flew 2% of total NATO sorties (or 13-times more than the B-2) while dropping 20% of the ordnance. In other words, on an apples-to-apples basis,

an equal number of B-1B aircraft (six) had to fly roughly 6-times more sorties than six B-2 bombers to match the B-2’s combat record of hitting 11% of all targets. Yet, only the B-2 was able to hit the aforementioned crucial bridge over the Danube which had eluded all other NATO strike aircraft. thereby affirming the B-2’s efficiency advantage.

This is not meant to denigrate the B-1B, a most versatile and powerful strike aircraft, but rather to illustrate that the advanced technologies associated with the B-2 enable it to be more efficient because it is able to do more with fewer sorties at lower risk. The B-2 requires a two-person crew versus three for a

B-1B. Therefore in the example given from the 1999 Balkans War, six B-2 bombers placed 12-crew members in combat while six B-1B bombers placed 18-crew members (or 50% more) in combat. This affirms not only a higher efficiency rate for the B-2, but lower attrition risk since fewer crew members are needed for a mission.

As of this writing, both the B-2 and B-1B have experienced zero combat losses. However the same cannot be said for the other bomber aircraft used in this comparision. The B-52 and FB-111 both experienced losses in combat with lower accuracy versus their aformentioned successors. While these two bombers performed admirably in high-profile missions, their success was tempered by the loss of aircraft and combat personnel. This provided the incentive for further advancement in technologies to increase the success rate while lowering the attrition risk to both aircraft and crew. The outcome was development and deployment of the B-1B (initial operating capability reached in 1986) and the B-2 (1997). But before these advanced aircraft could be deployed, the B-52 and FB-111 shouldered the burden of long-range strike missions that carried high attrition risk. Two such long-range strategic bombing missions are given as examples for this paper in which these aircraft were essentially the “tip of the spear.”

Operation Linebacker II (US Christmas Bombing vs Vietnam 1972)

For eleven days, 207 B-52 bombers launched continuous aerial bombings on North Vietnam. While this mission led to resumption of eventual settlement talks, 16 B-52 bombers (each carrying a crew of 6) were shot down by the enemy for an aircraft loss rate of 7.7%.

Operation El Dorado Canyon (US Airstrike vs Libya 1986)

This strike mission featured 18 FB-111 bombers (each carrying a crew of 2). Nine (9) of the 18 FB-111s (or 50%) released their ordnance on target. One FB-111 was shot down by the enemy for an aircraft loss rate of 5.6%.

As a reminder that it is the portfolio or mix of different types of aircraft that generates the highest probability of successful, accurate strikes with the least risk (the central theme of my book CALL TO GLORY), it is worth noting that in Operation Desert Storm (1991), B-52s flew 1,620 sorties while delivering

40% of the weapons dropped by coalition forces and with zero combat losses. The FB-111 strategic bomber was not used in Operation Desert Storm but two variants of the airframe, the F-111E and F-111F, were deployed with great success. The tactical F-111 variants were credited with delivering approximately 80% of the war’s laser-guided bombs and destroying over 1,500 enemy tanks and armored vehicles. As part of a mixed force, the F-111 variants had zero combat losses.

> Northrop: Transformed From Respectable Company to Industry Leader

Although just 21 B-2 aircraft were built, thereby implying a unit cost of $2.1 billion, the enormous success of this capital project transformed Northrop – the primary contractor – from a solid, respectable company in the military/aerospace sector to an iconic global industry brand. Moreover, it helped to fulfill the potential as envisioned by its legendary founder, Jack Northrop. Financially, Northrop’s industry reputation was based on its success as a manufacturer of light-weight, economical fighter aircraft (notably the T-38 and F-5) which for decades have served as trainers as well as assets sold to overseas US allies while also used by the US Air Force and US Marine Corps. Northrop’s legacy as an innovator in aerodynamic design can be traced directly to its entrepreneurial founder, Jack Northrop, who created the flying wing that would eventually become the company’s global brand identity. Beginning in 1929 with the Avion Experimental #1 and continuing throughout the 1940s with the N-M9 Flying Wing, XP-79B Flying Ram, XB-35, YB-49 and the YB-35, Northrop laid the foundation for what would become the B-2.

Since the flying wing concept was based largely on intuition rather than analytics, the early pioneering variants of this design relied on very skilled test pilots to make it work. By the 1980s computer and fly by wire technologies were developed to resolve control and stabilization issues that plagued the early variants. This transformed the flying wing from a novelty into a formidable combat asset. As a technology driver, the B-2 not only changed the role of the strategic bomber but its technical advancement elevated Northrop into an industry leader. The financial success of the B-2 Spirit as a Public Private Partnership enabled Northrop Corporation to acquire the Grumman Corporation in 1994, thereby becoming Northrop

Grumman Corporation.

Despite the inherent cyclical nature of the military/aerospace industry and its eventual consolidation, the success of the B-2 Spirit and its accompanying synergy not only enabled Northrop to acquire Grumman, but achieve a very successful investment record as a publicly traded company. Beginning with 1981, when Northrop was officially awarded the contract to build the B-2, and the ensuing four decades ending in 2020, the stock increased in value by 5-fold from $61 to $305. This investment record, driven in large part by the success of the B-2, appears poised for even higher flight as Northrop Grumman was selected as the prime contractor for the B-21 Raider, the next generation stealth bomber! [Sources: Northrop Grumman Public Company Documents and]


The financial and operating success of the B-2 Spirit had a further significant effect in terms of how very large scale military capital projects are evaluated. Earlier we quantified how the B-2 has superior accuracy and survivability versus prior generation strategic bomber aircraft, thereby translating into lower risk and greater efficiency. This has created a seismic shift in how such capital assets are valued and deployed. Prior generations of bomber aircraft were built in much larger quantities to fulfill various global mission requirements while allowing a wide measure of error for attrition risk.

Here is how the production numbers of the bomber aircraft cited in this paper compare: 744 B-52s, 76 FB-111s, 100 B-1Bs and 21 B-2s. Of these bomber aircraft, the estimated number currently in service as of this writing are: 58 B-52s, 45 B-1Bs and 20 B-2s. The FB-111 was retired in the early 1990s.

Historically, the standard metric for evaluating such aircraft is operational readiness or mission capability rates. As a practical matter, simpler or less technically complex aircraft have lower maintenance. Lower maintenance requirements tend to create higher readiness or capability rates. Although the last B-52 was produced in 1962, there have been several capital upgrades that have extended the life of the airframe while enabling it to remain at a higher mission capability rate versus the B-1B and B-2. Latest published mi

Latest published mission

2% for the B-1B and 60.47% for the B-2.

Applying these mission capable rates to the aforementioned aircraft fleets currently in service, implies that 38 out of the 58 B-52 bombers are available for immediate deployment versus 21 B-1Bs out of 45 and 12 B-2s out of 20. While the B-52 does not have the same low-level capability as the variable, swing-wing B-1B nor the stealth of the B-2, its utilitarian airframe has enabled the B-52 to remain a valuable asset because of its relatively higher operational readiness rate and its adaptability into a stand-off, long-range platform for missiles, drones and electronic countermeasures plus other varied roles such as maritime surveillance. The universal acceptance of the mission capable rate metric has continued to be a major reason for the B-52 remaining in active service.

In the case of the B-1B, its noticeably lower operational readiness can be attributed to excessive wear-and-tear associated with its ongoing long-range missions in the War on Terror since the early 2000s. The B-2, an inherently more complex aircraft than either the B-52 or the B-1B, has the second best mission capable rate among the trio of strategic jet bombers. However, due to its significantly higher survivability and accuracy, the strict application of this metric is less meaningful due to its stealth capability.

Earlier we quantified how two (2) B-2 bombers were capable of fulfilling the same missions that would otherwise require 8-to-16 times more bomber aircraft (16 to 32 B-52s or B-1Bs, respectively, for conventional gravity bomb and precision strike missions). This staggering comparison reflects the higher survivability and accuracy associated with the B-2’s stealth. Thus while the mission capable rate is important in evaluating the value of a long-range strike aircraft, it is far less meaningful in the “Age of Stealth” since fewer aircraft are required.

The current operational readiness of the B-2 means that 12 such aircraft (out of 20) are immediately available for combat. Yet it is unlikely that all aircraft would be needed simultaneously as the B-2s historically have met or exceeded expectations versus all prior generation strategic bombers while

involving no more than 10% to 30% of the B-2 fleet in any given mission.

Here are three examples. In 1999 during the Balkans War, six (6) B-2s flew non-stop from Missouri to Yugoslavia (and back) while recording the highest efficiency including destroying high-value targets that had eluded all other strike aircraft. During the War on Terror in March 2011, two (2) B-2s were involved with Operation Odyssey Dawn to enforce the “no-fly” zone in Libya. In January 2017, two (2) B-2s attacked the adversary’s training camp in Libya. In each of these examples, less than one-third of the B-2 fleet was required for combat, while still having a respectable 60.47% operational readiness! Moreover, since the B-2s, like all other aircraft, have a series of specific missions that are carried out as part of a “mixed” force, this also underscores the likelihood of not having to actively use all B-2s at once. In sum, the B-2’s stealth makes the mission capable rate metric less relevant versus prior eras in which much larger bomber fleets with higher operational readiness were needed. The B-2’s stealth gives it higher survivability and accuracy, thereby negating the need for vastly larger aircraft fleets whose vast size was the margin of error due to higher attrition (i.e., higher risk to aircraft and crew).

While the mission capable rate is less relevant when evaluating the B-2 as a capital asset, a key or immutable factor in making the B-2 valuable is 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 transcendent if not transformative nature of the B-2 stealth bomber has made this aircraft a fungible asset (i.e., transferrable from one generation to the next) thereby enabling it to remain a frontline, go-to weapon now entering its fourth decade of service! Given that Northrop Grumman was selected as the prime contractor for the next generation stealth bomber, the B-21 Raider, it can be inferred that the accumulated experience and investment associated with the B-2 was the foundation for this contract. In other words, an imputed or implied added return on investment (in the form of a new capital project) has been derived from the B-2, which helps to make comparable future stealth projects equally if not more financially successful.


We have shown that from 1981-2020 the Northrop B-2 Spirit as a Public Private Partnership has been an economic powerhouse as measured by Income, Employment and Return on Investment while being a major technology driver across a wide number of venues. The combat success of the B-2 as measured by accuracy, survivability and efficiency has altered national defense policy in terms of resource management and strategy. All of this helped elevate Northrop into a global industry leader while increasing its equity value by 5-fold in terms of stock price. This is not to suggest it has been a smooth, easy path especially with an industry known for prolonged economic cycles. To be sure there were numerous challenges to overcome and setbacks along the way. Much has been written about those challenges by others and we would commend the reader to review the many articles and books to get a detailed account on such matters. Our purpose here has been to utilize Finance – which explains how capital is employed to create added-value and is the language of business – to gain insight and develop context for evaluating very large military capital projects like the B-2 Spirit. We see the B-2 as not only a viable if not invaluable national security asset but a technology driver that has helped advance the future.

REFERENCES Mission Capable Rate for B-52, B-1B and B-2 Strategic Bombers for 2019-2020. May 19, 2020.

“B-2: Stealth at War.” Smithsonian Channel education video. 2013

Boeing Company. Public company documents (

Cardenas, Robert Brig Gen – USAF (Ret) – Honoree of the National Aviation Hall of Fame. Personal interview (November 12, 2015) on his test flight experience with Northrop YB-49 Flying Wing.

Deptula, David A. Lt Gen – USAF (Ret). Beyond the “Bomber”: The New Long-Range Sensor-Shooter Aircraft and United States National Security –

The Value of Stealth chapter. 2015.

Dornan, Robert K. Former US Representative (California). 1977-1983, 27th Congressional District; 1985-1993, 38th Congressional District; 1993-1997, 46th Congressional District. Telephone interviews (December 24, 2013 and January 20, 2014) on B-52, B-58, B-1B, FB-111 and B-2 strike aircraft.

Grant, Rebecca Dr. The B-2 Goes to War. Iris Press (New York). 2001.

Green, William (compiler) and Punnett, Dennis (silhouette artist). The Observer’s Book of Aircraft. Frederick Warne & Co. (London and New York). 1965.

Haloulakos, George A. (CFA Charterholder). Spartan Research and Consulting Archives: Case Files and Field Notes on Military/Aerospace Industry, Military Aircraft, Finance and Strategy. 1976 – 2021.

Haloulakos, Vassilios Elias Dr. (Aerospace Engineer – Scientist – Professor and Author). Ongoing personal interviews (1981-2019) on aerospace industry, stealth technology, strike aircraft and aerodynamic design.

Haloulakos, George A. (CFA Charterholder). CALL TO GLORY – How the Convair B-58 Hustler Helped Win the Cold War. ISBN: 9780692475454. UC San Diego Bookstore Publishing. 2015.

Haloulakos, George A. (CFA Charterholder). “The B-52 Stratofortress: The ACE of Heavy Bombers.” BUF BULLETIN. Vol. 22 – No. 4 – Issue 82. Fall 2014.

Haloulakos, George A. (CFA Charterholder). HIGH FLIGHT – Aviation as a Teaching Tool for Finance, Strategy and American Exceptionalism. ISBN: 9780100727380. UC San Diego Bookstore Publishing. 2014.

Lockheed Martin. Public Company Documents (

Malyasov, Dylan. “35 Years of Lethality: ASAF Celebrates B-1’s History.” June 30, 2020. “B52 Combat Losses in Vietnam.”

Northrop Grumman. Public Company Documents ( [Historic stock price data – split adjusted].

Orr, Verne Dr. – 14th Secretary of US Air Force (1981-1985). Doctoral dissertation on the development of the B-1 bomber (Claremont Graduate University) 2005. Dr. Orr helped procure the B-1 as USAF Secretary.

US Department of Commerce – Bureau of Economic Analysis (

US Department of Defense – Combat Records of Various Aircraft

Westwick, Peter Dr. STEALTH: The Secret Contest to Invent Invisible Aircraft. Oxford University Press (New York). 2020.

White, Rowland. Vulcan 607. Bantam Press (London) 2006.

Withers, Martin. DFC, LLB. Chief Pilot and Operations Director, Vulcan to the Sky Trust. Written correspondence / research interview (April 8 – May 7, 2014) on his experience in flying the Vulcan XM607 on its decisive strike mission that changed the course of the 1982 Falkland Islands War.

B-29 Super-fortress: An Aircraft Ahead of its Time at the Right Time!

George A. Haloulakos, 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.


This year marks the 75th Anniversary of the Boeing B-29 Super-fortress as its maiden flight occurred September 21, 1942. In a continuing series, this article is yet another financial reappraisal of historic or iconic aircraft. As the single most expensive weapons system undertaken by the United States of America during World War II, it warrants our attention in both financial and strategic terms. The goal of this article is to share new insights from a Finance perspective. Among the insights to be presented: (1) Profitability Analysis, (2) Added-Value from Delivery/Distribution Systems and (3) Return on Investment (ROI).

This research article is organized as follows: First, we present observations based upon research and analysis of open source references. Second is an explanation on our analytical approach that is a fusion of Finance, Strategy and Aviation. Third is a financial analysis that includes lessons learned.
Finally our closing thoughts address the legacy of the B-29.


  • Victory – the ultimate metric by which a military asset is measured – is synonymous with the Boeing B-29 Superfortress. In its commemorative May 2015 edition featuring spotter cards of World War II aircraft as inserts, Air & Space magazine described the B-29 as “The bomber that ended the war; the only one ever to drop atomic bombs in combat.”
  • As a technology driver, the B-29 generated spin-off benefits outside of combat that we continue to benefit from this present day! Its game-changing role in the aviation/aerospace industry makes the Superfortress a truly historic capital asset that goes well beyond nostalgia.
  • The B-29 was solidly profitable. Its financial gains demonstrate an efficient, well-run capital project that provided a most satisfactory use of public funds fulfilling both military and civilian purposes.

Finance, Strategy and Aviation: Evaluating Historic Capital Projects

Continue reading B-29 Super-fortress: An Aircraft Ahead of its Time at the Right Time!


George A. Haloulakos, 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.


Value is the key performance measure in a market economy because it encompasses the long-term interests of all stakeholders in a company. In highly competitive global businesses – especially with diversified companies — it is essential for a firm to be effective in all three phases of managing cash flow — operations, investing and financing – to generate cash at a return exceeding its cost of capital. The concept of stakeholder management has broadened the responsibility of management to include financial stakeholders (i.e., equity owners and creditors) and non-financial stakeholders such as customers, employees and suppliers. This task is magnified for diversified companies whose corporate structure is based on a mix of different types of product or business groups having a variety of financial requirements. Corporate financial strategy for diversified companies based on a portfolio management style may benefit from a stakeholder approach in order to cope with a myriad of challenges including, but not limited to, achieving economy of scale, diversification and growth in difficult or less predictable environments. Two different eras – the “stagflation” period from the mid-1970s to the very early 1980s and the “globalization” decade of the 2000s – provided extremely competitive market conditions where diversified companies achieved mixed results with divergent stock price performance. The case studies reviewed here offer a study in contrast in how the stock market values diversified firms with different corporate financial strategies.


F-4 Phantom: A Fighter Aircraft for All Seasons


Note: Aircraft photograph is from US Navy files and is in the public domain.

GEORGE_SPARTAN0001George 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!

Continue reading F-4 Phantom: A Fighter Aircraft for All Seasons

CALL TO GLORY– How the Convair B-58 Hustler Helped Win the Cold War

GEORGE_SPARTAN0001George A. Haloulakos, CFA, is a university instructor, author and entrepreneur [DBA Spartan Research and Consulting, 1995-to date]. His published works utilize aviation as a teaching tool for Finance, Game Theory, History and Strategy.


