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Discussion 6

Discussion 6

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Module 12 Information

Fleet Planning

One of the most difficult decisions airline managements must make is whether to buy new or used aircraft and what type.  Alternatively, they must consider whether it makes better financial sense to modernize older aircraft already in their fleet or to acquire aircraft from the outside. Many additional factors, including the costs associated with engineering and maintenance, must be weighed. The factors are constantly changing, and their relative importance at each airline depends on the carrier’s individual situation

Factors in Fleet Planning
Many factors must be balanced against one another:

· Maintenance costs

· The price of fuel

· The availability and price of used aircraft

· Resale value

· The price of new aircraft

· Terms of purchase

· Cash flow

· Debt/equity ratio

· The availability of money from lenders

· The receptivity of Wall Street to the issuance of stocks, bonds and debentures

· Interest rates

· Route structure

· Competitive situation

· Strategy

· Labor costs

In the Pre-deregulation era fleet decisions were simpler, usually based on technical considerations. The airframe and engine manufacturers came up with improved models, and the airlines bought them on about a five-year re-equipment cycle. With deregulation, the established airlines had to find ways to reduce the operating costs associated with aircraft already in their inventory that were not as efficient as the newer generation of equipment. In the quest to achieve the lowest possible unit cost, U.S. airlines have come to stress hub and-spoke route systems where practical, impacting fleet planning . With deregulation, economies of scope are perhaps as important as economies of scale This has led carriers to serve not only more city-pair markets but more varied markets than ever before. This, in turn, has caused the largest airlines to require a wider variety of aircraft than ever before. As the hubs become increasingly congested and slot limitations more constraining, there is a natural tendency to schedule larger aircraft rather than smaller ones through the hub, especially during periods of peak activity

Fleet Rationalization: Consolidation of the industry during the 1980s as a result of mergers has led to a proliferation of specific aircraft types operated by any particular carrier As the number of airlines capable of placing launch orders and of becoming sponsors of new aircraft types diminishes with consolidation, the manufacturers also experienced added pressure to lower prices. Still another anticipated effect of consolidation and subsequent fleet rationalization is that aircraft will tend to stay in the fleets even longer.

Fleet Commonality: One of the main reasons for aircraft purchases in large numbers is fleet commonality. Some aircraft types of the same manufacturer have common pilot type-rating, meaning that pilots can fly on both. Engine choice is offered on almost all new transports having 200 or more seats, and is an important factor in decisions to buy a particular type Usually, the selection is based on power plant commonality with other aircraft in the operator’s fleet

Long-Range Aircraft: The Boeing 777, launched in 1990, is aimed at markets between the 767 and 747; it competes directly with the A330/A340 series. In late 2011, Boeing launched the 787 Dreamliner, a mid-sized twin-engine wide body aircraft that is capable of carrying between 250 and 300 passengers This aircraft will compete against Airbus’ 350 XWB, a 250- to 550-passenger long-range aircraft that was available in the mid 2010s. More detailed information on the manufacturers is below.

The trend toward leasing: The choice for an airline interested in financing a new airplane is, ultimately, to lease or purchase the aircraft. In 1984, only approximately 20 percent of the world’s commercial aircraft were leased. By early 2000, however, leasing had become far more popular, accounting for well over half of all aircraft acquisitions. There are two types of leases, operating and financial: An operating lease is a non-cancelable short-term lease; at the end of the lease, the lessor retains full title to the asset and bears any market risk as to its value at that time. Under a financial lease, title passes at the end of the lease to the lessee for a pre agreed-upon sum. Some of the most prominent aircraft leasing companies include: AerCap (
AerCap (Links to an external site.)
)), Air Lease Corporation, and Dubai Aerospace Enterprise,.

