Valuation of design adaptability in aerospace systems

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Fernandez Martin, Ismael
Mavris, Dimitri N.
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As more information is brought into early stages of the design, more pressure is put on engineers to produce a reliable, high quality, and financially sustainable product. Unfortunately, requirements established at the beginning of a new project, and the environment that surrounds it, continue to change in some unpredictable ways. The risk of designing a system that may become obsolete during early stages of production is currently tackled by the use of robust design simulations, a method that allows to simultaneously explore a plethora of design alternatives and requirements with the intention of accounting for uncertain factors in the future. Whereas this design technique has proven to be quite an improvement in design methods, under certain conditions, it fails to consider the intrinsic value embedded in the system when certain design features are activated. This thesis introduces the concepts of adaptability and real options to manage risk foreseen in the face of uncertainty at early design stages. The method described herein allows decision-makers to foresee the financial impact of their decisions at the design level, as well as the exposure to risk. This thesis contains two relevant examples regarding the decision of introducing new technologies. First, the case study of Southwest Airlines, and the decision it took to retrofit blended winglets technology in its already delivered Boeing 737-700, is introduced to validate the proposed technique. In the second example, the manufacturer evaluates whether technologies should be included in a new aircraft engine design, left out, or offered as an option to retrofit in the future. This case demonstrates the benefits of each of these actions and the monetary value of offering retrofitting options as upgrades to the airlines when the value of the technology fluctuates considerably. The results obtained in both exercises show the benefits of real options analysis during the design process of aerospace systems. These include: a better management of design features over time, a better picture of uncertainty around future technology economics, a good understanding of adaptability value over time, and a consistent risk reduction with respect to alternatives in which flexibility was not embedded.
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