The Convair B-58 Hustler, a pioneering aircraft that helped usher advancement in aeronautics while providing object lessons in Finance, Strategy and Game Theory makes for a compelling story. Finance explains how capital is employed to create added-value. Strategy explains how resources are mobilized to capitalize on opportunities while achieving victory. Game Theory embodies strategies and tactics in situations of conflict or competition in which participants are faced with choices of action in which they win or lose based on what others choose to do or not to do. Statistics may provide guidelines or rules of thumb but in the midst of conflict where human behavior comes into play, actions and outcomes do not necessarily conform to a statistical norm or numeric formula. The long-retired supersonic B-58 is a unique teaching tool for these disciplines made all the more interesting by its remarkable achievements during its service life from 1960-1970. In the following excerpt from my forthcoming book CALL TO GLORY, basic principles in Game Theory are demonstrated in this historic case study that are useful in evaluating two major public policy issues facing our nation today: the merits of launching a new strategic bomber and dealing with adversaries that have publicly declared their intention to destroy us.

Continue reading CALL TO GLORY– How the Convair B-58 Hustler Helped Win the Cold War


GEORGE_SPARTAN0001George A. Haloulakos, CFA DBA Spartan Research and Consulting, Core Adjunct Finance Faculty – National University and Instructor-Finance, University of California at San Diego (UCSD) Extention – See more at:




Financial and strategic decision making requires a dynamic rather than static approach when measuring Return on Investment (ROI).  This is especially true with military assets where the stakes for success or failure cannot be assessed by mere accounting terms but whether or not victory is achieved.  Deployment of a military asset such as the B1 Bomber transcends the eternal debate of “guns versus butter” because how it is ultimately used may determine whether a nation, in this case, the USA, is able to survive and secure a peace in which liberty and freedom prevail rather than the peace of surrender.  Peace through strength is not adventurism but the ability to protect and defend the liberty and freedom of our citizens anywhere in the world.  The B1 Bomber has proven to be a very successful asset in securing this goal since entering service in 1985.  In this paper it will be shown that versatility, firepower, economy and efficiency are the foundation in which the B1 Bomber has achieved a superior ROI in quantitative and qualitative terms.  While the words “economy” and “efficiency” are often perceived as incongruent with assessing the value of military assets, context will be provided in this paper to properly understand why it applies with the B1.

Raison d’être for the B1 Bomber

If an enemy is determined on conquering you and uses all his or her resources to fulfill that objective, he or she is at war with you; and unless you contemplate surrender, then you are at war with that enemy!  Furthermore, unless you are considering treason, then your objective, like that of the enemy, is victory.  Since the end of World War II, our nation has dealt with such ongoing threats – namely the “Cold War” (1947-91) and the “War on Terror” (2001 – to date).  The B1 Lancer was designed, developed and eventually deployed to help achieve victory in such conflicts.  What makes the B1 story so compelling is how this aircraft evolved over time to remain relevant and viable as our military strategy itself has changed from massive retaliation to flexible response to precision targeting.  Ultimately its versatility and adaptability is why the B1 is one of the most important military assets in our arsenal of freedom.

Unlike previous generations of bomber aircraft, the B1, commonly known as the “Bone” [originally from “B-One”], has perhaps evoked far more discussion and analysis because of the nature of the 24/7 news cycle and digital media.  As such, in the popular press the B1 has been evaluated in the same manner as a new consumer electronics product or automobile.  As a practical matter, the technical difficulty of each generation of military aircraft increases geometrically, not arithmetically.  This means that to design, develop, test, manufacture and deploy a new aircraft requires at least 10-15 years.  To fully and properly evaluate such an asset requires a perspective and metrics that differs from the approach associated with disposable consumer and industrial products with short life cycles.  Moreover, it is not just a matter of throwing a switch and the plane is ready for flight but rather exhaustive testing is needed to make sure the new aircraft can fulfill its mission requirements with maximum safety for its crew.

A popular but mistaken criticism of the B1 was that it was accident prone because it incurred three crashes and seven mishaps during its first six years of operation.  Historic analysis [“A Tale of Two Bombers” authored by retired USAF Colonel Walter Boyne, July 2006] documents that the B1’s track record is noticeably better versus other, far less sophisticated bombers.  Colonel Boyne noted that over the first six years of operation, the B47 lost 176 aircraft (9% of the total B47 fleet) while the B52 lost 27 aircraft or 5% of its total fleet.  The B1 was just three percent!

As costs have increased over time, the useful life of an aircraft becomes even more vital when measuring its added-value.  For example, the supersonic B58 Hustler which had a brief operational career (1960-70) experienced a loss of 26 aircraft or 22.4% of production.  A total of 116 B-58s were produced: 30 trial aircraft and 86 production B-58A models.  Its cost/value relationship was significantly further diminished when the USSR developed highly effective surface-to-air missiles (SAMs) thus nullifying the B58’s high-altitude capability and forcing it into a low-level  penetration role for which it was never intended and thereby limiting both its range and strategic value.  It had been designed for nuclear strikes and was never employed for conventional bombing.  The B58 was so highly specialized that it was not a fungible asset that could be economically or efficiently transitioned into a different role.  [Readers may recall seeing footage of the B58 as the fictional Vindicator Bomber in the 1964 film “Fail Safe” and again in the 2000 made-for-TV remake of that same film.]  As such, even in the context of the Cold War, the B58 became less effective because it lacked versatility, flexibility and firepower necessary for a strategic bomber to maximize its purpose.

By the 1970s, it became apparent that while the B52’s versatility would enable it to remain a valuable asset, it was highly vulnerable to new threats posed by enemies of the USA.  In order to fulfill its military objectives, the B52 and its crews were now at far greater risk when engaged in combat.  This became painfully evident in December 1972 during the Vietnam Conflict when ten (10) B52s were shot down inside North Vietnam during round-the-clock bombing raids; the SAMs developed by the USSR and used by North Vietnam led to the loss of 28 crewmembers killed in action and 33 prisoners of war in the downing of those ten (10) bombers.  Sixteen (16) other B52s went down outside of North Vietnam.  Nine were due to combat.  Seven were “operational losses” which occurred while B52s were en-route to combat areas in Vietnam.

With the grounding of the B58s in 1970 and the vulnerability of the B52s on public display in 1972, the need for a high-performance but versatile strategic bomber was self-evident.  This, along with other prior developments to be discussed in this paper, helped provide the raison d’être for the B1 bomber.

VICTORY: The True Measure of Return on Investment for Military Assets

In the post World War II period, the USA was engaged in a 40+ year “Cold War” with the former USSR and in recent years has deployed military assets in various global theaters in the “War on Terror.”  In both conflicts, the B1 Bomber helped achieve victory in the “Cold War” while meeting or exceeding mission requirements in the “War on Terror.”  As both of these conflicts can be viewed as a battle for survival between the forces of liberty and freedom versus totalitarianism, the metric for measuring Return on Investment cannot be confined to mere accounting or finance based data.  In war victory is the true measure of success for victory means survival.  As Winston Churchill said:  “Victory at all costs, victory in spite of all terror, victory however long and hard the road may be; for without victory there is no survival.”  When factoring the immeasurable value of liberty and freedom, victory supersedes both accounting and finance data in assessing added-value from military assets.  On this basis, the B1 Bomber has been a significant contributor in achieving victory, and thereby has produced a satisfactory, if not superior, Return on Investment.

In business, accounting is based on historic cost data while finance is based on market-value based information.  Moreover, finance takes into account the opportunity cost (i.e., the highest valued alternative forsaken to pursue a given project) as well as the time value of money.  Both of these metrics, however, fall short of truly measuring the Return on Investment (ROI) for a military aircraft program.  Such weapons are designed, developed and deployed with the express purpose of achieving victory in the field of battle.  This does not necessarily mean that to assess its ROI a strategic bomber like the B1 requires actual use in a “shooting war” BUT its presence as a potential threat can have an enormous deterrent effect on the enemy because of the knowledge that it will succeed in its mission if actually deployed.  While this paper will demonstrate that in accounting and finance terms, the B1 achieved positive returns in the context of its mission, the true metric, victory, is the one emphasized here for reasons already noted.  Thus, we will now further examine the characteristics of this remarkable aircraft that has made the B1 a high ROI military asset.  The ROI is best appreciated when examined from both economic and strategic perspectives.

  • Economic ViewpointThe total economic return for the B1 is both quantitative and qualitative.  The quantitative benefits include a long service life, higher survivability rate and wider utilization of air bases.  Qualitative benefits include spin-off applications for other aircraft programs plus various industries.  In nominal US dollars, the unit cost for the B1 was $200 million per aircraft [based on $20 billion for design, development and manufacturing] or $283 million in constant 1998 US dollars.  The aircraft’s useful life is estimated to be at least to the year 2040 and beyond, which imply 55 or more years!  Compared to the older B52, the B1 has higher survivability, speed, firepower and can be deployed amongst a greater number of air bases because it requires less runway space.  As shown in a later section of this paper, the B1 was a significant contributor to help the USA win the Cold War and in the War on Terror has achieved a mission capable rate of 79%.  The B1 has a much higher survivability rate versus the B52 due to its stealth features such as blended contours and radar absorbing materials that reduced its radar reflectivity to one one-hundredth that of the B52.  Higher survivability reduces risk for the crew and lengthens the useful life of the aircraft.  As noted in the Aviation Video International documentary film series Great Planes, given the B1’s operating record, it has proven to be “not so expensive after all.”  In addition, production and deployment of the B1 was a major driver in reviving the US aerospace industry with major advances in computers, software, composite materials and precision guided munitions.  Much like the Apollo manned spacecraft program of the 1960s, there were enormous spin-off benefits for civil, commercial and personal applications in telecommunications, medical technology, engineering, science and other such related areas.  One example is how the advancement in computers accelerated concurrent with the production and deployment of the B1.  Computer technology was an integral part of America’s 25-year economic boom (1983-2007) because of the enormous productivity that cascaded throughout the economy from increased computer applications.  Another example is how B1-related design and development work has been a process driver for other major military and commercial aircraft programs.  CFM International (January 25, 2010) observed that the B1A engine was upgraded with greater durability and efficiency so that it was used in the B1B, and then later the basis for variants in the F14 Tomcat, F16 Falcon, B2 Spirit and various small-to-medium sized commercial airliners such as the long-range Boeing 737.  All of these economic benefits plus protection against enemies who have vowed to conquer us is a high ROI indeed!
  • Strategic ViewpointThe B1 Bomber’s strategic value has increased over time because it has a proven performance record as an effective deterrent in all three (3) major defense strategies employed by the USA over the past 50+ years.  Moreover, the B1 airframe has been adaptable to new technologies that could be incorporated into its design along with effective countermeasures that enable the aircraft to operate in different venues while fulfilling new mission requirements.  As noted earlier, the B58 Hustler had a relatively short service life because it lacked versatility to be useful with shifting strategies.  During the 1950s and up to the mid-to-late 1970s, American strategic forces were deployed in the context of what was termed the “Mutually Assured Destruction” (MAD) doctrine.  The premise is that full scale use of nuclear weapons by two opposing sides result in the mutual destruction of both the attacker and defender.  This assumes that both sides are able to launch a sufficient counterattack in war.  For manned bombers, however, this requires that an attack group plus its air-refueling tankers are able to get airborne 10 minutes or less after the enemy has launched its missiles.  Due to this narrow window of time, a number of bombers were kept airborne at all times (“24/7”) to reduce putting the entire fleet at risk by being on-ground.  However ORI (Operational Readiness Inspections) consistently demonstrated that USAF bombers were able to meet or beat the 10-minute launch threshold during the Cold War.   By the mid-to-late 1970s, the USSR had achieved a quantitative advantage in launchers and weapons platforms over the USA and simultaneously was expanding its reach as evidenced by its invasion of Afghanistan in 1979.  Such developments required a shift in strategy to “flexible response” in which military assets had to be rapidly deployed in various global regions, often simultaneously, to project US power as a deterrent against further incursion.  Unlike the MAD doctrine which dealt with stationary targets, this implies that targeting of military and civilian centers were no longer fixed but now had to be adjusted in real time to accommodate the shift in world events and flow of enemy military assets.  With the defeat of the USSR and end of the Cold War in 1991, the emphasis in strategy shifted again, but this time to precision targeting.  The improved technology, shifting political climate and reductions in strategic forces necessitated a far more efficient, flexible and precision striking capability – especially with long-range bombers.  Precision striking capability colloquially means “more firepower for the money” with less or minimal collateral damage to non-target areas versus gravity bombs.

THE VICTORY FORMULA: Firepower + Versatility + Economy

Superior Firepower [as measured by payload]

Firepower, which measures the capability of a military asset, is best quantified when using a consistent or common metric for comparative analysis applicable to multiple bomber aircraft.  In this case, we use the precision JDAM (Joint Direct Attack Munitions) or “smart bombs” as the way to measure capability of directing force at an enemy through strategic bomber deployment.  Essentially, the precision JDAM is a guidance system “bolted” or “strapped” on to a gravity bomb thereby converting it into a precision guided weapon.  As a practical matter, the rules of engagement evolve over time to reflect not only improved technology but political considerations that include, but are not limited to, “collateral” damage to non-combatants.  For this type of environment, “smart” or “precision guided” weapons become the more common metric when evaluating firepower as the aforementioned collateral damage cannot always be treated as “tactical necessities.”  While each bomber aircraft has unique storage and delivery features along with varied mix of offensive weapons, the JDAM or “smart bomb” is an up-to-date asset that replaces “gravity bombs” used in prior combat situations, and since it can be incorporated into each aircraft, this is the asset used for measuring firepower for each bomber aircraft.  In the Bomber Payload exhibit located in the Appendix, it is self-evident that the B1 outguns the B52 and B2 (the other major USAF bombers) on per aircraft and fleet basis.  Here is a statistical comparison on a JDAM basis.

Aircraft Type Internal JDAMs External JDAMS Total JDAMS(ac/fleet)
B1 (# in fleet: 65) 24 12 [if permitted by START] 36 / 2,340
B52 (# in fleet: 76) 12 6 18 / 1,368
B2  (# in fleet: 20) 16 NA 16 / 320

Explanatory Notes: (1) a/c: aircraft; (2) Total firepower = (# of a/c) x (JDAMS per a/c); (3) Fleet size are combat aircraft (test aircraft are not included in respective fleet firepower metrics).

Even without the external JDAMs, the B1 outguns the B52 and B2, respectively, by +100% and +50%.  This is the most relevant comparison as the B2 was not designed for external payload while the B1’s external capability is limited by treaty.  As a practical matter, each aircraft type has specific characteristics and mission capabilities that make each a valuable asset in the context of an overall military strategy.  This simple comparison demonstrates that on a JDAM payload basis, the B1 is the best performing bomber aircraft in the US arsenal.

Firepower, in and of itself, is not necessarily the sole measure of superiority.  The ability to project and deliver that firepower is crucial to its ultimate purpose in achieving victory.  In the ensuing sections, it will be shown that the B1’s multiple capabilities on a combat readiness basis at a moment’s notice, including a blend of flexibility and strength, affirm its superior firepower.

Versatility = Stellar Performance

The B1 is a multi-mission aircraft carrying the largest payload of both guided and unguided weapons in the USAF inventory.  As such it can rapidly deliver those weapons in massive quantities against any adversary, anywhere in the world, at any time.

The B1’s versatility is best described by Air Combat Command in its Fact Sheet:

“The B-1B’s blended wing/body configuration, variable-geometry wings and turbofan afterburning engines, combine to provide long range, maneuverability and high speed while enhancing survivability. Forward wing settings are used for takeoff, landings, air refueling and in some high-altitude weapons employment scenarios. Aft wing sweep settings – the main combat configuration — are typically used during high subsonic and supersonic flight, enhancing the B-1B’s maneuverability in the low- and high-altitude regimes. The B-1B’s speed and superior handling characteristics allow it to seamlessly integrate in mixed force packages. These capabilities, when combined with its substantial payload, excellent radar targeting system, long loiter time and survivability, make the B-1B a key element of any joint/composite strike force. The B-1 weapon system is capable of creating a multitude of far-reaching effects across the battlefield.”

Unlike other high-performance but less adaptable bomber aircraft such as the B58 Hustler, this versatility has enabled the B1 Lancer to remain a relevant, front-line weapon in the context of three major strategies: massive retaliation, flexible response and now, precision targeting.  During the showdown stage of the Cold War in the 1980s, the shift in strategy from massive retaliation to flexible response began as military targets were no longer stationary and the risk of potential conflict became more spread out geographically with changes in the global political-economy.  By 1987, when the B1 entered into the service of the Strategic Air Command (SAC), whose motto was “Peace is our Profession,” the shift was underway.  At this point, the B1 was initially outfitted with nuclear weapons.  SAC was deactivated at the end of the Cold War and the ensuing reorganization of military aircraft assets into the Air Combat Command marked another shift in strategy, this time to precision targeting.

With the end of the Cold War, political tensions became more regionalized (albeit on a global basis) and threats of war were on a more limited scale in which the danger of massive worldwide nuclear destruction was no longer the concern it had once been.  In this setting, while the adversary was no longer a monolithic entity like the USSR, danger still lurked but in the form of terrorism.  With advanced technology and heightened political sensitivity about quelling military threats but with minimal or no collateral damage to civilians or non-combatants, precision targeting with conventional weapons became the norm.  With the B1 shifting to greater conventional weapon capability, its versatility became more apparent as several bomb wings could now be deployed into the Air National Guard along with the development of the USAF Weapons School B1 Division.  In sum, the B1 has delivered stellar performance while operating under different strategies to protect and defend the liberty and freedom of our citizens anywhere in the world.

