Aviation Decision - Case Study Example

Aviation Decision: Student Name: Name of institution: Lecture; Date: Introduction This report discusses a major aviation decision made by Emirates Airlines in recent years. Emirates airlines in the past few years have shown intention to operate wide-bodied aircrafts. Emirates decision seems to be based on the obvious economies of scale made by flying more passengers on one aircraft. However, the decision to expand its fleet with wide-bodied A380 and Boeing 777s is not based purely on the cost implication of using Superjumbos. Emirates decision seems to be informed by other factors including the popularity of wide-bodied airliners among passengers. The stretched capacity of major airport runways is another major factor that has led Emirates to favor wide-bodied aircrafts over narrower models. This essay discussed the decision made by Emirates to phase out narrow-body airliners in favor of their wide bodied Boeing-777s and A380. The report starts by discussing the reason why Emirates had to make the decision to rely on wide-bodied airliners in the future. Secondly, the paper discusses the decision making methodology that Emirates used to arrive at the decision that is the subject of this report. Thirdly, the essay discusses some of the factors that could make Emirates decision to go wide-body fail. Notably, regulations remain a great risk to an airline which will rely on just two models of wide-body aircrafts in the future. In the fourth section, the reports discusses the type of biases the Emirates decision makers are susceptible to while deciding to only operate wide-bodied airliners in the Emirates fleet. Why the Decision had to be made? According to Kamel (2015), Emirates has made the decision to purchases more A380 and Boeing 777R airplanes and cease purchases of the A350. Emirates decisions is informed by the fact that the two wide bodied models carry more passengers than the narrow bodied models A330 that dominated the airlines fleet in past decade (Kamel, 2015). In January 2005, Emirates announced that they would order 100 A380s if Airbus agreed to upgrade the A380 model. Emirates preference for the wide bodied models emerged as the airlines view the bigger models as more profitable. Emirates have been the biggest buyers of the A380 SuperJumbo and have been pressing the Airplane maker to do a major upgrade of the airplanes engine (Kamel, 2015). The advantages for wide body airlines are obvious. For example, the A380 is the world’s largest airliner and seats over 580 passengers. According to the Emirates Chief, the wide body airliners hold enormous potential for an expanding airline like Emirates (Kamel, 2015). Emirates argue that the A380 and the 777s have greater passenger appeal and the potential to maximize profits for airlines by carrying more passengers in one trip. Evidence that Emirates is able to maximize profits is seen by the increasing profitability trends of the gulf carrier. In 2015, Emirates announced a 43 per cent increase in profits in the background of an industry where major airlines are grounding to a halt. The popularity of the Airbus is shown by the passenger numbers on Emirates most popular flights. The Airlines flights to London’s Heathrow are 90 per cent full (Kamel, 2015). This percentage of seat occupancy has not been achieved on other jet types proving the popularity of the A380 among passengers. The Airbus and the 777s have also a low seat-mile cost when compared to narrow body aircrafts. According to Kamel (2015), Emirates development of a new engine for the A380 could see the seat-mile cost fall by a further 10 to 13 per cent. In May 2015, Airbus announced plans to fly the A380 on Indian routes following the steps of rival Singaporean Airlines who introduced the A380 on the Mumbai route in May. SIA was also the first Airline to fly the A380 on the Singapore/Sydney route, while Qantas soon followed with its own A380 flights on the Sydney route. Given the popularity of the A380 with passanger, Emirates had no choice but to focus on increasing the number of wide-bodied A380s and 777R in its fleet. The airport industry is also increasingly characterized by capacity constraints at major hub airports. In some airports like Heathrow getting parking space is expensive and difficult. In Airports like JFKA, airplanes have to line up to approach the airlines. In addition, the airline industry continues to grow meaning more airport space will be needed to handle demand. Emirates may be aiming to handle to problem of capacity constraints by resulting to wide-body aircrafts that carry more passengers. According to European Commission (2015), over 1000 of the world’s most important airports are experiencing capacity constraints. Even smaller airports experience capacity constraints