The MD-11: Its Short-lived Passenger Service - Essay Example

MD-11: Short lived passenger liner and future in cargo Introduction The paper will not consider matters of technical design. It will not consider matters of establishing safety standards etc. It will however seek to consider the market forces. The market forces in the areas of operation. This would be from the side of the operator and the market being served. Thesis Statement The aircraft should be seen as a machine. In this case it is a flying machine. Machines are classified by area such as operation, speed, capacity, type of fuels etc. In the case of an aircraft the main question is that of safety and that of economics. OVERVIEW Sub-classification The main emphasis is from the side of earnings and profits in six areas. First will be the overview of the subject. Then there is the impact of money concerns. This will be limited to areas of national factors and technology. It will next consider the market from the money side. Then the commercial aspects will be seen on the operation in a timing outlook. The timing outlook will reflect on the past present and future. It will show how closely related these time horizons are linked. In the end it will show why overall the MD-11 will be a very profitable investment. After these two considerations the aircraft should be further classified by size. Today it is narrow bodied or wide bodied. Finally is distance of operation. There are three, short, medium and long range. The economics is the strongest determinant in the market place. Economic Framework The general rule it that the machine (aircraft) is part of the assets of the corporation. The corporation is owned by stock holders. The corporation is created to earn income. The corporation can be owned by individuals. In other cases the corporation is owned by a government. In some limited cases there may be joint ownership. The corporation has to first determine how it will operate in a particular industry. In the case of aviation there are two main areas. The area depends on the service being provided. They are two services. The transportation of people called passengers. The other is moving of goods and products. This is called cargo. In some cases the corporation will decide if to operate exclusively in one area or if there should be some combination. This combination is called the product mix. The product mix is general used to maximize profit per operation. Market place There are market place constraints. This is based on economic theory. All business activity is governed by it. A quick definition is the management of scarce resources. First is the question of geography. This means determining if the business will operate within a country or between one or more states. The then the next constraint is to meet the requirements of the law. This is very complex. The manufacturer of the aircraft (machine) has to first meet the requirements. Then the corporation has to meet requirements for operation. MONEY ASPECT Aircraft Finance The financing determines the possibility of use. In this case the air cargo industry. The economic decision is to recover investment and to keep operating cost low to earn a profit. One financing method is to purchase the aircraft. This is mostly done for private operations. It is possible for commercial ownership. The reason is that aircraft costs are very high. A catalog price in this case can be higher than US$ 60 million. The cost is generally too high for private ownership. Leasing is the next option. There are three possibilities. First is the direct lending then operating leasing and third is finance leasing Acquisition by direct lending is possible because of the financial climate. The group of banks provides the funds. The banks then hold a security interest in the aircraft. This is usually used for short term financing. Short time in the industry is considered to be ten years or less. Finance leasing or capital leasing as in accounting language is for the long term. This is somewhat complicated because the aircraft is bought by investors. The buying process gives a special ownership to the buyer. This is because the buyer uses equity and debt to acquire the vehicle. The aircraft is now made available to the airline for operation. It might not be easy to have this arrangement for the MD-11 because it is now considered old technology. Taxation The arrangement for acquisition has different tax implications. The tax implications are influenced by the laws of the relevant nation or group of nations. The aircraft is acquired. There are tax matters during the ownership period. This is based on the ownership of the aircraft. The airline company is a separate tax implication. The disposition of the aircraft should be considered at the time of acquisition. It is possible to consider the tax implications at that future time. Operation In addition, the method of acquisition has an impact on the operation. There is a contract in place. The contract sets out the manner of use. It also sets out the conditions to be expected at the end of the contract period. Some contracts provide for the airline to buy out the interest of the financiers. Today the MD-11 will not easily meet such an arrangement. The reason is that the average airline operating the MD-11 will be cash strapped. The airline owners may be people knowledgeable in the freight business. They may not be investors holding large pools of cash. This way a short term contract will be more realistic. They may return the aircraft at the end of the contact. They will be free to seek a newer aircraft for their business venture. Owning the aircraft could leave the airline with huge losses. They would be holding an obsolete or near obsolete aircraft. The decision would be to operate it and have smaller profit margins. The other choice would be to sell it at a loss. This creates a loss on capital. There maybe tax benefits in some cases. Different nations have different tax treatments for such decisions. Intermodal Containerization The MD-11 has a reasonable to excellent future in the market because of the technology in handling cargo. The most important element today is the need to move cargo efficiently. The containerization of cargo makes this possible. The ULD is the most important tool in the operation of air