Economy: Efficiently Fulfilling the Mission

As noted earlier, economy (i.e., getting the most or highest total return in terms of quantitative and qualitative benefits from a capital outlay) for a military aircraft can be measured in terms of firepower, service life, versatility and its overall contribution to helping achieve victory in war.  On all of these measures, it has been shown in this paper that the B1 Lancer has met or exceeded expectations.  Another measure of economy is efficiently fulfilling its combat mission in the midst of an actual firefight (i.e., where bombs are dropping, missiles are being fired and air-to-air combat is a constant risk) and in this regard, it will be shown here that the B1 also excels.  In the ensuing section, the B1’s contribution to winning the Cold War is discussed in the context of the overall strategy that led to that outcome.  In this section, we will provide examples of the B1’s economy in combat situations.

According to Air Combat Command, the B1 was first used in combat in Operation Desert Fox (1998) where aircraft penetrated Iraqi defenses to destroy Republican Guard barracks.  The following year in Operation Allied Force, six B1 aircraft accounted for 2% of air sorties but delivered more than 20% of total tonnage in this conflict!  In Operation Enduring Freedom the B1s accounted for 5% of the strike sorties against Afghanistan while delivering over 70% of the precision guided JDAMs.  In Operation Iraqi Freedom the B1s represented just 1% of the combat sorties but 22% of the guided weapons!   All of this was accomplished with a 79% mission success rate and with zero losses of aircraft and crew.  The B1 was dubbed the “MVP” – Most Valuable Plane – for its versatility and success rate in Operation Iraqi Freedom.  In 2012, a squadron of nine B1s flew 770 sorties in Afghanistan during a six-month period – the most ever for B1s on a single deployment.  This squadron spent 9,500 hours airborne while having at least one aircraft in the air at all times, accounting for 25% of combat aircraft sorties over the country while there and averaging 2 to 3 requests for air support per day.  All of these examples and the accompanying metrics affirm the economy of the B1 – i.e., efficiently fulfilling its mission! 

Caveat: Playing to Win

While the capabilities of military assets such as the B1 are critical to the success of the mission and achieving victory, there is an equally important factor: the will to win.  The B1 Bomber is designed to achieve optimal results when under the command of leadership that plays to win rather than a play-not-to-lose / avoid being second-guessed approach.  To place a sophisticated military asset such as the B1 in a sub-optimal, play-not-to-lose performance role puts both the aircraft and crew at grave risk.  This is analogous to high-level (e.g., Olympic class) sporting events where if a top athlete in peak condition does not play all-out, he or she risks having their body injured or compromised.

The B1 provides an optimal mix of process and technology to project-and-deliver maximum firepower anywhere and anytime, while possessing stealth-like flexibility to approach, evaluate, readjust if necessary and then strike with lethal precision.  Moreover it has a proven performance record of doing so with the high likelihood of safely returning to home base, preserving both the equipment and crew for its next deployment.  The B1, along with other high-powered bomber and strike aircraft, are not toys or playthings to be deployed as if one is playing an interactive video game.

The B1’s deployment by the Reagan Administration in the early-to-mid 1980s was a key element to implementing an “offensive” rather than “defensive” strategy.  In this showdown stage of the Cold War, flexible response had replaced massive retaliation in terms of strategic emphasis, but this was in the context of demonstrating a will to win and apply massive retaliation if necessary.  The B1 had restored penetration capability for the USAF strategic bomber force — [whose diminishment with the B52 in the early 1970s during the Vietnam Conflict was now fully evident] — plus its stealth characteristics enabled it to loiter, search and destroy.  This proved to be crucial for the USA in regaining the initiative and upper hand because the B1 would be able to locate mobile targets such as missile launchers and destroy them if necessary.  Prior to the B1 deployment, US long-range bombers by the mid-to-late 1970s, namely the B52, had very limited penetration capability in relation to USSR air defenses (interceptor aircraft and missiles) and thus relegated to a stand-off position in which it could launch cruise missiles.  De facto, this essentially meant US manned bombers were in an all-or-nothing role with limited reconnaissance capability because for the B52 to enter enemy airspace to verify targets would put the aircraft and its crew in a very low survivability situation.  Launching missiles from a safe stand-off position severely limited the flexibility of a manned bomber force.  Once launched, the missiles could not be recalled, and there was no way to determine if in fact the targets had been moved prior to attack, which could be accomplished by an aircraft with stealth and penetration characteristics.  With the USSR having shifted from stationary to movable launchers, the B1’s flexibility, penetration and stealth capabilities proved invaluable in neutralizing this threat.  In other words, re-locatable targets (e.g., mobile missile launchers) need to be found before they can be destroyed.  The B1’s versatility and firepower to accomplish this task enabled US air power to reassert its superiority in strategic forces.

The B1 was a game changer because it demonstrated that the USA was no longer standing pat but upgrading its long-range bomber force to not only be more effective with both “massive retaliation” and “flexible response” strategies, but also be adaptable to future strategies incorporating new technologies and different rules of engagement (influenced by political / diplomatic considerations).  In the context of game theory, this now forced the opposition to rethink its strategic posture and capabilities, as well as make its own upgrades or changes to its armed forces, thereby necessitating increase in their own public defense expenditures.  The private enterprise driven US economy, noted for innovation, entrepreneurship, capital formation and wealth creation, was better able to support development and deployment of military assets such as the B1 as its aforementioned economic spin-off benefits facilitated even greater economic expansion.  By comparison, a centralized state ownership economy like the USSR could not keep up.  With the USA now operating in a “we win, they lose” mode, the upgraded American strategic forces supported by a revitalized, growing economy check-mated their Cold War Soviet rivals, achieving victory in 1991.

The B1 fleet is operated by Air Combat Command (ACC) whose motto is “Global Power for America.”  The ACC maintains command-ready forces able to respond to challenges in a constantly changing world in order to protect our nation’s security.  With the end of the Cold War in the early 1990s, the B1’s role was shifted to delivery of conventional rather than nuclear weapons due to its greater firepower (as measured by payload), flexibility (allowing it to seamlessly integrate with mixed forces), and its unique combination of long-range, maneuverability, and high speed while enhancing survivability.  Moreover, the shift from nuclear to conventional armament, allowed for B1 aircraft to be deployed in the oft more efficient and economical Air National Guard, state-based Air Force militias in the USA.  [The role of militia organizations are described in the US Constitution – Article 1, Section 8, Clauses 15-16 and Amendment 2].  According to the Boeing Company [which now owns Rockwell, the original maker of the B1 Lancer] public documents: “The U.S. Air Force decided to retire 33 B-1Bs and remove the aircraft from Mountain Home and the Georgia and Kansas Air National Guard bases. This has now been accomplished and the remaining aircraft were consolidated at Dyess AFB and Ellsworth AFB.”  However the ability to redeploy the B1 implies capacity and flexibility to fulfill its mission in a more economical manner as well as adapt to changes in the political economy.

VIGILANCE: The Back-story

Beyond victory in combat, the B1 profile would be incomplete without the back-story on how it survived formidable political opposition to later become one of the most important assets in the US military arsenal.  In order to fully appreciate how this came to be, it is necessary to review two (2) major aircraft programs – the Northrop YB49 Flying Wing and North American XB70 Valkyrie – whose individual histories had a material impact on the B1 Lancer.  Furthermore, there are a number of key people that deserve mention who were instrumental in sustaining research, development and testing for the B1 program in the aftermath of its 1977 cancellation.  Here is a summary of what happened and the resulting impact on the B1 Lancer.

How the Flying Wing and Valkyrie Provided the Segue for the B1 Lancer

Part 1: The Northrop YB49 Flying Wing

The Northrop YB49 Flying Wing was a jet-powered strategic bomber that first flew in 1947 and was designed for service in the USAF.  [Classic sci-fi movie fans might recall seeing actual test-flight footage of the YB49 in the 1953 film “The War of the Worlds” dropping an atomic bomb against the invading Martians.]  This futuristic aircraft provided the template for the Northrop B2 Spirit stealth bomber that entered service in the early 1990s.  But in the late 1940s and early 1950s, high-altitude and high speed were the preferred characteristics for a strategic bomber, and the Flying Wing was designed for low-altitude flying for penetration into enemy territory and had a maximum speed of 495 miles per hour.  In retrospect, the Flying Wing was well ahead of its time, reflecting the ingenuity and entrepreneurship of Northrop’s technology trailblazing founder and leader, Jack Northrop.  The Flying Wing had control and stabilization difficulties that decades later would be solved by “fly by wire” and “computer generated artificial stability” technologies, culminating with development and deployment of the aforementioned the B2 Spirit.

While these technological issues were significant and reasonable for passing over the Flying Wing in favor of the more conventional propeller driven Convair B36 Peacekeeper, there were back-room dealings and political gamesmanship involved with this decision.  These political maneuverings and their outcome would later play an important role in the B1 Lancer story.  In a 1979 videotaped news interview, Jack Northrop publicly stated that Northrop’s YB49 Flying Wing program was cancelled in 1950 by USAF Secretary Stuart Symington because Northrop refused to comply with Mr. Symington’s recommendation that Northrop merge with competitor Convair.  According to Mr. Northrop, Convair’s financial terms for the merger were not equitable.  Concurrently, Convair had very strong lobbyists in Washington, DC, while Northrop’s independent nature often conflicted with the political deal-making endemic to the nation’s capital.

As a result, despite its obsolete World War II-era design, the Convair B36 Peacekeeper prevailed in securing a mass-production order for USAF deployment during the Truman Administration.  Shortly thereafter, following his resignation as USAF Secretary, Mr. Symington was named President of Convair!  The reader is left to his or her own judgment regarding conflict of interest and the role of political wheeling and dealing in this matter, but there is still more to this story.  While still holding his post as USAF Secretary, Mr. Symington ordered all the Flying Wing air frames destroyed [they were chopped up and shredded onsite in plain sight of Northrop employees] AND he refused the Smithsonian’s request that the USAF donate one of those aircraft to the museum for its collection of Northrop’s pioneering aircraft.  For this reason there is no full-scale version of Northrop’s original all-wing aircraft for study and research.  It is self-evident that this was, and is, a loss for aviation history as well as for scientific research and development.  While Northrop retained the original YB49 flight test data, an important asset was forever lost as political deal making prevailed over the preservation of advanced aviation design for all generations.  Northrop was awarded a very small, low profile production contract for its F89 Scorpion fighter as compensation for cancellation of the Flying Wing.  But the opportunity cost associated with the willful and intentional destruction of the Flying Wing by vindictive political opponents was recognized as a setback for aviation and scientific progress.  Consequently, such actions were not repeated with later generations of strategic bombers, and this would ultimately help provide the necessary window of opportunity for the B1 to continue its research and flight test work following its initial cancellation.  [During those continuing research and flight tests, the B1 was reconfigured and upgraded from its initial B1A model to the B1B, enabling it to be transformed into a most versatile, formidable aircraft.]

Part 2: The North American XB70 Valkyrie

During the 1950s, the Boeing B52 Stratofortress succeeded the Convair B36 Peacekeeper as the primary USAF long-range bomber.  The rationale for manned bombers even as Intercontinental Ballistic Missiles (ICBMs) started to account for a larger percentage of total US strategic weapons was the ability to remain in the air at a long distance from their bases (thereby reducing their vulnerability to sneak attack).  High altitude and high speed continued to be emphasized to provide greater flexibility and elusiveness in combat.  The North American XB70 Valkyrie, designed for high altitude (77,000+ feet) and high speed (2000+ miles per hour), was thought to be a logical successor to the B52.  While lacking the range and payload of the B52, the Valkyrie’s high performance was viewed as a reason for its deployment.  However, during the late 1950s and early 1960s, USSR surface-to-air missiles and interceptor aircraft reached a stage of development where they could neutralize high-altitude / high speed long-range bombers.  On this basis, the value of the XB70 was severely limited as a mass-produced, front-line combat aircraft and by the end of the Eisenhower Administration had fallen out of favor.

In 1961, the Kennedy Administration cancelled mass production of the XB70 deeming it as unnecessary, uneconomical and lacking penetration capability into strengthened enemy air defenses.  However, unlike the Flying Wing cancellation of 1950, it was recommended that the XB70 Valkyrie be continued for advanced research into aerodynamics, propulsion and other subjects related to large supersonic transports.  Thus the Valkyrie could serve as a process driver for both advanced military and civilian jet aircraft.  In other words, a positive economic return would be accrued in a research rather than combat role.  The needless destruction of an asset having both scientific and military worth was avoided, thereby setting a precedent for future military aircraft projects.  This proved to be a saving grace for the B1 when it was initially cancelled in 1977 by not only providing a rationale for continuing research and test flights but also building an informational foundation transferrable to later generation of bomber aircraft.  Eventually, two XB70 aircraft were developed for multiple test flights with the data and material from these tests later being used for the later B1 program!  One of the XB70 aircraft crashed in 1966, with the second retired in 1969 so that it would be on permanent display in a museum.  Unlike the Flying Wing, the Valkyrie was allowed to continue, albeit in a research rather than combat role.  As such the XB70 helped advance aerodynamics and propulsion technology.  Moreover, when it fulfilled its research mission, the Valkyrie was made available for future generations to study as a static museum display.

Part 3: Lessons Learned From the Flying Wing and Valkyrie

There are two major lessons to be taken from these high-tech aircraft programs.  First, continued research and flight tests rather than abrupt cessation of an advanced jet aircraft program expands the frontier of knowledge so that it creates far-ranging applications in commercial and military venues.  This also gives flexibility to restart a program when new advancements create a significant competitive advantage in a combat role.  Essentially, this is what occurred with the B1 as its “B1B” version ultimately proved to be vastly improved over its “B1A” version because of improved firepower, survivability, economy, flexibility and versatility.  This was made possible by the advancements during 1977-80 that led to its restart in 1981.  The second lesson is that decisions concerning strategic military aircraft must be viewed not merely in financial or political terms, but how the possibility of eventual deployment can affect the enemy and give our nation flexibility and strength.  Abrupt cancellation of an advanced military aircraft can be misinterpreted by the enemy as a signal of retreat.  Indeed, it is more advantageous to always leave open the possibility of its deployment with the view that ongoing research and testing will further upgrade its combat capability.  Even if that aircraft is not deployed in its original version, its presence allows for our nation to maintain initiative and be in a decisive, offensive posture rather than a passive, defensive stance.  This allows our nation to preserve peace in which liberty and freedom prevail, rather than the peace of surrender.

Part 4: Vision and Courage in the Congressional, Military and Corporate Venues

The rationale for restarting the B1 in 1981 and how it proved to be a game changer in winning the Cold War has already been addressed earlier in this paper.  To place this in context, it is worth examining the preceding events.  The Carter Administration cancelled production of the B1A program in 1977 in favor of land and submarine based ICBMs, air launched cruise missiles, upgraded B52 bombers and funding an advanced technology bomber (i.e., stealth).  This decision was rooted in the aforementioned MAD (mutually assured destruction) doctrine of the 1950s and 1960s.  Viewing the world through such a prism meant that halting deployment of the B1A could be more economically replaced with air launched cruise missiles from a B52 at a standoff position and that stealth capability would be required to penetrate enemy air defenses.  The problem with this strategy was that it ignored the inherently long lead times required for design, development and procurement for a new jet aircraft PLUS was invalidated by a shift in USSR strategy in which the enemy was asserting itself worldwide in multiple theaters simultaneously.  This necessitated a shift in USA military strategy from massive retaliation to flexible response.  However, while the B52 fleet could support on-demand global missions, its long runway requirements severely limited forward basing alternatives thereby negating projection of American air power.  With these events in full swing during the post 1977 era and the precedents set by the YB49 Flying Wing and XB70 Valkyrie programs, the Carter Administration permitted continuation of research and flight tests for four B1A prototypes.  The reader may infer that this was a hedge against the earlier cancellation decision, especially given potential domestic political backlash and the increased threat posed by Soviet adventurism.

In this environment, Rockwell (formerly North American) – the primary B1 contractor — committed some of its own corporate funds for research and development with the implicit if not tacit encouragement of key USAF decision makers PLUS the Congressional budgetary support led by US Representative Robert K. Dornan (CA).  In addition, US Senator Barry M. Goldwater (AZ) was a stalwart supporter of US military preparedness, especially air power, while advocating superiority rather than parity of American armed forces vis-à-vis its USSR counterparts.  Messrs. Dornan and Goldwater were also experienced military pilots who had flown the B1 as well as all other major US military jet aircraft.  They understood the necessity of decisive force and projection of strength as a means of securing peace while protecting the freedom and liberty of our nation.  Since the House of Representatives has budgetary authority, Mr. Dornan’s ongoing support, as well as his ability to secure backing from US Representative Norman Dicks (WA) allowed for sufficient DOD funding to augment Rockwell’s corporate funds keeping the B1 program quietly active.

By 1981, when the Reagan Administration took office, the B1A had been totally transformed into the B1B, an entirely different aircraft versus its earlier version.  While lacking the speed of the B1A, the B1B proved to be a superior aircraft because it now featured stealth characteristics plus low terrain flying that meant greater survivability, penetration capability, increased versatility (including deployment onto shorter runways) and much longer service life because it could be integrated into a wider array of missions and strategies versus the B52 and predecessor strategic bombers.  In addition, the flight tests and research allowed for USAF, Congressional and corporate decision makers to eventually spread out the production of the B1 into virtually every single state.  Thus every state in the union was a stakeholder both financially and strategically in this ultimately game-changing military aircraft program.  The vision and courage of key decision makers in the ranks of the USAF, Congress and the corporate world (namely Rockwell) made it possible for the B1 to take flight as an important weapon in our nation’s arsenal of freedom.  The lessons of the past, namely the Flying Wing and Valkyrie, were successfully incorporated into not only maintaining the B1 on life support but upgrading it for future generations. 