during peak hours and peak season. Many airports are unable to expand due to opposition by the public and sometimes for lack of resources like land to cater for the expansion. Many aviation experts view wide-body aircrafts with greater passenger capacity as part of the solution to capacity constraints at major airports. Airports in Europe, Asia and North America are already facing capacity constraints. According to European Commission (2015), the demand for air travel will double by 2030. Already five European Airports: Frankfurt, Gatwick, Heathrow, Milan Linate and Dusseldorf are operating at full capacity. In 15 years time, more European Airport will be saturated. Capacity constraints will be expected in Paris CDG, Athens, Vienna, Warsaw and Barcelona1 (European Commission, 2015). Emirates has these in mind as the A380 replaces between 2 and 4 ordinary airports therefore reducing the strain on airport capacity greatly. Airport capacity is expensive and thus the less capacity Emirates needs, the lesser the cost of operating its fleet. Airport runways are the most expensive airport resource and Emirates are able to cut their expense of runway by operating bigger planes. The A380 and 777R enable Emirates deliver more passengers to a destination airport with just a few planes. This means that Emirates is able to address the problem of capacity constraints while achieving cost reduction. Competition is also a major factor when Airlines are making decision on the type of Aircrafts they will have on their fleet. Competition in the airline industry is intense and Emirates may want to change its fleet to wide-bodied aircraft that are more preferred by customers (PKT, 2014). The fact that Emirates major competitors are also shifting to wide-bodied airplane explains Emirates decision to make the Wide-bodied 777R and the A380 the mainstays of their fleet. Emirates feel that the wide-bodied aircrafts enable them to deliver the quality its customers expect from them. Changing regulations in the airlines industry are also another major motivation for the decision to go with wide-body aircrafts. Emirates decided to deploy the A380 on its Dubai-Mumbai route after the Indian government removed restrictions on the use of the A380 in Indian Airports (PKT, 2014). Emirates also started using the Boeing-777s on the Delhi, Mumbai and Hyderabad route. Singaporean Airlines introduction of the superjumbo came after the Indian Airport lifted a ban they hand placed on A380 landing on Indian Airports. Emirates can now be able to operate the A380 to the Indian airports of Mumbai, Delhi, Bangalore and Hyderabad. These airlines are able to handle the batch arrival of passengers from large airliners like the A380 and the Boeing-777R. The Indian government had imposed the ban on A380 flights into its airports after worries that their ability to carry hundreds of passengers would hurt Indian Airlines. What Criteria did Emirates use to make the Decision? The measured criteria decision making methodology is one of the most appropriate decision techniques to use in making the decision to use wide-bodied airliners exclusively (Smith, 2003). The measured decision criteria assign point to each decision criterion according to their relative importance to the decision at hand. Then each of the decisions alternatives is given points according to how well they meet the criterion. When points have been assigned to all alternatives, the points are added up and the alternative that scores the highest is chosen. Criterion Possible points Narrow-Body Airliner Wide-Body Aircraft Mile-seat economy 30 20 25 Passenger Preference 30 15 30 Adoption by Rival 20 10 15 Solution to capacity constraints at Airports 10 5 8 Total 90 50 78 Alternative Decision Methodology Emirates could have used the Decision Matrix or Weighted Decision Table which is more sophisticated (Smith, 2003). In this methodology, the alternatives are given a ranking for each criterion while each criterion is weighted like in the measured criteria method. Factors that could lead to the decision going wrong Airbuses lack of commitment to the A380 The airliner manufacturing industry is dominated by Boeing and Airbus who make the A380 and the Boeing 777s. These two aircrafts are the mainstay of Emirates future fleet as shown by the airliners expansion plans (Schlappig, 2014). Unfortunately, Airbus has not committed to the development of the A380 and has been quoted as saying they will cease production of the model (Kameel and Rothman, 2014). Emirates has taken delivery 0f 57 A380s out of an order of 140 A380s it made. Emirates seems to be the only Airline interested in the A380s as no airline made orders for the A380s in 2014 (Schlappig, 2014). This concern about Airbus discontinuing production may interfere with Emirates plan to make