Massachusetts Institute of Technology ESD.71 Engineering Systems Analysis for Design Application Portfolio An Assessment of Unmanned Aircraft Systems for Flight in the National Airspace System Luke Cropsey 4 December 2007Application Portfolio Draft/27 November 07 Luke Cropsey, Major, USAF ESD.71 Engineering Systems Analysis for Design Cell Phone #: 617-259-0689 Page 2 of 22 Email: [email protected] Executive Summary This application portfolio addresses the development of real options for acquiring an unmanned aircraft system (UAS) that will be capable of achieving Federal Aviation Administration (FAA) approval to operate in the National Airspace System (NAS). The primary source of uncertainty modeled in this assessment is the fraction of manned aircraft missions the UAS will be capable of replacing. This translates into the relative revenue stream the UAS will be capable of generating as a fraction of replaced manned mission costs. After a general overview is provided describing the situation associated with flying UAS in the NAS, the major alternatives for how a solution could be pursued are described in three major design categories: 1) A “Top-Down” systems engineering approach, 2) An “Empirical” approach, and 3) A “Flexible” approach. Each of these are described in further detail to more fully characterize their strengths and weaknesses. Following the development of the major design options available, a more detailed treatment of the uncertainties on the project is presented, and a notional decision tree is described out to the second stage of outcomes and decisions. Each option is evaluated through the end of the second stage of the decision tree and an expected value is calculated for each option. Uncertainty is then introduced into the picture by modeling the manned aircraft costs (recall, this forms the basis for the UAS revenue stream) as a probability density function that can be described using a binomial lattice with a specified annual drift and volatility. The uncertainty in the manned aircraft costs are modeled out across a 50-year time horizon to capture the full impact of the variability over the expected lifetime of the UAS. The portfolio concludes by assessing the relative value that is brought to the table by having the flexibility to cease operations at any point where the cost of flying the UAS will be greater than simply stopping operations.Application Portfolio Draft/27 November 07 Luke Cropsey, Major, USAF ESD.71 Engineering Systems Analysis for Design Cell Phone #: 617-259-0689 Page 3 of 22 Email: [email protected] Table of Contents Executive Summary........................................................................................................................ 2 Table of Contents............................................................................................................................ 3 Table of Figures.............................................................................................................................. 3 List of Tables .................................................................................................................................. 3 Background and Options Development.......................................................................................... 4 Uncertainty Development in the Model.......................................................................................... 6 Major Options and Decision Tree Analysis.................................................................................... 8 Uncertainty Development............................................................................................................. 13 Flexible Option Valuation............................................................................................................. 16 Conclusion and Final Thoughts .................................................................................................... 19 Table of Figures Figure 1. Graphical Depiction of Possible Mid-Air Collision Geometry....................................... 6 Figure 2. Decision Tree Analysis of Three Options. .................................................................... 11 Figure 3. Probability Distribution of Manned Operating Costs over Time.................................. 14 Figure 4. Expected Value over Time............................................................................................ 15 List of Tables Table 1. Initial Assumptions and Values Modeled for Air Force Variables. ................................. 8 Table 2. Net Present Value of Options using Decision Tree Analysis ($ in millions)................. 12 Table 3. Decision Tree NPV Results with Recurring Costs ($ in millions)................................. 13 Table 4. Upside and Downside Value Determinations at each Time Step (millions of $).......... 16 Table 5. Upside & Downside Probabilities for Table 4 Values at each Time Step...................... 16 Table 6. Net Revenue Calculation Given Manned Operations Uncertainty................................. 17 Table 7. Net Revenue (Table 6) * Probability of Occurance (Table 5)........................................ 17 Table 8. Expected and Net Present Values for Varying Manned Operation Costs. ..................... 17 Table 9. Value of Option to Shut Down Operations..................................................................... 19Application Portfolio Draft/27 November 07 Luke Cropsey, Major, USAF ESD.71 Engineering Systems Analysis for Design Cell Phone #: 617-259-0689 Page 4 of 22 Email: [email protected] Background and Options Development The system that will be analyzed for the application portfolio will be an analysis of three alternatives for integrating unmanned aircraft systems (UAS) into the national airspace system (NAS). UAS platforms face substantial restrictions in their operational use in the NAS because these platforms have no physical mechanism to comply with CFR Part 91 requiring pilots to “see-and-avoid” other air traffic. With the removal of the pilot from the airborne portion of the UAS system, the human eyeball is no longer capable of meeting the intent of the regulation. In addition, there are substantial technological issues with communication reliability links, procedural problems that need to be addressed, and regulatory guidance that needs to be developed in order to realize a fully capable