The B1 Lancer is an affirmation of peace and freedom through the display of American courage and exceptionalism.  This aircraft was the by-product of ingenuity, entrepreneurship, risk-taking and vigilance.  When produced and deployed on a massive scale, it not only helped secure victory in the Cold War but remains a versatile, front-line weapon in the War on Terror.  Its design and development was a major driver in reviving the US aerospace industry with major advances in computers, software, composite materials and precision guided munitions.  Moreover, the B1 has been adaptable for the various strategies employed for US national security – massive retaliation, flexible response and precision targeting – during the past 50+ years.  Having first been deployed in 1985, it has a projected service life reaching at least until 2040, if not beyond.  Carrying the largest payload of both guided and unguided weapons in the USAF inventory, Air Combat Command has stated on record ”the multi-mission B1 remains the backbone of America’s long-range bomber force.”  Based on its versatility, firepower, economy and efficiency the B1 Lancer has achieved a superior ROI in quantitative and qualitative terms.

PHOTO GALLERY: Online readers may wish to check out this exhibit of USAF B1 photographs posted by Mike Neely.  Here is the link:


My sincere thanks to all the men and women associated with the B1 Lancer – especially those members of the US armed forces whose dedication, sacrifice and service make it possible for all of us to enjoy the blessings of liberty and freedom.  Special thanks to the Honorable Robert K. Dornan for his generosity of spirit, strength of character and seriousness of purpose in connection with his service to our nation.  I am especially grateful for his support of this paper and salute his patriotism.

About the Author:

George A. Haloulakos is a Chartered Financial Analyst [CFA] and consultant: DBA Spartan Research and Consulting, specializing in finance, strategy and new business ventures (1995-to date).  Author of DOLLAR$ AND SENSE: A Workbook on the ABCs of Investments and Directed Studies in Advanced Financial Analysis, George has published over 300 security analyst reports on diversified companies and industries.  George holds an MBA in Finance and BS (Summa Cum Laude) in Quantitative Business Analysis from the Marshall School of Business, University of Southern California, where he was a graduate assistant in finance & business economics.  He holds Certificates of Completion from the Holy Cross Greek Orthodox School of Theology and Monterey Institute of International Studies, and is a member of the ordained clergy of the Orthodox Church in America with rank/title of Reverend Protodeacon.


Air Combat Command (ACC) public documents.

Air Force Historical Research Agency, United States Air Force, Maxwell Air Force Base, Alabama.

Air Force Magazine (online). “A Tale of Two Bombers,” by Walter Boyne.  Volume 89, Number 7.  July 2006.

Aviation Video International (Australia). “Great Planes – Rockwell B1 Lancer.”

Boeing Company public documents.  (Note: Boeing now owns Rockwell.)

Constitution of the United States of America.

Dornan, Robert K.  Former US Representative (California).  1977-1983, 27th Congressional District; 1985-1993, 38th Congressional District; 1993-1997, 46th Congressional District.  Telephone interviews December 24, 2013 and January 20, 2014.

Evergreen Aviation Museum (The Captain Michael King Smith Educational Institute).  McMinnville, Oregon, USA.

FORBES (online). “Some Disturbing Facts About America’s Dwindling Bomber Force,” by Loren Thompson.  August 16, 2013.

Flying Leatherneck Historical Foundation & Aviation Museum.  Marine Corps Air Station (MCAS) Miramar.  San Diego, California, USA.


Goodpaster, Brig. General Andrew J., White House Office Records of Andrew J. Goodpaster 1952-61.  Dwight D. Eisenhower Presidential Library.

Green, William (compiler) and Punnett, Dennis (silhouette artist). The Observer’s Book of Aircraft.  Frederick Warne & Co. (London and New York). 1965.

Haloulakos, G.A. CFA Charterholder. (BS, MBA. Marshall School of Business, University of Southern California).  “Lockheed C130 Hercules: Versatility + Strong Cash Flow = Competitive Advantage.”  2014. and Experimental Aircraft Association

Haloulakos, G.A. CFA Charterholder. (BS, MBA. Marshall School of Business, University of Southern California).  “Lockheed Tri-Star Redux: A Play to Win Strategy.”  2013.

Haloulakos, G.A. CFA Charterholder. (BS, MBA. Marshall School of Business, University of Southern California) and Mossavar-Rahmani, Farhang.  Finance Chair – National University.  (DBA.  United States International University).  “The Boeing Company: A Case Study on Betting it All.”  2013. and

Haloulakos, George A., (DBA Spartan Research and Consulting), Case Study Files and Field Notes on Corporate Strategy, Military/Aerospace Industry, High-Tech and Commercial Jet Aircraft – Spartan Research, 1980 – 2014.

Haloulakos, George A. (CFA Charterholder).  Dollar$ and Sense: A Workbook on the ABCs of Investments.  Page 11.  Spartan Research and Consulting, Inc. (Bellevue, WA).  2002.  ISBN: 9780-1007-2482-2.  UCSD Bookstore.

Haloulakos, George A. (Graduate Assistant – Marshall School of Business, University of Southern California). “Reformulating Corporate Financial Theory for the 21st Century.”  Research support for M.C. Findlay, III (Finance Chair – Marshall School of Business, University of Southern California).  August, 1981.

Haloulakos, V.E.  Aerospace Engineer, Scientist and Professor.  (BSME, MSAE and ENGR.D.  Viterbi School of Engineering, University of Southern California). “B52 Combat Losses in Vietnam.”

1961 Budget Message.  Kennedy Archives, March 28, 1961.  Pages 1-38.


Scott, Kelly.  CISA (Certified Information Systems Auditor), EA (Enrolled Agent), instrument rated private pilot, aviation enthusiast. (BS, MBA.  Haas School of Business, University of California at Berkeley).

Sweetman, Bill. Stealth Aircraft: Secrets of Future Airpower.  Motorbooks International.  1986

Taynai, Jason.  Crew Chief – B1 Bomber, Flight Line Launch and Recovery Support, Dyess Air Force Base, Abilene, TX (1986-89).


Scott, Kelly.  Industry/Historic/Technical Research.  CISA (Certified Information Systems Auditor), EA (Enrolled Agent), instrument rated private pilot, aviation enthusiast. (BS, MBA.  Haas School of Business, University of California at Berkeley).   Mr. Scott worked for NASA Human Factors Laboratory at NASA Ames Research Center testing pilot heads up displays (HUD) simulation of ground taxi in poor visibility. 


Precision Joint Direct Attack Munitions (JDAM): Bomber Payload

NOTE: Each Precision JDAM represented by “^”

B1 Lancer [Maximum Firepower: 36/aircraft] x 65 aircraft = 2,340 Precision JDAMs


[Standard JDAMs: 24 internal] x 65 aircraft = 1,560 Precision JDAMs





[External JDAMs if allowed by START: 12] x 65 aircraft = 780 Precision JDAMs




B52 Stratofortress [Firepower: 18/aircraft] x 76 aircraft = 1,368 Precision JDAMs


[Standard JDAMs: 12 internal] x 76 = 912 Precision JDAMs





[External JDAMS: 6] x 76 aircraft = 456 Precision JDAMs



B2 Spirit [Firepower: 16/aircraft] x 20 aircraft = 320 Precision JDAMs






Sources: Boeing; Northrop-Grumman;; Spartan field-research notes.


Primary Function: Long-range, multi-role, heavy bomber
Builder: North American Rockwell/Rockwell International (now owned by Boeing)
Operations Air Frame and Integration: Offensive avionics, Boeing Military Airplane; defensive avionics, EDO Corporation
Power plant: Four General Electric F-101-GE-102 turbofan engine with afterburner
Thrust: 30,000-plus pounds with afterburner, per engine
Length: 146 feet (44.5 meters)
Wingspan: 137 feet (41.8 meters) extended forward, 79 feet (24.1 meters) swept aft
Height: 34 feet (10.4 meters)
Weight: Empty, approximately 190,000 pounds (86,183 kilograms)
Maximum Takeoff Weight: 477,000 pounds (216,634 kilograms)
Speed: 900-plus mph (Mach 1.2 at sea level); maximum speed (Mach 1.25 or about 950 miles per hour at 50,000 feet altitude); low-level speed (Mach 0.92 or 700 miles per hour at 200 to 500 feet altitude)
Range: Intercontinental, unrefueled / 7,500 miles
Ceiling: More than 30,000 feet (9,144 meters); service ceiling 60,000 feet
Crew: Four (aircraft commander, copilot, and two weapon systems officers)
Armament: 24 GBU-31 GPS-aided JDAM (both Mk-84 general purpose bombs and BLU-109 penetrating bombs) or 24 Mk-84 2,000-pound general purpose bombs; 8 Mk-85 naval mines; 84 Mk-82 500-pound general purpose bombs; 84 Mk-62 500-pound naval mines; 30 CBU-87, -89, -97 cluster munitions; 30 CBU-103/104/105 WCMD, 24 AGM-158 JASSMs or 12 AGM-154 JSOWs.
Date Deployed: June 1985
Number Built:  (a) B1A model – 4; (b) B1B model – 100.

Unit Cost: $283.1 million (fiscal 1998 constant dollars)
Inventory: Active force, 65 (test, 2); ANG, 0; Reserve, 0

Sources: Air Combat Command (ACC), Boeing Company


C130 pic

George A. Haloulakos, CFA DBA Spartan Research and Consulting, Core Adjunct Finance Faculty – National University and Instructor-Finance, University of California at San Diego (UCSD) Extention


Lockheed’s leadership in military aircraft for more than 50 years has been anchored and aided financially by the steady, stable presence of its multi-purpose C130 Hercules program.  From a finance perspective, the C130 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.  Lockheed’s iconic C130 Hercules built for the US Air Force and US Navy, is arguably the most versatile tactical transport aircraft ever built. Its uses appear almost limitless: airlift and airdrop, electronic surveillance, search and rescue, space-capsule recovery, helicopter refueling, landing (with skis) on snow and ice, and aerial attack. It has even landed and taken off from a carrier deck without benefit of arresting gear or catapults.  This program has been in operation since the mid-1950s and its multi-service / multi-faceted functional role has kept the Marietta Georgia plant in production and modification/upgrade mode of the C130 to the present day!  The purpose of this paper is to discuss the added-value arising from a cash-cow business model using the C130 as a case study.


The Growth Share Matrix, developed by Bruce Henderson for the Boston Consulting Group in 1970, is an analytical model 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.

Cash Change

 The four quadrants are popularly known as:

“Stars” – High growth / High share [upper left quadrant]

“Cash Cows” – Low growth / High share [lower left]

“Question Marks or Wild Cats” – High growth / Low share [upper right]

“Pets or Dogs” – Low growth / Low share [lower right]


Typically, a balanced portfolio is comprised of a mix of cash cows, stars and question marks, while pets (or dogs) are either divested or avoided because of being viewed as potential 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.

High relative pic

Essentially, the firm is managed as an investment portfolio with the product or business groups treated as individual investments.  Each group is evaluated on how its expected financial performance (arising from its growth/share features) will add to the total corporate business portfolio with least risk.  The goal is to avoid total dependence on any single group, lower volatility of return on invested capital (ROIC) as measured by standard deviation (sigma) and maximize total risk-adjusted ROIC for the entire firm.

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.

Putting Them Together: ROIC, Market Share and Growth

Return on Invested Capital (ROIC) measures how efficiently a firm converts invested capital (debt + equity) into profit.  A subset of ROIC is Return on Equity (ROE), which measures a firm’s net income in relation to its shareholder equity.  A company with strong or vibrant earnings growth and a high ROE is usually a market share leader in its industry or sector.  Strong earnings growth with a low ROE indicates a firm may be absorbing capital in order to maintain profit growth.  This high level of investment is often associated with business models that have a high level of fixed costs, and are usually manufacturing firms.

According to Investor’s Business Daily [8/12/2010, page B1], “top quality stocks, when they begin their winning runs, generally carry an ROE ratio of 17% or higher.”  With publicly traded companies, the ROE is metric more closely tracked because of its association with shareholder equity, but is also viewed as the driver for ROIC, a metric often used in conjunction with ROE when managing a firm’s business model as a product portfolio, with market share and growth as the key variables for making investment decisions.


For explanatory purposes of this paper, I have classified Lockheed’s aircraft product portfolio into three categories: High-Tech Military Aircraft, Military Transport & Multi-Purpose Aircraft and Commercial Aircraft.  To the best of my knowledge, there are no public corporate documents that conceptualize the aircraft product portfolio in this exact manner, but in my research and teaching roles, it serves as a helpful way to understand Lockheed and its business history.  In the interest of clarity and concision, please note that the list of aircraft in each of the aforementioned categories is not all inclusive, but rather highlights the key aircraft programs that are representative of Lockheed’s overall competitive position.   For the same reason, mapping of these groups is general rather than specific.

Military trans



The primary benefits of the cash cow model in the context of aviation are financial independence/flexibility, manufacturing synergy and brand equity.  These benefits provide the foundation in which an aircraft manufacturer is able to launch new products that help accelerate overall corporate growth and cash flow, that in turn, strengthens the overall corporate business model.  Positive cash flow from a given product group implies that its reinvestment requirements have been met thereby leaving surplus cash to be redeployed elsewhere in the business portfolio for new product development, share buyback or paying down debt.  Manufacturing synergy occurs as long-term projects can often generate collateral benefits such as technology transfer (i.e., production methods that can be applied across different programs) and serving as a process driver to lower unit costs as well as promote innovation.  Brand equity – the value of having a well-known name based on superior performance and quality – puts a firm in a much stronger position to generate more money from its product and service offerings.  In this paper we will document how Lockheed’s C130 Hercules program has, and continues to provide the benefits of financial independence/flexibility, manufacturing synergy and brand equity – the benefits or attributes of a cash cow model.


The attributes that have enabled the C130 Hercules to be a cash cow model for more than 50 years are versatility, reliability and superior performance.  The C130 has been in continuous production longer than any other military aircraft with a “workhorse” reputation that it is ready for any mission, anywhere, anytime.  In Lockheed’s public documents, the following summary is offered:

“The C-130J Super Hercules offers superior performance and new capabilities, with the range and flexibility for every theater of operations and evolving requirements. This rugged aircraft is regularly sent on missions in the harshest environments, and is often seen as the first aircraft “in,” touching down on austere landing strips before any other transport to provide humanitarian relief after natural disasters.

With more than 1 million hours of flying combat, humanitarian, special operations, aerial refueling, firefighting, and search and rescue missions around the world, the C-130J stands ready for its next mission and for whatever the future holds.

C-130J Super Hercules by the Numbers:
— 1 million+ flight hours logged
— Operated by 15 countries
— 16+ different missions operating worldwide
— Used to set 54 world records
— 300+ C-130Js delivered or on order
— Can operate out of 2,000 foot-long dirt strips in high mountain ranges
— Ability to transport more than 40,000 pounds of cargo and supplies

C-130 Hercules Family by the Numbers:
— Operated by 70 countries
— 2,400+ C-130 aircraft delivered”

Source: Lockheed-Martin Public Documents, 2013.


The benefits of cash flow generation and manufacturing synergy had noticeable impact on the company from almost the beginning.  The success of the C130 (first launched in 1954) with the US Air Force and US Navy enabled Lockheed to introduce the first propeller turbojet commercial aircraft in 1961 [Electra – a favorite with PSA, American and Western].  From this Lockheed evolved the Electra to the long-range submarine chaser, the P3 Orion.  The Electra and reciprocal engine aircraft had limited commercial success as the Boeing 707 surpassed them all following its commercial launch in 1958.  [For a detailed report on the Boeing 707, see “The Boeing 707: A Case Study on Betting It All” by George A. Haloulakos and Farhang Mossavar-Rahmani.]  However, the collateral benefits of the C130 as a cash cow would continue in the ensuing decades.  Throughout the Cold War as Lockheed developed exotic high-tech military aircraft with reconnaissance and strike capabilities for the US Air Force and the Central Intelligence Agency, the C130 continued to be a steady, stable cash flow generator providing financial support for these projects.  Yet at the same time, the C130 was rapidly developing into a most versatile, reliable multi-purpose aircraft.  The stable, strong presence of the C130 upgraded Lockheed’s brand image as a superior, all-purpose, military aircraft manufacturer.  This type of reputation coupled with positive financial results has enabled the C130 to support Lockheed as a positive contributor through the long up-and-down cycles that characterize the industry.

Given the highly classified nature of Lockheed’s military aircraft business, and numerous corporate reorganizations over the years, it is difficult to precisely estimate the detailed financial mix of the different aircraft programs.  However, it is a matter of public record that the company’s notable commercial aircraft programs had limited success (Electra Prop Turbojet), did not fully materialize (Super Sonic Transport [SST]) or posted very marginal financial results (L1011 Tri-Star).  While the C5 military transport program experienced financial pressure due to start-up costs and related difficulties, ultimately it became a solid contributor.  However, the C5’s start-up problems concurrent with the L1011 Tri-Star’s cost overruns and delayed launch (due to problems with jet engine supplier Rolls Royce) raised serious concern about Lockheed’s financial viability.  [For a detailed report on the Lockheed L1011 Tri-Star, see “Lockheed Tri-Star Redux: A Play to Win Strategy” by George A. Haloulakos.]

