Republic of the Philippines

PHILIPPINE STATE COLLEGE OF AERONAUTICS

Villamor, Piccio Garden, Pasay City

AE 523
AIR TRANSPORT ECONOMICS AND MANAGEMENT

Research

FLEET PLANNING

Submitted by:
Robarios, John Ericsson I.
BSAeE 5-4

Submitted to:
Engr. Romeo E. Gorospe Junior
Instructor
1. Many factors must be considered before reaching the critical decision to acquire a specific
number of a particular aircraft. All operating departments become involved in determining
the number and type of aircraft required to implement the corporate strategy in future
periods. This process is referred to as fleet planning, or the aircraft selection process.

One of the most difficult decisions airline managements must make is whether to buy new
or used aircraft and what type. Alternatively, they must consider whether it makes better
financial sense to modernize older aircraft already in their fleet or to acquire aircraft from the
outside. Many additional factors, including the costs associated with engineering and
maintenance, must be weighed. The factors are constantly changing, and their relative
importance at each airline depends on the carrier’s individual situation.

2. Factors in Fleet Planning

• Deregulation - Before deregulation, the airlines constituted a fairly stable business,
and fleet decisions were much simpler, usually based on technical considerations.
Overall costs could be predicted with some degree of confidence. Deregulation
changed the rules of the game. New nonunion carriers, usually flying relatively
inexpensive used aircraft, invaded traditional markets with low fares. With
deregulation, the established airlines had to find ways to reduce the operating costs
associated with aircraft already in their inventory that were not as efficient as the
newer generation of equipment. The incumbent carriers began to focus 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.
• The Hub and Spoke System - Hubs have also influenced carriers’ decisions with
regard to larger aircraft, such as the Boeing 767 and Airbus A330. As the hubs become
increasingly congested and slot limitations more constraining, there is a natural
tendency to schedule larger aircraft rather than smaller ones through the hub,
especially during periods of peak activity.
• Technical Aspects - Aircrafts are being acquired primarily because it promises
lower-cost production of the airline product, not because of its inherent differences—
which most passengers will not recognize in any case.
• Fleet Rationalization - What will influence the acquisition process involving new
aircraft is the economic organization of the airline industry as consolidation proceeds.
 With aircraft once more playing a greater role in determining a carrier’s market share,
coupled with the mild relaxation of cost-cutting pressures that consolidation will
induce, airlines can be expected to add staff, especially as consolidation increases
and the scale of individual airlines supports specialization of function within the
organization. Consolidation also increases the interdependence between mega-
carriers on the one hand and the manufacturers of aircraft and engines on the other.
The aircrafts will tend to stay in the fleets even longer and gives rise to the possibility
of far longer depreciation periods. But such consolidation will lead to a reduced
propensity to accept innovation.
• Fleet Commonality – For example the Boeing 757 and 767 have common type-
rating requirements, a distinct advantage to the carriers operating both types, as well
as a strong inducement for airlines that are operating either model.
• Long-Range Aircraft - Point-to-point service has always been popular, but the
concept has even more appeal for travelers today because of their increasing
frustration with air traffic delays and mounting congestion at major hub terminals.
• The Trend Towards Leasing - The choice for an airline interested in financing a
new airplane is, ultimately, to lease or purchase the aircraft, but due to the tax
disadvantages of purchasing an aircraft, leasing became more attractive. Leasing also
provides airlines a fast and advance aircraft technology cheaply.
There are two types of leases:
(1) Operating lease - is a noncancelable short-term lease. At the end of the lease,
the lessor retains full title to the asset and bears any market risk as to its value
at that time. When an operating lease is signed and the asset is put into service,
there is no large initial cash outflow from the lessee.
(2) Financial (capital) lease - With these leases, the financial effect is the same
as a loan except that title to the asset remains with the lessor until all lease
payments have been made. Title passes at the end of the lease to the lessee
for a preagreed-upon sum. The result is that there is no market risk on the
value of the asset borne by the lessor unless there is default.

