The R&D Tax Credit Aspects of a Nondysfunctional Airline Industry



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        During most of our reader's lifetimes, the global airline industry has been dysfunctional with few major airlines financially capable as customers demand/support major waves of new generation aircraft and product innovation. Airlines have two major costs, labor and fuel. All three major American airlines, namely American Airlines, Delta Air Lines, and United Airlines, have recently emerged from bankruptcy and can now better manage their labor costs. In addition, Southwest Airlines has remained financially strong since inception.

        Recent fuel costs have been stable and new generation aircraft are much more fuel efficient. Demonstrating the industry's new stability, three major new airline entrants from the Middle East recently ordered nearly $100 billion in new planes with enhanced technology requirements. This means that the airline industry now has a much more financially stronger global client base, coupled with major new customers that can demand and pay for innovative technological improvements. Novel technological advances can be supported by federal R&D tax credits.


The Research & Development Tax Credit

        Enacted in 1981, the federal Research and Development (R&D) Tax Credit allows a credit of up to 13% of eligible spending for new and improved products and processes. Qualified research must meet the following four criteria:

  • New or improved products, processes, or software
  • Technological in nature
  • Elimination of uncertainty
  • Process of experimentation

        Eligible costs include employee wages, cost of supplies, cost of testing, contract research expenses, and costs associated with developing a patent. On January 2, 2013, President Obama signed the bill extending the R&D Tax Credit for 2012 and 2013 tax years.


Figure 1:
The New, Stronger Airline Industry

Airlines and Equipment

Figure 2 below presents some of Boeing's new product innovation with the new 777X jet

Figure 2: Ready to Take Off - Boeing's new 777X

Boeing 777 diagram


Innovative Changes by Boeing Co.

        Boeing Co. currently manufactures planes for big carriers in the United States, Asia, and Europe. The original 777 is the top-selling plane in Boeing's lineup. Able to carry as many as 350 people, the largest model lists for $320 million; although discounts are common on all planes for large customers and those ordering in bulk. The next generation 777X is being designed for the trio of Middle Eastern carriers that are roiling the global airline industry. The Catalog price of the 777X has not yet been made public, but is expected to be about $340 million based on a recent Lufthansa's order. Sales of the 777X jet are projected to be $1.1 trillion over the next twenty years.

        The 777X keeps its aluminum body much like the former 777, but has carbon-fiber wings and is 20% more fuel-efficient. The wing span of the 777X is around 234 feet; the largest Boeing has ever designed.

        The first model, the 777-9X, will be able to fly as far as 8,000 nautical miles with more than 400 passengers while burning 20% less fuel than the current 777, now the world's biggest twin-engine jet. A second variant, carrying about 350 people, will follow and push the range past 9,400 nautical miles - far enough for a non-stop flight from New York to Singapore.

Figure 3 below presents the operating cost savings opportunity related to the 777X model:

Cost Efficient Boeing 777



Industry Leader Emirates

        Emirates airline is geographically well positioned since two thirds of the world's population lives within eight hours. Emirate airline is the largest operator of long-range aircraft, including the Airbus A380 Superjumbo and the Boeing 777. Emirates' costs are low because it is non-unionized and its average plane is less than six years old which greatly reduces fuel costs and maintenance bills. Moreover, Emirates benefits from the fact that as a member of the United Arab Emirates, there is no corporate income tax.



Washington State for Boeing's New 777X Plant

        Boeing's new contract deal, with its largest union, reinforces a key portion of its effort to aggressively controlling costs and avoiding interferences for one of its most important new jetliners. The 51% to 49% approval vote on the eight year deal that occurred January 4, 2014 reflected a division within the machinists union over a contract that includes deep concessions on health-care costs and retirement. The approval of a contract will take place in 2016 with a promise from Boeing to assemble its planned 777X jetliner and its carbon-fiber composite wings in unionized facilities in Washington State.

        22 States offered 54 sites for Boeing to create high-value aerospace jobs. Realizing the new reality, the State of Washington is offering an $8.7 billion economic incentive package to retain the corporate giant. Some of the components of the Washington State economic development package are presented below.

New Boeing Plant: Potential Economic Incentives in Washington State:
  • Business & occupation tax reductions of 40%: $4.2 billion
  • Tax breaks for other aerospace: $23.4 million
  • Tax credits for new aircraft development: $3.5 billion
  • Property tax credit: $563 million
  • Sales tax exemption to buy new computers: $242 million
  • 1,000 new job training positions: $8 million
  • Construction of new training facility: $5 million



The Fuel Efficiency of the Boeing 777x

        In order to make the 777X more efficient, Boeing is using a new engine from GE Aviation, called the GE9X, and longer composite wings based on the technology used in the 787. While longer wings can improve efficiency, it's a problem for airports that cannot accommodate them. As a solution, the ends of the 777X's wings will fold up when the plane is on the ground, shortening the wingspan by 20 feet.