All the while as Lockheed experienced the good, the bad and ugly in terms of overall corporate financial results, the C130 Hercules remained as solid and strong as the mythological hero for which it was named.  In sum, performance, versatility and reliability has enabled the C130 to remain perennially relevant since the 1950s.  While not a “star” in the context of the Growth Share Matrix or a glamour vehicle like the company’s renowned high-tech military aircraft, the C130 is a stalwart “cash cow” and a model of versatility.  For these reasons, the C130 may be the “most valuable aircraft program” in Lockheed’s product portfolio.

In reviewing the stock price history of Lockheed (now Lockheed-Martin) from the mid-1950s to date, the one constant in the corporate business portfolio has been the C130 Hercules.  This is not to imply that the C130 Hercules has carried the entire company on its shoulders, but its significant presence and ongoing financial contribution is indisputable.  As a “cash cow” the stable, steady financial performance of the C130 program has enabled the company to not only help fund the growth of its “star” high-tech military aircraft, but also provide a safety net during cyclical declines.

Despite a close call in the early-to-mid 1970s, Lockheed ultimately triumphed over financial adversity, and having the C130 in its arsenal was a key element in remaining a relevant and key player in the aviation industry.  As a result Lockheed shares have been a big long-term winner for the buy-and-hold investor.  The following matrix affirms this conclusion.


Another way to appreciate the financial and operational staying power of the C130 is to examine the US military transport aircraft introduced during the 1950-1959 period by make and model, and compare the status of each aircraft in terms of service and/or production.  The following matrix documents that only the C130 is still in active service and in production.  All other military transport aircraft from that era have ceased production long ago, and only two other aircraft models remain in active service.



Lockheed’s C130 Hercules was originally designed as an assault transport but was adapted for a variety of missions, including: special operations (low-level and attack), close air support and air interdiction, mid-air space capsule recovery, search and rescue (SAR), aerial refueling of helicopters, weather mapping and reconnaissance, electronic surveillance, fire fighting, aerial spraying, Arctic/Antarctic ice resupply and natural disaster relief missions.

At present, the C130 primarily performs the intra-theater portion of the tactical airlift mission. This medium-range aircraft is capable of operating from rough, dirt strips and is the prime transport for paratroop and equipment drops into hostile areas.  Detailed information is located in the APPENDIX.


This is self-evident when reading the body of main text for this paper as well as the Appendix.  What is equally impressive is how accomplishing this mission has translated into a significant financial payoff that continues to the present day.  The C130 Hercules as a “cash cow” has not only provided a financial anchor for Lockheed’s aviation business portfolio, but has also helped fund the firm’s high-tech military aircraft programs, that, in turn, has produced significant cash dividends that accompanies the historic capital gains of its stock price noted earlier in this paper.

The financial payback in the form of cash dividends has been particularly evident into the 21st century.  In late September 2013, Lockheed increased its quarterly dividend by 16% to $1.33 per share from $1.15.  This was the firm’s 11th consecutive double-digit increase and its quarterly dividend has more than doubled from 2010-2013!  Lockheed strives to return at least 50% of free cash flow to shareholders through dividends and share buybacks while maintaining leadership in its “star” product group, high-tech military aircraft.  This cash return to Lockheed shareholders while maintaining leadership in a high-growth/high-share business is made possible by the steady, stable presence of having a “cash cow” – in this case, the C130 Hercules – in its corporate business portfolio.


Lockheed’s overall successful long-term record as a publicly traded company is a variation or by-product of a time-honored investment formula associated with Andrew Mellon (1855-1937) former US Treasury Secretary and financier.  Investor’s Business Daily (12/10/2013, page A3) observed that Mellon’s record of earning major returns resulted from dividing his investment funds in “new industries and those that are solid, but out of favor.”  In other words, Mellon invested in businesses that offered stable, steady returns while simultaneously identifying new opportunities promising high-growth and high market share.  Similarly, the reader may infer that Lockheed did the same by investing in the C130 Hercules so that this aircraft remained relevant and versatile over the ensuing decades while using surplus cash from that program to fund faster growing, higher margin aviation programs, namely its high-tech military aircraft that remains the firm’s signature accomplishment for more than 50 years.



The following sub-sections that comprise Background Information are from the web site.  While I have paraphrased and significantly rewritten this content (including clarification or spelling out of aviation terminology and other related data), in the interest of proper attribution and disclosure, I have italicized these sub-sections (i.e., treating this as a direct quotation) to accord credit to – a most invaluable reference source.

On August 23, 1954, the first of two YC130 prototype test aircraft made its maiden flight from Burbank, California to Edwards Air Force Base.  These two C130 prototypes were built at Lockheed’s “Skunk Works” operation in Burbank; but since then, more than 2,000 C130s have been built in Marietta, Georgia.

 The C-130A was the initial production model, with four three-bladed Allison T56-A-9 turboprops.   A total of 219 were ordered.  The first of the production models flew on April 7, 1955 with unit deliveries starting in December 1956.  Versatility of this aircraft was evident from the beginning: two DC-130As (originally GC-130As) were built as drone launchers/directors, carrying up to four drones on under-wing pylons.   All special equipment was removable, permitting the aircraft to be used as freighters (accommodating five standard freight pallets), assault transports, or ambulances.  [Note that the deployment of drones, while popularly associated with the “war on terror” is an asset with origins dating back more than 50 years.]

 US Air Force (USAF)

The C130B entered services in June, 1959, with a total of 134 delivered to the USAF. The B-model introduced the four-bladed Allison T56-A-7 turboprops, carried additional fuel in the wings plus upgraded (strengthened) landing gear.   Several C130Bs, used for aerial fire-fighting missions, are still in service with Air National Guard units.  Six C130Bs were modified in 1961 for mid-air snatch recovery of classified Air Force satellites.  During the 1960s, the C130 was used in combat, reconnaissance and other such missions where its multi-purpose capabilities enabled it to serve in Southeast Asia (“Vietnam Conflict”) and various global theaters during the Cold War.

 For the “Vietnam Conflict” several Air Force C-130As were converted into gunships.   In addition to their side-firing 20mm Vulcan cannons and 7.62mm Mini-guns, these converted C130As also possessed sensors, a target acquisition system, and a forward looking infra-red (FLIR) and low-light television system.  As the Cold War remained intense throughout the 1960s, a number of A-models, re-designated C130D, were fitted with wheel/ski landing gear for service in the Arctic and for resupply missions to units along the Distant Early Warning (DEW) line. Here are some noteworthy features: (a) two main skis – each 20 feet (6m) long, 6 feet (1.8m) wide, and weigh about 2,000 pounds (907kg) each; (b) nose ski is 10 feet (3m) long and 6 feet (1.8m) wide; (c) increased fuel capacity and provision for jet-assisted takeoff (JATO). These D versions were flown by the Air National Guard and have been replaced by the LC130H variant.

The C130E is an extended-range development of the C130B. A total of 369 were ordered and deliveries began in April 1962.   For the E model, the maximum ramp weight increased to 155,000 pounds (70,307kg) or 20,000 pounds (9,072kg) more than the B model.  Fuel capacity was increased by over 17,000 pounds (7,711kg).   In addition, more powerful Allison T-56-A-7A engines were used along with a pair of external fuel tanks (with a capacity of 1,360 gallons) that were slung beneath the wings, between the engines.  The recent wing modification to correct fatigue and corrosion on the USAF’s fleet of E models has extended the life of the aircraft well into the 21st century.

Similar to the E model, the C130H has updated T56-A-T5 turboprops, a redesigned outer wing, updated avionics, plus other minor improvements.  There is a divergence regarding when delivery actually began.   Delivery may have started as early as July 1974 [other sources state April 1975].   More than 350 C130Hs and derivatives were ordered for active and reserve units of the U.S. services.  The H model has become the most produced of all C130 models, with orders for 565 as of the end of 1979.

 US Navy (USN and Marines (USMC)

The C130 Hercules first entered naval service in 1960.  Four ski-equipped LC130F’s were obtained for Antarctic support missions and were soon followed by 46 KC130F models procured by the Marine Corps in 1962 for the dual role of assault transport and aerial tanker for fighter and attack aircraft.   During the same year the Navy obtained seven C130F’s without in-flight refueling equipment to serve its transport requirements. The KC-30F made its first test flight in January 1960 as the GV1 under the old Navy designation system.  The tanker version is able to refuel two aircraft simultaneously from the 3,600 gallons in its cargo compartment. The fuel is routed via two detachable pylon pods located below the outer wing, containing refueling gear.

 The Navy procured a number of C130Gs in 1965 to provide support to Polaris submarines and the exchange of their crews.   While essentially the same as the F model, these particular aircraft had increased structural strength, allowing higher gross weight operation.   All models feature crew and cargo compartment pressurization along with single-point refueling and a Doppler navigation system. Four of these aircraft were later modified as “Take Charge and Move Out” (TACAMO) communications relay aircraft and were re-designated EC130G. After replacement by the E6A, three aircraft were returned to transport configuration (albeit with no cargo ramp) as TC130Gs, one now serving as the Blue Angels support aircraft, with the name “Fat Albert” and regularly featured at air shows in this support role.

 One other model, the EC130Q, served in two Fleet Air Reconnaissance (VQ) squadrons.  This version featured a permanently installed “Very Low Frequency” (VLF) radio transmitter system used to supplement shore-based communications facilities and served as a strategic communications aircraft with ballistic-missile submarines.  During its third flight, this aircraft lost its left wing due to a fire.  However it was repaired and eventually transformed or converted into an AC130A gunship that was later retired in 1995.

Distinguished Service Record in Desert Shield and Desert Storm

Over 145 Hercules aircraft were deployed in support of Operations Desert Shield and Desert Storm. These aircraft moved units to forward bases once they arrived in the theatre.  From August 10, 1990 to the cease-fire, Air Force C130s flew 46,500 sorties and moved more than 209,000 people and 300,000 tons of supplies within the Area of Responsibility (AOR). They provided logistical support, aero-medical evacuation of the wounded, and battlefield mobility once the fighting started. During the “100-hour” ground campaign, C130s flew over 500 sorties a day!

 Question: What Makes the C130 Special?  Answer: Its Many Features!

From the web site, the C130’s features are enumerated below, and provide a self-evident basis on why this aircraft remains a relevant, significant contributor.

C130 design employs a cargo floor at truck-bed height above the ground, an integral “roll on/roll off” rear loading ramp, and an unobstructed, fully-pressurized cargo hold which can rapidly be reconfigured for the carriage of troops, stretchers or passengers. The C130 Hercules can also be committed for airdrops of troops or equipment and for Low Altitude Parachute Extraction System (LAPES) delivery of heavy cargoes.

  • Cargo Compartment – The C130 can carry more than 42,000 pounds (19,051kg) of cargo. Rollers in the floor of the cargo compartment enable quick and easy handling of cargo pallets and can be removed to leave a flat surface, if needed. Five 463L pallets (plus a ramp pallet for baggage) may be loaded onto the aircraft through the hydraulically-operated main loading ramp/door assembly located in the rear of the aircraft. The ramp can also be lowered to the ground for loading and unloading of wheeled vehicles. Tie-down fittings for securing cargo are located throughout the compartment.

In its personnel carrier role, the C130 can accommodate 92 combat troops or 64 fully-equipped paratroopers on side-facing, webbed seats. For aero-medical evacuations, it can carry 74 litter patients and two medical attendants.

  • Aerial Delivery of Cargo – Three primary methods of aerial delivery are used for equipment or supplies. In the first, parachutes pull the load, weighing up to 42,000 pounds (19,051kg), from the aircraft. When the load is clear of the plane, cargo parachutes deploy and lower the load to the ground.

The second method, called the Container Delivery System (CDS), uses the force of gravity to pull from one to 16 bundles of supplies from the aircraft. When the bundles, weighing up to 2,200 pounds (998kg) each, are out of the aircraft, parachutes deploy and lower them to the ground.

LAPES is the third aerial delivery method. With LAPES, up to 38,000 pounds (17,237kg) of cargo is pulled from the aircraft by large cargo parachutes while the aircraft is five to 10 feet (3m) above the ground. The load then slides to a stop within a very short distance.

  • Wings and Fuel Tanks – The full cantilever wing contains four integral main fuel tanks and two bladder-type auxiliary tanks. Two external tanks are mounted under the wings. This gives the C130 a total usable fuel capacity of approximately 9,530 gallons.
  • Landing Gear – The modified tricycle-type landing gear consists of dual nose gear wheels and tandem mains and permits aircraft operation from rough, unimproved runways. Main gear retraction is vertically, into fuselage blister fairings, and the nose gear folds forward into the fuselage. Power steering is incorporated into the nose gear.
  • Electrical Systems – AC electrical power for the C130H model is provided by five 40 KVA generators, four driven by the engines and one driven by the Auxiliary Power Unit (APU). On the E model, the power is supplied by four 40 KVA engine-driven generators, and a 20 KVA generator driven by the Air Turbine Motor (ATM). DC power is provided from AC sources through four 200 ampere transformer rectifiers and one 24 volt, 36 ampere-hour battery.

Hydraulic Systems – Four engine-driven pumps supply 3,000 psi (pounds per square inch) pressure to the utility and booster systems. An electric AC motor-driven pump supplies pressure to the auxiliary system and is backed up by a hand pump. The hydraulic system maintains constant pressure during zero or negative “g” maneuvers.

 Stretched Versions

Several military operators use the civilian version of the Hercules, which bears the Lockheed designation L-100. Certificated in February 1965, the basic L-100 was broadly equivalent to the C130E, without pylon tanks or military equipment. The L-100-20 was given plugs fore (5 feet/1.5m) and aft (3.3 feet/1m) of the wing. The L-100-30 has a full 15-foot (4.6m) fuselage stretch.

 Roles and Variants

The following matrix enumerates the roles and variants for the C130 that has enabled the Hercules to be a “cash cow” for Lockheed since the late 1950s.


 Other Special Projects or Interesting Events

Landing on a US Aircraft Carrier — One of the most astounding took place in October of 1963 when the U.S. Navy successfully landed a Marine Corps KC-130 on the deck of the USS Forrestal aircraft carrier.

Adding VSTOL (Vertical Short Take Off and Landing) Capabilities — In the aftermath of the 1980 failure of Desert One (aka Operation “Eagle Claw”) the U.S. military made radical modifications to a C-130H Hercules so it could take off and land almost like a helicopter. The aircraft was equipped with lift rockets slanting downward, slowdown rockets facing forward, missile motors facing backward, and still more rockets to stabilize the plane as it touched down. The mission — land in a Tehran soccer stadium, rescue 53 American hostages held captive in Iran, and then make a quick getaway!  Two aircraft received these special modifications and were re-designated YMC-130H. The first modified plane (#74-1683))created in just a couple of months, crashed on the runway during a training exercise after a rocket discharged prematurely and ripped off the aircraft’s right wing. The second modified plane (#74-1686) was never used and is now on display at Robins US Air Force Base in Georgia.



Air Force Historical Research Agency, United States Air Force, Maxwell Air Force Base, Alabama.

Boston Consulting Group.  Product and service brochures. 1981.

Edleson, Michael E. “Investment Analysis and Lockheed Tri-Star.” Harvard Business School: HBS Case No. 9-291-031, Rev. November 17, 1993.  Pp. 1-6.

Evergreen Aviation Museum (The Captain Michael King Smith Educational Institute).  McMinnville, Oregon, USA.

Findlay, M.C. and Williams, E.E. Toward A Neo-Institutionalist Theory of Finance. August, 1981.

Flying Leatherneck Historical Foundation & Aviation Museum.  Marine Corps Air Station (MCAS) Miramar.  San Diego, California, USA.

Green, William (compiler) and Punnett, Dennis (silhouette artist). The Observer’s Book of Aircraft.  Frederick Warne & Co. (London and New York). 1965.

Haloulakos, G.A. CFA Charterholder. (BS, MBA. Marshall School of Business, University of Southern California).  “Lockheed Tri-Star Redux: A Play to Win Strategy.”  2013.

Haloulakos, G.A. CFA Charterholder. (BS, MBA. Marshall School of Business, University of Southern California) and Mossavar-Rahmani, Farhang.  Finance Chair – National University.  (DBA.  United States International University).  “The Boeing Company: A Case Study on Betting it All.”  2013. and

Haloulakos, George A., (DBA Spartan Research and Consulting), Case Study Files and Field Notes on Corporate Strategy, Military/Aerospace Industry, High-Tech and Commercial Jet Aircraft – Spartan Research, 1980 – 2013.

Haloulakos, George A. (CFA Charterholder).  Dollar$ and Sense: A Workbook on the ABCs of Investments.  Page 11.  Spartan Research and Consulting, Inc. (Bellevue, WA).  2002.  ISBN: 9780-1007-2482-2.  UCSD Bookstore.

Haloulakos, George A. (Graduate Assistant – Marshall School of Business, University of Southern California). “Reformulating Corporate Financial Theory for the 21st Century.”  Research support for M.C. Findlay, III (Finance Chair – Marshall School of Business, University of Southern California).  August, 1981.

Haloulakos, V.E.  Aerospace Engineer, Scientist and Professor.  (BSME, MSAE and ENGR.D.  Viterbi School of Engineering, University of Southern California).

Investor’s Business Daily. “Healthy ROE: A Key Trait of Leadership.”  Page B1. August 12, 2010.

Investor’s Business Daily. “Lockheed Offers Higher Dividends.”  Page B11. December 4, 2013.

Investor’s Business Daily.  “Banker Andrew Mellon Put The Roar In The 20s.”  Page A3.  December 10, 2013.

Lockheed-Martin Company.  Various public company documents.  1954 – 2013.

