This paper discusses the relationship of accounting/finance and engineering/technology in the framework provided by the Concorde case study. Accounting is the collection, analysis and communication of financial information that is useful for those who need to make decisions and plans about organisations, and for those who need to control those organisations. Finance in the other hand is how an organisation raises and invests funds, how investors decide to invest their wealth, and how markets for investments operate. As a matter of fact the development of engineering inventions and the improvement of any engineering design are mainly managed by financial factors. The implications of situating accounting/ finance within engineering/ technical context can illustrate how the latter can contribute to the analysis of the former and to provide valuable inputs for managerial decision-making.
The idea of a supersonic aircraft had started as early as 1943 and steps were taken to develop one in 1946. However, it was not until 1959 that contracts were signed for the development of such an aircraft. Concorde development was led by BAC in Britain and Sud Aviation in France. The British worked on the engines, the French on the airframe. Naturally the costs of developing such a step forward in aeronautics proved to be costly. Initially in 1959 the government had expected to put in £500,000 (£6.8 million today's values) for feasibility studies. By 1964 the estimated costs of the program had risen to £200 million equivalent to £2.4 billion today. The three main factors responsible for this increase are inflation, currency devaluation and design changes.
Despite the staggering costs Aeropostiale-BAC were unlikely to drop the project to avoid excessive risks because the general rule is that the higher the risks the higher the returns and this proves basic theory of any firm, which is profit maximization. Cash flow techniques, called the net present value (NPV), were used but even these techniques are not exactly fireproof. Generally if the NPV is positive the project is accepted, if the NPV is negative the project is rejected. It is extremely difficult though, to make accurate forecasts of costs and revenues associated with large complex projects, so forecast errors can be large. Miscalculations are common in forecasts of new product design costs. Initial plant and equipment costs are hard to estimate; sales revenues and operating costs over the life of the project are generally even more uncertain. (Mark Hirschey 2009)
Finally, in 1968, 3 years behind schedule and despite all the technical political and financial problems Concorde was unveiled to the public. But an adoring public, superior technology and supersonic speed would not be enough. Concorde had to find buyers to recover its massive development costs. The world's most glamorous plane had flown to the most glamorous cities in the world but none of them would bring it any money. Only one city had sufficient millionaires per square mile to keep Concorde in the air, the Big Apple. Concorde was in desperate need of New York in order to maintain a commercial future. Eventually the Supreme Court in Washington DC after 19 months finally decided that the triumph of European technology could land at America's busiest airport, JFK. Hence in 1976 the trans-Atlantic flights to New York began which were to be the core of the service.
A problem in the late 1980s and early 1990s where parts of the upper rudder on a number of Concordes broke off, was corrected which was one of the problems that had a tremendous impact on the companies' finance. The July 2000 crash was the first time in Concorde's history there had been any fatal accident. After the accident Concorde was grounded. For nearly a year both airlines worked to strengthen the plane at an enormous cost. Ultimately only 20 Concordes were built and they were only sold to the two state-run airlines, British Airways and Air France. In fact the two airlines were subsidized by their governments to buy the aircrafts. Concorde eventually succumbed to the forces of economics, to a tragic accident in Paris that traced to a tire and fuel tank problem, and to the destruction of the World Trade Center on September 11, 2001, which killed a large number of the plane's best customers.(Gary Glassman 2005) Three years after the accident the world's first supersonic airliner made final landing at London Heathrow on the 24th of October in 2003.
Concorde throughout its 35 year career, despite its leading edge in aeronautical technology, faced a mountain of financial problems. "But why did the people who launched the project get the costs so mistaken? The straight answer must be: "They would have needed to be superhuman to get them right." These men were trying to do something that had never been done before - build an airplane that would carry 100 passengers at twice the speed of sound - and they had no precedents for designing and marketing a supersonic airliner. The men in charge did not and could not, know what a jungle of problems they would have to hack their way through." (F.G Clarke and Authur Gibson 1976)
As observed, the engineering/technology of the product alone cannot foretell if the product is going to be successful. Accounting/finance criteria have to be met in order for it to be profitable. Market research, initial cost assessment, financing requirements, budgetary planning and control, all of these have to be carried out before the project even reaches the development phase. In the case stated above, Concorde had the latest technology in engineering and design yet it did not manage to provide a profitable outcome. Hence engineering/technology is greatly dependable upon accounting and finance.
- F.G Clarke and Authur Gibson (1976): The story of the world's most advanced passenger aircraft
- Gary Glassman (2005): Supersonic Dream, PBS broadcast
- Mark Hirschey (2009): Managerial Economics, 12th edition