How the SST Will Be Financed

"If you don't do a hell of a job," warned Federal Aviation Administrator William F. ("Bozo") McKee, "you sure stand to lose a hell of a lot of money." McKee was talking to negotiators from Boeing and General Electric, shortly after the terms of their FAA contract to build the U.S. supersonic transport were settled. Signed on May 1, and made public in detail last week, the contract is, according to McKee, "one of the toughest that has ever been written." It is certainly one of the biggest.

Calculating the potential market for the SST with conservative care, the FAA figured that sonic-boom problems would limit the aircraft to routes over oceans and sparsely populated areas. On that basis, it predicted sales of 500 planes, at $40 million each, by 1990. By the time the first SST is delivered to an airline in late 1974, the cost of building two prototypes, production facilities and parts inventories will total some $4.5 billion, including $3.43 billion at Boeing, which is assembling the airframe, and $1.07 billion at engine-building G.E.

The contract provides for cost sharing between the Government and the builders on a 90%-10% basis--but only for some expenses. Boeing will actually get only $726 million in cash-on-the-line federal funds. To appease a reluctant Congress, ten U.S. airlines currently holding options on the SST volunteered $1,000,000 in "earnest money" for each of the 52 planes they have ordered. Future "progress payments" from airlines should come to $1.35 billion; tax relief in the development phase will mean another $310 million. In all, by 1975 Boeing will have scraped up a fantastic $1.06 billion on its own. G.E. will face a more manageable risk of $420 million.

Risks & Rewards. Financially, the FAA is determined to let the builders fly on their own after the prototypes are built, though the U.S. may well help Boeing with its huge capital needs by guaranteeing some loans. Even so, the Government's share of the $4.5 billion development bill should come to no more than $1.3 billion. The Government should easily recover all of that through royalty payments with the sale of the 300th plane (so far, including foreign orders, options have been taken on 114 U.S. SSTs). After that, Government royalties will be all gravy; by the sale of the 500th, for example, the return on the taxpayers' investment will be climbing beyond a compound annual rate of 4%.

Boeing and G.E. share most of the risks--and they are in for most of the rewards. It will probably be 15 long years before they recoup their costs, but they could earn more than 11% to 12%, after taxes, on their investment, which makes for quite a deal.

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