Corporate fleet planning is interested in information about:

· Current Resources. The carrier’s current resources include its present fleet inventory by type of aircraft, use, and month (see Tables in the Chapter)

· Corporate Objectives. Top management’s objectives for the company, or corporate objectives, include forecasted profitability and other Key Performance Indicators

· Projected Industry Environment. Projected industry environment include the outlook for the national economy, the outlook for the industry, and the carrier’s performance within the industry

· Marketing Strategy. This is a key piece of information, requiring considerable interplay among corporate planning and other administrations, primarily marketing

The aircraft evaluation process can be broken down into five areas:

· Design Characteristics. Design characteristics include such factors as the aircraft’s dimensions, weight profile, fuel capacity, type of power plants, systems and seating configuration

· Physical Performance. Physical performance characteristics include items such as payload-range diagrams, takeoff and landing data, cruise and approach speeds, runway requirements, and noise performance

· Maintenance Needs. Maintenance needs include spare parts availability, aircraft compatibility with the rest of the fleet, product support, technical record keeping, and training support

· Acquisition Costs. Acquisition costs include the cost of the aircraft itself plus spare parts, ground equipment needed, maintenance and flight training required, and the cost of the money itself if the aircraft is to be financed through debt or equity financing

· Operating economics. Revenue potential and direct operating costs in terms of airplane miles and seat-miles must be examined

Duopoly Economic Models

A duopoly is an oligopoly where there are only to manufacturers. The classic case was developed by Cournot in 1838 for a homogeneous product (well water) and each firm treats the output of its competitor as fixed (conjectural variations) which generates its residual demand curve.  The model is not that difficult to develop and lends itself well to a game theory treatment the solution of which is a Nash equilibrium.  The solution is not competitive which is to say that economic profit can be earned.  If you are interested the NSF funded Experimental Economics Center at Georgia State has developed a suite of tools (EconPort) experimental economic markets and you should recall this from earlier in the course. Take a look at the Industrial Organization section of the handbook for some interesting treatments of duopoly. 
 EconPort IO (Links to an external site.)

Also a quick google search on “cournot model” will generate a number of interesting resources for looking at duopoly models.  It should be noted that the small airplane (General Aviation) manufacturing market in the US is also a duopoly with 
Textron (Links to an external site.)
 and 
Piper (Links to an external site.)
 as the major manufacturers although they have been receiving some competition recently from 
Cirrus Aircraft (Links to an external site.)
 and 
Diamond Aircraft Industries al (Links to an external site.)
though Diamond was recently acquired by China.  Finally the most competitive segment of aircraft manufacturing is the light sport and experimental market, see the Experimental Aircraft Association (
EAA (Links to an external site.)
) for more information about this market segment.

Fleet Optimization Modeling

The fleet optimization modeling process can be quite complex and involves the factors discussed above blender into a modeling process, usually linear programming where you want to find values for decision variable that maximize (profit)  or minimize (cost) the value of an objective function subject to constraint (capacity, resources, competition, etc.). While we will not go into detail on this , the attached paper for airlines in China gives you a sense of what is involved  (
Wang et al., 2015

  download).

Aircraft Manufacturer Material  

What follows here is information on airplane characteristics as they pertain to airline operations and particular city pair routes. The Boeing decision to continue the 737 line is also discussed.  You should note the differing pilot management philosophies between Airbus and Boeing.  Also in what follows the regional jet manufacturers are also discussed. Embraer is connected with Boeing and Bombardier is a part of Airbus so with respect to the airline aircraft manufacturers the duopoly market structure is appropriate.

Big Plane vs Little Plane: 
Video (Links to an external site.)

Little Plane War   
Video (Links to an external site.)

Boeing s Airbus:  the
737Max (Links to an external site.)

 

Airbus

A320 Compilation for Jetsmart ( A Chilean Low Cost Airline)  
A320 (Links to an external site.)

Airbus partnership  with engine manufacturer Rolls Royce   
A330 (Links to an external site.)

A330 Assembly: 
A330-900 (Links to an external site.)

Here’s an interactive image of an A330  cockpit:  
Cockpit (Links to an external site.)

Bombardier CRJ Regional Jet:  
CRJ (Links to an external site.)

Check out this PDF on the Market Forecast 2017-2036 from Bombardier Commercial Aircraft:  
Market Forecast

 download

Boeing

 Boeing 777 Advanced Manufacturing:  
FAUB (Links to an external site.)

Boeing 777 China Airlines Interior:  
360 Video (Links to an external site.)

Boeing 787 Japan Star Wars 787:  
ANA 787   (Links to an external site.)

Embraer E-Jet 
 EJET
 (Links to an external site.)


         

Check out this PDF on the 2019  Embraer Aircraft Finance Outlook: 
Finance Outlook

 download

 

Airports

How Airports Make Money:
How Airports Make Money (Links to an external site.)