the A380s and the Boeing-777s the mainstays of its fleet. Emirates have complained bitterly about Airbus’ plan to end the production of the A380s. Economic downturns Economic fortunes of the countries served Emirates could affect passenger numbers on many of the Airlines routes. During the recent global economic crisis, the gloom in the financial markets dampened demand across various industries including the airline industry. There is no guarantee that such economic misfortunes may not reoccur in the future affecting Emirates strategy of using economies of scale to maximize profitability (Smith, 2003). If passenger numbers go down, Emirates will be forced to fly under capacity on the A380 and 770s which off course consume more resources to fly than their narrower-bodied alternatives. Emirates may find is hard to maintain profitability if it can’t manage more than 50 per cent seat occupancy on the super jumbos. In 2003, British Airways and Air France had to drop the supersonic Concorde from their fleets after a downturn in passenger numbers was experienced in the airline industry (Concorde Retires, 2003). The main advantage of the Concorde over other airlines was speed. However, the speed advantage did not save the supersonic jet when passenger numbers started dwindling in the early 2000s (Westcott, 2013). Similarly, the appeal of the A380 and 777s might not suffice when passenger numbers drop. In fact, the ability to carry many passengers is a disadvantage in the event of an economic downturn thet forces passenger numbers down. In such a case, the airlines that will be still operating low capacity airplanes will be at an advantage as they will be able to fly the fewer passengers cheaply. Reduction in the number of Trans-atlantic flyers in the early 2000s meant that the Concorde could not be operated profitably and it was hence retired. Government Regulations Government regulations in the aviation industry are a significant factor that affects the operation of airlines. As seen earlier, a ban on A380 in Indian Airport prevented major airlines from flying the A380s into the Indian cities of Hyderabad, Delhi, Mumbai and Bangalore (PKT, 2014). Some government may take similar protective stances that may prevent the superjumbos from flying into their airports. The decision to use A380 and Boeing-777s will also run into problems if any of the two airplanes develops safety problems. One of the most iconic airliners of the last two decades, the Concorde, was retired in 2003 after it started experiencing safety problems. After a crash in 2000, the safety of the Concorde came into doubt and was one of the causes why the supersonic jet lost favor with travelers. It would be a disaster if Emirates are forced by safety concerns to drop the A380 or the 777s from its flights. In the next two years, Emirates will be home to over 140 A380s. If a significant safety defect affecting the Superjumbos comes to the attention of Aviation safety authorities, the A380 may have to be grounded. If that was to happen, it would be disastrous for Emirates who would have become dependent on the two airliners. Unfortunately, the A380 is a relatively new Aircraft model and its safety is still unproved. In addition, if an A380 clashes and kills all on board, the amount of despair it would cause just by the sheer number of deaths is too great Survivorship Bias Survivorship bias is one the biases that could affect the decision makers at Emirates when deciding to phase out narrow bodied aircrafts. Survivorship bias is defined as an overly optimistic look at the market while overlooking possible failures (Amin and Kat, 2003). For example, If Emirates decision on retaining wide-bodied aircrafts depends on the monthly sales survey in the airline industry, it is susceptible to survivorship bias. Most sales surveys are conducted with little regard for the reasons that drive increases in sales or decreases. Many market reports have predicted immense growth in the Airline industry. However, Emirates should be keen to discover the drivers of this growth to avoid suffering from survivorship bias. For example, increase in ticket sales may be recorded if an airline rival goes under (Amin and Kat, 2003). Thus growth in sales for the remaining airlines does not translate to growth in demand. However, decision makers suffering from survivorship bias will interpret such growth in sales as a trend of continuing growth in the industry. Emirates must remember that survivorship bias impact data and are causes of serious distortion. Since failure is not included in the data used to make decisions, the outlook is overly optimistic. Analysis of information with survivorship bias leads to overly optimistic decisions that may lead to the demise of the airline. Confirmation bias Confirmation bias is