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Lockheed Tri Star Case
And Investment Analysis
Executive Summary
This case study about Lockheed is a great example of a company who failed on a number of
different levels. While the Tristar project was supposed to make Tristar a real player in the
commercial airliner industry, it essentially devastated the company instead. Lockheed’s
mistakes were clear. Their break-even analysis suffered because of their inability to perform
proper NPV analysis in the capital budgeting. Doing this would’ve caused them to cease the
project and look elsewhere for revenue to grow.
The lack of NPV analysis coupled with a higher discount rate and an overestimation of their
ability to gain a large portion of the market share were all contributors to this downfall.
Lockheed had an optimistic view on the industry growth on the whole, and if they had been
more disciplined in their approach, they would’ve seen the pitfalls in this venture. All of this
oversight caused the crippling of Lockheed as a company, leading to the drop in the company’s
share price from $64 in January 1967 to $11 in January 1971.
Introduction
Lockheed, one of the 20th century’s foremost military aviation companies held a long tradition
of acquiring government contracts and producing state of the art fighter jets, bombers,
helicopters, and other military aeronautic vehicles. In 1971, after multiple product failures
throughout military contracts, the company sought to compete in the civilian airline market
with competitors such has Boeing and McDonnell Douglas in order to gain government
guaranteed loans to fund the production of the L-1011 Tristar: a three-engine plane capable of
transporting up to 400 passengers on medium to long-distance flights. (Airline History
Museum)
In this project, Lockheed planned to produce an average of 35 planes per year at a price tag $14
million per plane making for initial up-front costs between $800 million and $1 billion. While
this price tag may have seemed sky-high, Lockheed officials were confident that their late entry
to the civilian airline market would eventually pay off. With the goal of breaking even at 195-
205 aircrafts, Lockheed only had 103 planes purchased with another 75 that had options-to-
buy.
In 1981, after losing $2.5 billion on the unprofitable Tristar venture, Lockheed chairman Roy W.
Anderson stated there was “no other choice but to begin now to phase the Tristar out in an
orderly manner.” (TIME) This failure is one that can largely be attributed to the incredibly high
initial costs necessary for the process, especially considering Lockeed’s lack of liquidity due to
other struggling projects, as well as internal operational delays and a late start to an
increasingly saturated passenger airline market. With unfavorable NPV projections and a late
entrance to a crowded market, our group aims to define the pitfalls of Lockheed by projecting
and analyzing Lockheed finances throughout the life of this product.
Data/Analysis
In July 1971 Lockheed’s CEO claimed that the break-even point of the TriStar project would be
reached at sales somewhere between 195 and 205 aircraft. Table 1 shows our discounted cash
flow analysis of Lockheed’s break-even estimate.
Table 1
Year
Units
Produced
Preproduction
Costs
Production Costs
$14/unit
Revenues
$16/unit
Total Cash
Flows
Net Present
Value
1967 ($100) ($100) ($100)
1968 ($200) ($200) ($182)
1969 ($200) ($200) ($165)
1970 ($200) $140 ($60) ($45)
1971 ($200) ($490) $140 ($550) ($376)
1972 35 ($490) $560 $70 $43
1973 35 ($490) $560 $70 $40
1974 35 ($490) $560 $70 $36
Discounted Cash Flow Analysis of the Lockheed Tristar Program
Assuming Production of 210 Units