freight. The Unit Load Device is a type of container designed for the aircraft industry. It reduces handling as the cargo is inside the device. The workers actually move the device instead of directly handling the cargo. The UDL are standard. The advantage is that it is possible to calculate the number of units to be moved. The conversions are very easy. The reason is that they easily fit different size aircraft. The MD-11 aircraft have about all been refitted with wider designed doors than those used for passengers. The aircraft can easily be handled with the same equipment as that used for the newer airliners in service. These ULD and the improved doors is advancement in technology that has helped the aircraft. In most cases, advances in technologies result in accelerating obsolescence. These two advancements in technology has increased the value of the MD-11. The line for present and future is further blurred. The ULD device brings the MD-11 an old aircraft in use today being able to operate in the same market as the future aircraft like B777 and B787. These are the aircraft for delivery after 2012. It will be agreed that 2012 is definitely in the future. Aircraft fly to move people or goods. In addition they spend a considerable amount of time on the ground. The place for them is highly specialized. The place for them on the ground is landing at an airport. There is quite often a fee for landing. The fee is not set. It is based on whatever factors the particular airport chooses. Some pricing components are weight, time of day, aircraft operator or type of aircraft. In some cases there are no fees to land. This may or may not have an additional charge for services after landing. The busyness of the airport may influence the amount of fees charged. There should be good management. It may be possible to manage efficiently the number of landings. These landing fees could add up. Such management can contribute to the lowering of operating cost over a thirty day period. Economics This makes competition a major factor in business activity. There is always the possibility of another carrier being able or willing to carry the load. This is part of the free market phenomenon. This way there is the potential for new entrants, and of course others to make exit from the market. Financing There is the comparison to that of an automobile. First there is out right purchase. This is rare except in the case of governments. In some cases NGO may enter into such arrangements. There is for private aircraft one general aviation. For commercial aircraft there are three approaches called schemes. They are secured lending operating leasing and finance leasing NATIONAL ASPECT The Manufacturers The MD-11 came into service in 1990. The problem is seen immediately. This is because the Airbus was in production almost twenty years earlier. The MD-11 is a three engine aircraft. Immediately the operating cost is significantly different and higher. It is much cheaper to maintain a two engine than three engine airliner. These are both wide body aircraft. The question of economic reality is dominant. The Airbus has two very powerful engines. The Airbus was made by government backed Aerospatiale in Europe. The MD-11 was made by a private company, McDonald Douglas. Later This Company merged with Boeing. This resulted in a new private company. These two companies were fierce competitors. A new private company emerged. It was able to use economies of scale. In addition it was able to compete directly with the European Airbus. Such a move was important because Airbus has the backing of several governments. In many ways the Air Bus Company is a state organization. Technology It is necessary to look at what is available. The availability has to do with the manufacturer’s product available. Nest is the cost of the product. And how will the financing be provided. There are two general ways of financing. First there is the possibility of buying the aircraft. The other alternative is to lease the aircraft. This second method of financing has some additional constraints. Aircraft performance The aircraft MD-11 is classified as a wide body medium to long range aircraft. This classification is important. It tells how far cargo can be taken in one flight. The more landings that are necessary on a trip increases the cost of operation. The cost of operation increases the cost of the freight to the shipper or owner of the cargo. The landings somewhat defeat the purpose of the air travel. The object is to get the cargo to the destination as quickly as possible. NATIONS AND TECHNOLOGY The container is an important tool. This is an old technology. It was used many years ago in the rail industry. It has become important because of computerization and the need for speed in operations. International Standards Organization, ISO specifications were introduced for handling all cargo. The immediate benefit was the standardization. This resulted in reduced damage and increased security of cargo. There was an immediate commercial benefit because insurance cost was significantly lower. This standardization helped in cross comparison cost between the competing modes of freight. It was now easier to consider the freight, whether sea, rail, or truck freight with air freight. Future of Air Cargo Liner The air cargo business is driven by air cargo planes available for service. The aviation business is driven by two factors after safety. The first factor is technology. The technology is in the design and production. Next it is considered in the maintenance of the aircraft. The other area of the technology is in the area of operation. The second factor is economics. This aspect is two fold in application. This is because it is directly linked to fuel consumption. Fuel consumption has to do with aviation economics. The other part of the economics is the personnel side. The personnel have to have specific training. In addition they must meet stringent health and life style conditions. Today we are faced with high energy prices. In addition the prices fluctuate widely and suddenly. It is important for the airline operator to be able to manage the fuel costs. The effective management of the fuel cost makes the airline profitable. In the process the cost of the freight is lower (Dennis, W., & Mathews, N. 2003). The