Fleet Planning - Case Study Example

Fleet Planning The airline industry is basically one of the major industry around the globe which services every corner in the globe approximately. It is a huge industry having its effects on other industries as well. In any particular country, the airline industry is one basic industry that can affect other industries such as the tourism and the global airline manufacturing industry. In the last decade or so, the airline industry has faced major hiccups in terms of revenue and profit earning. There has been a major change in the airline industry’s cost and revenue structure because of many factors such as global economic crisis, increasing fuel prices, environmental issues, etc. It is all because of all such various factors, it is considered that the airline industry is a vibrant and unpredictable industry. As this industry has been really dynamic of late, it has been considered by many airline service providers to alter their performance style into a private management style rather than the earlier government interfering style. (The Global airline industry program) To respond to the dynamic nature of the airline industry, many airline service providers have followed a low-cost strategy and to be able to apply this low-cost strategy, fleet planning strategies have been followed. In order to implement a successful the fleet planning strategy, companies have focused upon four different issues: Costs are a major factor that enables a company to earn profits. If the costs are controlled properly, higher profits would be earned. In recent years, costs have been an important aspect towards a company’s success. The knowledge and control of the costs provided by the latest aircraft models, engines and fleet universality are an important aspect in the assessment of future fleet necessities. Demand in the market is another aspect which ascertains the requirement of fleet for a company. The general demand by the customer regarding the services provided and the fares offered would also be necessary in ascertaining the appropriate fleet for a company. Seating capacity and utilization would also help an airline company to ascertain the aircraft to be bought. All such factors would have to be looked upon and after these factors are properly understood and evaluated, a reasonable profit earning fare would be fixed by the airline companies. What costs and revenues are most important in evaluating the following fleet options and why?  1. When adding more aircraft of the same type It should be noted that there are factors that influence the buying of a new aircraft. The biggest revenue/cost saving of adding more aircraft of the same type is the compatibility and similarity, for example Airbus in marketing their Aircraft claims that communality exists between their aircrafts and the of having a fleet of different type sizes of aircraft from Airbus would: Less time is needed in training pilots from flying one type of aircraft to another. It also takes less time in training maintenance manpower from maintaining one type of aircraft to another. Since the systems are similar and properly use the same tools and procedures for maintenance or even operation such as refueling, or baggage handling, that would have a big effect on the operational costs. COSTS The only main cost of communality is that if having the whole fleet of the same type of aircraft, it is difficult to change and the airline would not be in a good position in the negotiation for a new aircraft with the manufacturers, while if they have a mix fleet they can buy one aircraft type or another so that would help them get a better price of the aircraft needed. (Wail I. Harasani) 2. When replacing a fleet of older aircraft with fleet of new aircraft of a similar size When a company decides to replace its existing aircraft with a newer one, it has to look upon different factors. The usual public perception is a positive one when an airline company replaces its existing aircraft with a new one and this leads to an increased preference by customers towards that particular airline company but this factor alone does not make it a decisive one. There are other factors which need to be looked upon. The positive aspects of such a decision are: The new aircraft would need minimal maintaining and almost no overhauling costs. The new aircraft would be more fuel efficient It would also have a reduced carbon emission, hence representing the company as an environmental friendly company. There would a technological advancement in the new aircraft as compared to the older one. Higher insurance costs with older aircrafts Besides all such positive aspects there would be other negative or worrying issues as well: The new aircraft would require a very high cost for the company, this cost would be such that it would require a lot of time for the company to extract the new aircraft cost out of the profit earned for that particular airline. The purchase of the new aircraft would require financing and if the interest rates are high, it would more costly for the company to acquire the new aircraft. (Aircraft analysis and fleet planning, 2005) Such decision of replacing the aircraft usually revolve against the basic and the major issue of the capital expenditure required to buy that aircraft 3. When replacing with aircraft of larger size. The A380 not only delivers lower costs but also gives a 50% increase in seats in a "slot" at an airport. At key airports where you cannot get any more runway capacity (e.g. London Heathrow) it becomes the only way to grow your market if you are already running 747s. (Dani Alonso) In A380 biggest economic advantage to look for is the sheer volume (carry more passengers the same distance), but also need to take into effect the related operational cost savings of operating two A380s instead of three 747-400s. You will need one third less flight crew (four instead of six), probably 20-30% less flight attendants (depending on how the airline staffs), one third less ground crew (since the A380 loads cargo the same way a 744 does through two doors), 20-30% less catering and cleaning crews (the A380 has more galleys and cabin square footage), etc. (Brandy Madison, 2009) Landing fees should be a little less (since they are based on weight and an A380 is about 100 tons heavier than a 744, but two A380s wont weigh as much as three 744s). Along with that, there would be savings in maintenance and fuel costs of operating fewer planes. Add it all together, and if you have the traffic patterns to fill a couple of them, you can see how an A380 can seriously lower your operating costs on a route versus flying flocks of smaller