Fleet Planning for Allegiant Air - Coursework Example

Fleet Planning for Allegiant Air Dear Sir, Please refer to your memo dated 5 November 2013, where you raised nine questions on Fleet planning for Allegiant Air. I am enclosing detailed responses to each question. The next pages repeat the questions you raised, and give my answers. While the GGGF Nutcracker 1B spreadsheet forms the basis for calculation of effects of different fuel prices, lease rates, MRO costs and aircraft utilisations, where required, I have cited from academic resources, and these resources are listed in the reference section. Kindly let me know if you need further elaboration for any of the questions. Yours Sincerely, Robin Banks, Senior Airline Analyst 1. What is the strategy and business model of Allegiant Air? What makes the airline special? How is the composition of the current fleet related to the way allegiant conducts its business? Answer: Allegiant Air is a low cost airline carrier, operating in the Los Angeles and Las Vegas sector in USA. It uses the 'scheduled service business model', which serves leisure travellers in the northern regions and in ferrying passengers from different cities to casinos in Nevada, Laughlin, and Reno. The firm also serves as a connecting flight with larger air operators and often flies to smaller and less congested airports that have lesser airport charges and fees. The airlines uses a 'no frill' method and does not offer onboard entertainment or food, or water. Passengers need to buy these items, and this adds to the income of the aircraft. In addition, the airline operates on a 'charter' basis and takes a limited number of departures to ensure that it has a minimum of 87% passenger load factor (Subramanian, 1994). To keep its operation costs down, Allegiant Air initially purchased older McDonnell Douglas MD-80 in 2002, which it obtained at lower costs, but these aircrafts have higher operational costs per passenger, higher aircraft and fuel charges, and have a lesser number of seats. To remain profitable, the airlines must bring down the operating costs, while increasing the block per hour utilisation for the aircraft. Allegiant Air is considering switching over to the new aircraft models such as Airbus 757, Airbus 319 and Airbus 320. The plan is to phase out the MD-80 models while replacing them gradually with the newer models. The following figure gives the proposed fleet breakdown and composition until the end of 2015. This figure will increase to 53, while the total fleet will increase from the 66 units in 2013 to 78 units in 2015. The main reason why the airlines still operates the MD-80 aircraft is the lower monthly lease at $ 38,000 while the charges are $ 230,000 for A319 and $ 270,000 for A 320. This huge price differential has an impact on the operating costs (Nutcracker, 2014). Figure 1.1 Fleet composition and projection (Nutcracker, 2014) 2. What are the underlying prospects for Allegiant air in terms of traffic growth and how big is it likely to be In terms of RPK and a number of employees in 2015 and 2020? Answer: One of the most important metrics to calculate an airline operator's efficiency is the revenue per passenger kilometres - RPK. It is calculated as the product of (number of passenger) and the (distance travelled). Important concepts in this calculation are the stage length and journey of travel. Passengers travelling long distances pay more than those travelling shorter distances. However, the number of passengers carried is less in the long distance case (Feo and Bard, 2009). The passenger load factor also becomes important in deciding the RPK (Allegiant, 2014). Please refer to the RPK calculated for the three types of baselines, using data from the Nut Cracker Excel sheet.   MD-80 Baseline A319 Baseline A320 Baseline Seats 166 156 180 Average passengers per departure 144.4 135.7 156.6 Average stage length (km) 1500 1500 1500 RPK 216600 203550 234900 For the calculations, the average stage length is considered the same at 1500 kms. However, the number of passengers for each type of aircraft is different with MD-80 having a capacity of 166 seats, A319 a capacity of 156 and A320 having a capacity of 180. Hence, the RPK is maximum for the A320 model. In any case, the RPK depends on the passenger load factor, considered at a constant value of 87 percent, and if this factor reduces, the RPK will see an immediate fall. As per IATA predictions and forecast, airlines can expect a 31% rise in passengers by 2020. This figure is also considered for Allegiant, which generated $ 1 billion revenues in 2013 (IATA, 2014). With a 31 percent increase, the revenue by 2020 is expected to reach $ 1.31 billion considering fuel cost of $ 3.17 per USG. With increase in