lower freight price improves the marketing to the movement of cargo. The dominant unit will be supplied by Boeing. Actually there will be two units. First is the 777 and the 787. The competition will be from Airbus. It must be remembered that by 2007 the sales out to the year 2012 were confirmed. The B777 This is the outstanding freight liner of the present and future. The problem is that it has not received the projected orders to date. This is surprising. It has the best performance in distance and cost of fuel consumption. The aircraft benefits from advanced technology. In this way it can operate easily in sensitive noise areas of the world. Such a capability helps on night landings. The night landings can mean getting the freight in to the customer destination ahead of the competition. The B787 This is not necessarily a contender. It is called the dream liner. The very name speaks of comfort. Comfort is not a real selling factor in freight movement. Boeing had under priced the units at US $120 million. They since raised the price twice. This is a psychologically negative to the freight market. Plain and simple, a new customer is not willing to pay more than the earlier customer. Air bus The A380 was developed to be a passenger air liner. The error was to be in competition with the B747. That is why it is a four engine aircraft. Such a design has put it out of the market. There was much marketing effort. It has been too difficult to overcome the passenger liner image. In addition it has been more difficult to overcome the four engine design in the presence of two engine airliners. The result is that production and design has been cancelled indefinitely. Open Skies This is a concept that was encouraged by the USA. Simply it is the idea of accepting only market forces for the operation of commercial aircraft (Murphy, P., Dalenberg, D., & Daley, J. 1989). The operators are free to decide capacity and fee structure. The operators would recognize a mechanism for settling disputes. The operators would be also free to enter into cooperative agreements as they so desire. The government involvement would be limited. In most cases the government would provide security and safety. The government could also authorize a third country of operation. The intent would be to establish fairness without restricting trade. These two operational provisions show the blurring of the lines between the present and the future. MD-11 operators are free to seek out such operational environments where ever they see it possible to operate at a profit. Cabotage Cabotage rights are the rights to operate with in the territorial area of a country. This was first applied to travel on water. The concept has been transferred to aircraft operation. In this case it would be the use of airspace and airport facilities. MD-11 equipment may be able to gain an advantage by providing cargo service for developing countries. The country government or some of its commercial interest may not be able to acquire wide body service. The MD-11 will be worthwhile. There would be hardly any increase in operating cost. The operating cost would be kept low because of the ULD technology. The country dictates how cargo is moved within its borders. The restrictions would affect not only shipments but also trans-shipments. COMMERCE Operational Environment This is the aircraft available for acquisition. What is the existing availability of capital in the market place. Next is the segment of the industry choice for business activity. This is very important because this determines the profitability of the corporation. Passenger Travel Today’s market is extremely competitive. There is the no frills service. There is the frequent flier miles programs. The open skies system of air services agreements. This is relatively new. It is obvious that there is an emphasis on luxury. The wide open space gives that sense of luxury. In addition the passenger mile is impacted by the number of seats available per aircraft. The configuration of the seats also enhances the luxury feeling. These factors are the main ones to remove the M-11 from the present and future passenger market. Deregulation Entry into the market is easier than in the past in the USA and Europe. The same regions are the major producers of aircrafts. The regions also have high demand for the cargo service. Many think of deregulation as only in the USA. It exists in the European market. The complication exists because Europe is made up of different countries. Nationalism The airline industry serves almost all sectors of the modern economy. In addition the airline industry is served by many different sectors of the economy. One major sector is that of government. The national and military impact is directly impacted. In addition the airline industry is a collector of tax revenue for the governments. This includes the national government and the foreign government where the airline operates. Air Cargo There is the need to move products quickly and efficiently to the destination (Reed, D. n.d.). Today we have standardization. This has been facilitated by the use of computer technology. As a result cargo is moved by containerization methods. The added technology of computerization is another help to the operation of the MD-11. Bar coding can be read by the computer. The placement and movement of the containers now allows for easier tracking. TIMING Past The MD-11 Came into the market place when the technology had already changed. In addition the market had already changed. There was deregulation. The deregulation was happening in two major segments of the world market. There was strong deregulation in the USA. This is the home country of the aircraft. Then there was the deregulation in the European market. This is a major market in terms of business activity to earn revenue. It is also important because it is the place of major rival competition in aircraft production. The rival is the Air Bus. In the case of Europe there is the added problem in that the entire aviation market environment is dominated by government. This is particularly necessary since there are several sovereign nations in the European market. This is in contrast to the USA which is a single country or state. The added problem is that the MD-11 aircraft was late in reaching the market. This