14.1.1: Discuss the importance of the fleet-planning process to both short-term and long-term management decision making in an airline.
* Fleet-planning
... [Show More] is one of the most difficult decisions airline leadership must make.
* A huge consideration is whether it makes better financial sense to modernize older aircraft already in a carrier's fleet or to purchase new aircraft.
* Airline managers must weigh both the short-term and long-term consequences of fleet-planning.
* In addition to the overall financial health of carriers, the costs associated with engineering and maintenance must be considered.
* The short-term and long-term consequences of fleeting planning continuously change over time resulting in a different relative importance of factors at each airline depending on the carriers' individual situations.
1.1: *Fleet planning is probably one of the most important steps in the airline planning process. Fleet planning decides which aircraft are needed and when they need to be acquired by, This is extremely important for long term and short term management decision making. Besides maintenance, many other factors must be thought of also. Fuel, availability and prices of used aircraft are all perfect examples for short term. Long term examples would include factors such as interest rates, competitive situation strategies, labor costs, stocks, etc.
14.1.2: How is this process in a sense betting on the future?
* Fleet-planning is a bet on the future since there are many long-term factors that must be considered.
* One of the most important costs is maintenance.
* Fortunately, maintenance costs have been decreasing since the 1960s.
* Also, when an airline purchases a new aircraft, the carrier can generally get by for 7 to 10 years without having significant maintenance costs.
* Other future factors that will affect fleet-planning include:
-- the price of fuel;
--- the availability and price of used aircraft;
--- resale value;
--- the price of new aircraft;
--- terms of purchase;
--- interest rates;
--- route structure;
--- competitive situation;
--- strategy;
--- and labor costs.
14.1.3: What effect has deregulation had on the fleet-planning process?
As a result of deregulation, the established carriers had to find more efficient ways to operate and fly while reducing operating costs. Deregulation led non-union carriers to invade traditional markets withlower fares and allowed LCC to expand their markets. Trunk carriers had the notion to always be prepared for peak demands. However, with the smaller airlines were competing with their smaller engine aircrafts and only needed a small flight crew of 2 instead of 4 - they were operating at lower costs and making a profit.
1.3: * Prior to deregulation, airlines had a fairly stable business and fleet decisions were much simpler
* As they were usually based on technical considerations.
* Deregulation changed everything, however,
--- as new non-union airlines invaded traditional markets
--- with low fares and flew relatively inexpensive used aircraft.
* With deregulation, the established carriers had to "find ways to reduce operating costs associated with aircraft already in their inventory that were not as efficient as the newer generation of equipment."
1.3: * With deregulation, many airlines had to find ways to reduce the operating costs associated with aircrafts already in their inventory that were not as efficient as the newer generation of equipment. The carriers began to focus more on new equipment that generated the lowest operating costs and were available in sufficient quantities and at the right times to meet their fleet and market planning requirements. Many companies, because of deregulatiion had to upgrade their fleets more rapidly to compete successfully.
14.1.4: Discuss the implications of the hub-and-spoke system and industry consolidation on fleet planning.
1.4:
* Hub-and-spoke systems can influence fleet planning as it will influence new aircraft requirements on how to save costs and enjoy the economies of scale.
* Hubs have also influenced carriers' decisions about larger aircraft, such as Boeing 767 and Airbus A330.
* As hubs become increasingly congested, there is a general rule for larger twin-engine aircraft operating intercontinentally and internationally.
1.4: * The hub-and-spoke system and industry consolidation have had tremendous impact on fleet planning.
* The hub-and-spoke system has helped airlines achieve the lowest possible unit costs which has had deep influence on new aircraft requirements.
* For example, lift capacity has become greater on smaller aircraft with shorter full-payload ranges.
* The hub-and-spoke system has also influenced carriers to serve more markets with smaller aircraft.
* The increased traffic at slot-restricted airports due to the hub-and-spoke system and industry consolidation has resulted in airline managers to reevaluate their fleet planning.
* There is a natural tendency today to schedule larger aircraft rather than smaller ones through the hubs as major airports become increasingly congested and slot limitations more constraining.
1.4: * The implication of the hub and spoke system was to make sure airlines were achieving the lowest possible unit cost. This system had influenced airlines to serve more city-pair markets and more varied markets than ever before. This has caused the largest airlines to require a much wider variety of aircraft than ever before. This affected the industry's consolidation. The Hubs have influenced carriers' decisions with regard to larger aircraft, such as the Boeing 767 and Airbus 330. The hubs are forced to consolidate now because of limitations. Fleet-planning now has to schedule larger aircraft rather than smaller ones through the hub, especially during peak seasons.