the number of aircraft, increase is expected in the number of employees. The number of employees by 2013 end = 2100 No. of aircraft = 66 Therefore, aircraft to employee ratio = 31.82 Expected increase in number of aircraft by 2010 @ 31% growth = 87 Therefore, expected increase in number of employees = 2768 3. What is your opinion about the composition of the current fleet? Answer: From the table presented in Q1, it is seen that by 2013 end, out of the total 66 aircraft, 52 numbers are MD-80, 3 numbers are A319 and five numbers are A320 model. This indicates that the fleet is mainly made up of MD-80 models. Please refer to the following table, whose values are extracted from the Nutcracker Fleet Planning sheet (Nutcracker, 2014).   MD-80 Baseline A319 Baseline A320 Baseline Average passengers per departure 144.4 135.7 156.6 RPK 216600 203550 234900 Monthly lease (US$) 38000 230000 270000 Block fuel (USG) 2507 1880 1980 Utilisation (block hrs/day) 5.55 10 10 Annual cost for one aircraft (US$) 89,77,208 141,81,876 154,16,760 Cost per departure (US$) 11,257 9,870 10,729 Cost per block hour (US$) 4,432 3,885 4,224 Cost per seat (US$) 68 63.3 59.6 Cost per passenger (US$) 77.9 72.7 68.5 Monthly lease for MD-80 at $38,000 is lesser than the $ 230000 for A319 and $ 270,000 for A320 and this makes MD-80 cheaper to lease than the two other aircraft. Additionally, the utilisation in block hours per day for MD-80 is 5.55, for A 319, and A 320 it is 10. This in turn means that MD-80 has to operate for only 5.5 hours per day to achieve the specified RPK while the other two have to operate for 10 hours per day, to reach the RPK, and this requirement can be a potential problem in the future when the passenger load factor of 87% is not available. When the annual costs of each aircraft are examined, it is seen that MD-80 costs are $ 89,77,208, while A319 costs are $ 141, 81,876, and A320 costs are $ 154, 16,760. This in turn indicates that MD-80 has the lowest annual costs, but all other the operating costs are the highest. 4. How can allegiant Air be successful using old aircraft when many other airlines are moving towards acquiring new, fuel-efficient types? Answer: Data presented in table for Q3, shows the various costs and the operating characteristics of the three aircraft types. It is obvious that MD-80 has higher costs, and it is important to reduce the costs, especially when other airlines are buying fuel-efficient aircraft. It is not possible to increase the fuel efficiency of the MD-80 since fuel efficiency is a function of the aircraft model and type. Hence, changes are suggested for parameters such as the 'average passenger load factor' (percentage) that is increased to 92% from the existing 87%. Other changes suggested are reducing the average stage length (km) to 1200 from the existing value of 1500 Kms. These changes have an impact on other parameters, including the four major costs heads (Gao, et al, 2009). Please refer to the following table that gives the changes and their impact for baseline and flex scenarios.   MD-80 Baseline MD-80 Flex - Changed 1. Average passenger load factor (%) 87% 92% 2. Average stage length (km) 1500 1200 3. Utilisation (block hrs/day) 5.5 8 Cost per departure 11,257 9,245 Cost per block hour 4,432 4,419 Cost per seat 67.8 55.7 Cost per passenger 77.9 60.3 As seen in the above table, by changing the values for the first three attributes, the overall costs of departure, cost per block, cost per seat and the cost per passenger is reduced. However, this has resulted in an increase in the annual cost per aircraft from $ 89, 77,208 to $ 129, 02,376. In any case, the impact of these costs is reduced when one considers the increase in average customers per departure from 144.4 to 153.2. Considering that, it is not possible to reduce the maintenance costs or increase the number of seats, the airline can consider changing the values and performance parameters for the three items listed in the table. 5. Is Allegiant’s president correct to suggest that the operating costs of old MD-80s are as low than more modern aircraft type? Answer: The operational costs refer to costs other than the leasing costs and cost of procuring the aircraft. These are fixed costs, and they do not have a direct impact on the operations. The costs included in the operational costs are cost per departure, cost per block hour, cost per seat, and the cost per passenger. Each of these costs has four components, and these are fuel costs, maintenance and repair overheads, leasing costs, and weight related costs (Swan and Adler, 2006). The following table lists the summary of these costs.   