planes. Airbus A380 The 787 is more a "traditional" airplane in terms of operation. It needs two crew members similar to the 757/767/A330s that it will be replacing. It will have roughly the same number of seats, so flight attendant costs will be the same, as well ground crew/catering/cleaning and such. Being all-composite, the 787s weight will be significantly lower, which means it will burn less fuel then the planes it replaces (and that fuel burn will be improved with the new generation of engines used) and landing fees should be lower, as well. The lower weight also will allow the 787 to load more cargo which will help generate more revenue. So in the end, the A380 uses its size to make it cheaper to run fewer of them than smaller planes. And the 787 just makes the plane significantly cheaper to operate then a comparably-sized older plane. There are a number of routes that need the capacity of the A380, which is why it will be a success and there are a whole lot of routes that dont need an A380, but could use a more efficient version of what they are flying now, which is why the 787 will also be a success. (PlaneSpottingWorld.com) 4. When replacing with or adding aircraft of longer range Expansion fleet tends to be viewed and valued more comprehensively. Airline profits are sensitive to even slight changes in fuel costs, average fare levels and passenger demand. The main competitive factors in the airline industry are fares, customer service, routes served, flight schedules, types of aircraft, safety record and reputation, code-sharing relationships, capacity, in-flight entertainment systems and frequent flyer programs.” Following revenues and costs are needed to be evaluated when replacing with or adding aircraft of longer range. REVENUES Revenue passenger miles (the total number of revenue-paying passengers multiplied by the number of miles they flew). Revenue passenger miles represent the number of miles flown by revenue passengers. Passenger revenue yield per revenue passenger mile (how much was made on each passenger for each mile they flew); where Yield per passenger mile” is the average amount one passenger pays to fly one mile. “Average fare” that represents the average one-way fare paid per flight segment by a revenue passenger. The load factor i.e. how many revenue passenger miles were booked for the available seat miles that an airplane could fill, a higher number showing that an airline is operating efficiently and closer to “capacity”. “Load factor” is the percentage of aircraft seating capacity that is actually utilized (revenue passenger miles divided by available seat miles). COSTS Fuel costs (average cost per gallon), which is the largest single cost for an airline. Average fuel cost per gallon” represents total aircraft fuel costs, including fuel taxes and effective portion of fuel hedging, divided by the total number of fuel gallons consumed. Average fleet age as older fleets need to be replaced sooner, at high cost, and are more expensive to operate). Their debt levels and fuel hedge books. Because airlines are highly levered businesses, in that their financial leverage is high, and their operating leverage is moderate to high. It’s a bad combination for the equity investor, as unexpected events could push companies into bankruptcy. Second, fuel hedges are important because they can save a company much money, or destroy much capital, based on prudent hedging or reckless speculating (the line between the two is thin) in the derivatives markets. (William Gibson, Scribd.com) Company for example JetBlue utilizes financial derivative instruments, on both a short-term and a long-term basis, as a form of insurance against the potential for significant increases in fuel prices. But poor job in hedging, it shows a negative position of $480 million in fuel derivatives and has given or pledged $510 million in cash and assets to its counterparties. (Alpha and Vega, 2010) 5. When choosing between two aircraft of similar size and range There are many issues and factors when choosing and selecting between two aircrafts of similar size and range. Price is an influential factor that really makes the choosing a simpler process. The prices of two similar size aircrafts can be different; hence the company’s own affording capability would be its priority e.g. Airbus A350 and the Boeing B787. Besides the price, the airline operator may have their own preference of the aircraft company e.g. Boeing, Airbus, Embraer, etc. The British Airway has favored the Airbus more recently. (British Airways, 2009) After Sale service provided by the aircraft manufacturer would also be another factor that could charm the buying trend of any particular aircraft. More quick and responsive After Sale service would definitely be admired by the airline operator buying any particular aircraft. Finally, the scrap or the residual value would be considered before an aircraft of similar size and range would be bought. It is usually the engines that fetch the primary value while an aircraft is dismantled and sold. Aircrafts fetching the higher scrap value might also help reach a decisive conclusion. (Flightglobal.com, 2010) References Airbus A380, Plane Spotting World.com http://plane.spottingworld.com/Airbus_A380 Airbus A380 Vs Boeing 747, By Dani Alonso http://ezinearticles.com/?Airbus-A380-vs-Boeing-747&id=849142 Aircrafts, Flightglobal.com, 2010 http://www.flightglobal.com/articles/2010/07/07/344137/talking-scrap.html Aircraft Analysis and fleet planning, Aircraft Commerce, Chapter 23, 2005 http://www.aircraft-commerce.com/sample_articles/sample_articles/fleet_planning_sample.pdf Evaluation and Selection of a Fleet of Aircraft for a Local Airline Wail I. Harasani Aeronautical Engineering Department, Faculty of Engineering, King Abdulaziz University, Jeddah, Saudi Arabia http://www.kau.edu.sa/centers/spc/jkau/Doc/Eng/17 2/Evaluation%20and%20Selection%20of%20a%20Fleet%20of%20Aircraft%20for%20a%20Lo al.pdf The Airbus A380, Head and Shoulders Above the Boeing 747, Brandy Madison, 2009 http://www.associatedcontent.com/article/1888244/the_airbus_a380_head_and_shoulders.html?cat=16 How to Read Financial Statements – Evaluating Value Drivers and Searching in Footnotes (Part 3) – Alpha, by Alpha and Vega, an Investor and a Trader, July 20th, 2010 http://www.riskoverreward.com/2010/07/how-to-read-financial-statements.html The Global airline industry program, Airline Industry Overview http://web.mit.edu/airlines/analysis/analysis_airline_industry.html William Gibson - Airline Fleet Planning and Aircraft Investment Appraisal http://www.scribd.com/doc/24714346/William-Gibson-Airline-Fleet-Planning-and-Aircraft-Investment-Appraisal Read More