1.4: * The growth of hub-and-spoke networks has allowed airlines to have a large number of city pairs and a variety of destinations.
* The wide range of markets has made it so large airlines need a diverse selection of aircraft in order to efficiently serve these locations.
Industry consolidation
* Industry consolidation will cause the interdependency between mega-carriers and manufacturers to strengthen.
* Additionally, consolidations will likely cause aircraft to stay in the fleets even longer, which will force manufacturers to lower their prices as the quantity demanded decreases.
* One negative effect is that consolidation will lead to fewer carriers influencing the market, which in turn decreases the desire for innovation.
* Industry consolidation in 1980s has changed proliferation of specific aircraft types operated by any particular carrier.
* They need to acquire new aircraft to enable them to enjoy the benefits of maximum practical fleet commonality in the long run.
14.2.1: What are some of the advantages of fleet commonality?
One of the main reasons for aircraft purchases in large numbers is fleet commonality.
* The fleet commonality expands the benefits of operating a standardized fleet of aircraft that share common parts, training requirements, or other characteristics.
* The Boeing 757 and 767 for example have common requirements which is a distinct advantage to the carriers operating both types and operating either model.
* The newer generation provides various models with identical features which offers airlines using such models greater flexibility for planning new routes.
* Commonality is also apparent in the Airbus Series because many of the same models share component parts and flight deck instrumentation.
* New generation of 737 family provides various models with identical cockpits and seating from 100 to 180 passengers, offering airlines greater flexibility for planning new routes.
* Engine choices are more flexible and can be based on power plant commonality with other aircraft in the operator's fleet.
14.2.2: Why has there been a trend toward leasing?
There are two reasons for a trend toward leasing:
* First, the 1986 Tax Reform Act eliminated investment tax credit,
---- taxpaying companies could deduct a fixed percentage of the cost of asset directly from their tax liability,
--- which is effective to reduce the price of asset tot he acquirer.
* Second, the act reduced allowable deductions from taxable income for depreciation.
--- Accelerated depreciation allows firms to depreciate more than actual depreciation of an asset for tax purposes.
--- This will postpone taxes over life of asset, increasing the rate of return on asset.
2.2: There was a trend towards leasing because of the troubled state of the airline industry during the early 1990's.
* Many financial institutions awaited the outcome of the bankruptcy of several major carriers
* Aircraft manufacturers offered special incentives to boost sales and leasing; and gave the smaller carriers the flexibility to trade up by exchanging a smaller model for a larger one.
* By buying in quantity the leasing companies get lower unit prices, which benefited them because it rcted the relatively reasonable rental rates they charge.
14.2.3: Distinguish between an operating and a financial lease.
Operating Lease
* An operating lease is a short-term lease than cannot be canceled.
* At the end of the operating lease the market value of the asset is the responsibility of the lessor (also the asset is 100% owned by the lessor at the end of the lease) and the lessee has no obligations there afterwards (has no debt on its books).
* Another characteristic is that with a operating lease there is no down payment (large initial cash outflow from lessee); you would just start paying your monthly, yearly, etc cycle.
Financial Lease
* The financial or capital lease can be distinguished by a few factors.
* The title to the asset is remains owned by the lessor until the end of the lease term (when all payments have been made) where then the title is transferred to the lessee for a "pre-agreed" upon sum.
* There is no market risk to the lessor after the lease.
* The financial lease is reported in the same manner as loans;
* The value of the asset that was leased shows as an asset for the company leasing it and the value of the leased asset shows as a liability.
14.2.4: How will noise restrictions affect future aircraft purchases?
Noise restrictions led to the orders for models such as the Boeing 757 to replace the 727's indicating that the days for aging airliners in the fleet were undoubtedly numbered. With the higher maintenance costs, higher noise levels, and higher fuel consumption, these things made them replaceable by newer generation models.
14.3.1: What are some of the factors an aircraft manufacturer has to take into consideration during the design and development stage of a new commercial jetliner?
* The design and development stage for a new commercial jetliner takes approximately five to six years.
* The costs of designing and developing a new aircraft are astronomical.
* The break-even production point for an aircraft manufacturer can be anywhere from 200 to 600 aircraft.
* As a result, a number of carriers must be interested in a particular aircraft before a manufacturer will make the necessary investment.
* It is also critical for manufacturers to bring airlines into the design and development process as soon as possible so that ideas can be gathered before the project is too advanced to make changes.