MD-80 Baseline A319 Baseline A320 Baseline Cost per departure (US$) 11,257 9,870 10,729 Cost per block hour (US$) 4,432 3,885 4,224 Cost per seat (US$) 68 63.3 59.6 Cost per passenger (US$) 77.9 72.7 68.5 Total costs (US$) 15,835 13,891 15,081 As seen from the above table, the costs of MD-80 at $15.386 are higher than the other two aircraft. Among these, the A319 model has the lowest total costs at $ 13,891. Among these, the cost per passenger is important, since it considers the number of passengers and the load factor. However, a closer look at the four cost components, presents a different picture. Please refer to the following graph, whcih illustrates a plot of the four cost components for the three aircraft for the cost per passenger (Nutcracker, 2014). Graph 5.1. Plot of four cost components for the three aircraft Among the four cost components, fuel costs as a percentage of the overall costs for the three aircraft are 55.5% for MD-80, 44.3% for A 319 and 40.5% for A320. The breakup of percentage for the other cost components is also indicated. It is clear from data in the table and the graph that operation costs of MD-80 are higher than the other aircraft. However, the utilisation block for MD-80 is set at 5.5 while for the other two aircraft, it is set at 10, thereby leading to their higher utilisation and lower costs. Even if this value was increased to 10 for MD-80, or if the values for the other two aircraft was reduced to 5.5, MD-80 would still have higher operational costs. Therefore, the suggestion by the president that operating costs of MD-80 are as low as other aircraft is incorrect. 6. Using the GGGF Nutcracker 1B spreadsheet, explore the effects of different fuel prices, lease rates, MRO costs and aircraft utilizations and you report on your finding. Answer: The Nutcracker Excel sheet gives detailed working of fleet costs with pre-assigned values for fuel prices, lease rates, MRO costs, and aircraft utilizations. As a part of the study, these values are changed and the impact on the four costs is calculated. Please refer to the following table that gives the new changed values for some of the parameters. The lower part of the table has the new costs and old costs for comparison (Nutcracker, 2014).   MD-80 Flex A319 Flex A320 Flex Fuel price ($/USG) 2.80 2.80 2.80 Monthly lease (US$) 38000 50000 50000 MRO (US$/block hr) 500 450 500 MRO (US$/cycle) 500 450 500 Average passenger load factor (%) 92% 92% 92% Average stage length (km) 1200 1200 1200 Utilisation (block hrs/day) 10 10 10   New costs/ Old costs   Cost per departure $/US 7897/ 11,257 6371/ 9,870 6782/ 10,729 Cost per block hour $/US 3,775/ 4,432 3,045/ 3,885 3,241/ 4,224 Cost per seat $/US 47.6/ 67.8 40.8/ 63.3 37.7/ 59.6 Cost per passenger $/US 51.7/ 77.9 44.4/ 72.7 41.0/ 68.5 Total Costs $/US 11,771/ 15,835 9,501/ 13,891 10,102/ 15,081 The changes done in the table are as follows: fuel costs changed to 2.8 from 3.2; monthly lease for A319 and A320 changed to 50,000; MRO changed to 500 only for MD-80; average stage length changed to 1200 and utilisation changed to 10 only for MD-80. The impact of changes in the costs is seen in the lower part of the table. The total costs for MD-80 have reduced from 15,835 to 11,771; for A319, the reduction is from 13,891 to 9501 and for A320, the reduction is from 15,081 to 10,102. Fuel costs, that make up between 60-72% of the costs have reduced from 3.2 to 2.8 and this is the current price of aviation fuel. Lease costs however contribute only 3% to the cost and the reduction in its value does not have much of an impact on the overall costs (Nutcracker, 2014). 7. It is understood that factors other than operating costs need to be taken into account when deciding on a fleet plan. Provide a summary of these factors and explain their influence on fleet planning decisions. Answer: When deciding on a fleet plan, a number of factors other than the operating costs need to be considered and these are discussed as follows (Deloitte, 2014; GE, 2014). When deciding on the MRO, a flat maintenance costs serves little purpose if the aircraft age is not considered. Aircrafts that are more than five years old, will need an extensive overhaul, replacement of the engine parts, and a full inspection of the hull. This can result in high expenses and the financial practice is to depreciate the airplanes in five years, so that adjustments can be made in the book of accounts, and the value of the airplane written off. Load balancing is important when creating the flight schedules, and when making the annual fleet plan. While larger aircraft such as A320 carry 180 passengers, the 87% load factor means that 23 seats will possibly remain vacant, while a 92% load factor possibly leads to 14 vacant seats. Hence, on routes with lower loads, it is better to use smaller aircraft. It makes better sense to have