The operating costs of maintenance, insurance, and taxes are normally the same
for both ownership and leasing. For the smaller carriers that lacked the huge
amounts of cash needed to buy a couple of planes, leasing firms provided an
attractive avenue to acquisition. Airlines that had previously ordered equipment
directly from manufacturers found that they were unable to get deliveries when
they needed the planes. To solve their problem, they turned to leasing companies.
 • Noise Restrictions - Most early orders for new-generation aircraft were conceive as
direct replacements of older planes—usually with models of roughly the same size.
Higher maintenance costs, higher noise levels, and higher fuel consumption make
them candidates for replacement by newer-generation models.

Some fleet decision factors

• Maintenance costs;
• The price of fuel;
• The availability and price of used aircraft;
• Resale value;
• The price of new aircraft;
• Terms of purchase;
• Cash flow;
• Debt/equity ratio;
• The availability of money from lenders;
• The receptivity of financial companies such as Wall Street to the issuance of stocks,
bonds and debentures;
• Interest rates
• Route structure
• Competitive situation
• Strategy
• Labor costs

3. The Fleet-Planning Process

1) Information Needed
a) Current Resources – The carrier’s current resources include its present flee
inventory by type of aircraft, use, and month. The corporate planning unit must
completely analyze the carrier’s current resources—what it has now, what it has on
order—as a starting point in the aircraft selection process.
 b) Corporate Objectives - Top management’s objectives for the company, or corporate
objectives, include forecasted profitability (operating revenues and expenses,
operating income, net earnings, earnings per common share, and return on
investment), systemwide load factors, acceptable levels of cash on hand, market share
on prime routes, debt/equity ratio, and general guidelines regarding new-aircraft
acquisition.
c) Projected Industry Environments - This includes the outlook for the national economy,
the outlook for the industry, and the carrier’s performance within the industry.
d) Marketing Strategy - This is a key piece of information, requiring considerable interplay
among corporate planning and other administrations, primarily marketing. A critical
area of consideration is fare and rate structure levels in various markets for both
passenger and cargo service.
2) The Fleet-Planning Model
The unconstrained operating plan fleet-planning model have been developed to translate
this information into a fleet-planning model that is used in determining future aircraft
acquisition requirements, aircraft assignment requirements, financial requirements, and
operating conditions over various planning periods (2 and 3 years ahead for order versus
option decisions, 4 and 5 years ahead to ensure that the purchases made in years 2 and
3 were consistent with long-term developments, and possibly 7 to 10 years ahead to
ensure consistency and to gain insight into financial and facility needs in the long term).
3) System Constraints
The next step in the fleet-planning process is the application of system constraints to
the model output that has been derived. Generally, system constraints become more
amenable to relief as lead time increases. There are a number of internal constraints,
including such economic realities as the airline’s profitability or lack thereof. After the
system constraints have been applied to the fleet-planning model, corporate
planning is le_ with a constrained operating plan, or optimization model. Basically,
the airline has now broken down aircraft types needed to implement its plan according to
characteristics such as range (long, medium, short), passenger or cargo capacity, and
direct operating costs.
4) Aircraft Evaluation
a) Design Characteristics - include such factors as the aircraft’s dimensions, weight profile
(including maximum zero-fuel weight and operator’s empty weight), fuel capacity,
type of power plants, systems (electrical, hydraulic, and environmental), seating
configuration, containers and pallets, bulk volume, and total volume.
 b) Physical Performance - The technical parameters normally considered under this area
are referred to as the physical performance factors. These include such items as
payload-range diagrams, takeoff and landing data, cruise and approach speeds,
runway requirements, and noise performance.
c) Maintenance Needs - include such considerations as spare parts availability, aircraft
compatibility with the rest of the fleet, product support, technical record keeping, and
training support in terms of visual and audio aids. Having narrowed the choice of
aircraft on the basis of these technical factors, the airline must consider the final two,
the acquisition costs, including payment terms and financing, and the operating
economics of the aircraft.
d) Acquisition Costs - include the cost of the aircraft itself plus spare parts, ground
equipment needed, maintenance and flight training required, and the cost of the
money itself if the aircraft is to be financed through debt financing (borrowing from
various financial intermediaries, such as insurance companies or commercial banks)
or equity financing (sale of bonds or stocks). The availability of new aircraft is another
important consideration. Airlines must also consider the possibility of trade -ins and
compare the potential advantage of leasing versus purchase.
e) Operating Economics - The most difficult area to evaluate. It includes the potential
aircraft’s contribution to the company’s profitability. Revenue potential and direct
operating costs in terms of airplane miles and seat-miles must be examined.
5) Tentative Fleet Planning and Financial Evaluation
After the aircraft evaluation, corporate planning prepares a projected earnings statement
and cash flow for the expanded fleet. Then it makes recommendations for specific aircraft
additions to and retirements from the fleet over a given time period, generally up to 10
years. Included with the recommendations is an order-option-plan mix;
a) Orders include proposed firm orders;
b) Options (to purchase) permit the acquisition of relatively favorable delivery positions
but provide flexibility to meet changing circumstances;
c) Plan aircraft are long-range future aircraft acquisitions that permit activation of long-
lead-time items, such as facility renovations, while permitting further study of shorter-
lead-time elements.
6) Presentation and Management Approval
Progress reviews are done periodically during the fleet-planning process, which not only
ensures the full input of management’s views but also minimizes the amount of new
material to be covered during the final presentation.
4. The Boeing Approach