How Airports Make Money

 

U.S. Airspace

A Day in US Airspace: 
NASA video (Links to an external site.)

FedEx Impact on US Airspace: 
Video (Links to an external site.)

What happens in Memphis:
Video (Links to an external site.)


Minimize Video

Discussion Paper 6 Information/Assignment

Develop a paper that describes historical, current, and expected future economic profit potential and  conditions for the aviation industry segment that you selected in  an earlier module. an aviation industry. In your report you should discuss the industry definition using NAICS and address how the industry has been changing (growth, concentration, technology pandemic impact, etc.) over the last few (four) years or so. Information on growth and concentration can be taken from  or computed from the federal trade commission web site (see links) or various other sources of aviation data. The specific concentration measure to use is the Herfindahl Hirschman index which is based on market share although concentration ratios can be used as well. Discuss some of the financial statement characteristics associated with a major firm in your industry. Also develop a financial (stock) market perspective where you examine how the major firms in your industry have performed. Be sure to examine your industry using the perspective from Michael Porter’s Competitive Forces Model. Also, for the firm you select within your industry develop a Business Model Canvas that spans the nine elements that make up the model. You can use but do not copy the Southwest Airline business models that were presented in one of the earlier course modules. You can also use materials that you have developed in earlier papers that you wrote for this course.

Your paper should include tables and charts supporting your discussion of your selected industry.  After reading your report an investor should have a good picture of recent and current trends and profits in your selected industry along with its strengths, weaknesses, opportunities, and threats and be able to decide if an investment in the industry should be made perhaps by adding the firm you examine to an investment portfolio.

General Paper Information

1. Your paper should be 25 pages or less of double spaced text in a 12 point font with a ragged right margin. Only text counts toward the page limit.

2. Your paper should be a Microsoft Word Document and should have a title page that, in addition to the title, includes your name and email address.

3. Your paper should have a set of references that you used to find information for your content. If you use the material of others acknowledge that use with a reference in your text, for example, (Smith, 2007) or (BEA, 2003).

4. You should not use wikepedia, investopedia, cliff notes, etc., etc. as references for your paper.The report should not be copied text from other sources; it should be in your own words. Your report will be run through a plagiarism checker (


http://turnitin.com/static/plagiarism.html (Links to an external site.)Links to an external site.


).

5. You should use tables or charts from aviation and economic web sites in your paper to illustrate your discussion.

6. The style guide to use for your paper is the APA style guide (
http://apastyle.apa.org (Links to an external site.)Links to an external site.
). Do not get bogged down with style, no need for abstracts, tables of contents, lists of figures or charts. Just text with citations and references (not a bibliography).

 

 

 

 

 

Grade Rubric for Research Report

 

 

CATEGORY

13-16

9-12

6-8

0-5

Organization

Information is very organized with well-constructed paragraphs and subheadings.

Information is organized with well-constructed paragraphs.

Information is organized, but paragraphs are not well-constructed.

The information appears to be disorganized.

Information Content

All topics are addressed with text and current and recent data about each.

Most topics are addressed with text and current and recent data about most.

Most topics are addressed with text with very little current and recent data about each.

Many topics not addresses and very little supporting data.

Quality of Information

Information clearly relates to the main topic. It includes several supporting details and/or examples.

Information clearly relates to the main topic. It provides 1-2 supporting details and/or examples.

Information clearly relates to the main topic. No details and/or examples are given.

Information has little or nothing to do with the main topic.

Sources

All sources (information and graphics) are accurately documented in the desired format.

All sources (information and graphics) are accurately documented, but a few are not in the desired format.

Most sources (information and graphics) are accurately documented, but many are not in the desired format.

Many sources are not accurately documented.

Mechanics

No grammatical, spelling or punctuation errors.

Almost no grammatical, spelling or punctuation errors

A few grammatical spelling, or punctuation errors.

Many grammatical, spelling, or punctuation errors.

Diagrams & Tables

Diagrams and tables are neat, accurate and add to the reader’s understanding of the topic.

Diagrams and tables are accurate and add to the reader’s understanding of the topic.

Diagrams and tables are neat and accurate and sometimes add to the reader’s understanding of the topic.

Diagrams and tables are not accurate OR do not add to the reader’s understanding of the topic. 

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