Mitchell, Gordon.  “Hitched to the Tri-Star – Disaster at Lockheed Would Cut a Wide Swathe.” Barron’s (March 15, 1971).  Pp. 5-14.

New York Times Historical Archives.  1954 – 2013.

Scott, Kelly.  CISA (Certified Information Systems Auditor), EA (Enrolled Agent), instrument rated private pilot, aviation enthusiast. (BS, MBA.  Haas School of Business, University of California at Berkeley).

Time.  (August 21, 1972).  Page 62.


Scott, Kelly.  Industry/Historic/Technical Research.  CISA (Certified Information Systems Auditor), EA (Enrolled Agent), instrument rated private pilot, aviation enthusiast. (BS, MBA.  Haas School of Business, University of California at Berkeley).   Mr. Scott worked for NASA Human Factors Laboratory at NASA Ames Research Center testing pilot heads up displays (HUD) simulation of ground taxi in poor visibility.  Subsequently in later years, using C130’s, the Army Air National Guard Rescue Group at Moffett Field would approach and land with all lights off occasionally using HUD devices.  He was proud to be a part of the simulation testing and its connection with the C130 Hercules!






GEORGE_SPARTAN0001George A. Haloulakos, CFA DBA Spartan Research and Consulting, Core Adjunct Finance Faculty – National University and Instructor-Finance, University of California at San Diego (UCSD) Extention




The Lockheed L1011 Tri-Star, a tri-jet wide body aircraft introduced in the early 1970s, was regarded as a technical marvel whose commercial success was severely limited by financial and developmental problems with Rolls Royce, the sole developer of the Tri-Star’s engines.  Despite being a quiet, efficient, easy to handle wide-body aircraft with a stellar safety record (of the five fatal accidents involving L1011s, only one was due to a problem with the aircraft) the Tri-Star program was unable to overcome its late entry into the commercial market, and Lockheed announced in 1981production would end with the 250th and last L1011 on order in 1984.  Since then, the Lockheed Tri-Star has become a classic business school case study in finance.   The typical solution offered usually involves a variation of shutting down the commercial aircraft program and refocusing on Lockheed’s military aircraft and avionics businesses, or a “work-out” in which the firm struggles to drive commercial sales to the elusive break-even mark.  In this paper, it is shown that a positive Net Present Value for the Tri-Star was, in fact, achievable but requires one to depart from the oft-linear and sometimes limited vision from the standard MBA playbook.  The solution offered here requires a change in corporate strategy (utilizing a proven business model serving not one, but two end-user markets) and leveraging Lockheed’s significant competitive advantage in high-performance military aircraft.


Financial decision making requires one to make recommendations including, but not limited to capital budgeting, competitive strategy, marketing and other such areas with the goal of optimizing Net Present Value.  The case study method forces a person to define-and-solve the problem within the historic time frame in which the case takes place by utilizing given background information as well as supplemental data gathered from independent research.  Time pressure means that one does not have the luxury of dotting each “i” or crossing each “t” but to provide a defensible solution in accordance with the situation.  Playing it safe via risk-averse solutions (that are often self-evident from a strict, linear-based accounting prism) usually means staying within the realm of consensus views, while playing to win means having to take greater risk, but if done with a creative, non-linear approach can sometimes lead to more satisfactory outcomes.  As such, the goal with financial decision making using the case study method is offering a solution that provides the highest probability of success.  This paper presents a play-to-win strategy that incorporates a behaviorist view of finance aimed at achieving a financial outcome above consensus expectations


A synopsis of the facts of the case is as follows: The L1011 Tri-Star is a wide-body commercial aircraft with a capacity of up to 400 passengers.  Lockheed was late to enter the market due to jet engine production delays by Rolls Royce (sole supplier for the Tri-Star). In the early 1970s, Lockheed sought a $260 million federal loan guarantee to secure bank credit to complete its L1011 Tri-Star aircraft.  Preproduction costs were $960 million during 1967-71.  The production phase beginning in 1972 would be in the range of 210 – 300 aircraft, and extend as far as 1980.  The project was regarded as inventory intensive and front loaded; 35 planes per year was the planned annual output.   Unit production costs were given at $14 million for the low end of the output range and $12.5 million for the 270-300 unit output range.  Unit production costs above the 300 unit threshold were $11 million due to the learning curve effect.  To achieve unit sales of 270-300 aircraft assumed an optimistic 10% annual growth in commercial air travel.  Cash receipts from the sale of aircraft were based on: (1) advance deposit of 25% of total price received two years prior to delivery, and (2) the balance due of 75% received when aircraft was delivered.  This implies that for 35 aircraft built (and presumably sold at an average selling price of $16 million) in a year, $140 million of the $560 million in total annual revenue is received as cash flow two years earlier.

The required rate of return on Lockheed assets (prior to Tri-Star) was estimated to be 9%-10%, with 10% cited as the initial rate used by the company for valuing the project.  The main focus in evaluating the economic value of Tri-Star was primarily based on its commercial prospects.  Divergent views on commercial market potential ranging from 270-300 units as approaching break-even (versus an original plan of 210 aircraft) to theoretical sales potential of 500 aircraft, as well as differences in accounting versus economic results puts forth the question on whether or not to proceed with the program.  This situation is exacerbated by direct competition from the Airbus 300B and McDonnell Douglas DC-10 tri-jet, and indirect competition from the Boeing 747.


Betting the Company on a Single Project is an Industry Norm

Since the inauguration of the commercial jet age with the Boeing 707 in the mid-to-late 1950s, the behavioral norm among industry players is essentially to “bet the company” in launching a new generation of aircraft.  Part of this behavior arises from the enormous investment of financial capital and time (often a decade or more) inherently required for designing, developing and launching a new aircraft.  The propensity to undertake such risk is underscored by the prestige and brand equity associated with a successful jet aircraft program that can often create financial synergy for other related businesses that in turn, can generate very large, extended cash flows.  The notion of withdrawing from a new jet aircraft program carrying so much prestige and large financial stakes (even when caution is warranted) may be an acceptable alternative in the MBA playbook, but in the boardrooms where “betting it all” behavior is the norm, such a strategy is regarded as playing not to lose rather than playing to win.  As such, a strategy in this business environment aimed at resolving financial difficulty that will actually be implemented requires daring and a willingness to take risk.  Sir Isaac Newton, mathematician, once said that “No great discovery was ever made without a bold guess.”  This saying fits the jet aircraft industry where leading firms achieve technical and financial success with bold risk-taking behavior that seeks to go beyond linear-based consensus thinking.

Leveraging Cost Over Two Rather One End-User Markets = Better Return/Risk

Using the Boeing 707 program as the appropriate business model shows that financial success in commercial jet aircraft stems from having a military aircraft business that allows for risk sharing and diversification.  Specifically, Boeing’s success in commercial jet aircraft stemmed from its military aircraft business in terms of risk sharing (e.g., 707 and its military KC-135 version) and diversification.  The strong position in defense-related projects (e.g., Minuteman and Cruise missiles) provided stable, steady cash flow for the entire corporation thereby providing an additional financial cushion to undertake development of new generations of jet aircraft.  Boeing received orders for 400 KC-135 jet aircraft tankers in March 1955 from the US Air Force, and completed production-and-delivery of ½ of that order (or 200 aircraft) two years later that enabled the 707 to reach break-even in late 1956.  Commercial aircraft orders did not translate into large scale unit shipment until 1959-60 with 77 and 91 707s delivered to US and overseas airlines during that period.  Significant financial payback for the commercial 707 version did not really occur until 1967-68 when Boeing achieved triple digit unit deliveries, respectively, of 118 and 111, that enabled the company to post record corporate net income over the same period.  The triple-digit threshold for the 707 commercial deliveries, had proven elusive until that point, and was never achieved thereafter for the 707 model, thereby affirming the importance of its military version (which did achieve triple digit annual unit deliveries very early in the program life cycle).

Lockheed is the Premier High-Tech Military Aircraft Company

By the end of the 1960s, Lockheed established itself as the leading high-tech military aircraft manufacturer with a significant competitive advantage in speed, performance, efficiency, safety and ease of handling.  Lockheed’s product portfolio included interceptors (T33 Shooting Star and F104 Starfighter), transport aircraft (C141 Starlifter) and special reconnaissance (U2 Spy Plane and YF12 or SR71 Blackbird).  All of these aircraft featured a very sleek or streamlined look, plus utilized special materials that facilitated the aforementioned advantages.  This characteristic carried over into the Tri-Star: the L1011’s tri-jet configuration featured one jet under each wing, and the third, center mounted with an S-shaped duct air inlet embedded in the tail and upper fuselage.  With the Cold War still at its peak in the early 1970s, Lockheed’s expertise in this field was a most valuable national security asset.  The company’s competitive advantage in all the facets of this area resulted from a bold and visionary strategy implemented by its famed Skunk Works operation that handled top-secret classified projects.

Runner-up for the Super Sonic Transport (SST) Was a Game Changer

During the 1960s Lockheed’s L2000 was the company’s entry in the government funded competition to build the first supersonic transport for the United States of America.  On December 31, 1966 the contract was awarded to Boeing.  Federal funding was cancelled in 1971, forcing Boeing to take a loss on the project.  In the interim, Lockheed staked its commercial aircraft fortunes on the L1011 Tri-Star, eventually investing $960 in pre-production costs for this wide-body jet aircraft from 1967-1971.  Finishing as runner-up to Boeing was a “game changer” as it forced Lockheed to narrow its focus to a single program (rather than two) to gain foothold in the commercial market.  Ultimately, the cancellation of Federal funding for the SST further changed the game because now Boeing was forced to narrow its focus, thereby intensifying the competition in the wide-body jet market, with Airbus and McDonnell Douglas as direct competitors, and Boeing as an indirect competitor to Lockheed’s Tri-Star.

Commercial Wide-body Aircraft Warrant Additional Risk Premiums

Wide-body jet aircraft carry additional risk premiums that warrant a required rate of return that is greater than the rate given for Lockheed assets (prior to Tri-Star).  On the business side, not only is the Tri-Star risk elevated due to reliance on a single supplier for its jet engines, but unlike Boeing and McDonnell Douglas who are already well established in the commercial jet aircraft market, Lockheed has no installed commercial customer base upon which to leverage Tri-Star sales efforts.  The increased liquidity risk due to high up-front working capital is due to the large scale of manufacturing required for all wide-body jet aircraft versus the narrow-body predecessors.  On the financial side, there is a litigation concern due to the explosive rapid decompression risk that is inherent to all wide-body jet aircraft.  For these reasons, any calculation of economic value for Tri-Star necessitates use of a required rate of return that is greater than the 10% initially given.  We estimate that a 13% required rate of return is warranted and provide a breakdown on how we arrive at this calculation.


Initial Required Rate of Return (Prior to Tri-Star)

All Lockheed Assets


+ Business Risk

No installed commercial base, only one jet engine supplier (Rolls Royce)


+ Financial Risk

Explosive rapid decompression for wide-body jets = litigation risk


+ Liquidity Risk

Inventory intensive (front-end) of manufacturing cycle


= Tri-Star Required Rate of Return

Lockheed Assets + Tri-Star Risk Factors




In the context of this case study, it is recommended Lockheed revise its L1011 Tri-Star strategy to focus on both the commercial and military end-user markets in order to leverage its significant competitive advantage in high-tech military aircraft with the goal of positioning the Tri-Star to replace the original 200 Boeing KC-135 jet refueling aircraft deployed in 1957.


This change in strategy would produce a positive Net Present Value of $149.85 million for the Tri-Star arising from: (a) spreading cost over two end-user markets rather than one, (b) reduce unit production costs (learning curve benefit) due to higher volume and (c) lower risk due to increased cash flow from a diversified sales base.  As noted in the OBSERVATIONS section, the higher risk associated with this project necessitates using a proven business model better suited for such considerations.

The theme for this strategy is driving cash flow via a “replacement cycle” as the aforementioned 200 Boeing KC-135 tanker aircraft would be due for replacement by the mid 1970s on account of metal fatigue and need for improved efficiency.  It is self-evident that with the Cold War necessitating round-the-clock deployment of strategic bombers worldwide that the KC-135 aircraft would be in constant use and therefore have take-off/landing cycles that are 2.5 to 3 times greater than its commercial 707 model.  This coupled with the fact that those first 200 KC-135 aircraft utilized lower strength 7178 aluminum alloy instead of the fail-safe standard with 2024 alloy underscores if not exacerbates the concern about metal fatigue arising from the aforementioned inherently greater number of take-off/landing cycles.

Lockheed’s L1011 Tri-Star with its high performance, efficiency, safety, special materials with greater durability and longevity plus ease-of-handling make it an ideal candidate to enable the US Air Force to significantly upgrade as well as diversify its tanker fleet.  Moreover, the technology transfer of Lockheed’s high-tech military aircraft into Tri-Star would transform the wide-body tri-jet into a complementary support vehicle for refueling the various military aircraft (bombers, interceptors, and reconnaissance plus transport vehicles) deployed worldwide.  The need to replace the first 200 KC-135 tankers is immediate for reasons already noted, and Lockheed could fulfill the task in a two-year time frame as Boeing did in the late 1950s.  This would ease financial pressure by enabling Tri-Star to achieve positive Net Present Value on the strength of its military unit shipments and give Lockheed the flexibility to further expand its commercial presence.  In sum, this shift in strategy would allow Lockheed to leverage its competitive advantage in high-tech military aircraft, reduce risk, lower unit costs and significantly increase sales volume.

This strategy expands Lockheed’s opportunity set and thereby increases the probability of greater overall financial success with a bold, “play-to-win” approach that reflects the company’s risk-taking style.  While politics may come into play with military contracts and is often the great unknown factor, Lockheed’s premier position in high-tech military aircraft versus its peers gives it considerably greater leverage than either Boeing or McDonnell Douglas, and this recommended change in strategy puts Lockheed in the best position to succeed with its Tri-Star L1011.


In this section, we present three scenarios that examine the accounting (earnings) and economic (cash flow) perspectives of the Tri-Star project.  Scenarios 1 and 2 demonstrate that while the Tri-Star achieves positive accounting profits, the economic value is negative because of negative Net Present Value arising from unsatisfactory sales volume by focusing only on the commercial market.  Scenario 3, the recommended strategy, yields much higher sales volume due to serving both commercial and military markets (with a 60/40 mix) and thereby achieves positive accounting and economic outcomes.


Scenario 1 (300 unit shipments @ 10% required rate of return)

Scenario 01



Scenario 2 (300 unit shipments @ 13% required rate of return)

Scenario 02



Scenario 3 (500 unit shipments @ 13% required rate of return)

Scenario 03


Estimated Impact on Lockheed’s Stock Price

The equation for valuing an investment into perpetuity is: V = C / (r – g).

V: Value

C: Cash flow

r: Required rate of return

g: Long-term growth rate

The “r” is given initially as 10% (for valuing Lockheed assets prior to Tri-Star) and later estimated to be 13% for the Tri-Star project itself.  The “g” for valuing investments into perpetuity will have upper limit of 3% based on “e” – the mathematical constant which is the base of the natural logarithm – “e” is the base amount of growth shared by all continually growing processes [and this includes business or economic entities]. The natural logarithm is the logarithm to the base “e” where “e” is an irrational constant approximately equal to 2.718281828459.  This number falls between 2 and 3, and so the use of 3 as an upper boundary for the growth rate when estimating Value into perpetuity.

Part a: Explaining the Decline in Stock Price Based on Given Case Information

It is given that Lockheed’s stock price declined from $71 (1967) to $3.25 (1974) due to financial difficulties associated with the Tri-Star and unrelated military contracts, but no information is provided regarding cash flow, so it can be inferred that “C” is the unknown variable.  Using the aforementioned data we calculate the following:

V = C / (r – g)

71 = C / (0.10 – 0.03)

71 = C / 0.07

C = 4.97

Thus it can be mathematically inferred that at its peak share price of $71, Lockheed’s cash flow per share “C” was $4.97.

V = C / (r – g)

3.25 = C / (0.115 – 0.03)

3.25 = C / 0.085

C = 0.28

Thus it can be mathematically inferred that at its low share of $3.25, Lockheed’s cash flow per share “C” was $0.28.  Note that in calculating “C” we used an “r” of 11.5%, which is halfway between 10% and 13%.  Our reasoning is that Tri-Star became a more influential factor on Lockheed’s total required rate of return, but not sufficient to increase the total corporate “r” to the 13% Tri-Star level.

The conclusion from this exercise is a demonstration of stock price as the market’s estimated present value of cash flow.  In the case of Lockheed, the 95% decline in market value from 1967 – 74 tracks the equal percentage decline in cash flow and also reflects an upward revised required rate of return to incorporate higher risk premiums arising from the Tri-Star capital project.

Part b: Where Does the Stock Price Go From Its Low?

Here the problem can become a bit difficult as the case references both Tri-Star and military contracts as contributors to Lockheed’s financial difficulties, but there is no further information disclosing relative significance of each.  Since the case study itself concerns Tri-Star, our focus will be on estimating how improving the financial returns of the L1011 Tri-Star may translate into potential (and in this instance incremental) stock price appreciation with the caveat that the company stabilizes its other portfolio business groups.  Since stock price performance reflects the firm’s record in either adding or subtracting from intrinsic value based on execution of its capital projects, we may infer that a capital project yielding a positive Net Present Value (NPV) adds to stock price while a negative NPV reduces stock price.