        Every airline in the world is looking to buy new planes that are more economical to fly. Middle Eastern based airlines, which are becoming global juggernauts, depend on large, long-haul planes to shuttle travelers between Asia, Europe, and the Americas, and plane manufacturers from Boeing to Airbus, Bombardier to Embraer S.A. are working on designing more fuel efficient models. Fuel is often cited as the main operational expense, and reduced costs equate to more savings throughout.



3D Printing in the Airline Industry

        The airline industry has taken global leadership in 3D printing and these novel innovations may be eligible for federal R&D tax credits.



General Electric (GE) Airplane Engines

        GE is making a big investment in 3D printing and plans to build more than 85,000 fuel nozzles for its new Leap jet engines. Usually the nozzles are assembled from 20 different parts however, also known as additive manufacturing, 3D printing can create the units in one metal piece, through a successive layering of materials. The process is more efficient and can be used to create designs that can't be made using traditional techniques. GE says, "The finished product is stronger and lighter than those made on the assembly line and can withstand the extreme temperatures (up to 2,400 degrees F) inside an engine."



Pratt & Whitney Airplane Engines

        Pratt & Whitney, in conjunction with the University of Connecticut (UConn), recently opened the new Pratt & Whitney Additive Manufacturing (AM) Innovation Center at UConn which is said to be one of the most advanced AM laboratories in the country.

        The new UConn AM center has the latest 3D printing equipment and rapid prototyping technologies, including two Arcam EBM A2X (Electron Beam Melting) machines that are designed for manufacturing large metal parts at high temperatures. The EBM A2X platforms are the first of their kind in the Northeast. UConn recently initiated EBM training for academic personnel and industry engineers.

        The AM lab is aiming to develop advanced techniques for complex production parts used particularly in aerospace, biomedical science, and other industries. The long term goal is to ramp up Connecticut's industry production capabilities through the reduction of manufacturing times, elimination of material waste, and allowing the creation of a new generation of intricate, light-weight, and durable custom-made products.

        Pratt & Whitney has invested more than $4.5 million in the lab, and has plans to further invest an additional $3.5 million. "This unique partnership between Pratt & Whitney and UConn is an excellent example of the innovation and collaboration that will drive Connecticut's future economic success," commented UConn President Susan Herbst. "The new Pratt & Whitney Additive Manufacturing Innovation Center will allow us to push into new frontiers of manufacturing and materials science while training a new generation of engineers in some of the world's most sophisticated manufacturing technology."

        The centre is expected to play an important role in UConn's new Technology Park planned to open in 2015. The University is planning to focus highly on a new curriculum surrounding 3D printing. The lab will host workshops for students and engineers and local manufacturers will be invited to explore how to utilize 3D printing in their own product design, development, and manufacturing activities.



Rolls-Royce Aircraft Engines

        Rolls-Royce is looking to use 3D printers to make lighter components for its aircraft engines. The company's head of technology, Dr. Henner Wapenhans, states "3D printing opens up new possibilities and new design space, through the 3D printing process you're not constrained [by] having to get a tool in to create a shape. You can create any shape you like."

        Rolls Royce can now do things faster and more efficient. To make metal components or mold parts in the traditional manner, a manufacturer first has to create the tooling, the form by which a person will make the part. It can take about 18 months to go through all of the necessary iterations.

        The innovation within the 3D printing industry will allow for "faster, better, and cheaper" manufacturing, "We're limited when we use traditional techniques to gaining only two of the three things we desire, yes, but as every engineer knows if you can bring in some entirely new method of doing things you can indeed gain the entire trinity".



Conclusion

        A strong global airline industry provides a tremendous platform for unprecedented aircraft innovation. Boeing proposes a new, large, state-of-the-art facility that will be at the center of the U.S. innovation wave. 3D printing and other supply chain innovation will further enhance the performance of the 777X along with the performance of Boeing competitors. Federal R&D tax credits are available to support the entire U.S. aircraft innovation supply chain.

Article Citation List

   


Authors

Andressa Bonafé is a Tax Analyst with R&D Tax Savers.

Charles G Goulding is the Manager of R&D Tax Savers.

Eliana Goolcharan is a Tax Analyst with R&D Tax Savers.


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