led them to seek other ways of market penetration. The problem is that the approach was overdone. They ended up offering too many versions of the same product. There were five products. Four of them had a significant cargo hauling selling feature. The company was vigorously trying to get passenger airliner market share. The company then started to market to FedEx. This is a major freight carrier. The product was then seen as a freighter. Added to this was the emergence of passenger comfort. The emergence proved to be a permanent shift instead of a slight preference. Present The industry is operating under very high fuel costs. The three engine machine cannot successfully compete with two engine machines. The aircraft is mostly used as a freight liner. By the end of 2008 There were less than five airlines using it a as a passenger liner. There has been substantial improvement in engine performance and reliability. This technological advance is used by new aircraft production. The company had plans to refit the aircraft with the third engine removed. This would have been a competitive advancement. The problem is that it would have been competing with the Boeing two engine aircraft. One example is the B737. It would not be practical to compete with it’s self since the new company would be producing and selling both. The economies of scale dictate the need for the newer model. A newer model is always seen as the better product compared to a refurbished or reengineered product. Future There is a place for the MD-11 in the form of a feeder or short trip aircraft. They can be used for small airlines. Such airlines serve short trips either directly to market or as feeder aircraft between larger airports. In addition it can be used as a backup unit for when the load is too small for the general high capacity wide body. At present it is necessary to have lower capacity units. This accommodates a product mix for profitability. This can be seen by the fact that the major airlines have small capacity aircraft with their wide body units. Air travel is mostly used for passenger traffic. The need to move people quickly and in comfort is the key factor. Aircraft cost are high in acquisition costs. This means that newer units will tend to be used for passenger traffic. The void will be filled by the use of older or air craft for air freight. There is a good supply of MD-11 Aircraft. This is due to the fact that they are currently in use as freight liners. Air lines will have a good supply of personnel and other resources to be used in the freight business. The specialized resources like those of personnel lend it well to air cargo. The Era The aircraft industry is a very new industry. The air cargo industry is also new. The jet engine is very new. The materials being used in aircraft production are also new. This results in an industry that for all practical purposes is difficult to separate into three separate segments of past present and future. At the same time, the movement of people and goods is as old as the hills. An interesting phenomenon is that today the various air craft in air cargo service go back to units from the earliest times. Such an old aircraft is the DC3 to the present MD-11 to the future B777 and B787 aircraft. All these aircraft are in service now. At the same time they are in production for firm deliveries more the three years in the future. Conclusion The economic factors have been the strongest driver. It has given the MD-11 a firm footing in the future freight market. It is obvious there will be no further production of the MD-11. Its original production company is out of business. The market place has changed for ever. The freight market will be dominated by larger and more efficient airliners. The airbus will seek to offer a product to compete with the present wide body leader, Boeing. This will result in further availability of wide body modern fuel efficient airliners. The MD-11 will be able to operate in places where there are small and or new air freight companies. Such companies will mostly serve regional markets. It will generally be used in some cases in some large airline companies. This aircraft can be used skillfully as part of the fleet of the larger carriers. If it is used with a large company, it will be in a subsidiary. The subsidiary ownership structure provides for control and profitability. This aspect is important to the stock holders of the parent corporation. The subsidiary approach is a great help. Asset sales are important to maximize profitability. The parent company can be strapped for cash. The cash can be made available by selling the subsidiary. Such a sale is of a separate business. Such a device avoids the disruption of the balance sheet of the holding company. The sale may also be due to favorable conditions in the market. The MD-11 has a secure future. Secure should be understood in the sense that it has to depend on what happens in the other parts of the global economy (Smith,B.1997). An increase in passenger travel will reduce the availability of airliners with the combined passenger freight configuration. A reduction in fuel cost will keep it in the competitive range with the two engine aircraft. A fall off in over all capacity will impact financing. Fewer people will b willing to finance new aircraft activity. The existing MD-11 has already been financed. The financiers will be willing to stay with the MD-11 as it has a good track record. In the finance world it would be said to be reducing investment risk in an uncertain financial economic system. References Dennis, W., & Mathews, N. (2003, October 27). Dragonair Moving Out. Aviation Week & Space Technology, 159(17), 47-47. Retrieved July 24, 2009, from Academic Search Premier database. Murphy, P., Dalenberg, D., & Daley, J. (1989, Winter89). Improving InternationalTrade Efficiency: Airport and Cargo Concerns. Transportation Journal, 29(2), 27-35. Retrieved July 24, 2009, from Academic Search Premier database Reed, D. (n.d.). Absolutely, positively a force in China. USA Today, Retrieved July 24, 2009, from Academic Search Premier database. Smith, B. (1997, June 16). MD-11 gains momentum with cargo operators. (Coverstory). Aviation Week & Space Technology, 146(25), 123. Retrieved July 24, 2009, from Academic Search Premier database. Read More