aircraft made by the same manufacturer. This reduces the number of spares needed since an aircraft manufacturer usually uses the same parts for different models. Low cost carriers are no frill aircrafts and do away with providing food and other services. However, the aircraft need to be clean, comfortable, and safe. Unclean and uncomfortable aircraft, rude airline staff, create a bad experience for customers and they may not fly again with the airline. Fuel costs and green aircraft requirements post pressure on airlines with aging fleets. Aircraft with lower fuel consumption reduce operating costs substantially. Aircraft with green technologies face lower taxes at airports, and customers prefer to travel on such aircrafts. However, the acquisition costs are higher for new aircraft. Tradeoffs, where the older aircrafts are traded for new ones, should be examined. 8. Although the airline has begun to acquire a small of used A319s and A320s , it has over 50 MD-80s . What are the options for the future? Would an investment from GGGF influence fleet planning strategy? Answer: As seen in responses for Q1, the airline has 52 MD-80 aircraft. There is no hope of reducing these aircrafts in the near future, considering that; Allegiant is not making very high profits. In addition, the cost of acquiring the new models of aircraft is high, with A319 having a monthly lease cost of $ 230,000, and A320 costing 270,000 per month. Acquiring the new aircraft models would reduce the operating costs; however, the lease costs are prohibitively high. An investment from GGGF would help to influence the fleet strategy. With sufficient funds, the Allegiant can consider repatriating the older aircraft with some write off for the older aircraft and hiring or leasing new aircraft. It will not be possible to replace all the 52 old aircraft in one go, and it is recommended that the older aircrafts should be replaced in phases (Papakostas, et al, 2010). 9. Preliminary recommendation for the future fleet? Answer: An important point to note for Allegiant Air is that it is a low cost carrier, 'no frills carrier'. Revenues from passengers are less since the fares are lower than other airlines. Making elaborate long term plans for modern technology and fuel-efficient aircraft looks good on paper, but airlines with low operating profits and low margins, find it difficult to afford new technology aircraft. Such firms usually operate on a short-term basis and seek profits so that they can remain operational. Procuring the latest types of aircraft is a good strategy, but these aircraft should be brought only to replace the older aircraft that have to be retired. In this way, the airline does not spend excessively on the new craft that are more fuel-efficient. The new aircraft have an utilisation block of 10 hours per day, for 365 days/ year, leaving no leeway for downtime and repairs. In addition, there is a demand for 92% capacity utilisation. While the forecast points to a 31% growth, any adverse incidents, accidents, can disrupt the operations, resulting in the fleet being grounded, and leading to huge losses for the airlines. Hence, the suggestion for the future is that Allegiant must be prudent, conservative, continue with its older fleet, and add new aircraft when the opportunity arises (Gopalan and Talluri, 2008). References Allegant, 2014. Investor Overview. [Online] Available at: [Accessed 16 July 2014] Deloitte, 2014. Aircraft fleet planning – a new perspective. [Online] Available at: [Accessed 15 July 2014] Feo, T. A., and Bard, J. F., 2009. Flight scheduling and maintenance base planning. Management Science, 35(12), 1415-1432. Gao, C., Johnson, E., and Smith, B. 2009. Integrated airline fleet and crew robust planning. Transportation Science, 43(1), 2-16. GE, 2014. Aircraft Evaluation & Fleet Planning. [Online] Available at:. [Accessed 15 July 2014] Gopalan, R., and Talluri, K. T., 2008. Mathematical models in airline schedule planning: A survey. Annals of Operations Research, 76, 155-185. IATA, 2013. Airlines Expect 31% Rise in Passenger Demand by 2017. [Online] Available at: [Accessed 15 July 2014] Nutcracker, 2014. Aircraft Fleet Planning. College Course Notes Papakostas, N., Papachatzakis, P., Xanthakis, V., Mourtzis, D., and Chryssolouris, G., 2010. An approach to operational aircraft maintenance planning. Decision Support Systems, 48(4), 604-612. Subramanian, R., Scheff, R. P., Quillinan, J. D., Wiper, D. S., and Marsten, R. E., 1994. Coldstart: fleet assignment at delta airlines. Interfaces, 24(1), 104-120. Swan, W. M., and Adler, N., 2006. Aircraft trip cost parameters: A function of stage length and seat capacity. Transportation Research Part E: Logistics and Transportation Review, 42(2), 105-115. Read More