The Scenario 3 Financial Model quantifies our recommendation that a dual commercial and military business model for Tri-Star yields a positive NPV of $149.85 million or $13.26 per share [based on 11.3 million shares outstanding given in the case study].  A simple, but reasonable inference is to impute the $13.26 per share NPV directly into the Lockheed stock price, and this yields a target stock price of $16.51 (or a 5-fold stock price improvement from its low).  The stock price equation quantifying the benefit for finding a way to retain and convert Tri-Star into a financial winner:

Target Price = Low + NPV per share

Target Price = 3.25 + 13.26

Target Price = 16.51


Edleson, Michael E. “Investment Analysis and Lockheed Tri-Star.” Harvard Business School: HBS Case No. 9-291-031, Rev. November 17, 1993.  Pp. 1-6.

Findlay,M.C. and Williams, E.E. Toward A Neo-Institutionalist Theory of Finance. August, 1981.

Francillon, Rene’ J.  Boeing 707 – Pioneer Jetliner.  MBI Publishing Co. (Osceola, Wisconsin.  USA).  1999.  Page 97.

Green, William (compiler) and Punnett, Dennis (silhouette artist). The Observer’s Book of Aircraft.  Frederick Warne & Co. (London and New York). 1965.

Haloulakos, G.A. CFA Charterholder. (BS, MBA. Marshall School of Business, University of Southern California) and Mossavar-Rahmani, Farhang.  Finance Chair – National University.  (DBA.  United States International University).  “The Boeing Company: A Case Study on Betting it All.”  2013.

Haloulakos, George A., (DBA Spartan Research and Consulting), Case Study Files and Field Notes on Military/Aerospace Industry, High-Tech and Commercial Jet Aircraft – Spartan Research, 1995 – 2013.

Haloulakos, George A. (CFA Charterholder).  Dollar$ and Sense: A Workbook on the ABCs of Investments.  Page 11.  Spartan Research and Consulting, Inc. (Bellevue, WA).  2002.  ISBN: 9780-1007-2482-2.  UCSD Bookstore.

Haloulakos, George A. (Graduate Assistant – Marshall School of Business, University of Southern California). “Reformulating Corporate Financial Theory for the 21st Century.”  Research support for M.C. Findlay, III (Finance Chair – Marshall School of Business, University of Southern California).  August, 1981.

Haloulakos, V.E.  Aerospace Engineer, Scientist and Professor.  (BSME, MSAE and ENGR.D.  Viterbi School of Engineering, University of Southern California).  “The Wave Dynamics of Explosive Decompression in Jumbo Jets.”  May 11, 1975.

Haloulakos, V.E.  Aerospace Engineer, Scientist and Professor.  (BSME, MSAE and ENGR.D.  Viterbi School of Engineering, University of Southern California).  “The Wave Dynamics of Explosive Decompression in Jumbo Jets – UPDATE – The Resolution of DC-10 Cargo Door Problem.”  2011.

Mitchell, Gordon.  “Hitched to the Tri-Star – Disaster at Lockheed Would Cut a Wide Swathe.” Barron’s (March 15, 1971).  Pp. 5-14.

Time.  (August 21, 1972).  Page 62.


THE BOEING COMPANY: A Case Study on Betting it All

George A. Haloulakos, CFA DBA Spartan Research and Consulting, Core Adjunct Finance Faculty – National University

Co-authored with: Farhang Mossavar-Rahmani, DBA, Professor of Finance – National University


Since helping launch the commercial jet aircraft age with its 707 model in the 1950s, the Boeing Company has taken very large risks (some might even say gambles) on developing new generations of wide-body commercial jet aircraft.  This approach has historically been known as a “bet the company strategy.” As each new generation of wide-body jet aircraft has placed enormous financial pressure on Boeing (including, but not limited to up-and-down earnings results, increased debt burden and a cyclical stock price) thereby significantly increasing the risk of corporate financial failure.  Yet despite a few close calls, Boeing has emerged successfully from each cycle, enabling it to maintain industry leadership and generate satisfactory long-term financial returns.  In this paper, as part of our ongoing research on risk-taking behavior we will focus on the 707 model that formed the template for Boeing’s “betting it all” corporate strategy associated with the launch of new generations of wide-body aircraft over the ensuing decades.


Now the world’s largest aerospace company, Boeing was founded in 1916 by William E. Boeing in Seattle, Washington. The company is composed of multiple business units: Boeing Commercial Airplanes (BCA); Boeing Defense, Space & Security (BDS); Engineering, Operations & Technology; Boeing Capital; and Boeing Shared Services Group. As top U.S. exporter, the company supports airlines and U.S. and allied government customers in 150 countries. Boeing’s products and tailored services include commercial and military aircraft, satellites, weapons, electronic and defense systems, launch systems, advanced information and communication systems, and performance-based logistics and training.

Boeing Commercial Airplanes

Boeing has been the premier manufacturer of commercial jetliners for over 40 years. Today, their main commercial products are the 737, 747, 767 and 777 families of airplanes and the Boeing Business Jet. New product development efforts are focused on the Boeing 787 Dreamliner, and the 747-8. The company has nearly 12,000 commercial jetliners in service worldwide, which is roughly 75 percent of the world fleet. Through Boeing Commercial Aviation Services, the company provides round-the-clock technical support to help operators maintain airplanes in peak operating condition. Commercial Aviation Services offers a full range of world-class engineering, modification, logistics and information services to its global customer base, which includes the world’s passenger and cargo airlines, as well as maintenance, repair and overhaul facilities.

Capital Investment Decisions

Capital investment decisions at Boeing are unique and—to some degree—risky. For example, in the mid-1950s, despite failing to profit on civilian planes in two decades, Boeing spent $185 million to develop the first American all-jet transport, the 707, despite not having made money in a non-military plane in twenty years, Boeing spent $185 million to develop the 707, the first American all-jet transport.   To put this in context, this capital investment was $36 million or 25% more than Boeing’s total net worth of $149 million in 1956!


Table 1



Financial Category

Amount (US$ millions)



Engineering & Tooling


Plant & Equipment


Thrust Reverser & Sound Suppressor


Advertising & Sales


Flight Test & Research



$185 million


Boeing’s attitude toward risk can be better understood if we look at the company’s earnings during that time. From 1946-49, Boeing’s average annual net income was less than $1.4 million.   From 1950-53, average net income increased to $12 million as the company benefitted from its military aircraft business, led by its signature B-52 jet bomber.  Since the cost of building a prototype commercial jet aircraft was estimated to be $15 million (versus the eventual/ actual cost of $16 million), Boeing determined it was too great a risk as a stand-alone project.  The numbers implied such a project would put the entire company at grave financial risk.  At that time airlines were reluctant themselves to commit their financial stake entirely on reliance or use of jet aircraft alone.

However, Boeing determined the risk of launching a commercial jet aircraft was worth undertaking given the following additional considerations.  As it turned out, Boeing’s B-52 jet bomber fleet deployment worldwide necessitated demand for a tanker jet-aircraft for refueling purposes. Existing prop aircraft flew too slow and too low for efficient refueling.  Given the aforementioned sharp increase in average net income, Boeing determined that the $15 million+ cost to develop a prototype 707 would be less risky because it would be designed to serve two (instead of one) potentially very large global markets, thereby lowering risk and increasing expected returns.

In 1955, Boeing secured an order for production of 400 military units from the US Air Force for its 707 model, equal to the projected (and eventual) installed base of B-52s for US Strategic Air Command.  With this strong endorsement of the 707 aircraft and burgeoning world travel, commercial airlines started to express interest.  Boeing was able to differentiate itself from both foreign and domestic competitors by maintaining flexibility with its own customers.  Specifically, Boeing was able to widen its cabin space by four inches with minor engineering and tooling costs plus retain the core features incorporated into its military prototype.  This enabled Boeing to have faster time-to-market deliveries and higher absorption rate of fixed overhead for both military-and-commercial aircraft assembly operations.  Total 707 commercial deliveries were 1011 (from 1958-94).

During the 1954-58 cycle in which Boeing invested heavily in the 707, corporate Net Income was stable-to-lower while Total Liabilities increased 2.3 times.  In 1954, Net Income and Total Liabilities, respectively, were $32.4 million and $171.9 million.  By 1958, Net Income was $29.4 million and Total Liabilities were $403.7 million, or Total Liabilities exceed annual Net Income by a factor of 13.7.  By comparison, during1950-53, average Total Liabilities exceeded average annual Net Income by a factor of 12.

Stock Price

Investors initially responded positively to the new project. The Company’s stock price reached a high of $79.63 in 1955 and then fluctuated for the next three years going down to $36.62 in 1957 and then up to $45.62 the following year.

In sum, Boeing did “risk the company,” as measured by the cost to develop the program ($185 million) versus its net worth ($149 million) with the prototype exceeding its average annual Net Income ($16 million versus $12 million) over the same period.  But this risk was tempered by leveraging the cost over two end-user markets rather than one. Additionally, Boeing established a sales-and-earnings platform on an already strong, well-established business (defense/military) that could be adapted for creating a civilian commercial segment.  Earning power as measured by Net Income increased at about the same rate (2.5x) as the increase in Total Liabilities (2.3x) when measuring the 1954-58 period with the pre-707 era of 1950-53.

Time Line for Launching New Era: Milestone Events (1955-1958)

The Boeing 707 helped revolutionize commercial air travel, and thereby generated enthusiasm while boosting its worldwide prestige and brand name.




March 1955 Order for 400 aircraft United States Air Force
October 1955 Order for 20 aircraft Pan American Airways
November 1955 Order for 30 aircraft American Airlines
February 1956 Order for 33 aircraft TWA
October 1956 Order for 15 aircraft BOAC
1957 Completes delivery of 200 aircraft (1/2 of 1955 order) United States Air Force
1958 Delivery of 8 commercial aircraft Commercial airlines with Pan Am taking first delivery

Significant financial payback took longer to occur.  While Boeing achieved breakeven with the 707 in late 1956, the long-term nature and large capital investment for the aircraft business meant that it took 10 years for the 707 to reach peak-production while simultaneously helping the company achieve peak-earnings in 1967-68.  Unit deliveries for the 707 in 1967-68 were 118 and 111, respectively, as company Net Income exceeded $83 million both years.

After the 707: SST, Wide Body Jet Aircraft, Bigger Bets and Bigger Risk

By the mid-1960s, Boeing had firmly established itself as a leader in commercial jet aircraft with the 707 as its flagship product worldwide.  In anticipation of demand for supersonic jet travel, and with airlines extrapolating the shift of passengers from trains and transoceanic ships into a need for wide-body jet aircraft, Boeing made an even bigger bet by simultaneously pursuing both markets. Boeing did this without having the military aircraft market as a “hedge” or back-up like it did with the 707.  Boeing appeared to be flying high with Net Income topping $83 million in 1967 and 1968, concurrent with triple-digit unit deliveries of the flagship 707 aircraft each of those years.   However, Net Income dropped 88% to $10.2 million in 1969 as economic slowdown, declining air travel and financial retrenchment by the airline industry caused 707 unit shipments to fall by nearly 50%.  In such a weak economy, Boeing only delivered four 747s in 1969, which implied low absorption of fixed overhead and profit margin pressure.  Federal funding of the SST was cancelled in 1971, forcing Boeing to take a loss on this project.

During a peak in the late 1960s and a bottom in 1971, the stock fell 88% as the development of a supersonic transport to compete against the Concorde was called off. And in response to the sharp decline in demand for commercial jet aircraft, Boeing cut its commercial aircraft workforce from 83,700 in 1968 to 20,750 in 1971.

The only reason Boeing did not fail was due to the financial offset by its strong, stable military business in the form of its Minuteman and Cruise missile programs.  Eventually, the long-expected increase in air passenger travel materialized and the accompanying need for wide-body jet aircraft gained momentum with Boeing’s 747 as the prime beneficiary.

Boeing’s financial resurgence, its diverse family of aircraft (narrow-and-wide body models) able to serve all worldwide markets and its strong, stable military business enabled it to outlast and outdistance its competitors. Lockheed exited commercial aircraft in 1981, with McDonnell Douglas and European Air Bus remaining as prime competitors, but with far fewer product offerings versus Boeing.  By 1997, McDonnell Douglas was acquired by Boeing, thereby eliminating it as a competitor.

The commitment of capital and time associated with being a leader in commercial aircraft would appear to support a “bet the company approach” with each successive generation of new jet aircraft. However, Boeing has utilized different tactics to achieve financial success and maintain its market leadership.  The 767 was the company’s first twin-jet wide-body model; the 777 was the first “fly by wire” airliner and the first computer-designed commercial jet aircraft; the 787 is comprised of over 80% composite materials enabling it to be more fuel efficient due to significantly less weight.  Boeing has diversified (and thereby lowered) its risk by outsourcing manufacture of key components and sections of its aircraft models while retaining the design, development and final assembly functions.

This lower degree of vertical and horizontal integration versus the approaches taken in its 707 and 747 models has enabled the company to more efficiently utilize all its resources while still taking the necessary risks to maintain its leadership.  As noted earlier, the success of Boeing’s 707 and 747 programs can be partly attributed to the company’s core competency in military and defense sectors. The 707 was launched on the basis of potentially, and ultimately serving two very large markets, commercial and military. Thus, the company’s missile business was able to sustain Boeing’s overall financial viability while the company weathered the industry downturn in the early 1970s.  As the company launched its later generations of jet aircraft, military/defense business remained a key contributor to overall corporate success for the same reasons noted for the 707 and 747.  The company’s strategic posture was further strengthened when Boeing acquired McDonnell Douglas, which was the largest military aircraft player.


Boeing’s “bet the company strategy” appears to have successively increased earnings power (measured by Net Income) with each generation of new commercial jet aircraft.  Each new revolutionary jet aircraft program eventually is the primary driver in raising total Net Income by several-fold (versus the cycle immediately prior to it).  The 707 led to a 2.5x increase in Net Income (late 1950s/early 1960s versus mid-1950s) and by 1967-68, Net Income was 2x higher than its 1961 level.   The 747 helped Boeing surpass the 1967-68 peak by a factor of 7-times by 1980, with the 767 and 777 programs leading to an eventual 7-fold improvement in Net Income by 2011 versus 1980.  For more information, please see Exhibit 1.

Boeing’s success in commercial jet aircraft stemmed from its military aircraft business in terms of risk sharing (e.g., 707 and its military KC-135 version) and diversification.  The strong position in defense-related projects (e.g., Minuteman and Cruise missiles) provided stable, steady cash flow for the entire corporation thereby providing an additional financial cushion to undertake development of new generations of jet aircraft.  The acquisition of the largest US military contractor, McDonnell Douglas, further strengthened Boeing’s corporate business portfolio in terms of earnings, cash flow and diversification.

Cyclical, financial and execution risks remain perennially relevant for the commercial jet aircraft business. However, Boeing has a proven performance record of being able to maintain its market leadership and increasing its earning power with each generation of new aircraft.  This includes, but is not limited to, accommodating unique customer demand requirements on a global scale, rationalization in down cycles, improvement of assembly and manufacturing processes and either buying out (e.g., acquiring McDonnell Douglas) or driving out (e.g., Lockheed) its major US commercial jet aircraft competitors.

While Boeing’s stock price has been cyclical, investors have learned to be patient every time the company undertakes a bigger bet when launching a new generation of aircraft. In general, as shown in Exhibit II the price of stocks have been more in line with future orders rather than net profit.



 FINANCIAL POSITION (Net Income and Total Liabilities)


(Financial Figures in US$ Millions) / Years 1951 – 2012



Total Liab.






Stock Price








































































































































































































Total Liab.






Stock Price




















































































































































































Exhibit II

Percentage changes in Stocks 1962-2013







%   Change










































































































































































































































































%   Change











































































































Air International. “367-80(707 Prototype)” – N.P., N.D.

Boeing Company.  Various public company documents, 1950 – 2012.

Boeing 747-400, Aircraft of the World. N.P.:International Master Publishers., N.D.

Boeing 777-400, Aircraft of the World. N.P.: International Master Publishers, N.D.

Connolly, Patrick. “‘Old Bird’ Ushered in Jet Era.” Page A-40; The San Diego Union [San Diego, CA] 8 Oct. 1978, Weekend Edition, Business Section.

Fortune Magazine.  “The Selling of the 707.”  October, 1957

Green, William (compiler) and Punnett, Dennis (silhouette artist). The Observer’s Book of Aircraft.  Frederick Warne & Co. (London and New York). 1965.

Haloulakos, V.E.  Aerospace Engineer, Scientist and Professor.  (BSME, MSAE and ENGR.D.  Viterbi School of Engineering, University of Southern California).

Harris, Neil. “Boeing 747: Constructing the Colossus.” FLIGHT Internationa.l December 19. 1968: Page 1027.

History Link.Org – Washington State History.

The San Diego Union [San Diego, CA], “Boeing Jet’s First Flight Called ‘A-ok.'” September 27, 1981: Page A-4.

Securities & Exchange Commission (SEC) EDGAR System – 10 K Reports.

Thompson, R. G. “Dash 80.” Air and Space Magazine. April-May 1987: Pages 63-65

Wharton Research Data Service.


Ku, Yueh Su.  Financial Research/Data Mining.  UC San Diego Extension – Finance Certificate post graduate student.

Shannahan, MeglynAnne Price. Industry/Economic Research.  UC San Diego Extension – Finance Certificate post graduate student.





The Impact of Sarbanes–Oxley on Small Businesses

George A. Haloulakos, CFA DBA Spartan Research and Consulting, Core Adjunct Finance Faculty – National University

Co-authored with: Farhang Mossavar-Rahmani, DBA, Professor of Finance – National University

In 2002 Congress passed the Sarbanes-Oxley (SOX) Act after a series of fraudulent accounting and finance activities and questionable behavior by many high level corporate executives during the early part of the 21st century. The Act set new or enhanced standards for corporate officers and directors of all publicly traded US companies, as well as public accounting firms servicing those companies. In the context of Agency Theory, the main purpose was to restore investor confidence, prevent or reduce the management misconduct, and protect stockholder interest. The Act also holds both Chief Executive Officers and Chief Financial Officers of the companies criminally and civilly accountable for the financial reports of their companies.