The design and development stages for a new jetliner can take from five to six years. In the
case of the Boeing 757 and 767 models, the concept of a more fuel-efficient aircraft was
born in the mid-1970s with the skyrocketing price of fuel. Many industry analysts believe
Boeing ended 2005 in a much better position than its rival, owing in large measure to the
sales success of its 787 Dreamliner and the 777.

Boeing promised a 22 percent improvement in operating costs over the 727—more than
double the original estimate. The improvements are based primarily on the fact that a fully
loaded 757 is 42 percent more fuel efficient than a full Boeing 727, the most popular
commercial aircraft ever produced and the mainstay of the major carriers. Design
improvements allow it to carry up to 63 more passengers with the 757-300 model and carries
a more powerful engine. The use of electronic monitoring device and navigational aids that
allows the 757 to be flown by just 2 pilots.

A number of carriers must be interested in a particular aircraft before manufacturer will make
the necessary investment. This is extremely important to a manufacturer because of the
tremendous development costs of a new aircraft.

Another important step in the process of designing and developing a new aircraft is

taking an objective look at the company’s product in comparison with its competition. It is
important to select those characteristics for comparison that are of particular concern to the
potential airline customer.

In 1988, Boeing introduced its 747-400, which is capable of flying 412 passengers more than
7,200 nautical miles, 1,000 more than the 747-300. This means that Northwest Airlines, the
first to use these aircraft, is easily able to fly nonstop from New York to Tokyo without weight
restrictions.

The 747-400 represents a natural progression in the 747 family, which began service life in
1970 with Pan Am. Boeing’s sales of the 747 reached 1,200 aircraft by the turn of the 21st
century, covering the 747-100 and its long-range, short-fuselage variant, the SP; the
increased-takeoff-weight 747-200; the stretched-upper-deck 300; and the 400.

In basic design, the latest model is substantially the same as that of the 300, with identical
fuselage, flight controls, and wing section (as far as the wing tips). There are, however, three
major differences: (1) the wings are extended by 6 feet and have 6-foothigh winglets; (2)
an all-digital two-person-crew flight deck is substituted for the three person, conventionally
instrumented original; and (3) the aircraft is offered with new engines—the Pra_ & Whitney
PW4000, General Electric CF6-8OC2, or Rolls-Royce RB 211-524134a. The 747-400 also has
capacity in its horizontal stabilizer for 3,000 gallons of extra fuel, bringing capacity to over
56,500 gallons. In November 2005, Boeing announced a new model called the 747-800.
Technology will be based on the 787 and will be capable of flying up to 350 passengers in a
three-class configuration up to 8,000 nautical miles.

Other changes include the use of new aluminum alloys developed for the Boeing 757 and
767; a change to carbon brakes, saving 1,800 pounds in weight; and a completely redesigned
interior, providing greater seating flexibility, larger overhead storage bins, and a wireless
cabin entertainment system, in which radio and visual signals are picked up from floor-
mounted transmitters, greatly simplifying rearrangement of the interior.

All according to this reference.

Reference
Wensveen, J. G. (2007). Principles of Airline Scheduling. In J. G. Wensveen, Air
Transportation : A Management Perspective 6th Edition (pp. 343-369). Burlington:
Ashgate Publishing Company.