another type of bias that may affect the decision to only retain wide-bodied aircrafts on the Emirates fleet. Confirmation bias is termed as the tendency to look for and depend on information that conforms to ones views and expectations while ignoring opposing information (Klayman, 1995). Confirmation bias leads decision makers to make unbalanced decision that are based on narrow biased information. For example, if Emirates decision makers ignore information about the performance of large-capacity airlines in economic downturn they will have fallen victims to confirmation bias. Unfortunately, humans are susceptible to confirmation bias by their very nature. According to Klayman (1995), it is a known human tendency to collect information that support ones beliefs and ignore information that contradicts such beliefs. In addition, confirmation bias extends to the analysis of information as individuals with this type of bias will analyze a given set of information to arrive at their favored conclusion. According to Klayman (1995), two individuals can arrive at different conclusion given the same information provided they have confirmation bias. Publication bias This refers to a situation where positive outcomes are given more emphasis and coverage than negative outcomes. It is well established that advisors, strategist, analyst and newspaper writers tend to underreport negative and over report positives (Dickersin, 1990). It is important for the decision makers at Emirates to be aware of the publication bias for the sets of data they use to make the decision involving wide-body aircrafts. Consideration must be given to the fact that information published on the A380 and Boeing 777s contains considerable publication bias. Publication bias may for example overlook safety defects in the two airlines which may affect the operation and profitability of Emirates in the future. Decision makers must remember that most of the time they will be making decisions based on positive publication bias. Many times you find report that have phrases like “ the quarterly growth exceeded expectations” “the airlines A380 flights to Heathrow are almost always 90 per cent full”, the A380 is very popular with customers” among other positive references to alternatives in the decision to be made (Dickersin, 1990). It is the work of the decision maker to discern any publication bias that is present in the reports that will be referenced in the decision making. To overcome biases in decision making competence in behavioral finance is needed (Dickersin, 1990). Survivorship, confirmation and reporting bias can be overcome by understanding how our own behavior impacts our investment decision. Recognizing the potential biases and their effect is important in controlling the effect of biases on decision as important as maintaining a wide-body fleet of airliners. Evaluating the Effectiveness of Investment Decision Emirates adoption of wide-body aircrafts for their fleet is a decision whose effectiveness will have to evaluated. Evaluation of the decision involves checking whether the desired objectives of the decision are being achieved. In this case, the criteria used in making the decision will have to be checked and most importantly are they being achieved. One of the most important aspects of evaluating investment decision is knowing whether they are profitable. In such a case, Emirates can apply the Internal Rate of Return (IRR) to analyze the cash flow analysis of the revenue being brought in by the wide-bodied fleet of airliners Internal Rate of Return (IRR) is one the financial metric used for evaluating capital acquisitions, project, proposals and investments (Lumby and Jones, 2001). IRR compares the timing and magnitude of cash flow returns with cash flow costs. Emirates can use the IRR to Conclusion Emirates decision to phase out narrow bodied aircrafts and remain with the A380 and the Boeing 777s seems to be good. Emirates Airline is able to make major cost savings and maximize profitability by flying the high capacity wide bodied planes instead of the smaller alternatives. Emirates decisions also seem to be visionary as wide bodied high capacity airlines have been quoted as one of the solutions to overstretched runways at major airports. However, Emirates must make sure that the decision is not too optimistic by considering the various biases that may affect the decision. Before, deciding to order only two versions of Wide-bodied airlines it is important for Airbus to consider what would become of their fleet, if an A380 or the 777s are involved in an accident. Considering the potential problems that may arise from the decision reveal that Emirates are being too optimistic. References Amin, G. S., & Kat, H. M. (2003). 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