Since passage of the SOX Act, many studies have been conducted to find out the impact of the Act on businesses. The results have been mixed. In some cases the value of stocks increased, but in other cases companies experienced a significant increase in costs. The Act also has created obstacles and has made it increasingly difficult for new or small companies to go public. In such cases the compliance costs were a major issue. In this study, we are examining three such companies that were negatively impacted by the SOX Act.


The Sarbanes-Oxley Act of 2002 also known as the “Public Company Accounting Reform and Investor Protection” Act, consists of 18 sections that serve multiple regulatory functions. The overall goal of the Act was to restore investor confidence by reinforcing corporate accountability as well as improving the accuracy and reliability of information provided to investors (Jain et al., 2006). The Act specially focuses on management responsibilities for internal control and auditing independence. The Act required the SEC to take certain actions to ensure that there are regulatory structures in place to implement it.

Kenneth Lehn (2008) summarized the key provisions of the Sarbanes-Oxley (SOX) Act as follows,

  • Increased disclosure requirements of public companies
  • Increased role of independent directors
  • Expanded liability of officers
  • Required companies to assess and disclose adequacy of internal controls
  • Created the Public Company Accounting Oversight Board (PCAOB) to regulate auditors
  • Prompted the Securities & Exchange Commission (SEC) and exchanges to adopt new corporate governance rules

In this landmark paper, Prof. Lehn cited very mixed results as measured by empirical financial research.  Specifically, he noted the following conclusions from various studies:

  • Zhang (2007) – SOX related events had negative effect on companies’ stock prices.
  • Li, Pincus, and Rego (2006) and Jain and Rezaee (2006) – SOX related events had a positive effect on companies’ stock prices.
  • Chhaochharia and Grinstein (2007) – Stock prices of large firms not in compliance with SOX increased around SOX’s passage; those of small firms not in compliance with SOX declined.
  • Wintoki (2007) – Stock prices of small, young, high growth companies declined around passage of SOX.
  • Litvak (2007) – Stock prices of foreign firms cross-listed in the U.S. declined vis-à-vis non-cross-listed matched firms around key SOX events.
  • Zingales (2007), Litvak (2007) – The premium for foreign firms cross-listing in the U.S. declined after SOX.
  • Doidge, Karolyi, and Stulz (2007) – The premium for foreign firms cross-listing in the U.S. did not change significantly after SOX.

Other studies confirm that the cost of implementation of the SOX Act were proportionally higher for small businesses than large ones. According to the finding of the SEC Advisory Committee on Smaller Public Companies (88):

From the earliest stages of its implementation, Sarbanes-Oxley Act Section 404 has posed special challenges for smaller public companies. To some extent, the problems smaller companies have in complying with Section 404 are:

  • Lack of clear guidance;
  • An unfamiliar regulatory environment;
  • An unfriendly legal enforcement atmosphere that diminishes the use and acceptance of professional judgment because of fears of second-guessing by regulators and the plaintiffs’ bar;
  • A focus on detailed control activities by auditors; and
  • The lack of sufficient resources and competencies in an area in which companies and auditors have previously placed less emphasis.

In this paper we study the impact of Section 3: Corporate Responsibility, Section 4: Enhanced Financial Disclosures and especially 4.1: Disclosures Controls, Section 4.4: Assessment of Internal Control and Section 4.5: Smaller Public Companies.

As part of this study we looked at the costs associated with implementing the SOX Act, which includes external auditor fees, director and officer insurance, board compensation, lost productivity, and legal costs. In general, each of these cost categories increased significantly between FY 2001 and FY 2006 (Foley & Larder Survey 2007).

Case study

Due to the aforementioned mixed results (as measured by stock price performance), and our view that perhaps the self-correcting nature of the financial markets had a greater impact than the passage of the SOX Act, we focused our research on how SOX affected risk taking. We examined real life case studies to assess how firms have incorporated SOX into their financial and strategic planning processes, and their corresponding outcomes.  While these real life examples do not necessarily represent an across-the-board or universal impact, the effect on risk-taking is noticeable and has material or significant financial consequences.

The following situations are offered with the permission of the participating firms subject to the aforementioned NDAs.[1]  These examples are provided to demonstrate how SOX affects risk-taking behavior, and in each case, the financial outcome associated with actions taken (or not taken) due to SOX.

We have selected three types of business models for this study: vision care solutions, oceanographic equipment and specialty consumer.  For simplicity, these companies will be denoted as follows:

VCS: Vision Care Solutions

OE: Oceanographic Equipment

SC: Specialty Consumer

Basic information (for more information please see Exhibit 1):


Revenues (E) in 3 years $8 million $1.5 million $4.5 million
Debt/Equity $50,000/$200,000 0/$500,000 0/$300,000
Number of  Employees (E) 18 6 15
Owners/Operators 1 2 3

(E) Estimate

Each of these companies or business models were owner-operated with the goal of eventually becoming publicly traded entities.  These case studies occurred between 2002-2010, in the aftermath of the passage of SOX.  In each case, the owner-operator developed a profitable specialty niche model that had scalability (i.e., could be replicated in different regions or potential for large scale production).

In each of these situations SOX proved to be costly, burdensome, time consuming and distracting.  The additional layer of costs and burdens in terms of time and implementation had the effect of diverting financial and intellectual capital away from innovation and product development and redirected toward compliance in the context of a very risk-averse internal environment.  The resulting financial outcomes in relation to both the explicit and implicit costs associated with SOX compliance are self-evident.  However, it should be noted that not all of these had unsatisfactory outcomes.  One instance proved to be very satisfactory, but nevertheless was influenced by the preoccupation with the danger and risk of making the slightest mistake that potentially could undermine years of work.

VCS (Vision Care Solutions)

The Situation: In the very early 2000s, VCS was founded by an electrical engineer who was inspired to create this company in response to the onset of his own visual impairment and his empathy for others who like him, were “legally” blind.  The VCS founder developed and patented three different vision care solutions that would provide glare protection without obstructing one’s line of sight.  Specifically, VCS’s strategy was to provide solutions for potential clients seeking improved safety, increased productivity and greater comfort by enhancing various eye-care products [e.g., prescription, plain or dark glasses, goggles, helmets and related] with enhanced glare protection.  As such, VCS identified three mass markets, each aligned with its specific vision care solution: (1) individual consumers of prescription and non-prescription eye glasses; (2) professional and amateur athletes; and (3) commercial drivers, truckers, pilots, railway drivers and ship captains.  The total value (US$) of these three mass markets was conservatively estimated to be in the range of $25 to $30 billion.

What Happened Next:  VCS developed a prototype product for each of the aforementioned mass markets, lined up future engineering, technical, sales and support staff and a proposed manufacturing site.  Given the very large target markets, VCS sought equity financing via the public markets.  [Bank financing proved unsatisfactory given the inherently conservative nature of commercial lenders who deemed the business model extremely risky due to perceived over dependence upon the founder and being an emerging/early stage situation.]  The model VCS adopted was similar to the same one used by microbrewers that went public in the mid-to-late 1990s to capitalize on the growing public demand for craft beer.  In this instance microbrewers essentially used the Internet as well as financial literature attached to its product shipments to solicit equity capital.  However, by the time VCS was ready to embark on its capital raising efforts, the passage of Sarbanes-Oxley (SOX) created a whole new set of compliance protocols and filing of additional paperwork.

VCS diverted a portion of its limited capital to hiring attorneys and accountants to aid in compliance, but the financial cost associated with this process (even with self-help services) proved to be above plan.   Moreover, the additional 3 to 6 month period required to comply with new SOX standards proved very costly with a negative collateral development: loss of the manufacturing site and specialized personnel that had been previously lined up. These individuals could no longer afford to wait for a capital infusion, and thus sought employment elsewhere.   In a last ditch effort to sustain momentum, VCS sought grant funding from public and private sources, but the enormous paperwork and review process associated with this process proved to be an obstacle that the VCS founder was unable to overcome.

The Outcome: Following a promising start, VCS essentially went “dark” and suspended filing any further paperwork seeking equity financing.  Financial capital that had been earmarked for product and business development, and then later diverted to compliance with the new SOX regulations, evaporated.  As a result, VCS sought a more risk-averse strategy to pursue product licensing and/or a long-term special services employment contract to develop its products for a large company serving the vision care markets.  This has proven unsatisfactory as the perceived failure to raise equity from the public markets in its earlier efforts created a “stigma” for VCS thus deterring potential corporate suitors from investment.

The Verdict:  VCS believes that SOX and the resulting environment of inordinate preoccupation with compliance issues proved burdensome and ultimately a major obstacle to securing equity capital.  The negative effect of missing its window of opportunity with available skilled personnel and prime manufacturing space was due to the delay associated with compliance.   In addition, the financial capital was not available to retain those resources because it was being paid to attorneys and accountants.  VCS has never been able to recover from this as the founder personally financed development and patent filings for his work, and no further personal capital (debt or equity) was available to him.  As such, VCS is left to wonder what might have been!  It should be noted that the VCS founder has no illusions but would have preferred that the negative verdict be dictated by market forces (competition, supply & demand, and so forth) rather than the vagaries and delays associated with regulations that ultimately deter risk-taking.

OE (Oceanographic Equipment)

The Situation: In early 2007, OE was financially exhausted after having spent more than 5 years developing a technology product for personal and commercial uses in oceanography.  In the aftermath of SOX the company did not wish to pursue going public due to compliance costs, nor did it wish to disclose its technology with “angel” and venture investors because of the potential of giving up too much control and financial benefits of its intellectual properties.  OE considered forming a Limited Liability Corporation (LLC) and selling units to hobbyists, scientists and others who would have interest in the company’s technology, but ultimately vetoed this option due to potentially being overly cumbersome and time consuming.  Despite a potentially very large end-user market for its technology, the idea of investing additional financial and intellectual capital in order to navigate through the SOX protocols or satisfy the insatiable desire for control by venture investors and financial angels was viewed as unacceptable.  This forced OE to solely concentrate on how to monetize its intellectual properties in a timely manner, especially given its diminishing financial resources.

What Happened Next:  OE hired a consultant to establish a valuation for its technology and develop a combined licensing strategy and special services contract to help the founders recover its cumulative investment, provide a future stream of recurring income from its technology and stable employment.  While this was being done, a suitable candidate firm was found that was willing to pay for the technology, manufacture and distribute the product. This was done with the OE founders working in a consulting role to help implement this process.  Armed with a valuation study, OE proposed formation of a strategic alliance that called for an upfront payment to the founders (allowing the buyer access to the technology), and then a recurring income stream arising from a percentage licensing fee applied to future revenues. Additionally, there would be a long-term special services contract whereby the founders would receive compensation for helping bring the product to market and sustain its expected commercial success.  In principle, this agreement was accepted by the candidate firm with what proved to be minor adjustments or concessions by OE: the upfront payment would be paid in three equal installments over a 3-month period instead of a lump sum. Further, the majority of those payments would be classified as engineering fees rather than licensing fees so that it would not have to be treated as a capitalized expense item.

The Verdict:  OE believed this financial solution was optimal from the standpoint of reflecting its mission and values.  The technology was developed out of a love for oceanography, and this commitment was reflected by the founders putting their personal financial position at risk.  OE was created as a vehicle for the founders to create and develop the technology for commercial application.  Once completed—and after considering the further additional commitment of time and financial capital—OE determined that monetizing its intellectual properties and recovering its investment was not available only through the Initial Public Offering (IPO) venue, it could be fulfilled in a more efficient and less risky manner through a licensing agreement.  Hence, the aforementioned strategic alliance with the upfront installment payments, recurring licensing fee income plus the special services contract.  In this case, the new hurdles posed by SOX caused OE to reconsider carefully and ultimately pursue a strategic alternative that provided a much better fit in terms of reward and risk.  Since then, OE founders concede that had it been “easy” to go the IPO route, the sustainable financial returns might have been much lower (or non-existent) because OE was better suited as a product group for a large firm rather than a stand-alone entity.  SOX protocols ultimately proved to be a blessing for OE in securing an optimal financial strategy for its technology that enabled it to thrive in a more suitable venue than the publicly traded securities markets.

SC: (Specialty Consumer)

The Situation: From 2001–2003 SC was formed with the objective of further leveraging the “third space” concept that had taken hold during the 1990s.  The “third space” concept was based on the view that with flextime and the boundaries between home and work becoming ambiguous, more people were spending leisure time outside the work place and home.  The “third space” concept includes, but is not limited to, a gourmet coffee store model (e.g., Starbucks), health club, recreation centers, etc.  SC created a combined wine bar and retail store that would provide a channel of distribution for small west coast wineries that were thus far unable to compete for retail shelf space in traditional wine & liquor stores or in grocery stores.

What Happened Next:  SC worked closely with a financial consultant to create a business model that would be located in urban areas characterized by high foot traffic (e.g., tourists, hotel guests, cruise ship patrons, restaurant customers and so forth).  The SC model would allow such patrons to enjoy sampling premium quality wines from small wineries, purchase wine and complementary food offerings along with souvenirs, all the while enjoying quiet time with friends and/or business associates.  Essentially SC positioned itself as a wine version of Starbucks, and thus a scalable model that could be strategically placed to capitalize on the strong demand growth for wine while providing a distribution channel for small wineries located nationwide.

Due to the scalability factor, SC wanted to raise private equity to finance two (2) wine bars as a way of demonstrating its financial viability. Once those two operations were up and running, SC sought to tap the public equity markets to finance a large-scale expansion that would occur concurrently in various regions nationwide.  SC formed a series of contractual relationships with multiple wineries eager to participate, engaged other wine and food enthusiasts to run the operations.  Due to the aggressive (albeit achievable) growth plans, the imposition of SOX necessitated the use of significant financial capital to comply with the requirements of going public.  While necessary and appropriate given the desire to be a vital, active and growing public entity, this ultimately diverted funds away from retaining the specialized personnel for wine & food needed to run the operation; it also provided credibility with the investing public.  Without these people on hand, SC essentially became a “still born” idea as it became extremely difficult to move forward without their presence.  With the funds diverted to SOX compliance, it was a company that existed only on paper.

The Verdict:  SC initially believed that had it been able to spend its capital on retaining the specialty personnel needed to launch its flagship operation and building a “brick-and-mortar” business (i.e., deploy physical capital assets), which would have created a going-concern that would attract investor interest.  Ideally, SC thought of how the McDonalds brothers attracted the interest of Roy Kroc, who had the vision to transform the brothers’ burgers-and- fries outlet into a global enterprise.  But upon further reflection and additional research it became evident that, had the growth idea been confined to a small scale (i.e., build a single successful wine bar business first) and refine the concept so that it developed a track record that would later attract investment funding for scaling upward, this might have been more feasible.  SC sought to move forward way too fast.

While the idea of a wine bar was most feasible in terms of demand growth, profitability and return on capital, the near instantaneous formation of a large scale public enterprise might have proven to be very difficult to manage.   The cost estimate for SOX compliance associated with a near instantaneous formation of a publicly traded enterprise was approximately $1.5 million.  SOX compliance certainly absorbed a disproportionate amount of capital that otherwise would have been used for developing the business, but to cast blame for SC’s failure to become a reality solely upon SOX would be inaccurate.

Ultimately, the SC founders maintained their hobbyist interest in wine, but refrained from spending additional capital as their personal resources were exhausted and they had no interest in selling or licensing the model they created.  Preliminary feelers to prospective buyers or investors indicated that SC lacked sufficient product differentiation and a track record to warrant financial participation.  In a sense, the all or nothing approach taken by SC may have been its undoing.

The very rapid financial success each of the founders experienced in their individual corporate careers prior to pooling their resources for the SC wine bar venture resulted in overconfidence because they expected similar growth progression in the entrepreneurial venue.  Whether that would have occurred pre-SOX is unknown, but certainly the presence of SOX proved to be a formidable influence upon their business decisions and risk-taking behavior.


As all three cases show, the cost of compliance with SOX requirements have been the main reasons for the three cited companies not to pursue equity financing via the public market, and as a result they were not able to materialize their dreams.+++++++++++++++++++++++++++++++++++++++++

In short our finding indicates that SOX:

  • Reduces incentives for innovation and risk taking among entrepreneurs while increasing attention toward compliance because of inordinate fear of financial and legal penalties.
  • Has influenced diversion of personal capital by entrepreneurs from product development and related activities toward the hiring of attorneys and accountants in order to tap the public equity markets for capital funding.
  • Has reduced the flexibility of entrepreneurs in creating business models that otherwise would attract equity capital pre-SOX from prospective investors.

Exhibit 1


Explanatory Notes:

  • Employees for each firm are “independent contractors” and therefore not “permanent.”  Each firm sought or considered equity via the public offering route as a means to secure permanence in their “human resource” assets.
  • Only SC would have “internet” based sales as part of its expected revenue stream ($1 million or 22% of sales).  VCS and OE models did not have revenue-generating/transaction internet portals.
  • VCS would be a lab/manufacturer, OE would be contractor/vendor and SC would be retail (brick-and-mortar + internet portal).
  • Total owner capital $250,000 for VCS (with $50,000/$200,000 debt/equity mix), $500,000 for OE (all equity) and $300,000 for SC (all equity).  VCS owner committed 100% of personal financial resources as did OE owners, with the difference being that OE eschewed the use of debt.  SC owners set a limit or threshold on equity capital at risk, and would not commit any further.


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