* Other factors aircraft manufacturers must take into consideration include the ability of individual carriers to purchase the proposed new aircraft (there is a direct correlation between aircraft orders and airline profitability) and government regulations (such as safety, noise, and emission standards).
14.3.2: What is meant by "designing and developing an appropriate family of jets for the airlines"?
* Prior to deregulation, airlines had various aircraft models from different manufacturers in their fleets.
* Today, airlines are standardizing their fleets and dropping low-density routes to concentrate on high-density, long-haul routes.
* This specialization among the different levels of carriers presents a problem for the manufacturers who develop aircraft for many different user needs.
* As a result, manufacturers are challenged with designing and developing an appropriate family of jets that can fit the varied needs of airlines.
14.3.3: What is Airbus Industrie?
Airbus Industrie is a consortium of European aerospace manufacturers,
* Initially formed by France and Germany (each owning 37.9%), British Aerospace (20%), and Spain(4.2%).
* Today it is co-owned by the European Aerospace Defense and Space (80%) and BAE Systems PLC (20%).
* Different aircraft sections are made in different countries around the world (mostly in Europe).
* All sections are brought to Toulouse, France where final aircraft assemblies take place.
* The Airbus Industrie is determined to correct what its officials see as the abnormal situation of U.S manufacturers dominating sales to the western world.
* Their policy is to maintain a high degree of commonality in the systems, power plants, equipment, and structures of all its models.
* This allows operators to realize many savings in training costs and in spares holdings and investments.
14.3.4: How has Airbus Industrie been able to capture a foothold in the new-generation aircraft market?
3.4: * Despite the fact that Airbus Industrie may have benefited from political help, most industry observers attribute Airbus Industrie's success to timing
---- As "the Airbus was the first large twin-engine aircraft on the market, competing successfully against Lockheed 1011s and McDonnell Douglas DC-10s, both three-engine aircraft that consume more fuel."
* Airbus has been delivering more aircraft than Boeing every year since 2001.
* The design of the new models allowed operators to realize many savings and enforced their policy of maintaining a high degree of commonality in the systems, power plants, equipment and structures of all its models.
* Airbus Industrie's program for production of the long-range A340 and the medium to long range A330 was launched in June 1987.
* The program will achieve sales of about 1000 aircraft
* In June 1987, Airbus Industrie announced their first long-range aircraft, the A340, at the Paris Air Show.
* The A340 was available in two models, the A340-300 and the A340-200.
* The A340-300 has a three-class layout and is able to fly for 6,850 nautical miles,
* The A340-200 can carry 262 passengers and fly for 7,700 nautical miles.
* The new models share many of the same aspects as their previous aircraft, which would make the shift easy and manufacture move smoothly.
* This new, more efficient plane, allowed Airbus Industrie to compete with Boeing for the western aircraft market
* The achievement of a full product line has been a long-held goal of the company.
14-3.5: Do you think Airbus Industrie has an unfair advantage over domestic manufacturers? Why?
* Even though Airbus Industrie benefits from some of its political connections, I do not believe that the company has an unfair advantage over Boeing.
* Europe learned several years ago through many failed attempts that one company or one country alone cannot make it in the manufacturing industry.
* Airbus Industrie receives no subsidies from member countries.
* Even though participating governments contribute funds for research and development, Airbus repays every penny out of aircraft sales.
* Boeing, on the other hand, has often received subsidies from the state of Washington.
* Boeing also continuously benefits from lucrative military government contracts.
* As a result, I do not believe that Boeing is at an unfair disadvantage.
14-3.6: Give some examples of government regulations that a manufacturer must take into consideration in designing and developing a new aircraft.
Since governments are responsible for certifying new aircraft, manufacturers must take factor safety, noise, and emission standards into consideration when designing and developing a new model.
14.4.1: Describe what is included in each of the four basic inputs (informational needs) to the fleet-planning process: Current Resources
Current Resources
* Includes present fleet inventory by type of aircraft, use, and month. Financial and technical data on aircraft in order is also provided. These financial data include purchasing and leasing costs, start-up costs, and unit operating costs. The technical data on aircraft in order include payload-range figures, cruise performance information, runway requirements, noise levels, parts and service availability, and flight characteristics. In terms of maintenance resources, availability of personnel for each equipment must be considered, and lead times must be established. In addition, flight crews must be prepared in advance of delivery dates of aircraft in order. The corporate planning unit must completely analyze the carrier's current resources on hand and incoming orders. [Show Less]